 SAN JOSE, Calif., July 23, 2020 GLOBE NEWSWIRE -- Heritage Commerce Corp Nasdaq: HTBK, the holding company the Company for Heritage Bank of Commerce the Bank, today announced second quarter 2020 net income of 10.6 million, or 0.18 per average diluted common share, compared to 11.4 million, or 0.26 per average diluted common share, for the second quarter of 2019, and 1.9 million, or 0.03 per average diluted common share, for the first quarter of 2020. For the six months ended June 30, 2020, net income was 12.5 million, or 0.21 per average diluted common share, compared to 23.5 million, or 0.54 per average diluted common share, for the six months ended June 30, 2019. All results are unaudited. Our results improved in the second quarter of 2020; however, the ongoing impact of the Coronavirus pandemic continues to weigh heavily on our communities and market, said Keith A. Wilton, President and Chief Executive Officer. We benefitted from a 5 sequential quarter growth in loan balances during the second quarter of 2020, which primarily resulted from the addition of 324.6 million in Small Business Administration SBA Paycheck Protection Program PPP loans that funded during the quarter. These loans are fully guaranteed by the SBA. In addition, total deposits increased 16 in the second quarter of 2020 from the first quarter 2020 as a result of 533.6 million growth in deposits, primarily tied to deposits from customers that took out PPP loans. As expected, our net interest margin came under pressure from two Federal Reserve rate cuts in March of this year, but also from lower yields on newly funded PPP loans. Credit quality improved on a sequential quarter basis, as nonperforming assets NPAs declined 3.0 million, or 25 at June 30, 2020 to 9.1 million, from 12.1 million at March 31, 2020, and classified assets decreased to 31.5 million from 39.6 million.Notwithstanding the ongoing impact of the pandemic, we believe that our healthy capital and liquidity positions, strong earnings power, and conservative credit culture will serve us well through these challenging times, said Mr. Wilton. I also would like to thank our employees across the Company for their ongoing hard work and dedication to our customers.Coronavirus COVID-19 Weighs on Local Communities and Our EconomyIn mid-March, public health departments in the six largest counties in the San Francisco Bay Area, which account for most of the banks market footprint, imposed strict Shelter-in-Place orders for all residents. A few days later, the State of California issued a similar statewide order. Bay Area Counties and the state extended these orders through April, before easing restrictions in May and June. Following a resurgence in cases, on June 19, 2020, the state announced new health guidelines requiring the use of face coverings when in public or common spaces. On July 13, 2020, California expanded statewide indoor closures for businesses, encouraged the wearing of face masks and discouraged the gathering of individuals beyond immediate households. The Company has closely monitored the toll from the pandemic, including its economic impact. While the local response to COVID-19 appeared to have initially helped limit its spread, case numbers are once again increasing and the overall impact on our local economy may not be fully known. Since February, new jobless claims in California, through the week of July 11, totaled over 8.2 million, while the state has lost a net 2.6 million jobs 14.0. In the seven Bay Area counties we serve, 423,000 jobs 11.8 have been lost. The States unemployment rate at the end of June stood at 15.1, up from 5.3 at the end of March, while the unemployment rate in the seven Bay Area counties we serve increased to 12.0 from 3.4. At the end of March, Congress passed the Coronavirus Aid, Relief, and Economic Security Act CARES Act which included 349 billion in funding for the SBA PPP Loan Program. By mid-April, the Bank had processed 597 PPP loan applications with potential outstanding balances of 225.3 million. On April 23, 2020, Congress passed separate economic stimulus legislation, which provided an additional 310 billion in funding for the PPP Loan Program that the Company was also able to utilize to further support our small business clients. In all, the Bank processed a total of 1,105 PPP loan applications, with total principal balances of 333.4 million. PPP loan pay offs totaled 8.8 million during the second quarter of 2020, and the Company ended the quarter with 324.6 million in outstanding PPP loan balances. These generated 582,000 in interest income and 722,000 in deferred fees, which was partially offset by 54,000 in deferred costs expensed during the quarter. At June 30, 2020, total loans included deferred fees on PPP loans of 10.4 million and deferred costs of 1.2 million. PPP borrowers who can demonstrate that the funding received has been used for certain purposes such as to cover payroll and rent costs and meet certain other requirements, can qualify for partial or full federal relief on loan principal and interest. At present, the qualifying process for PPP borrowers to receive approval for loan forgiveness has yet to be finalized by the SBA. Nonqualifying borrowers or borrowers who have not applied for forgiveness, who received loans under the CARES Act, are contractually obligated to begin making monthly repayments on principal and interest six months after their loans have funded.Also in March 2020, in conjunction with the passage of the CARES Act, federal bank regulators announced new accounting guidance for loan modifications by banks, which is intended to provide temporary credit accommodation through loan payment deferrals for customers whose businesses have experienced economic hardship due to the impact of the Coronavirus. The guidance also allows for the temporary suspension of requirements for such loans to be classified as troubled debt restructurings TDR for accounting purposes. In response to customers needs, the Company made accommodations for initial payment deferrals of up to 90 days, generally, with the potential, upon application, for up to an additional 90 days of payment deferral 180 days maximum. The Company also waived all normal applicable fees. The following table shows the deferments at June 30, 2020 by category: DEFERMENTS BY CATEGORY in 000s, unaudited Pass and Watch 31,369 Special Mention 145,930 Classified 5,563 Total 182,862 Through June 30, 2020, the Company had approved 235 initial requests for payment deferrals on loans with balances totaling approximately 183 million, or 7, of our loan portfolio. The Bank has elected to initially downgrade the risk grades of these loans to Special Mention status. At the end of the second quarter of 2020, the pool of deferred loans in our portfolio were mostly tied to business borrowers from a broad range of industries and included 34 million in loan deferments to the healthcare industry mostly dentists and 23 million in loan deferments to the accommodation and food services industries mostly hotels and restaurants. Of the 183 million in deferred loans, 71 are supported by some form of real estate. Commercial real estate CRE deferments of 113 million included 75 million of investor CRE and 38 million of owner-occupied CRE. Deferred loans secured by CRE had an average loan-to-value LTV ratio of 41 at the end of the second quarter of 2020. The majority of deferred loans are also supported by personal guarantees. Between July 1 to July 15, 2020, 32 million in deferred loans returned to regular payment status and have been upgraded from Special Mention status. In addition to these previously mentioned deferred loans, we have purchased participations in a micro loan portfolio that had 3.3 million in deferments as of the end of the second quarter of 2020. The Bank had a portfolio of SBA 7a loans totaling 48.6 million, or 1.8 of its total loans, as of the end of the second quarter of 2020. As part of the SBAs Coronavirus debt relief efforts, beginning in the April 2020, the SBA commenced a six-month program to cover payments of principal, interest and any associated fees for these borrowers.In regard to our new lease agreement for 54,910 square feet of office space in San Jose, California, which was entered into in 2019 and commenced on February 1, 2020, with recent easing of Californias and Santa Clara Countys Coronavirus related Shelter-in-Place restrictions, the Company now anticipates completing the move of its main office and San Jose branch to this new location by the end of the third quarter of 2020. Credit Quality and PerformanceAt June 30, 2020, NPAs decreased by 7.9 million, or 46, to 9.1 million, compared to 17.0 million at the end of the second quarter of 2019, and decreased by 3.0 million, or 25 from 12.1 million at the end of the first quarter of 2020. Classified assets increased to 31.5 million, or 0.68 of total assets, at June 30, 2020, compared to 31.2 million, or 1.00 of total assets, at June 30, 2019, and decreased from 39.6 million, or 0.97 of total assets, at March 31, 2020. The linked quarter decrease in classified assets for the second quarter of 2020, compared to the first quarter of 2020, resulted from multiple loan payoffs and paydowns that were partially offset by loan downgrades. Classified deferments totaled 5.6 million at the end of the second quarter of 2020. Special Mention loans increased to 164 million, or by 115 million, in the second quarter of 2020, compared to 49 million in the first quarter of 2020. 