Heritage Commerce Corp Earnings Increased 29% to $3.2 Million in Third Quarter of 2013 from the Third Quarter of 2012

SAN JOSE, Calif., Oct. 24, 2013 (GLOBE NEWSWIRE) -- Heritage Commerce Corp (Nasdaq:HTBK), the holding company (the "Company") for Heritage Bank of Commerce (the "Bank"), today reported net income of $3.2 million for the third quarter of 2013, or $0.10 per average diluted common share, highlighted by strong organic loan and deposit growth, net interest margin expansion, and solid credit quality. Net income increased 29% compared to $2.5 million, or $0.08 per average diluted common share, for the third quarter of 2012, and increased 15% compared to $2.8 million for the second quarter of 2013. For the nine months ended September 30, 2013, net income available to common shareholders increased 36% to $8.2 million, or $0.26 per average diluted common share, from $6.0 million, or $0.19 per average diluted common share, for the nine months ended September 30, 2012. All results are unaudited.

"Our solid third quarter results reflect the progress we have achieved through the execution of our plan and investment in our franchise. Total loans grew by $93.7 million, or 12%, year-over-year and increased by $51.1 million, or 6%, on a linked quarter basis. At the same time, our net interest margin expanded 17 basis points to 3.94% from the third quarter a year ago," said Walter Kaczmarek, President and Chief Executive Officer. "The Greater San Francisco Bay Area economy continues to evidence a strong recovery resulting in increased loan demand. Additionally, we are benefiting from the addition of several seasoned bankers that were hired at the end of 2012 and in early 2013."

"Credit quality remains solid, as net recoveries totaled $534,000 for the third quarter of 2013, compared to $2.1 million of net charge-offs for the third quarter of 2012, and net recoveries of $270,000 for the second quarter of 2013," added Mr. Kaczmarek.

"As a result of our solid performance, we are delighted to announce the payment of a quarterly cash dividend of $0.03 per share in the fourth quarter of 2013 to our shareholders," Mr. Kaczmarek commented.

Third Quarter 2013 Highlights (as of, or for the period ended September 30, 2013, except as noted):

  • Diluted earnings per share increased 25% to $0.10 for the third quarter of 2013, compared to $0.08 per diluted share for the third quarter of 2012, and increased 11% from $0.09 per diluted share for the second quarter of 2013. Diluted earnings per share increased 37% to $0.26 for the first nine months of 2013, compared to $0.19 per diluted share for the first nine months of 2012.
  • Net interest income increased 9% to $12.8 million for the third quarter of 2013, compared to $11.8 million for the third quarter of 2012, and increased 6% from $12.2 million for the second quarter of 2013, primarily due to a higher average loan balance in the third quarter of 2013.
  • The net interest margin increased 17 basis points to 3.94% for the third quarter of 2013, from 3.77% for the third quarter of 2012, and increased 5 basis points from 3.89% for the second quarter of 2013. The increase in the third quarter of 2013 was primarily due to a lower cost of funds, higher yields on securities, and a higher average loan balance, partially offset by a lower yield on loans.
  • Loans (excluding loans-held-for-sale) increased 12% to $893.1 million at September 30, 2013, compared to $799.4 million at September 30, 2012, and increased 6% from $842.0 million at June 30, 2013.
  • Total deposits increased 5% to $1.20 billion at September 30, 2013, compared to $1.14 billion at September 30, 2012, and increased 1% from $1.19 billion at June 30, 2013. Deposits (excluding all time deposits and CDARS deposits) increased $54.2 million, or 6%, to $901.0 million at September 30, 2013, from $846.8 million at September 30, 2012, and increased $27.2 million, or 3%, from $873.9 million at June 30, 2013.
  • Credit quality remained solid with nonperforming assets declining 28% to $15.7 million at September 30, 2013, compared to $22.0 million at September 30, 2012. Nonperforming assets increased 5% from $15.0 million at June 30, 2013.
  • Classified assets, net of Small Business Administration ("SBA") guarantees, decreased 49% to $23.3 million at September 30, 2013, from $46.0 million at September 30, 2012, and decreased 2% from $23.8 million at June 30, 2013.
  • Net recoveries totaled $534,000 for the third quarter of 2013, compared to net charge-offs of $2.1 million for the third quarter of 2012, and net recoveries of $270,000 for the second quarter of 2013.
  • There was a credit to the provision for loan losses of $534,000 for the third quarter of 2013, compared to a provision for loan losses of $1.2 million for the third quarter of 2012, and credit to the provision for loan losses of $270,000 for the second quarter of 2013.
  • The allowance for loan losses ("ALLL") was 2.17% of total loans at September 30, 2013, compared to 2.39% at September 30, 2012, and 2.30% at June 30, 2013.
  • During the third quarter of 2013, the Company completed the redemption of its $9 million floating-rate subordinated debt, which will save approximately $360,000 of interest expense on an annual basis.
  • The Company announced it will pay a quarterly cash dividend of $0.03 per share in the fourth quarter of 2013 to holders of common stock and Series C Preferred Stock (on an as converted basis).
  • Capital ratios exceeded regulatory requirements for a well-capitalized financial institution on a holding company and bank level at September 30, 2013:



Capital Ratios

Heritage Commerce
Corp

Heritage Bank of
Commerce
Well-Capitalized
Financial Institution
Regulatory Guidelines
Total Risk-Based 15.2% 13.7% 10.0%
Tier 1 Risk-Based 14.0% 12.5% 6.0%
Leverage 11.5% 10.2% 5.0%

Operating Results

Primarily due to a higher average balance of loans, the Company's net interest income increased to $12.8 million for the third quarter of 2013, compared to $11.8 million for the third quarter of 2012. Net interest income for the second quarter of 2013 was $12.2 million. For the nine months ended September 30, 2013, net interest income was $37.1 million, compared to $36.2 million for the nine months ended September 30, 2012.

The net interest margin expanded 17 basis points to 3.94% for the third quarter of 2013, from 3.77% for the third quarter of 2012, and increased 5 basis points from 3.89% for the second quarter of 2013. The increase in the third quarter of 2013 was primarily due to a lower cost of funds, higher yields on securities, and a higher average loan balance, partially offset by a lower yield on loans. For the first nine months of 2013, the net interest margin decreased 8 basis points to 3.85%, compared to 3.93% for the first nine months of 2012, primarily due to a lower yield on loans, and a higher average balance of short-term deposits at the Federal Reserve Bank, partially offset by a higher average balance of loans and a lower cost of funds.

Solid asset quality and net recoveries for the first nine months of 2013 led to a credit to the provision for loan losses of $534,000 for the third quarter of 2013 and a credit to the provision for loan losses of $804,000 for the first nine months of 2013. The provision for loan losses was $1.2 million for the third quarter of 2012 and $2.1 million for the first nine months of 2012. There was a credit to the provision for loan losses of $270,000 for the second quarter of 2013. Net recoveries totaled $534,000 for the third quarter of 2013 and $1.1 million for the first nine months of 2013.

Noninterest income was $1.7 million for the third quarter of 2013, compared to $2.9 million for the third quarter of 2012, and $1.9 million for the second quarter of 2013. For the first nine months of 2013, noninterest income was $5.3 million, compared to $6.8 million for the first nine months of 2012. Noninterest income was lower in the third quarter and the first nine months of 2013, compared to the same periods in 2012, primarily due to a lower gain on sales of securities. There was no gain on sales of securities for the third quarter of 2013, and a $38,000 gain on sales of securities for the first nine months of 2013, compared to $1.1 million and $1.2 million, respectively, for the comparable periods a year ago.

Total noninterest expense for the third quarter of 2013 was $10.4 million, an increase of 2% from $10.1 million for the third quarter of 2012, and remained flat from $10.4 million for the second quarter of 2013. Noninterest expense for the first nine months of 2013 increased 4% to $31.6 million, compared to $30.5 million for the first nine months of 2012. The increase in noninterest expense for the third quarter and the first nine months of 2013, compared to the same periods a year ago, reflects increased salaries and employee benefits expense due to annual salary increases and hiring of additional lending relationship officers.

Income tax expense for the third quarter of 2013 was $1.5 million, compared to $939,000 for the third quarter of 2012, and $1.2 million for the second quarter of 2013. The effective tax rate for the third quarter of 2013 increased to 32%, compared to 27% for the third quarter of 2012, and 29% for the second quarter of 2013. Income tax expense for the first nine months of 2013 was $3.5 million, compared to $3.1 million for the first nine months of 2012. The effective tax rate for the nine months ended September 30, 2013 and 2012 was 30%. 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, and tax-exempt interest income earned on municipal bonds.

The efficiency ratio for the third quarter of 2013 was 71.25%, compared to 68.69% for the third quarter of 2012, and 73.85% for the second quarter of 2013. The efficiency ratio was 74.32% for the first nine months of 2013, compared to 70.95% for the first nine months of 2012.

Balance Sheet Review, Capital Management and Credit Quality

Total assets increased 3% to $1.40 billion at September 30, 2013, from $1.36 billion a year ago, and remained flat from $1.40 billion at June 30, 2013.

The investment securities available-for-sale portfolio totaled $280.5 million at September 30, 2013, compared to $410.8 million at September 30, 2012, and $293.8 million at June 30, 2013. At September 30, 2013, the securities available-for-sale portfolio was comprised of $212.5 million agency mortgage-backed securities (all issued by U.S. Government sponsored entities), $47.8 million of corporate bonds, and $20.2 million of single entity issue trust preferred securities. The pre-tax unrealized loss on securities available-for-sale at September 30, 2013 was ($125,000), compared to a pre-tax unrealized gain on securities available-for-sale at September 30, 2012 of $14.3 million, and a pre-tax unrealized loss on securities available-for-sale at June 30, 2013 of ($880,000).

At September 30, 2013, investment securities held-to-maturity totaled $89.7 million, compared to $25.6 million at September 30, 2012, and $81.7 million at June 30, 2013. At September 30, 2013, the securities held-to-maturity portfolio, at amortized cost, was comprised of $76.5 million tax-exempt municipal bonds and $13.2 million agency mortgage-backed securities.

Loans, excluding loans held-for-sale, increased 12% to $893.1 million at September 30, 2013, from $799.4 million at September 30, 2012, and increased 6% from $842.0 million at June 30, 2013. The loan portfolio remains well-diversified with commercial and industrial ("C&I") loans accounting for 46% of the portfolio at September 30, 2013. Commercial and residential real estate loans accounted for 43% of the total loan portfolio, of which 51% were owner-occupied by businesses. Consumer and home equity loans accounted for 8% of total loans, and land and construction loans accounted for the remaining 3% of total loans at September 30, 2013.

The yield on the loan portfolio was 4.85% for the third quarter of 2013, compared to 5.10% for the same period in 2012, and 4.93% for the second quarter of 2013. The yield on the loan portfolio was 4.97% for the first nine months of 2013, compared to 5.25% for the same period in 2012.

"Credit quality remains solid with nonperforming assets ("NPAs") declining 31% to 1.12% of total assets at September 30, 2013, compared to 1.62% of total assets at September 30, 2012," said Mr. Kaczmarek. NPAs were $15.7 million, at September 30, 2013, compared to $22.0 million a year ago, and $15.0 million on a linked quarter basis. The following is a detail of NPAs at September 30, 2013:

September 30, 2013
Balance % of Total
Commercial real estate loans $ 4,995 32%
SBA loans 3,808 24%
Home equity and consumer loans 2,547 16%
Land and construction loans 1,849 12%
Commercial and industrial loans 1,416 9%
Foreclosed assets 631 4%
Restructured and loans over 90 days past due and accruing 502 3%
$ 15,748 100%

At September 30, 2013, the $15.7 million of NPAs included $452,000 of loans guaranteed by the SBA and $502,000 of restructured loans still accruing interest income. Foreclosed assets were $631,000 at September 30, 2013, compared to $2.9 million at September 30, 2012, and $659,000 at June 30, 2013.

Classified assets (net of SBA guarantees) decreased 49% to $23.3 million at September 30, 2013, from $46.0 million at September 30, 2012, and decreased 2% from $23.8 million at June 30, 2013.

The following table summarizes the allowance for loan losses:

For the Quarter Ended:
September 30, June 30, September 30,
2013 2013 2012
ALLOWANCE FOR LOAN LOSSES
(in $000's, unaudited)
Balance at beginning of quarter $ 19,342 $ 19,342 $ 20,023
Provision (credit) for loan losses during the quarter (534) (270) 1,200
Net recoveries (charge-offs) during the quarter 534 270 (2,099)
Balance at end of quarter $ 19,342 $ 19,342 $ 19,124
Total loans $ 893,052 $ 841,950 $ 799,393
Total nonperforming loans $ 15,117 $ 14,378 $ 19,118
Allowance for loan losses to total loans 2.17% 2.30% 2.39%
Allowance for loan losses to total nonperforming loans 127.95% 134.52% 100.03%

Deposits totaled $1.20 billion at September 30, 2013, compared to $1.14 billion at September 30, 2012, and $1.19 billion at June 30, 2013. Noninterest-bearing deposits increased 1% to $409.3 million at September 30, 2013, from $405.9 million at September 30, 2012, and remained relatively flat from $407.5 million at June 30, 2013. Interest-bearing demand deposits increased 12% to $178.8 million at September 30, 2013, from $159.4 million at September 30, 2012, and increased 5% from $171.0 million at June 30, 2013. At September 30, 2013, brokered deposits decreased 30% to $62.8 million, from $89.2 million at September 30, 2012, and decreased 18% from $76.8 million at June 30, 2013. Deposits (excluding all time deposits and CDARS deposits) increased $54.2 million, or 6%, to $901.0 million at September 30, 2013, from $846.8 million at September 30, 2012, and increased $27.2 million, or 3%, from $873.9 million at June 30, 2013.

The total cost of deposits decreased 5 basis points to 0.19% for the third quarter of 2013, from 0.24% for the third quarter of 2012, and decreased 2 basis points from 0.21% for the second quarter of 2013. The total cost of deposits decreased 6 basis points to 0.20% for the first nine months of 2013, from 0.26% for the first nine months of 2012.

During the third quarter of 2013, the Company completed the redemption of its $9 million floating-rate subordinated debt, which will save approximately $360,000 of interest expense on an annual basis. The Company redeemed its Floating Rate Junior Subordinated Debentures due July 31, 2031 in the amount of $5 million issued to Heritage Statutory Trust II and the Company's Floating Rate Junior Subordinated Debentures due September 26, 2032, in the amount of $4 million issued to Heritage Statutory Trust III (collectively referred to as the "Floating Rate Sub Debt"). The Company used available cash and proceeds from a $9 million distribution from the Bank for the redemption. The Company incurred a total charge of $167,000 in the second quarter of 2013, representing the remaining portion of agency origination fees associated with the Floating Rate Sub Debt. There was no subordinated debt at September 30, 2013, compared to $9.3 million at September 30, 2012 and June 30, 2013.

The Company announced it will pay a quarterly cash dividend of $0.03 per share in the fourth quarter of 2013 to holders of common stock and Series C Preferred Stock (on an as converted basis).

Tangible equity was $168.8 million at September 30, 2013, compared to $166.9 million at September 30, 2012 and $165.9 million at June 30, 2013. Tangible book value per common share was $5.67 at September 30, 2013, compared to $5.60 a year ago, and $5.56 at June 30, 2013. There were 21,004 shares of Series C Preferred Stock outstanding at September 30, 2013, September 30, 2012, and June 30, 2013, and the Series C Preferred Stock is convertible into an aggregate of 5.6 million shares of common stock at a conversion price of $3.75, upon a transfer of the Series C Preferred Stock in a widely dispersed offering. Pro forma tangible book value per common share, assuming the Company's outstanding Series C Preferred Stock was converted into common stock, was $5.29 at September 30, 2013, compared to $5.23 a year ago, and $5.19 at June 30, 2013.

Accumulated other comprehensive loss was ($4.3) million at September 30, 2013, compared to accumulated other comprehensive income of $4.8 million a year ago, and accumulated other comprehensive loss of ($4.7) million at June 30, 2013. The decrease was primarily due to an unrealized loss on securities available-for-sale of ($69,000), net of taxes, at September 30, 2013, compared to an unrealized gain on securities available-for-sale of $8.3 million, net of taxes, at September 30, 2012. At June 30, 2013 the unrealized loss on securities available-for-sale was ($507,000), net of taxes. The components of other comprehensive loss, net of taxes, at September 30, 2013 include the following: an unrealized loss on available-for-sale securities of ($69,000); the remaining unamortized unrealized gain on securities available-for-sale transferred to held-to-maturity of $473,000; a liability adjustment on split dollar insurance contracts of ($2.4) million; a liability adjustment on the supplemental executive retirement plan of ($3.3) million; and an unrealized gain on interest-only strip from SBA loans of $956,000.

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 with full-service branches in Danville, Fremont, Gilroy, Los Altos, Los Gatos, Morgan Hill, Pleasanton, Sunnyvale, and Walnut Creek. Heritage Bank of Commerce is an SBA Preferred Lender. For more information, please visit www.heritagecommercecorp.com.

Forward Looking Statement Disclaimer

Forward-looking statements are based on management's knowledge and belief as of today and include information concerning the Company's possible or assumed future financial condition, and its results of operations, business and earnings outlook. These forward-looking statements are subject to risks and uncertainties. A number of factors, some of which are beyond the Company's ability to control or predict, could cause future results to differ materially from those contemplated by such forward-looking statements. The forward-looking statements could be affected by many factors, including but not limited to: (1) competition for loans and deposits and failure to attract or retain deposits and loans; (2) local, regional, and national economic conditions and events and the impact they may have on us and our customers, and our assessment of that impact on our estimates including, the allowance for loan losses; (3) risks associated with concentrations in real estate related loans; (4) 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; (5) the 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; (6) stability of funding sources and continued availability of borrowings; (7) our ability to raise capital or incur debt on reasonable terms; (8) regulatory limits on Heritage Bank of Commerce's ability to pay dividends to the Company; (9) continued volatility in credit and equity markets and its effect on the global economy; (10) the impact of reputational risk on such matters as business generation and retention, funding and liquidity; (11) oversupply of inventory and continued deterioration in values of California commercial real estate; (12) a prolonged slowdown in construction activity; (13) the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities, and executive compensation) which we must comply, including but not limited to, the Dodd-Frank Act of 2010; (14) the effects of security breaches and computer viruses that may affect our computer systems; (15) changes in consumer spending, borrowings and saving habits; (16) changes in the competitive environment among financial or bank holding companies and other financial service providers; (17) the 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; (18) the 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; (19) the ability to increase market share and control expenses; and (20) our success in managing the risks involved in the foregoing items. For a discussion of factors which could cause results to differ, please see the Company's reports on Forms 10-K and 10-Q as filed with the Securities and Exchange Commission and the Company's press releases. Readers should not place undue reliance on the forward-looking statements, which reflect management's view only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect subsequent events or circumstances.

Member FDIC

For the Quarter Ended: Percent Change From: For the Nine Months Ended:
CONSOLIDATED INCOME STATEMENTS September 30, June 30, September 30, June 30, September 30, September 30, September 30, Percent
(in $000's, unaudited) 2013 2013 2012 2013 2012 2013 2012 Change
Interest income $ 13,458 $ 12,838 $ 12,862 5% 5% $ 39,163 $ 39,607 -1%
Interest expense 627 685 1,038 -8% -40% 2,026 3,440 -41%
Net interest income before provision for loan losses 12,831 12,153 11,824 6% 9% 37,137 36,167 3%
Provision (credit) for loan losses (534) (270) 1,200 -98% -145% (804) 2,115 -138%
Net interest income after provision for loan losses 13,365 12,423 10,624 8% 26% 37,941 34,052 11%
Noninterest income:
Service charges and fees on deposit accounts 645 618 575 4% 12% 1,840 1,766 4%
Increase in cash surrender value of life insurance 414 410 434 1% -5% 1,240 1,292 -4%
Servicing income 331 385 429 -14% -23% 1,081 1,336 -19%
Gain on sales of SBA loans 103 134 221 -23% -53% 373 633 -41%
Gain on sales of securities -- 7 1,105 -100% -100% 38 1,164 -97%
Other 245 361 184 -32% 33% 744 570 31%
Total noninterest income 1,738 1,915 2,948 -9% -41% 5,316 6,761 -21%
Noninterest expense:
Salaries and employee benefits 5,772 5,864 5,336 -2% 8% 17,647 16,380 8%
Occupancy and equipment 986 1,028 1,041 -4% -5% 3,082 3,004 3%
Professional fees 602 400 587 51% 3% 1,984 2,268 -13%
Other 3,020 3,097 3,183 -2% -5% 8,837 8,805 0%
Total noninterest expense 10,380 10,389 10,147 0% 2% 31,550 30,457 4%
Income before income taxes 4,723 3,949 3,425 20% 38% 11,707 10,356 13%
Income tax expense 1,510 1,156 939 31% 61% 3,521 3,116 13%
Net income 3,213 2,793 2,486 15% 29% 8,186 7,240 13%
Dividends and discount accretion on preferred stock -- -- -- N/A N/A -- (1,206) -100%
Net income available to common shareholders $ 3,213 $ 2,793 $ 2,486 15% 29% $ 8,186 $ 6,034 36%
PER COMMON SHARE DATA
(unaudited)
Basic earnings per share $ 0.10 $ 0.09 $ 0.08 11% 25% $ 0.26 $ 0.19 37%
Diluted earnings per share $ 0.10 $ 0.09 $ 0.08 11% 25% $ 0.26 $ 0.19 37%
Common shares outstanding at period-end 26,341,021 26,338,521 26,320,184 0% 0% 26,341,021 26,320,184 0%
Pro forma common shares outstanding at period-end, assuming Series C preferred stock was converted into common stock 31,942,021 31,939,521 31,921,184 0% 0% 31,942,021 31,921,184 0%
Book value per share $ 5.73 $ 5.62 $ 5.68 2% 1% $ 5.73 $ 5.68 1%
Tangible book value per share $ 5.67 $ 5.56 $ 5.60 2% 1% $ 5.67 $ 5.60 1%
Pro forma tangible book value per share, assuming Series C preferred stock was converted into common stock $ 5.29 $ 5.19 $ 5.23 2% 1% $ 5.29 $ 5.23 1%
KEY FINANCIAL RATIOS
(unaudited)
Annualized return on average equity 7.58% 6.53% 5.91% 16% 28% 6.44% 5.59% 15%
Annualized return on average tangible equity 7.65% 6.60% 5.99% 16% 28% 6.51% 5.67% 15%
Annualized return on average assets 0.90% 0.82% 0.73% 10% 23% 0.78% 0.72% 8%
Annualized return on average tangible assets 0.90% 0.82% 0.73% 10% 23% 0.78% 0.73% 7%
Net interest margin 3.94% 3.89% 3.77% 1% 5% 3.85% 3.93% -2%
Efficiency ratio 71.25% 73.85% 68.69% -4% 4% 74.32% 70.95% 5%
AVERAGE BALANCES
(in $000's, unaudited)
Average assets $ 1,419,481 $ 1,373,202 $ 1,359,990 3% 4% $ 1,411,784 $ 1,334,676 6%
Average tangible assets $ 1,417,765 $ 1,371,372 $ 1,357,789 3% 4% $ 1,409,952 $ 1,332,357 6%
Average earning assets $ 1,316,037 $ 1,273,769 $ 1,247,309 3% 6% $ 1,310,288 $ 1,230,112 7%
Average loans held-for-sale $ 6,780 $ 5,189 $ 3,036 31% 123% $ 5,088 $ 3,051 67%
Average total loans $ 870,637 $ 812,376 $ 788,549 7% 10% $ 826,240 $ 779,935 6%
Average deposits $ 1,211,678 $ 1,158,479 $ 1,125,283 5% 8% $ 1,199,044 $ 1,100,886 9%
Average demand deposits - noninterest-bearing $ 418,657 $ 392,122 $ 393,204 7% 6% $ 423,807 $ 370,278 14%
Average interest-bearing deposits $ 793,021 $ 766,357 $ 732,079 3% 8% $ 775,237 $ 730,608 6%
Average interest-bearing liabilities $ 797,931 $ 775,924 $ 753,436 3% 6% $ 783,161 $ 754,598 4%
Average equity $ 168,254 $ 171,475 $ 167,407 -2% 1% $ 169,865 $ 172,928 -2%
Average tangible equity $ 166,538 $ 169,645 $ 165,206 -2% 1% $ 168,033 $ 170,609 -2%
End of Period: Percent Change From:
CONSOLIDATED BALANCE SHEETS September 30, June 30, September 30, June 30, September 30,
(in $000's, unaudited) 2013 2013 2012 2013 2012
ASSETS
Cash and due from banks $ 32,571 $ 33,890 $ 23,345 -4% 40%
Federal funds sold and interest-bearing deposits in other financial institutions 9,327 51,872 8,165 -82% 14%
Securities available-for-sale, at fair value 280,471 293,778 410,756 -5% -32%
Securities held-to-maturity, at amortized cost 89,732 81,731 25,592 10% 251%
Loans held-for-sale - SBA, including deferred costs 6,975 6,321 1,476 10% 373%
Loans:
Commercial 410,933 383,068 377,520 7% 9%
Real estate:
Commercial and residential 387,777 370,620 336,573 5% 15%
Land and construction 30,780 26,705 24,068 15% 28%
Home equity 50,100 48,667 45,565 3% 10%
Consumer 13,712 13,097 15,649 5% -12%
Loans 893,302 842,157 799,375 6% 12%
Deferred loan (fees) costs, net (250) (207) 18 -21% -1489%
Total loans, including deferred fees and costs 893,052 841,950 799,393 6% 12%
Allowance for loan losses (19,342) (19,342) (19,124) 0% 1%
Loans, net 873,710 822,608 780,269 6% 12%
Company owned life insurance 49,598 49,184 47,929 1% 3%
Premises and equipment, net 7,390 7,541 7,627 -2% -3%
Intangible assets 1,645 1,763 2,123 -7% -23%
Accrued interest receivable and other assets 49,216 50,818 48,758 -3% 1%
Total assets $ 1,400,635 $ 1,399,506 $ 1,356,040 0% 3%
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand, noninterest-bearing $ 409,269 $ 407,516 $ 405,880 0% 1%
Demand, interest-bearing 178,783 171,027 159,361 5% 12%
Savings and money market 312,991 295,336 281,579 6% 11%
Time deposits - under $100 22,029 23,062 26,513 -4% -17%
Time deposits - $100 and over 195,321 197,718 170,430 -1% 15%
Time deposits - brokered 62,833 76,800 89,172 -18% -30%
CDARS - money market and time deposits 14,311 17,580 5,098 -19% 181%
Total deposits 1,195,537 1,189,039 1,138,033 1% 5%
Subordinated debt -- 9,279 9,279 -100% -100%
Accrued interest payable and other liabilities 34,613 33,568 39,727 3% -13%
Total liabilities 1,230,150 1,231,886 1,187,039 0% 4%
Shareholders' Equity:
Series C preferred stock, net 19,519 19,519 19,519 0% 0%
Common stock 132,298 132,097 131,615 0% 1%
Retained earnings 22,949 20,694 13,052 11% 76%
Accumulated other comprehensive income (loss) (4,281) (4,690) 4,815 9% -189%
Total shareholders' equity 170,485 167,620 169,001 2% 1%
Total liabilities and shareholders' equity $ 1,400,635 $ 1,399,506 $ 1,356,040 0% 3%
End of Period: Percent Change From:
September 30, June 30, September 30, June 30, September 30,
2013 2013 2012 2013 2012
CREDIT QUALITY DATA
(in $000's, unaudited)
Nonaccrual loans - held-for-investment $ 14,615 $ 13,868 $ 17,396 5% -16%
Restructured and loans over 90 days past due and still accruing 502 510 1,722 -2% -71%
Total nonperforming loans 15,117 14,378 19,118 5% -21%
Foreclosed assets 631 659 2,889 -4% -78%
Total nonperforming assets $ 15,748 $ 15,037 $ 22,007 5% -28%
Other restructured loans still accruing $ 10 $ 668 $ 704 -99% -99%
Net (recoveries) charge-offs during the quarter $ (534) $ (270) $ 2,099 -98% -125%
Provision (credit) for loan losses during the quarter $ (534) $ (270) $ 1,200 -98% -145%
Allowance for loan losses $ 19,342 $ 19,342 $ 19,124 0% 1%
Classified assets* $ 23,342 $ 23,780 $ 46,002 -2% -49%
Allowance for loan losses to total loans 2.17% 2.30% 2.39% -6% -9%
Allowance for loan losses to total nonperforming loans 127.95% 134.52% 100.03% -5% 28%
Nonperforming assets to total assets 1.12% 1.07% 1.62% 5% -31%
Nonperforming loans to total loans plus nonaccrual loans - held-for-sale 1.69% 1.71% 2.39% -1% -29%
Classified assets* to Heritage Commerce Corp Tier 1 capital plus allowance for loan losses 13% 13% 27% 0% -52%
Classified assets* to Heritage Bank of Commerce Tier 1 capital plus allowance for loan losses 14% 13% 28% 8% -50%
OTHER PERIOD-END STATISTICS
(in $000's, unaudited)
Heritage Commerce Corp:
Tangible equity $ 168,840 $ 165,857 $ 166,878 2% 1%
Tangible common equity $ 149,321 $ 146,338 $ 147,359 2% 1%
Shareholders' equity / total assets 12.17% 11.98% 12.46% 2% -2%
Tangible equity / tangible assets 12.07% 11.87% 12.33% 2% -2%
Tangible common equity / tangible assets 10.67% 10.47% 10.88% 2% -2%
Loan to deposit ratio 74.70% 70.81% 70.24% 5% 6%
Noninterest-bearing deposits / total deposits 34.23% 34.27% 35.67% 0% -4%
Total risk-based capital ratio 15.2% 16.4% 16.1% -7% -6%
Tier 1 risk-based capital ratio 14.0% 15.1% 14.8% -7% -5%
Leverage ratio 11.5% 12.4% 11.6% -7% -1%
Heritage Bank of Commerce:
Total risk-based capital ratio 13.7% 15.6% 15.1% -12% -9%
Tier 1 risk-based capital ratio 12.5% 14.3% 13.8% -13% -9%
Leverage ratio 10.2% 11.7% 10.9% -13% -6%
*Net of SBA guarantees
For the Three Months Ended For the Three Months Ended
September 30, 2013 September 30, 2012
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) $ 877,417 $ 10,733 4.85% $ 791,585 $ 10,146 5.10%
Securities - taxable 310,460 2,247 2.87% 409,847 2,686 2.61%
Securities - tax exempt(2) 69,866 671 3.81% -- -- --
Federal funds sold and interest-bearing deposits in other financial institutions 58,294 42 0.29% 45,877 30 0.26%
Total interest earning assets(2) 1,316,037 13,693 4.13% 1,247,309 12,862 4.10%
Cash and due from banks 23,724 21,804
Premises and equipment, net 7,513 7,711
Intangible assets 1,716 2,201
Other assets 70,491 80,965
Total assets $ 1,419,481 $ 1,359,990
Liabilities and shareholders' equity:
Deposits:
Demand, noninterest-bearing $ 418,657 $ 393,204
Demand, interest-bearing 169,233 57 0.13% 154,735 58 0.15%
Savings and money market 316,247 140 0.18% 291,251 143 0.20%
Time deposits - under $100 22,600 19 0.33% 27,463 32 0.46%
Time deposits - $100 and over 197,464 179 0.36% 158,898 230 0.58%
Time deposits - brokered 71,105 178 0.99% 94,375 225 0.95%
CDARS - money market and time deposits 16,372 2 0.05% 5,357 2 0.15%
Total interest-bearing deposits 793,021 575 0.29% 732,079 690 0.37%
Total deposits 1,211,678 575 0.19% 1,125,283 690 0.24%
Subordinated debt 4,819 51 4.20% 19,626 346 7.01%
Short-term borrowings 91 1 4.36% 1,731 2 0.46%
Total interest-bearing liabilities 797,931 627 0.31% 753,436 1,038 0.55%
Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds 1,216,588 627 0.20% 1,146,640 1,038 0.36%
Other liabilities 34,639 45,943
Total liabilities 1,251,227 1,192,583
Shareholders' equity 168,254 167,407
Total liabilities and shareholders' equity $ 1,419,481 $ 1,359,990
Net interest income(2) / margin 13,066 3.94% 11,824 3.77%
Less tax equivalent adjustment(2) (235) --
Net interest income $ 12,831 $ 11,824
(1)Includes loans held-for-sale. Yield amounts earned on loans include loan fees and costs. Nonaccrual loans are included in average balance.
(2)Reflects tax equivalent adjustment for tax exempt income based on a 35% tax rate.
For the Nine Months Ended For the Nine Months Ended
September 30, 2013 September 30, 2012
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) $ 831,328 $ 30,874 4.97% $ 782,986 $ 30,754 5.25%
Securities - taxable 351,290 7,107 2.70% 399,341 8,758 2.93%
Securities - tax exempt(2) 56,405 1,603 3.80% -- -- --
Federal funds sold and interest-bearing deposits in other financial institutions 71,265 140 0.26% 47,785 95 0.27%
Total interest earning assets(2) 1,310,288 39,724 4.05% 1,230,112 39,607 4.30%
Cash and due from banks 23,313 21,329
Premises and equipment, net 7,548 7,843
Intangible assets 1,832 2,319
Other assets 68,803 73,073
Total assets $ 1,411,784 $ 1,334,676
Liabilities and shareholders' equity:
Deposits:
Demand, noninterest-bearing $ 423,807 $ 370,278
Demand, interest-bearing 167,138 174 0.14% 148,407 168 0.15%
Savings and money market 293,801 384 0.17% 292,661 487 0.22%
Time deposits - under $100 23,488 62 0.35% 27,897 105 0.50%
Time deposits - $100 and over 194,185 577 0.40% 165,004 731 0.59%
Time deposits - brokered 81,352 594 0.98% 90,800 645 0.95%
CDARS - money market and time deposits 15,273 5 0.04% 5,839 8 0.18%
Total interest-bearing deposits 775,237 1,796 0.31% 730,608 2,144 0.39%
Total deposits 1,199,044 1,796 0.20% 1,100,886 2,144 0.26%
Subordinated debt 7,776 229 3.94% 22,334 1,293 7.73%
Short-term borrowings 148 1 0.90% 1,656 3 0.24%
Total interest-bearing liabilities 783,161 2,026 0.35% 754,598 3,440 0.61%
Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds 1,206,968 2,026 0.22% 1,124,876 3,440 0.41%
Other liabilities 34,951 36,872
Total liabilities 1,241,919 1,161,748
Shareholders' equity 169,865 172,928
Total liabilities and shareholders' equity $ 1,411,784 $ 1,334,676
Net interest income(2) / margin 37,698 3.85% 36,167 3.93%
Less tax equivalent adjustment(2) (561) --
Net interest income $ 37,137 $ 36,167
(1)Includes loans held-for-sale. Yield amounts earned on loans include loan fees and costs. Nonaccrual loans are included in average balance.
(2)Reflects tax equivalent adjustment for tax exempt income based on a 35% tax rate.

CONTACT: Heritage Commerce Corp Debbie Reuter, SVP, Corporate Secretary (408) 494-4542Source:Heritage Commerce Corp