×

Heritage Commerce Corp Earnings increase 35% to $4.5 Million for the Second Quarter of 2015 from the Second Quarter of 2014

SAN JOSE, Calif., July 23, 2015 (GLOBE NEWSWIRE) -- Heritage Commerce Corp (Nasdaq:HTBK), the holding company (the "Company") for Heritage Bank of Commerce (the "Bank"), today reported that net income increased 35% to $4.5 million, or $0.14 per average diluted common share, for the second quarter of 2015, compared to $3.3 million, or $0.10 per average diluted common share for the second quarter of 2014, and increased 8% from $4.1 million, or $0.13 per average diluted common share for the first quarter of 2015. For the six months ended June 30, 2015, net income increased 35% to $8.6 million, or $0.27 per average diluted common share, from $6.4 million, or $0.20 per average diluted common share, for the six months ended June 30, 2014. All results are unaudited.

"We achieved record pre-tax income for the second quarter of 2015, reflecting the overall strength and diversity of our business and the robust economy of the San Francisco Bay Area markets in which we operate. Highlighting our strong operating performance were solid revenue growth, an increase in core deposits, and an expanding net interest margin," said Walter Kaczmarek, President and Chief Executive Officer. "Loan growth continued to be strong at 14% year-over-year and 3% on a linked quarter basis. Total commercial and residential real estate loans increased 12% and C&I loans increased 13% year-over-year. Growth in most of our loan categories highlights our ability to deepen and grow customer relationships, as well as gain new customers and market share. Bay View Funding, acquired in November 2014, is expanding our franchise and is positively impacting interest income and net interest margin."

"Deposits, excluding all time deposits and CDARS deposits, increased 19% year-over-year, and 2% on a linked-quarter basis," added Mr. Kaczmarek. "At the end of the first quarter of 2015, we announced our plans to acquire Focus Business Bank, and we expect this acquisition will generate considerable operating synergies. We remain on schedule for a closing in the third quarter of 2015."

Second Quarter 2015 Highlights (as of, or for the period ended June 30, 2015, except as noted):

  • Diluted earnings per share increased 40% to $0.14 for the second quarter of 2015, compared to $0.10 for the second quarter of 2014, and increased 8% from $0.13 for the first quarter of 2015. Diluted earnings per share increased 35% to $0.27 for the first six months of 2015, compared to $0.20 per diluted share for the first six months of 2014.
  • Reflecting strong balance sheet growth, net interest income increased 29% to $17.6 million for the second quarter of 2015, compared to $13.7 million for the second quarter of 2014, and increased 5% from $16.9 million for the first quarter of 2015. For the first six months of 2015, net interest income increased 28% to $34.5 million, compared to $27.0 million for the first six months of 2014.
  • The fully tax equivalent ("FTE") net interest margin increased 59 basis points to 4.66% for the second quarter of 2015, from 4.07% for the second quarter of 2014, primarily due to loan growth, higher yields on securities, and revenue from the higher yielding Bay View Funding factored receivables portfolio, and a special dividend of $203,000 paid by the San Francisco Federal Home Loan Bank ("FHLB"). The net interest margin increased 8 basis points for the second quarter of 2015, from 4.58% for the first quarter of 2015 primarily due to loan growth and the special dividend paid by the FHLB. For the first six months of 2015, net interest margin increased 56 basis points to 4.62%, compared to 4.06% for the first six months of 2014, primarily due to revenue from the higher yielding Bay View Funding factored receivables portfolio, and the special dividend paid by the FHLB.
  • Solid performance ratios include a return on average tangible assets of 1.09%, a return on average tangible equity of 10.49%, and an efficiency ratio of 63.70% for the second quarter of 2015.
  • Loans (excluding loans-held-for-sale) increased 14% to $1.13 billion at June 30, 2015, compared to $990.3 million at June 30, 2014, and increased 3% from $1.10 billion at March 31, 2015.
  • Nonperforming assets ("NPAs") declined to $5.3 million, or 0.31% of total assets, at June 30, 2015, compared to $8.7 million, or 0.59% of total assets, at June 30, 2014, and $8.4 million, or 0.51% of total assets, at March 31, 2015.
  • Classified assets, net of Small Business Administration ("SBA") guarantees, decreased 52% to $11.2 million at June 30, 2015, from $23.1 million at June 30, 2014, and decreased 33% from $16.6 million at March 31, 2015.
  • The Company had net recoveries of $181,000 for the second quarter of 2015, compared to net charge-offs of $27,000 for the second quarter of 2014, and net recoveries of $235,000 for the first quarter of 2015.
  • There was a $22,000 provision for loan losses for the second quarter of 2015, compared to a $198,000 credit provision for loan losses for the second quarter of 2014, and a $60,000 credit provision for loan losses for the first quarter of 2015. There was a $38,000 credit provision for loan losses for the six months ended June 30, 2015, compared to a $208,000 credit provision for loan losses for the six months ended June 30, 2014.
  • The allowance for loan losses ("ALLL") was 1.65% of total loans at June 30, 2015, compared to 1.88% at June 30, 2014, and 1.68% at March 31, 2015.
  • Deposits totaled $1.45 billion at June 30, 2015, compared to $1.27 billion at June 30, 2014, and $1.42 billion at March 31, 2015. Deposits (excluding all time deposits and CDARS deposits) increased $187.1 million, or 19%, to $1.19 billion at June 30, 2015, from $1.00 billion at June 30, 2014, and increased $24.2 million, or 2%, from $1.17 billion at March 31, 2015.
  • As of January 1, 2015, along with other community banking organizations, we became subject to new capital requirements, and certain provisions of the new rules will be phased in from 2015 through 2019 under Basel III and Dodd-Frank. The Company's consolidated capital ratios and the Bank's capital ratios exceeded the regulatory guidelines for a well-capitalized financial institution under the Basel III regulatory requirements at June 30, 2015.

Well-Capitalized
Heritage Commerce Heritage Bank of Financial Institution
Capital Ratios Corp Commerce Basel III Regulatory
Guidelines
Total Risk-Based 13.0% 12.6% 10.0%
Tier 1 Risk-Based 11.8% 11.3% 8.0%
Common Equity Tier 1 Risk-based 10.5% 11.3% 6.5%
Leverage 10.6% 10.2% 5.0%

Focus Business Bank Merger Update

On April 23, 2015, the Company and Focus Business Bank ("Focus") jointly announced the execution of a definitive agreement and plan of merger and reorganization whereby Focus will merge into Heritage Bank of Commerce in a transaction valued at approximately $59.0 million. The transaction combines two of the leading commercial banking franchises in San Jose, California with more than $2 billion in combined assets. Shareholders of Focus will receive a fixed exchange ratio at closing of 1.8235 shares of the Company's common stock for each share of Focus common stock. Based on the Company's stock price as of June 30, 2015, total consideration for each Focus share would be $17.52.

The Company and the Bank have received regulatory approvals from both the Federal Reserve Board of San Francisco and the California Department of Business Oversight for the merger of the Company and Focus. The transaction is subject to the approval of the shareholders of the Company and Focus. The Company and Focus will hold their respective special shareholder meetings on August 11, 2015, at 1:00 p.m. PDT. The transaction is expected to close in the third quarter of 2015, pending shareholder approval and the satisfaction of other customary closing conditions.

Focus is a California-based bank with approximately $408 million in assets at June 30, 2015, with a single branch located in downtown San Jose, CA. As of June 30, 2015, on a pro forma consolidated basis, the combined company would have had approximately $2 billion in assets. The pre‑tax acquisition costs incurred by the Company related to the Focus transaction totaled $542,000 during the first six months of 2015, of which $423,000 was incurred during the second quarter of 2015, and $119,000 was incurred during the first quarter of 2015.

Operating Results

Primarily as a result of growth in the loan portfolio, contribution to revenue from Bay View Funding, a special dividend of $203,000 paid by the FHLB, and increases in core deposits, net interest income increased 29% to $17.6 million for the second quarter of 2015, compared to $13.7 million for the second quarter of 2014, and increased 5% from $16.9 million for the first quarter of 2015. Net interest income increased 28% to $34.5 million for the six months ended June 30, 2015, compared to $27.0 million for the six months ended June 30, 2014.

The net interest margin (FTE) expanded to 4.66% for the second quarter of 2015, compared to 4.07% for the second quarter of 2014, and 4.58% for the first quarter of 2015. For the six months ended June 30, 2015, net interest margin increased 56 basis points to 4.62%, from 4.06% for the six months ended June 30, 2014. The increase was primarily due to revenue from the higher yielding Bay View Funding factored receivables portfolio, and the special dividend paid by the FHLB.

There was a $22,000 provision for loan losses for the second quarter of 2015, compared to a $198,000 credit provision for loan losses for the second quarter of 2014, and a $60,000 credit provision for loan losses for the first quarter of 2015. There was a $38,000 credit provision for loan losses for the six months ended June 30, 2015, compared to a $208,000 credit provision for loan losses for the six months ended June 30, 2014.

Noninterest income was $2.2 million for the second quarter of 2015, compared to $2.0 million for the second quarter of 2014, and $1.9 million for the first quarter of 2015. For the six months ended June 30, 2015 and June 30, 2014, noninterest income was $4.1 million.

Total noninterest expense for the second quarter of 2015 increased to $12.6 million, from $10.8 million for the second quarter of 2014, and increased from $12.3 million for the first quarter of 2015. Noninterest expense for the six months ended June 30, 2015 increased 17% to $24.9 million, compared to $21.3 million for the six months ended June 30, 2014. The increase in noninterest expense for the second quarter and six months ended June 30, 2015, was primarily due to the operating costs of Bay View Funding and costs related to the Focus transaction. The pre‑tax acquisition costs incurred by the Company related to the Focus transaction totaled $542,000 during the first six months of 2015, of which $423,000 was incurred during the second quarter of 2015, and $119,000 was incurred during the first quarter of 2015. Full time equivalent employees were 243, 203, and 243 at June 30, 2015, June 30, 2014, and March 31, 2015, respectively.

Primarily due to a higher net interest income, the efficiency ratio for the second quarter of 2015 improved to 63.70%, compared to 68.45% for the second quarter of 2014, and 65.35% for the first quarter of 2015. The efficiency ratio for the six months ended June 30, 2015 was 64.51%, compared to 68.57% for the six months ended June 30, 2014. The decrease in the efficiency ratio in the second quarter and six months ended June 30, 2015 compared to the same periods in 2014 was primarily due to higher net interest income and noninterest income, partially offset by higher noninterest expense.

Income tax expense for the second quarter of 2015 was $2.7 million, compared to $1.8 million for the second quarter of 2014, and $2.4 million for the first quarter of 2015. The effective tax rate for the second quarter of 2015 increased to 37.5%, compared to 35.6% for the second quarter of 2014 and 37.0% for the first quarter of 2015. Income tax expense for the six months ended June 30, 2015 was $5.1 million, compared to $3.6 million for the six months ended June 30, 2014. The effective tax rate for the six months ended June 30, 2015 was 37.3%, compared to 35.8% for the six months ended June 30, 2014. The difference in the effective tax rate for the periods reported, compared to the combined Federal and state statutory tax rate of 42%, is primarily the result of the Company's investment in life insurance policies whose earnings are not subject to taxes, tax credits related to investments in low income housing limited partnerships (net of low income housing investment losses), and tax-exempt interest income earned on municipal bonds. The increase in the effective tax rate for the second quarter and six months ended June 30, 2015, was primarily due to higher pre-tax income, while the net credits related to investment in low income housing limited partnerships and tax-exempt interest income earned on municipal bonds remained relatively flat.

Balance Sheet Review, Capital Management and Credit Quality

Total assets were $1.68 billion at June 30, 2015, compared to $1.48 billion at June 30, 2014, and $1.65 billion at March 31, 2015.

The investment securities available-for-sale portfolio totaled $209.1 million at June 30, 2015, compared to $261.5 million at June 30, 2014, and $200.8 million at March 31, 2015. At June 30, 2015, the securities available-for-sale portfolio was comprised of $157.6 million agency mortgage-backed securities (all issued by U.S. Government sponsored entities), $36.3 million of corporate bonds, and $15.2 million of single entity issue trust preferred securities. The pre-tax unrealized gain on securities available-for-sale at June 30, 2015 was $2.4 million, compared to a pre-tax unrealized gain on securities available-for-sale of $4.5 million at June 30, 2014, and a pre-tax unrealized gain on securities available-for-sale of $5.7 million at March 31, 2015. During the second quarter of 2015, the Company purchased $20.0 million of agency mortgage-backed securities available-for-sale with an aggregate book yield of 1.89% and duration of 4.89 years.

At June 30, 2015, investment securities held-to-maturity totaled $100.3 million, compared to $96.0 million at June 30, 2014, and $94.6 million at March 31, 2015. At June 30, 2015, the securities held-to-maturity portfolio, at amortized cost, was comprised of $83.5 million tax-exempt municipal bonds and $16.8 million agency mortgage-backed securities. During the second quarter of 2015, the Company purchased $3.2 million of agency mortgage-backed securities held-to-maturity with an aggregate book yield of 2.60% and duration of 5.96 years, and purchased $3.6 million of tax-exempt municipal securities held-to-maturity with an aggregate book yield of 2.74% and duration of 13.10 years.

Loans, excluding loans held-for-sale, increased 14% to $1.13 billion at June 30, 2015, from $990.3 million at June 30, 2014, and increased 3% from $1.10 billion at March 31, 2015. The loan portfolio remains well-diversified with commercial and industrial ("C&I") loans accounting for 42% of the loan portfolio at June 30, 2015, which included $42.3 million of factored receivables at Bay View Funding. Commercial and residential real estate loans accounted for 45% of the total loan portfolio, of which 48% were owner-occupied by businesses. Consumer and home equity loans accounted for 7% of total loans, and land and construction loans accounted for the remaining 6% of total loans at June 30, 2015. C&I line usage was 40% at June 30, 2015, compared to 42% at June 30, 2014, and 37% at March 31, 2015.

The yield on the loan portfolio was 5.66% for the second quarter of 2015, compared to 4.78% for the second quarter of 2014, and 5.71% for the first quarter of 2015. The yield on the loan portfolio was 5.69% for the six months ended June 30, 2015, compared to 4.82% for the six months ended June 30, 2014. The increase in the yield on the loan portfolio for the second quarter and six months ended June 30, 2015 compared to the same periods in 2014, primarily reflects the higher yielding Bay View Funding factored receivables portfolio.

NPAs at June 30, 2015 were $5.3 million, or 0.31% of total assets, compared to $8.7 million, or 0.59% of total assets, at June 30, 2014, and $8.4 million, or 0.51% of total assets, at March 31, 2015. At June 30, 2015, the NPAs included no loans guaranteed by the SBA. Foreclosed assets were $421,000 at June 30, 2015, compared to $525,000 at June 30, 2014, and $1.7 million at March 31, 2015. The following is a breakout of NPAs at the periods indicated:

End of Period:
NONPERFORMING ASSETS June 30, 2015 March 31, 2015 June 30, 2014
(in $000's, unaudited) Balance % of Total Balance % of Total Balance % of Total
Commercial real estate loans $ 3,160 60% $ 4,151 49% $ 1,693 20%
SBA loans 741 14% 799 10% 2,963 34%
Land and construction loans 500 10% 1,290 15% 1,688 19%
Foreclosed assets 421 8% 1,716 20% 525 6%
Home equity and consumer loans 327 6% 342 4% 578 7%
Commercial and industrial loans 104 2% 151 2% 766 9%
Restructured and loans over 90 days past due and accruing -- 0% -- 0% 454 5%
Total nonperforming assets $ 5,253 100% $ 8,449 100% $ 8,667 100%

Classified assets (net of SBA guarantees) were $11.2 million at June 30, 2015, compared to $23.1 million at June 30, 2014, and $16.6 million at March 31, 2015.

The following table summarizes the allowance for loan losses:

For the Quarter Ended For the Six Months Ended
ALLOWANCE FOR LOAN LOSSES June 30, March 31, June 30, June 30, June 30,
(in $000's, unaudited) 2015 2015 2014 2015 2014
Balance at beginning of period $ 18,554 $ 18,379 $ 18,817 $ 18,379 $ 19,164
Provision (credit) for loan losses during the period 22 (60) (198) (38) (208)
Net (charge-offs) recoveries during the period 181 235 (27) 416 (364)
Balance at end of period $ 18,757 $ 18,554 $ 18,592 $ 18,757 $ 18,592
Total loans $ 1,133,603 $ 1,101,991 $ 990,341 $ 1,133,603 $ 990,341
Total nonperforming loans $ 4,832 $ 6,733 $ 8,142 $ 4,832 $ 8,142
Allowance for loan losses to total loans 1.65% 1.68% 1.88% 1.65% 1.88%
Allowance for loan losses to total nonperforming loans 388.18% 275.57% 228.35% 388.18% 228.35%

The ALLL at June 30, 2015 was 1.65% of total loans, compared to 1.88% at June 30, 2014, and 1.68% at March 31, 2015. The decrease in the ALLL to total loans at June 30, 2015 from June 30, 2014 was primarily due to increasing loan balances with no default histories, coupled with the decrease in nonperforming assets, improving the quality of the loan portfolio overall. The ALLL to total nonperforming loans was 388.18% at June 30, 2015, compared to 228.35% at June 30, 2014, and 275.57% at March 31, 2015.

Total deposits increased $179.3 million to $1.45 billion at June 30, 2015, compared to $1.27 billion at June 30, 2014, and increased $23.5 million from $1.42 billion at March 31, 2015. Noninterest-bearing demand deposits increased $118.0 million at June 30, 2015 from June 30, 2014, and increased $29.9 million from March 31, 2015. Interest-bearing demand deposits increased $42.9 million at June 30, 2015 from June 30, 2014, and decreased $5.6 million from March 31, 2015. Savings and money market deposits increased $26.2 million at June 30, 2015 from June 30, 2014, and remained flat from March 31, 2015. Brokered deposits decreased $7.5 million at June 30, 2015 from June 30, 2014, and decreased $2.0 million from March 31, 2015. Deposits (excluding all time deposits and CDARS deposits) increased $187.1 million, or 19%, to $1.19 billion at June 30, 2015, from $1.00 billion at June 30, 2014, and increased $24.2 million, or 2%, from $1.17 billion at March 31, 2015.

The total cost of deposits decreased one basis points to 0.15% for the second quarter of 2015, from 0.16% for the second quarter of 2014, and remained the same from the first quarter of 2015. The total cost of deposits decreased 2 basis points to 0.15% for the six months ended June 30, 2015, from 0.17% for the six months ended June 30, 2014.

Tangible equity was $171.1 million at June 30, 2015, compared to $180.2 million at June 30, 2014 and $170.6 million at March 31, 2015. The decrease in tangible equity at June 30, 2015 from June 30, 2014 was primarily due to the addition of goodwill and other intangible assets from the Bay View Funding acquisition and an increase in accumulated other comprehensive loss, partially offset by an increase in retained earnings. Tangible book value per common share was $5.70 at June 30, 2015, compared to $6.09 at June 30, 2014, and $5.70 at March 31, 2015. There were 21,004 shares of Series C Preferred Stock outstanding at June 30, 2015, June 30, 2014, and March 31, 2015, 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 $5.31 at June 30, 2015, compared to $5.64 at June 30, 2014, and $5.31 at March 31, 2015.

Accumulated other comprehensive loss was ($3.3) million at June 30, 2015, compared to accumulated other comprehensive loss of ($92,000) a year ago, and accumulated other comprehensive loss of ($1.3) million at March 31, 2015. The unrealized gain on securities available-for-sale included in accumulated other comprehensive loss was an unrealized gain of $1.4 million, net of taxes, at June 30, 2015, compared to an unrealized gain of $2.6 million, net of taxes, at June 30, 2014, and an unrealized gain of $3.3 million, net of taxes, at March 31, 2015. The components of accumulated other comprehensive loss, net of taxes, at June 30, 2015 include the following: an unrealized gain on available-for-sale securities of $1.4 million; the remaining unamortized unrealized gain on securities available-for-sale transferred to held-to-maturity of $418,000; a split dollar insurance contracts liability of ($2.1) million; a supplemental executive retirement plan liability of ($3.8) million; and an unrealized gain on interest-only strip from SBA loans of $836,000.

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, Hollister, Los Altos, Los Gatos, Morgan Hill, Pleasanton, 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 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. In addition, our past results of operations do not necessarily indicate our future results. The forward‑looking statements could be affected by many factors, including but not limited to: (1) 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; (2) changes in the financial performance or condition of the Company's customers, or changes in the performance or creditworthiness of our customers' suppliers or other counterparties, which could lead to decreased loan utilization rates, delinquencies, or defaults and could negatively affect our customers' ability to meet certain credit obligations; (3) volatility in credit and equity markets and its effect on the global economy; (4) changes in consumer spending, borrowings and saving habits; (5) competition for loans and deposits and failure to attract or retain deposits and loans; (6) our ability to increase market share and control expenses; (7) our ability to develop and promote customer acceptance of new products and services in a timely manner; (8) risks associated with concentrations in real estate related loans; (9) other‑than‑temporary impairment charges to our securities portfolio; (10) an oversupply of inventory and deterioration in values of California commercial real estate; (11) a prolonged slowdown in construction activity; (12) changes in the level of nonperforming assets and charge-offs and other credit quality measures, and their impact on the adequacy of the Company's allowance for loan losses and the Company's provision for loan losses; (13) 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; (14) changes in inflation, interest rates, and market liquidity which may impact interest margins and impact funding sources; (15) our ability to raise capital or incur debt on reasonable terms; (16) regulatory limits on Heritage Bank of Commerce's ability to pay dividends to the Company; (17) the impact of reputational risk on such matters as business generation and retention, funding and liquidity; (18) the impact of cyber security attacks or other disruptions to the Company's information systems and any resulting compromise of data or disruptions in service; (19) the effect and uncertain impact on the Company of the enactment of the Dodd‑Frank Wall Street Reform and Consumer Protection Act of 2010 and the rules and regulations promulgated by supervisory and oversight agencies implementing the new legislation; (20) significant changes in applicable laws and regulations, including those concerning taxes, banking and securities; (21) changes in the competitive environment among financial or bank holding companies and other financial service providers; (22) 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; (23) 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; (24) the successful completion of the Focus Business Bank merger, integration of the business, employees and operations of Focus Business Bank with the Company and our ability to achieve the projected synergies of this acquisition; and (25) our success in managing the risks involved in the foregoing factors.

Member FDIC

For the Quarter Ended: Percent Change From: For the Six Months Ended:
CONSOLIDATED INCOME STATEMENTS June 30, March 31, June 30, March 31, June 30, June 30, June 30, Percent
(in $000's, unaudited) 2015 2015 2014 2015 2014 2015 2014 Change
Interest income $ 18,175 $ 17,366 $ 14,192 5% 28% $ 35,541 $ 28,047 27%
Interest expense 533 508 507 5% 5% 1,041 1,028 1%
Net interest income before provision for loan losses 17,642 16,858 13,685 5% 29% 34,500 27,019 28%
Provision (credit) for loan losses 22 (60) (198) 137% 111% (38) (208) 82%
Net interest income after provision for loan losses 17,620 16,918 13,883 4% 27% 34,538 27,227 27%
Noninterest income:
Service charges and fees on deposit accounts 715 623 646 15% 11% 1,338 1,266 6%
Increase in cash surrender value of life insurance 396 400 397 -1% 0% 796 795 0%
Servicing income 299 306 313 -2% -4% 605 661 -8%
Gain on sales of SBA loans 186 207 442 -10% -58% 393 599 -34%
Gain on sales of securities -- -- -- N/A N/A -- 50 -100%
Other 568 390 249 46% 128% 958 693 38%
Total noninterest income 2,164 1,926 2,047 12% 6% 4,090 4,064 1%
Noninterest expense:
Salaries and employee benefits 7,712 8,042 6,819 -4% 13% 15,754 13,062 21%
Occupancy and equipment 1,045 1,045 987 0% 6% 2,090 1,932 8%
Professional fees 239 95 126 152% 90% 334 712 -53%
Other 3,621 3,094 2,837 17% 28% 6,715 5,609 20%
Total noninterest expense 12,617 12,276 10,769 3% 17% 24,893 21,315 17%
Income before income taxes 7,167 6,568 5,161 9% 39% 13,735 9,976 38%
Income tax expense 2,690 2,430 1,837 11% 46% 5,120 3,576 43%
Net income 4,477 4,138 3,324 8% 35% 8,615 6,400 35%
Dividends on preferred stock (448) (448) (224) 0% 100% (896) (448) 100%
Net income available to common shareholders 4,029 3,690 3,100 9% 30% 7,719 5,952 30%
Undistributed earnings allocated to Series C preferred stock (331) (274) (358) 21% -8% (605) (673) -10%
Distributed and undistributed earnings allocated to common shareholders $ 3,698 $ 3,416 $ 2,742 8% 35% $ 7,114 $ 5,279 35%
PER COMMON SHARE DATA
(unaudited)
Basic earnings per share $ 0.14 $ 0.13 $ 0.10 8% 40% $ 0.27 $ 0.20 35%
Diluted earnings per share $ 0.14 $ 0.13 $ 0.10 8% 40% $ 0.27 $ 0.20 35%
Weighted average shares outstanding - basic 26,573,909 26,509,723 26,370,510 0% 1% 26,541,816 26,365,167 1%
Weighted average shares outstanding - diluted 26,767,255 26,680,253 26,503,401 0% 1% 26,724,260 26,493,466 1%
Common shares outstanding at period-end 26,596,094 26,522,739 26,370,510 0% 1% 26,596,094 26,370,510 1%
Pro forma common shares outstanding at period-end, assuming Series C preferred stock was converted into common stock 32,197,094 32,123,739 31,971,510 0% 1% 32,197,094 31,971,510 1%
Book value per share $ 6.30 $ 6.31 $ 6.14 0% 3% $ 6.30 $ 6.14 3%
Tangible book value per share $ 5.70 $ 5.70 $ 6.09 0% -6% $ 5.70 $ 6.09 -6%
Pro forma tangible book value per share, assuming Series C preferred stock was converted into common stock $ 5.31 $ 5.31 $ 5.64 0% -6% $ 5.31 $ 5.64 -6%
KEY FINANCIAL RATIOS
(unaudited)
Annualized return on average equity 9.59% 9.04% 7.45% 6% 29% 9.32% 7.28% 28%
Annualized return on average tangible equity 10.49% 9.89% 7.51% 6% 40% 10.20% 7.33% 39%
Annualized return on average assets 1.08% 1.03% 0.91% 5% 19% 1.05% 0.88% 19%
Annualized return on average tangible assets 1.09% 1.04% 0.91% 5% 20% 1.06% 0.88% 20%
Annualized return before income taxes and provision (credit) for loan losses to average assets 1.73% 1.61% 1.36% 7% 27% 1.67% 1.35% 24%
Net interest margin 4.66% 4.58% 4.07% 2% 14% 4.62% 4.06% 14%
Efficiency ratio 63.70% 65.35% 68.45% -3% -7% 64.51% 68.57% -6%
AVERAGE BALANCES
(in $000's, unaudited)
Average assets $ 1,664,568 $ 1,634,923 $ 1,469,085 2% 13% $ 1,649,839 $ 1,464,008 13%
Average tangible assets $ 1,648,505 $ 1,619,006 $ 1,467,718 2% 12% $ 1,633,686 $ 1,462,583 12%
Average earning assets $ 1,542,551 $ 1,516,284 $ 1,373,957 2% 12% $ 1,529,490 $ 1,367,973 12%
Average loans held-for-sale $ 1,748 $ 987 $ 4,135 77% -58% $ 1,370 $ 3,717 -63%
Average total loans $ 1,106,158 $ 1,064,849 $ 970,538 4% 14% $ 1,085,618 $ 948,911 14%
Average deposits $ 1,428,469 $ 1,403,636 $ 1,257,121 2% 14% $ 1,416,121 $ 1,253,644 13%
Average demand deposits - noninterest-bearing $ 550,869 $ 530,552 $ 436,018 4% 26% $ 540,767 $ 432,501 25%
Average interest-bearing deposits $ 877,600 $ 873,084 $ 821,103 1% 7% $ 875,354 $ 821,143 7%
Average interest-bearing liabilities $ 877,613 $ 873,135 $ 822,660 1% 7% $ 875,392 $ 821,955 7%
Average equity $ 187,179 $ 185,620 $ 178,963 1% 5% $ 186,400 $ 177,377 5%
Average tangible equity $ 171,116 $ 169,703 $ 177,596 1% -4% $ 170,247 $ 175,952 -3%
End of Period: Percent Change From:
CONSOLIDATED BALANCE SHEETS June 30, March 31, June 30, March 31, June 30,
(in $000's, unaudited) 2015 2015 2014 2015 2014
ASSETS
Cash and due from banks $ 36,960 $ 27,388 $ 32,162 35% 15%
Federal funds sold and interest-bearing deposits in other financial institutions 94,308 124,388 17,256 -24% 447%
Securities available-for-sale, at fair value 209,092 200,768 261,489 4% -20%
Securities held-to-maturity, at amortized cost 100,321 94,588 95,972 6% 5%
Loans held-for-sale - SBA, including deferred costs 3,794 1,390 2,269 173% 67%
Loans:
Commercial 471,651 458,498 415,557 3% 13%
Real estate:
Commercial and residential 508,497 487,475 454,676 4% 12%
Land and construction 68,666 74,972 47,758 -8% 44%
Home equity 71,579 65,243 56,743 10% 26%
Consumer 13,739 16,200 16,112 -15% -15%
Loans 1,134,132 1,102,388 990,846 3% 14%
Deferred loan fees (529) (397) (505) 33% 5%
Total loans, net of deferred fees 1,133,603 1,101,991 990,341 3% 14%
Allowance for loan losses (18,757) (18,554) (18,592) 1% 1%
Loans, net 1,114,846 1,083,437 971,749 3% 15%
Company owned life insurance 52,052 51,657 50,452 1% 3%
Premises and equipment, net 7,249 7,340 7,237 -1% 0%
Goodwill 13,055 13,054 -- 0% N/A
Other intangible assets 2,898 3,087 1,297 -6% 123%
Accrued interest receivable and other assets 45,631 45,790 40,736 0% 12%
Total assets $ 1,680,206 $ 1,652,887 $ 1,480,619 2% 13%
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand, noninterest-bearing $ 574,210 $ 544,339 $ 456,235 5% 26%
Demand, interest-bearing 235,922 241,477 193,041 -2% 22%
Savings and money market 380,398 380,486 354,175 0% 7%
Time deposits-under $250 55,571 55,747 57,987 0% -4%
Time deposits--$250 and over 160,106 163,066 158,011 -2% 1%
Time deposits - brokered 26,139 28,126 33,614 -7% -22%
CDARS - money market and time deposits 14,791 10,408 14,785 42% 0%
Total deposits 1,447,137 1,423,649 1,267,848 2% 14%
Accrued interest payable and other liabilities 46,030 42,461 31,246 8% 47%
Total liabilities 1,493,167 1,466,110 1,299,094 2% 15%
Shareholders' Equity:
Series C preferred stock, net 19,519 19,519 19,519 0% 0%
Common stock 134,307 133,992 132,911 0% 1%
Retained earnings 36,484 34,583 29,187 5% 25%
Accumulated other comprehensive loss (3,271) (1,317) (92) -148% -3455%
Total shareholders' equity 187,039 186,777 181,525 0% 3%
Total liabilities and shareholders' equity $ 1,680,206 $ 1,652,887 $ 1,480,619 2% 13%
End of Period: Percent Change From:
June 30, March 31, June 30, March 31, June 30,
2015 2015 2014 2015 2014
CREDIT QUALITY DATA
(in $000's, unaudited)
Nonaccrual loans - held-for-investment $ 4,832 $ 6,733 $ 7,688 -28% -37%
Restructured and loans over 90 days past due and still accruing -- -- 454 N/A -100%
Total nonperforming loans 4,832 6,733 8,142 -28% -41%
Foreclosed assets 421 1,716 525 -75% -20%
Total nonperforming assets $ 5,253 $ 8,449 $ 8,667 -38% -39%
Other restructured loans still accruing $ 158 $ 163 $ 1,180 -3% -87%
Net (recoveries) charge-offs during the quarter $ (181) $ (235) $ 27 23% -770%
Provision (credit) for loan losses during the quarter $ 22 $ (60) $ (198) 137% 111%
Allowance for loan losses $ 18,757 $ 18,554 $ 18,592 1% 1%
Classified assets(1) $ 11,168 $ 16,647 $ 23,092 -33% -52%
Allowance for loan losses to total loans 1.65% 1.68% 1.88% -2% -12%
Allowance for loan losses to total nonperforming loans 388.18% 275.57% 228.35% 41% 70%
Nonperforming assets to total assets 0.31% 0.51% 0.59% -39% -47%
Nonperforming loans to total loans 0.43% 0.61% 0.82% -30% -48%
Classified assets* to Heritage Commerce Corp Tier 1 capital plus allowance for loan losses 6% 9% 12% -33% -50%
Classified assets* to Heritage Bank of Commerce Tier 1 capital plus allowance for loan losses 6% 9% 13% -33% -54%
OTHER PERIOD-END STATISTICS
(in $000's, unaudited)
Heritage Commerce Corp:
Tangible equity $ 171,086 $ 170,636 $ 180,228 0% -5%
Tangible common equity $ 151,567 $ 151,117 $ 160,709 0% -6%
Shareholders' equity / total assets 11.13% 11.30% 12.26% -2% -9%
Tangible equity / tangible assets 10.28% 10.43% 12.18% -1% -16%
Tangible common equity / tangible assets 9.11% 9.23% 10.86% -1% -16%
Loan to deposit ratio 78.33% 77.41% 78.11% 1% 0%
Noninterest-bearing deposits / total deposits 39.68% 38.24% 35.98% 4% 10%
Total risk-based capital ratio(2) 13.0% 13.0% 15.1% 0% -14%
Tier 1 risk-based capital ratio(2) 11.8% 11.7% 13.9% 0% -16%
Common Equity Tier 1 risk-based capital ratio(2) 10.5% 10.4% N/A 1% N/A
Leverage ratio(2) 10.6% 10.5% 12.0% 1% -12%
Heritage Bank of Commerce:
Total risk-based capital ratio(2) 12.6% 12.3% 14.1% 2% -11%
Tier 1 risk-based capital ratio(2) 11.3% 11.0% 12.9% 3% -13%
Common Equity Tier 1 risk-based capital ratio(2) 11.3% 11.0% N/A 3% N/A
Leverage ratio(2) 10.2% 10.0% 11.2% 2% -9%
(1)Net of SBA guarantees
(2) June 30, 2015 and March 31, 2015 capital ratios are based on the Basel III regulatory requirements; June 30, 2014 capital ratios are based on the Basel I regulatory requirements.
For the Quarter Ended For the Quarter Ended
June 30, 2015 June 30, 2014
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) $ 1,107,906 $ 15,643 5.66% $ 974,673 $ 11,617 4.78%
Securities - taxable 238,801 1,937 3.25% 287,841 2,047 2.85%
Securities - tax exempt(2) 80,943 792 3.91% 79,845 779 3.91%
Federal funds sold and interest-bearing deposits in other financial institutions 114,901 80 0.28% 31,598 22 0.28%
Total interest earning assets(2) 1,542,551 18,452 4.80% 1,373,957 14,465 4.22%
Cash and due from banks 27,996 23,919
Premises and equipment, net 7,342 7,212
Goodwill and other intangible assets 16,063 1,367
Other assets 70,616 62,630
Total assets $ 1,664,568 $ 1,469,085
Liabilities and shareholders' equity:
Deposits:
Demand, noninterest-bearing $ 550,869 $ 436,018
Demand, interest-bearing 235,860 105 0.18% 199,010 82 0.17%
Savings and money market 382,751 198 0.21% 354,826 166 0.19%
Time deposits - under $100 19,065 14 0.29% 20,610 16 0.31%
Time deposits -- $100 and over 199,615 161 0.32% 194,483 157 0.32%
Time deposits - brokered 26,790 53 0.79% 37,766 83 0.88%
CDARS - money market and time deposits 13,519 2 0.06% 14,408 2 0.06%
Total interest-bearing deposits 877,600 533 0.24% 821,103 506 0.25%
Total deposits 1,428,469 533 0.15% 1,257,121 506 0.16%
Short-term borrowings 13 -- 0.00% 1,557 1 0.26%
Total interest-bearing liabilities 877,613 533 0.24% 822,660 507 0.25%
Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds 1,428,482 533 0.15% 1,258,678 507 0.16%
Other liabilities 48,907 31,444
Total liabilities 1,477,389 1,290,122
Shareholders' equity 187,179 178,963
Total liabilities and shareholders' equity $ 1,664,568 $ 1,469,085
Net interest income(2) / margin 17,919 4.66% 13,958 4.07%
Less tax equivalent adjustment(2) (277) (273)
Net interest income $ 17,642 $ 13,685
(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 Six Months Ended For the Six Months Ended
June 30, 2015 June 30, 2014
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) $ 1,086,988 $ 30,647 5.69% $ 952,628 $ 22,756 4.82%
Securities - taxable 234,651 3,716 3.19% 287,946 4,217 2.95%
Securities - tax exempt(2) 80,410 1,571 3.94% 79,895 1,557 3.93%
Federal funds sold and interest-bearing deposits in other financial institutions 127,441 157 0.25% 47,504 62 0.26%
Total interest earning assets(2) 1,529,490 36,091 4.76% 1,367,973 28,592 4.21%
Cash and due from banks 27,628 24,323
Premises and equipment, net 7,397 7,224
Goodwill and other intangible assets 16,153 1,425
Other assets 69,171 63,063
Total assets $ 1,649,839 $ 1,464,008
Liabilities and shareholders' equity:
Deposits:
Demand, noninterest-bearing $ 540,767 $ 432,501
Demand, interest-bearing 233,669 205 0.18% 199,207 159 0.16%
Savings and money market 382,385 383 0.20% 346,251 317 0.18%
Time deposits - under $100 19,370 29 0.30% 20,887 33 0.32%
Time deposits -- $100 and over 200,277 312 0.31% 194,644 316 0.33%
Time deposits - brokered 27,450 108 0.79% 43,384 199 0.92%
CDARS - money market and time deposits 12,203 4 0.07% 16,770 3 0.04%
Total interest-bearing deposits 875,354 1,041 0.24% 821,143 1,027 0.25%
Total deposits 1,416,121 1,041 0.15% 1,253,644 1,027 0.17%
Short-term borrowings 38 -- 0.00% 812 1 0.25%
Total interest-bearing liabilities 875,392 1,041 821,955 1,028 0.25%
Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds 1,416,159 1,041 0.15% 1,254,456 1,028 0.17%
Other liabilities 47,280 32,175
Total liabilities 1,463,439 1,286,631
Shareholders' equity 186,400 177,377
Total liabilities and shareholders' equity $ 1,649,839 $ 1,464,008
Net interest income(2) / margin 35,050 4.62% 27,564 4.06%
Less tax equivalent adjustment(2) (550) (545)
Net interest income $ 34,500 $ 27,019
(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, EVP, Corporate Secretary (408) 494-4542Source:Heritage Commerce Corp