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Heritage Commerce Corp Earnings Increased 23% to $4.4 Million, or $0.12 per Diluted Share, for the Fourth Quarter of 2015, from the Fourth Quarter of 2014; Net Income for the Full Year 2015 Increased 23% to $16.5 Million from 2014

SAN JOSE, Calif., Jan. 28, 2016 (GLOBE NEWSWIRE) -- Heritage Commerce Corp (Nasdaq:HTBK), the holding company (the “Company”) for Heritage Bank of Commerce (the “Bank” or “HBC”), today reported net income increased 23% to $4.4 million, or $0.12 per average diluted common share, for the fourth quarter of 2015, compared to $3.6 million, or $0.11 per average diluted common share for the fourth quarter of 2014, and increased 28% from $3.5 million, or $0.10 per average diluted common share for the third quarter of 2015.

For the year ended December 31, 2015, net income increased 23% to $16.5 million, or $0.48 per average diluted common share, from $13.4 million, or $0.42 per average diluted common share, for the year ended December 31, 2014. All results are unaudited and include costs associated with the integration of the Focus Business Bank (“Focus”) acquisition.

“With the acquisition of Focus, we have deepened our presence in Silicon Valley and improved our franchise. The integration of the two banks has been completed,” said Walter Kaczmarek, President and Chief Executive Officer. “We are pleased with the level of customer retention achieved during the integration and the systems conversion with Focus was well executed by our technology team. Additionally, while integrating the two companies, loan and deposit growth remained solid. As a result of the excellent deposit base from the Focus acquisition and our legacy deposit growth, we had excess liquidity that was invested in low yielding assets, such as deposits at the Federal Reserve Bank yielding on average 0.28% for the fourth quarter of 2015. We will be re-deploying our excess liquidity into higher-yielding loans and securities over the next few months.”

“We delivered solid financial results in the fourth quarter of 2015, earning $4.4 million, notwithstanding $3.0 million of final costs expensed in the fourth quarter associated with the Focus transaction,” added Mr. Kaczmarek. “For the full year ended December 31, 2015, severance, retention, acquisition and integration costs related to the Focus transaction totaled $6.4 million. These expenses are non-recurring, and we expect a minimal amount of such costs to extend into 2016.”

2015 Highlights (as of, or for the period ended December 31, 2015, except as noted):

  • Diluted earnings per share totaled $0.12 for the fourth quarter of 2015, compared to $0.11 for the fourth quarter of 2014, and $0.10 for the third quarter of 2015. For the year ended December 31, 2015, diluted earnings per share increased to $0.48, compared to $0.42 for the year ended December 31, 2014.
  • Net interest income increased 38% to $22.1 million for the fourth quarter of 2015, compared to $16.1 million for the fourth quarter of 2014, and increased 12% from $19.7 million for the third quarter of 2015. For the year ended December 31, 2015, net interest income increased 34% to $76.3 million, compared to $57.1 million for the year ended December 31, 2014.
  • Reflecting average Federal funds sold and interest-bearing deposits in other financial institutions of $429.0 million, the fully tax equivalent (“FTE”) net interest margin contracted 20 basis points to 4.13% for the fourth quarter of 2015, from 4.33% for the fourth quarter of 2014, and contracted 26 basis points from 4.39% for the third quarter of 2015.
  • The net interest margin improved 31 basis points to 4.41%, for the year ended December 31, 2015, compared to 4.10% for the year ended December 31, 2014. The improvement in the net interest margin for the full year of 2015 was primarily due to revenue realized from the higher yielding Bay View Funding factored receivables portfolio, the accretion of the loan purchase discount in loan interest income, and a special dividend paid by the FHLB in the second quarter of 2015, partially offset by the temporary investment of excess liquidity from the Focus acquisition.
  • The accretion of the loan purchase discount in loan interest income from the Focus transaction was $1.1 million for the fourth quarter of 2015, compared to $262,000 for the third quarter of 2015. The accretion of the loan purchase discount in loan interest income from the Focus transaction was $1.4 million for the year ended 2015.
  • Loans (excluding loans‑held‑for‑sale) increased $270.1 million, or 25%, to $1.36 billion at December 31, 2015, compared to $1.09 billion at December 31, 2014, which included an increase of $113.4 million, or 10%, in the Company’s legacy loan portfolio, and $156.7 million from the Focus loan portfolio. Loans increased $26.3 million, or 2%, from $1.33 billion at September 30, 2015.
  • Nonperforming assets (“NPAs”) were $6.7 million, or 0.29% of total assets, at December 31, 2015, compared to $6.6 million, or 0.41% of total assets, at December 31, 2014, and $5.9 million, or 0.26% of total assets, at September 30, 2015.
  • Classified assets, net of Small Business Administration (“SBA”) guarantees, were $20.5 million at December 31, 2015, compared to $16.0 million at December 31, 2014, and from $18.0 million at September 30, 2015.
  • Net charge-offs totaled $182,000 for the fourth quarter of 2015, compared to net charge-offs of $56,000 for the fourth quarter of 2014, and net recoveries of $281,000 for the third quarter of 2015.
  • There was a $371,000 provision for loan losses for the fourth quarter of 2015, compared to a $106,000 credit provision for loan losses for the fourth quarter of 2014, and a $301,000 credit provision for loan losses for the third quarter of 2015. There was a $32,000 provision for loan losses for the year ended December 31, 2015, compared to a $338,000 credit provision for loan losses for the year ended December 31, 2014.
  • The allowance for loan losses (“ALLL”) declined to 1.39% of total loans at December 31, 2015, compared to 1.69% at December 31, 2014, primarily due to the impact of the Focus acquisition. The ALLL was 1.41% of total loans at September 30, 2015. Excluding the Focus loan portfolio, the ALLL was 1.57% and 1.60% of total loans at December 31, 2015 and September 30, 2015, respectively.
  • Total deposits increased $674.4 million, or 49%, to $2.06 billion at December 31, 2015, compared to $1.39 billion at December 31, 2014, which included an increase of $297.5 million, or 21%, in the Company’s legacy deposit portfolio, and $376.9 million from the Focus deposit portfolio. Total deposits increased $100.8 million, or 5%, at December 31, 2015, compared to $1.96 billion at September 30, 2015.
  • As of January 1, 2015, along with other community banking organizations, the Company and the Bank became subject to new capital requirements, and certain provisions of the new rules are being phased in through 2019 under the Dodd-Frank Act and Basel III. 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, 2015.

Capital RatiosHeritage Commerce
Corp
Heritage Bank of
Commerce
Well-Capitalized
Financial Institution
Basel III Regulatory
Guidelines
Total Risk-Based 12.5% 12.6% 10.0%
Tier 1 Risk-Based 11.4% 11.4% 8.0%
Common Equity Tier 1 Risk-based 10.4% 11.4% 6.5%
Leverage 8.6% 8.6% 5.0%

Operating Results

Net interest income increased 38% to $22.1 million for the fourth quarter of 2015, compared to $16.1 million for the fourth quarter of 2014, largely due to the Focus acquisition, organic growth in the loan portfolio, the accretion of the loan purchase discount in loan interest income from the Focus transaction, and increases in core deposits. Net interest income increased 12% from $19.7 million in third quarter of 2015, reflecting a full quarter of revenue from the Focus loan portfolio and the accretion of the loan purchase discount in loan interest income from the Focus transaction. Net interest income increased 34% to $76.3 million for the year ended December 31, 2015, compared to $57.1 million for the year ended December 31, 2014, primarily due to loans acquired in the Focus acquisition, organic growth in the loan portfolio, contributions to revenue from Bay View Funding, the accretion of the loan purchase discount in loan interest income from the Focus transaction, and increases in core deposits.

The net interest margin (FTE) decreased 20 basis points to 4.13% for the fourth quarter of 2015, from 4.33% for the fourth quarter of 2014, and decreased 26 basis points from 4.39% for the third quarter of 2015. The decrease in the net interest margin for the fourth quarter of 2015 was primarily due the temporary investment of the excess liquidity from the Focus acquisition into lower yielding Federal funds sold and deposits at the Federal Reserve Bank, partially offset by the accretion of the loan purchase discount in loan interest income from the Focus transaction. For the year ended December 31, 2015, net interest margin increased 31 basis points to 4.41%, compared to 4.10% for the year ended December 31, 2014, primarily due to revenue from the higher yielding Bay View Funding factored receivables portfolio, the accretion of the loan purchase discount in loan interest income, and a special dividend of $203,000 paid by the FHLB in the second quarter of 2015, partially offset by the temporary investment of excess liquidity from the Focus acquisition.

The accretion of the loan purchase discount in loan interest income from the Focus transaction was $1.1 million for the fourth quarter of 2015, compared to $262,000 for the third quarter of 2015. The accretion of the loan purchase discount in loan interest income from the Focus transaction was $1.4 million for the year ended 2015.

At December 31, 2015, Federal funds sold and interest-bearing deposits in other financial institutions totaled $320.0 million. Average Federal funds sold and interest-bearing deposits in other financial institutions were $429.0 million for the fourth quarter of 2015, compared to $139.6 million for the fourth quarter of 2014, and $226.3 million for the third quarter of 2015.

There was a $371,000 provision for loan losses for the fourth quarter of 2015, compared to a $106,000 credit provision for loan losses for the fourth quarter of 2014, and a $301,000 credit provision for loan losses for the third quarter of 2015. The $371,000 provision for loan losses for the fourth quarter of 2015 resulted primarily from the impact of loan growth in the Company’s legacy loan portfolio, the renewal of former Focus loans now at the Company, and net charge-offs at Bay View Funding. There was a $32,000 provision for loan losses for the year ended December 31, 2015, compared to a $338,000 credit provision for loan losses for the year ended December 31, 2014.

Noninterest income increased to $2.8 million for the fourth quarter of 2015, compared to $1.8 million for the fourth quarter of 2014, and $2.1 million for the third quarter of 2015, primarily due to a $642,000 gain on the sale of securities in the fourth quarter of 2015 from the repositioning of the Company’s investment securities portfolio. For the year ended December 31, 2015, noninterest income was $9.0 million compared to $7.7 million for the year ended December 31, 2014, primarily due to a $642,000 gain on the sale of securities in the fourth quarter of 2015, and the full year impact of fee income from Bay View Funding.

Total noninterest expense for the fourth quarter of 2015 was $17.4 million, compared to $12.4 million for the fourth quarter of 2014, and $16.4 million for the third quarter of 2015. Noninterest expense for the year ended December 31, 2015 was $58.7 million, compared to $44.2 million for the year ended December 31, 2014. The increase in noninterest expense for the year ended December 31, 2015, was primarily due to costs related to the integration of Focus, and the additional operating costs of Focus and Bay View Funding. Noninterest expense included total Focus pre‑tax acquisition and integration costs of $3.0 million and $6.4 million for the three months and year ended December 31, 2015, respectively. Of the total acquisition and integration costs, salaries and employee benefits (including severance and retention expenses) were $710,000 and $2.9 million for the three months and year ended December 31, 2015, respectively, and other expenses related to the Focus acquisition and integration were $2.3 million and $3.5 million for the three months and year ended December 31, 2015, respectively. Noninterest expense for the third quarter of 2015 included severance and retention expense of $2.2 million, and other noninterest expense of $688,000 related to the Focus acquisition. Full time equivalent employees were 260 at December 31, 2015, 242 at December 31, 2014, and 270 at September 30, 2015.

The efficiency ratio for the fourth quarter of 2015 was 69.54%, compared to 69.34% for the fourth quarter of 2014, and 75.49% for the third quarter of 2015. The efficiency ratio for the year ended December 31, 2015 was 68.78%, compared to 68.19% for the year ended December 31, 2014. The increase in the efficiency ratio in the fourth quarter and the year ended December 31, 2015 compared to the same periods in 2014 was primarily due to one-time Focus acquisition costs.

Income tax expense for the fourth quarter of 2015 was $2.8 million, compared to $2.0 million for the fourth quarter of 2014, and $2.2 million for the third quarter of 2015. The effective tax rate for the fourth quarter of 2015 was 38.9%, compared to 35.6% for the fourth quarter of 2014 and 38.6% for the third quarter of 2015. Income tax expense for the year ended December 31, 2015 was $10.1 million, compared to $7.5 million for the year ended December 31, 2014. The effective tax rate for the year ended December 31, 2015 was 38.0%, compared to 36.0% for the year ended December 31, 2014. The increase in the effective tax rate for the fourth quarter and the year ended December 31, 2015, compared to the fourth quarter of 2014, and the year ended December 31, 2014, was primarily due to an increase in taxable income with a limited amount of tax deductions. The difference in the effective tax rate for the periods reported, compared to the combined Federal and state statutory tax rate of 42%, is primarily the result of the Company’s investment in life insurance policies whose earnings are not subject to taxes, tax credits related to investments in low income housing limited partnerships (net of low income housing investment losses), and tax-exempt interest income earned on municipal bonds.

Balance Sheet Review, Capital Management and Credit Quality

Total assets were $2.36 billion at December 31, 2015, compared to $1.62 billion at December 31, 2014, and $2.26 billion at September 30, 2015.

The investment securities available-for-sale portfolio totaled $385.1 million at December 31, 2015, compared to $206.3 million at December 31, 2014, and $257.4 million at September 30, 2015. At December 31, 2015, the Company’s securities available-for-sale portfolio was comprised of $324.3 million agency mortgage-backed securities (all issued by U.S. Government sponsored entities), $30.0 million U.S. Treasuries, $15.1 million of single entity issue trust preferred securities, $9.0 million of U.S. Government agency securities, and $6.7 million of corporate bonds. The pre-tax unrealized gain on securities available-for-sale at December 31, 2015 was $501,000, compared to a pre-tax unrealized gain on securities available-for-sale of $4.8 million at December 31, 2014, and a pre-tax unrealized gain on securities available-for-sale of $4.5 million at September 30, 2015.

During the fourth quarter of 2015, the Company repositioned its securities portfolio. The Company received gross proceeds of $71.8 million on investment securities available-for-sale it sold during the fourth quarter of 2015 with a book value totaling $71.2 million, resulting in a gain on sale of securities of $637,000. There was also a $5,000 gain on a bond that was called in the fourth quarter of 2015 included in gain on sale of securities. The investment securities sold during the fourth quarter of 2015 consisted of $29.4 million of corporate bonds, $8.3 million of tax-exempt municipal bonds, $11.3 million of collateralized mortgage obligations, $18.2 million of mortgage-backed securities, and $4.0 million of U.S. Treasuries.

During the fourth quarter of 2015, the Company purchased $212.7 million of investment securities available-for-sale, with a weighted average book yield of 1.89%. The investment securities purchased during the fourth quarter of 2015 consisted of $182.7 million of mortgage-backed securities with a weighted average book yield of 2.01%, and $30.0 million of U.S. Treasuries with a weighted average book yield of 1.15%. The mortgage-backed securities purchased during the fourth quarter of 2015 consisted of $82.9 million of Federal National Mortgage Association ("FNMA") securities, $69.9 million of Government National Mortgage Association ("GNMA") securities, and $29.9 million of Federal Home Loan Mortgage Corporation ("FHLMC") securities, with an average book yield of 2.07%, 1.90%, and 2.08%, respectively.

At December 31, 2015, investment securities held-to-maturity totaled $109.3 million, compared to $95.4 million at December 31, 2014, and $111.0 million at September 30, 2015. At December 31, 2015, the Company’s securities held-to-maturity portfolio, at amortized cost, was comprised of $93.5 million tax-exempt municipal bonds, and $15.8 million agency mortgage-backed securities.

Loans (excluding loans‑held‑for‑sale) increased $270.1 million, or 25%, to $1.36 billion at December 31, 2015, compared to $1.09 billion at December 31, 2014, which included an increase of $113.4 million, or 10%, in the Company’s legacy loan portfolio, and $156.7 million from the Focus loan portfolio. Loans increased $26.3 million, or 2%, from $1.33 billion at September 30, 2015.

The loan portfolio remains well-diversified with commercial and industrial (“C&I”) loans accounting for 41% of the loan portfolio at December 31, 2015, which included $40.1 million of factored receivables at Bay View Funding. Commercial and residential real estate loans accounted for 46% of the total loan portfolio, of which 42% 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 December 31, 2015. C&I line usage was 39% at December 31, 2015, compared to 42% at December 31, 2014.

The yield on the loan portfolio was 5.92% for the fourth quarter of 2015, compared to 5.39% for the fourth quarter of 2014, and 5.70% for the third quarter of 2015. The yield on the loan portfolio was 5.75% for the year ended December 31, 2015, compared to 4.96% for the year ended December 31, 2014. The increase in the yield on the loan portfolio for the fourth quarter and year ended December 31, 2015, compared to the same periods in 2014 primarily reflects the accretion of the loan purchase discount in loan interest income from the Focus transaction. Excluding the accretion of the loan purchase discount the yield on the loan portfolio was 5.57% and 5.62% for the fourth quarter and year ended December 31, 2015, respectively, and 5.59% for the third quarter of 2015.

At December 31, 2015, NPAs were $6.7 million, or 0.29% of total assets, compared to $6.6 million, or 0.41% of total assets, at December 31, 2014, and $5.9 million, or 0.26% of total assets, at September 30, 2015. At December 31, 2015, $6.0 million of the NPAs were in the Company’s legacy loan portfolio, and $734,000 of the NPAs were in the Focus loan portfolio. At December 31, 2015, the NPAs included no loans guaranteed by the SBA. Foreclosed assets were $364,000 at December 31, 2015, compared to $696,000 at December 31, 2014, and $393,000 at September 30, 2015. The following is a breakout of NPAs at the periods indicated:

End of Period:
NONPERFORMING ASSETS December 31, 2015 September 30, 2015 December 31, 2014
(in $000's, unaudited) Balance % of Total Balance % of Total Balance % of Total
Commercial real estate loans $ 2,992 44% $ 3,075 52% $ 1,651 25%
Restructured and loans over 90 days past due and still accruing 1,662 25% - 0% - 0%
Home equity and consumer loans 781 12% 316 5% 350 5%
SBA loans 423 6% 673 12% 2,335 36%
Foreclosed assets 364 5% 393 7% 696 11%
Commercial and industrial loans 301 5% 947 16% 199 3%
Land and construction loans 219 3% 492 8% 1,320 20%
Total nonperforming assets $6,742
100% $ 5,896 100% $ 6,551 100%

The $1.7 million of restructured and loans over 90 days past due and still accruing included in nonperforming loans at December 31, 2015 have been brought current subsequent to year-end.

Classified assets (net of SBA guarantees) were $20.5 million at December 31, 2015, compared to $16.0 million at December 31, 2014, and $18.0 million at September 30, 2015. The increase in classified assets at December 31, 2015 from December 31, 2014 was primarily due to the Focus acquisition. At December 31, 2015, $10.5 million of the classified assets were in the Company’s legacy loan portfolio, and $10.8 million of the classified assets were in the Focus loan portfolio.

The following table summarizes the allowance for loan losses:

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) 2015 2015 2014 2015 2014
Balance at beginning of period $ 18,737 $ 18,757 $ 18,541 $ 18,379 $ 19,164
Provision (credit) for loan losses during the period 371 (301) (106) 32 (338)
Net (charge-offs) recoveries during the period (182) 281 (56) 515 (447)
Balance at end of period $ 18,926 $ 18,737 $ 18,379 $ 18,926 $ 18,379
Total loans $ 1,358,716 $ 1,332,405 $ 1,088,643 $ 1,358,716 $ 1,088,643
Total nonperforming loans $ 6,378 $ 5,503 $ 5,855 $6,378
$ 5,855
Allowance for loan losses to total loans 1.39% 1.41% 1.69% 1.39% 1.69%
Allowance for loan losses to total nonperforming loans 296.74% 340.49% 313.90% 296.74% 313.90%

The ALLL at December 31, 2015 declined to 1.39% of total loans, compared to 1.69% at December 31, 2014, primarily due to the impact of the Focus loan portfolio, which was marked to fair value on the acquisition date. Excluding the $156.7 million (at fair value) Focus loan portfolio at December 31, 2015, the ALLL was 1.57% of total loans. The ALLL was 1.41% of total loans at September 30, 2015. Excluding the $162.9 million (at fair value) Focus loan portfolio at September 30, 2015, the ALLL was 1.60% of total loans. The ALLL to total nonperforming loans was 296.74% at December 31, 2015, compared to 313.90% at December 31, 2014, and 340.49% at September 30, 2015.

Total deposits increased $674.4 million, or 49%, to $2.06 billion at December 31, 2015, compared to $1.39 billion at December 31, 2014, which included an increase of $297.5 million, or 21%, in the Company’s legacy deposit portfolio, and $376.9 million from the Focus deposit portfolio. Total deposits increased $100.8 million, or 5%, at December 31, 2015, compared to $1.96 billion at September 30, 2015.

The total cost of deposits decreased one basis point to 0.14% for the fourth quarter of 2015, from 0.15% for the fourth quarter of 2014, and the third quarter of 2015. The total cost of deposits decreased one basis point to 0.15% for the year ended December 31, 2015, from 0.16% for the year ended December 31, 2014.

The Company has a $5.0 million line of credit with a correspondent bank, of which $3.0 million was outstanding at December 31, 2015.

Tangible equity was $191.3 million at December 31, 2015, compared to $168.0 million at December 31, 2014 and $194.2 million at September 30, 2015. The increase in tangible equity at December 31, 2015 from December 31, 2014 was primarily due to the shares issued to the Focus shareholders in connection with the Focus acquisition and an increase in the Company’s retained earnings, partially offset by the one-time acquisition and integration costs from the Focus transaction. Tangible book value per common share was $5.35 at December 31, 2015, compared to $5.60 at December 31, 2014, and $5.44 at September 30, 2015. There were 21,004 shares of Series C Preferred Stock outstanding at December 30, 2015, December 31, 2014, and September 30, 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 outstanding Series C Preferred Stock was converted into common stock, was $5.07 at December 31, 2015, compared to $5.23 at December 31, 2014, and $5.15 at September 30, 2015. The decrease in tangible book value per common share and the pro forma tangible book value per common share, assuming the outstanding Series C Preferred Stock was converted to common stock, at December 31, 2015 compared to December 31, 2014 was primarily due to an additional 5,456,713 shares of the Company’s common stock issued to Focus shareholders and the one-time acquisition and integration costs from the Focus transaction.

Accumulated other comprehensive loss was ($6.2) million at December 31, 2015, compared to accumulated other comprehensive loss of ($1.9) million at December 31, 2014, and accumulated other comprehensive loss of ($2.0) million at September 30, 2015. The unrealized gain on securities available-for-sale included in accumulated other comprehensive loss was an unrealized gain of $296,000, net of taxes, at December 31, 2015, compared to an unrealized gain of $2.8 million, net of taxes, at December 31, 2014, and an unrealized gain of $2.6 million, net of taxes, at September 30, 2015. The components of accumulated other comprehensive loss, net of taxes, at December 31, 2015 include the following: an unrealized gain on available-for-sale securities of $296,000; the remaining unamortized unrealized gain on securities available-for-sale transferred to held-to-maturity of $402,000; a split dollar insurance contracts liability of ($3.6) million; a supplemental executive retirement plan liability of ($4.1) million; and an unrealized gain on interest-only strip from SBA loans of $794,000.

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 their impact on us and our customers; (2) changes in the financial performance or condition of the Company’s customers; (3) volatility in credit and equity markets and its effect on the global economy; (4) competition for loans and deposits and failure to attract or retain deposits and loans; (5) our ability to increase market share and control expenses; (6) our ability to develop and promote customer acceptance of new products and services in a timely manner; (7) risks associated with concentrations in real estate related loans; (8) other‑than‑temporary impairment charges to our securities portfolio; (9) an oversupply of inventory and deterioration in values of California commercial real estate; (10) a prolonged slowdown in construction activity; (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) 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; (13) changes in inflation, interest rates, and market liquidity which may impact interest margins and impact funding sources; (14) our ability to raise capital or incur debt on reasonable terms; (15) regulatory limits on Heritage Bank of Commerce’s ability to pay dividends to the Company; (16) changes in our capital management policies, including those regarding business combinations, dividends, and share repurchases, among others; (17) 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; (18) the ability to keep pace with, and implement on a timely basis, technological changes; (19) 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; (20) changes in the competitive environment among financial or bank holding companies and other financial service providers; (21) 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; (22) significant changes in applicable laws and regulations, including those concerning taxes, banking and securities; (23) 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; (24) 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; (25) the successful 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 within expected time frames; and (26) 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 $000's, unaudited) 2015 2015 2014 2015 2014 2015 2014 Change
Interest income$ 22,896 $ 20,306 $ 16,717 13% 37% $ 78,743 $ 59,256 33%
Interest expense 758 623 625 22% 21% 2,422 2,153 12%
Net interest income before provision for loan losses 22,138 19,683 16,092 12% 38% 76,321 57,103 34%
Provision (credit) for loan losses 371 (301) (106) 223% 450% 32 (338) 109%
Net interest income after provision for loan losses 21,767 19,984 16,198 9% 34% 76,289 57,441 33%
Noninterest income:
Service charges and fees on deposit accounts 717 748 622 -4% 15% 2,803 2,519 11%
Increase in cash surrender value of life insurance 472 429 404 10% 17% 1,697 1,600 6%
Servicing income 324 214 319 51% 2% 1,143 1,296 -12%
Gain on sales of SBA loans 183 267 113 -31% 62% 843 971 -13%
Gain on sales of securities 642 - - N/A N/A 642 97 562%
Other 491 408 354 20% 39% 1,857 1,263 47%
Total noninterest income 2,829 2,066 1,812 37% 56% 8,985 7,746 16%
Noninterest expense:
Salaries and employee benefits 9,034 10,358 6,960 -13% 30% 35,146 26,250 34%
Occupancy and equipment 1,174 1,072 1,072 10% 10% 4,336 4,059 7%
Professional fees 882 612 562 44% 57% 1,828 1,891 -3%
Other 6,271 4,377 3,821 43% 64% 17,363 12,022 44%
Total noninterest expense 17,361 16,419 12,415 6% 40% 58,673 44,222 33%
Income before income taxes 7,235 5,631 5,595 28% 29% 26,601 20,965 27%
Income tax expense 2,812 2,172 1,993 29% 41% 10,104 7,538 34%
Net income 4,423 3,459 3,602 28% 23% 16,497 13,427 23%
Dividends on preferred stock (448) (448) (280) 0% 60% (1,792) (1,008) 78%
Net income available to common shareholders 3,975 3,011 3,322 32% 20% 14,705 12,419 18%
Undistributed earnings allocated to Series C preferred stock (209) (111) (349) 88% -40% (912) (1,342) -32%
Distributed and undistributed earnings allocated to common shareholders$ 3,766 $ 2,900 $ 2,973 30% 27% $ 13,793 $ 11,077 25%
PER COMMON SHARE DATA
(unaudited)
Basic earnings per share$ 0.12 $ 0.10 $ 0.11 20% 9% $ 0.48 $ 0.42 14%
Diluted earnings per share$ 0.12 $ 0.10 $ 0.11 20% 9% $ 0.48 $ 0.42 14%
Weighted average shares outstanding - basic 32,109,440 29,075,782 26,460,519 10% 21% 28,567,213 26,390,615 8%
Weighted average shares outstanding - diluted 32,389,213 29,332,452 26,615,743 10% 22% 28,786,078 26,526,282 9%
Common shares outstanding at period-end 32,113,479 32,076,505 26,503,505 0% 21% 32,113,479 26,503,505 21%
Pro forma common shares outstanding at period-end, assuming Series C preferred stock was converted into common stock 37,714,479 37,677,505 32,104,505 0% 17% 37,714,479 32,104,505 17%
Book value per share $ 7.03 $ 7.12 $ 6.22 -1% 13% $ 7.03 $ 6.22 13%
Tangible book value per share$ 5.35 $ 5.44 $ 5.60 -2% -4% $ 5.35 $ 5.60 -4%
Pro forma tangible book value per share, assuming Series C preferred stock was converted into common stock$ 5.07 $ 5.15 $ 5.23 -2% -3% $ 5.07 $ 5.23 -3%
KEY FINANCIAL RATIOS
(unaudited)
Annualized return on average equity 7.11% 6.41% 7.72% 11% -8% 8.04% 7.44% 8%
Annualized return on average tangible equity 9.09% 7.46% 8.20% 22% 11% 9.41% 7.60% 24%
Annualized return on average assets 0.74% 0.70% 0.88% 6% -16% 0.86% 0.88% -2%
Annualized return on average tangible assets 0.75% 0.71% 0.89% 6% -16% 0.88% 0.88% 0%
Net interest margin 4.13% 4.39% 4.33% -6% -5% 4.41% 4.10% 8%
Efficiency ratio 69.54% 75.49% 69.34% -8% 0% 68.78% 68.19% 1%
AVERAGE BALANCES
(in $000's, unaudited)
Average assets$ 2,378,578 $ 1,956,047 $ 1,619,881 22% 47% $ 1,912,421 $ 1,523,272 26%
Average tangible assets$ 2,324,661 $ 1,925,912 $ 1,609,068 21% 44% $ 1,882,641 $ 1,519,526 24%
Average earning assets$ 2,159,447 $ 1,805,801 $ 1,500,270 20% 44% $ 1,757,892 $ 1,419,926 24%
Average loans held-for-sale$ 8,289 $ 3,197 $ 813 159% 920% $ 3,574 $ 2,503 43%
Average total loans$ 1,325,872 $ 1,229,792 $ 1,057,866 8% 25% $ 1,182,522 $ 989,873 19%
Average deposits$ 2,042,654 $ 1,693,282 $ 1,376,503 21% 48% $ 1,643,385 $ 1,302,782 26%
Average demand deposits - noninterest-bearing$ 785,876 $ 652,529 $ 515,209 20% 53% $ 630,198 $ 463,134 36%
Average interest-bearing deposits$ 1,256,778 $ 1,040,753 $ 861,294 21% 46% $ 1,013,187 $ 839,648 21%
Average interest-bearing liabilities$ 1,259,033 $ 1,040,919 $ 875,525 21% 44% $ 1,013,816 $ 843,651 20%
Average equity$ 246,921 $ 214,105 $ 185,107 15% 33% $ 205,154 $ 180,514 14%
Average tangible equity$ 193,004 $ 183,970 $ 174,294 5% 11% $ 175,374 $ 176,768 -1%

End of Period: Percent Change From:
CONSOLIDATED BALANCE SHEETSDecember 31,September 30,December 31, September 30,December 31,
(in $000's, unaudited) 2015 2015 2014 2015 2014
ASSETS
Cash and due from banks$ 24,112 $ 28,691 $ 23,256 -16% 4%
Federal funds sold and interest-bearing
deposits in other financial institutions 319,980 364,247 99,147 -12% 223%
Securities available-for-sale, at fair value 385,079 257,410 206,335 50% 87%
Securities held-to-maturity, at amortized cost 109,311 111,004 95,362 -2% 15%
Loans held-for-sale - SBA, including deferred costs 7,297 7,873 1,172 -7% 523%
Loans:
Commercial 556,522 554,169 462,403 0% 20%
Real estate:
Commercial and residential 625,665 606,819 478,335 3% 31%
Land and construction 84,428 84,867 67,980 -1% 24%
Home equity 76,833 74,624 61,644 3% 25%
Consumer 16,010 12,595 18,867 27% -15%
Loans 1,359,458 1,333,074 1,089,229 2% 25%
Deferred loan fees (742) (669) (586) -11% -27%
Total loans, net of deferred fees 1,358,716 1,332,405 1,088,643 2% 25%
Allowance for loan losses (18,926) (18,737) (18,379) 1% 3%
Loans, net 1,339,790 1,313,668 1,070,264 2% 25%
Company owned life insurance 60,020 59,549 51,257 1% 17%
Premises and equipment, net 7,773 7,513 7,451 3% 4%
Goodwill 45,664 44,898 13,044 2% 250%
Other intangible assets 8,518 8,906 3,276 -4% 160%
Accrued interest receivable and other assets 54,035 58,448 46,539 -8% 16%
Total assets$ 2,361,579 $ 2,262,207 $ 1,617,103 4% 46%
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand, noninterest-bearing$ 821,405 $ 758,440 $ 517,662 8% 59%
Demand, interest-bearing 496,278 440,517 225,821 13% 120%
Savings and money market 496,843 490,572 384,644 1% 29%
Time deposits-under $250 64,021 65,626 57,443 -2% 11%
Time deposits-$250 and over 158,820 174,703 163,452 -9% -3%
Time deposits - brokered 17,825 24,150 28,116 -26% -37%
CDARS - money market and time deposits 7,583 8,015 11,248 -5% -33%
Total deposits 2,062,775 1,962,023 1,388,386 5% 49%
Borrowings 3,000 1,000 - 200%N/A
Accrued interest payable and other liabilities 50,368 51,208 44,359 -2% 14%
Total liabilities 2,116,143 2,014,231 1,432,745 5% 48%
Shareholders' Equity:
Series C preferred stock, net 19,519 19,519 19,519 0% 0%
Common stock 193,364 193,070 133,676 0% 45%
Retained earnings 38,773 37,366 33,014 4% 17%
Accumulated other comprehensive loss (6,220) (1,979) (1,851) -214% -236%
Total shareholders' equity 245,436 247,976 184,358 -1% 33%
Total liabilities and shareholders' equity$ 2,361,579 $ 2,262,207 $ 1,617,103 4% 46%

End of Period: Percent Change From:
December 31,September 30,December 31, September 30,December 31,
2015 2015 2014 2015 2014
CREDIT QUALITY DATA
(in $000's, unaudited)
Nonaccrual loans - held-for-investment$ 4,716 $ 5,503 $ 5,855 -14% -19%
Restructured and loans over 90 days past due and still accruing 1,662 - - N/A N/A
Total nonperforming loans$ 6,378 $ 5,503 $ 5,855 16% 9%
Foreclosed assets 364 393 696 -7% -48%
Total nonperforming assets$ 6,742 $ 5,896 $ 6,551 14% 3%
Other restructured loans still accruing$ 149 $ 183 $ 167 -19% -11%
Net (recoveries) charge-offs during the quarter$ 182 $ (281)$ 56 165% 225%
Provision (credit) for loan losses during the quarter$ 371 $ (301)$ (106) -223% 450%
Allowance for loan losses$ 18,926 $ 18,737 $ 18,379 1% 3%
Classified assets(1)$ 20,493 $ 17,976 $ 15,978 14% 28%
Allowance for loan losses to total loans 1.39% 1.41% 1.69% -1% -18%
Allowance for loan losses to total nonperforming loans 296.74% 340.49% 313.90% -13% -5%
Nonperforming assets to total assets 0.29% 0.26% 0.41% 12% -29%
Nonperforming loans to total loans 0.47% 0.41% 0.54% 15% -13%
Classified assets(1) to Heritage Commerce Corp Tier 1
capital plus allowance for loan losses 9% 8% 9% 13% 0%
Classified assets(1) to Heritage Bank of Commerce Tier 1
capital plus allowance for loan losses 9% 8% 9% 13% 0%
OTHER PERIOD-END STATISTICS
(in $000's, unaudited)
Heritage Commerce Corp:
Tangible equity$ 191,254 $ 194,172 $ 168,038 -2% 14%
Tangible common equity$ 171,735 $ 174,653 $ 148,519 -2% 16%
Shareholders' equity / total assets 10.39% 10.96% 11.40% -5% -9%
Tangible equity / tangible assets 8.29% 8.79% 10.50% -6% -21%
Tangible common equity / tangible assets 7.44% 7.91% 9.28% -6% -20%
Loan to deposit ratio 65.87% 67.91% 78.41% -3% -16%
Noninterest-bearing deposits / total deposits 39.82% 38.66% 37.29% 3% 7%
Total risk-based capital ratio(2) 12.5% 12.3% 13.9% 2% -10%
Tier 1 risk-based capital ratio(2) 11.4% 11.2% 12.6% 2% -10%
Common Equity Tier 1 risk-based capital ratio(2) 10.4% 10.2%N/A 2%N/A
Leverage ratio(2) 8.6% 10.4% 10.6% -17% -19%
Heritage Bank of Commerce:
Total risk-based capital ratio(2) 12.6% 12.1% 13.1% 4% -4%
Tier 1 risk-based capital ratio(2) 11.4% 11.0% 11.9% 4% -4%
Common Equity Tier 1 risk-based capital ratio(2) 11.4% 11.0%N/A 4%N/A
Leverage ratio(2) 8.6% 10.2% 9.9% -16% -13%
(1)Net of SBA guarantees
(2)December 31, 2015 and September 30, 2015 capital ratios are based on the Basel III regulatory requirements;
December 31, 2014 capital ratios are based on the Basel I regulatory requirements.

For the Quarter Ended For the Quarter Ended
December 31, 2015 December 31, 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) $ 1,334,161 $ 19,899 5.92% $ 1,058,679 $ 14,375 5.39%
Securities - taxable 291,106 1,880 2.56% 211,590 1,563 2.93%
Securities - tax exempt(2) 94,463 914 3.84% 79,879 779 3.87%
Other investments and interest-bearing
deposits in other financial institutions 439,717 523 0.47% 150,122 273 0.72%
Total interest earning assets(2) 2,159,447 23,216 4.27% 1,500,270 16,990 4.49%
Cash and due from banks 43,374 28,085
Premises and equipment, net 7,689 7,483
Goodwill and other intangible assets 53,917 10,813
Other assets 114,151 73,230
Total assets $ 2,378,578 $ 1,619,881
Liabilities and shareholders' equity:
Deposits:
Demand, noninterest-bearing $ 785,876 $ 515,209
Demand, interest-bearing 471,893 236 0.20% 218,176 93 0.17%
Savings and money market 521,368 271 0.21% 382,799 183 0.19%
Time deposits - under $100 23,062 17 0.29% 19,871 15 0.30%
Time deposits - $100 and over 212,294 172 0.32% 199,072 156 0.31%
Time deposits - brokered 20,960 42 0.79% 28,104 56 0.79%
CDARS - money market and time deposits 7,201 1 0.06% 13,272 2 0.06%
Total interest-bearing deposits 1,256,778 739 0.23% 861,294 505 0.23%
Total deposits 2,042,654 739 0.14% 1,376,503 505 0.15%
Short-term borrowings 2,255 19 3.34% 14,231 120 3.35%
Total interest-bearing liabilities 1,259,033 758 0.24% 875,525 625 0.28%
Total interest-bearing liabilities and demand,
noninterest-bearing / cost of funds 2,044,909 758 0.15% 1,390,734 625 0.18%
Other liabilities 86,748 44,040
Total liabilities 2,131,657 1,434,774
Shareholders' equity 246,921 185,107
Total liabilities and shareholders' equity $ 2,378,578 $ 1,619,881
Net interest income(2) / margin 22,458 4.13% 16,365 4.33%
Less tax equivalent adjustment(2) (320) (273)
Net interest income $ 22,138 $ 16,092
(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 Year Ended For the Year Ended
December 31, 2015 December 31, 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) $ 1,186,096 $ 68,259 5.75% $ 992,376 $ 49,207 4.96%
Securities - taxable 246,084 6,707 2.73% 251,077 7,117 2.83%
Securities - tax exempt(2) 86,589 3,358 3.88% 79,939 3,115 3.90%
Other investments and interest-bearing
deposits in other financial institutions 239,123 1,594 0.67% 96,534 907 0.94%
Total interest earning assets(2) 1,757,892 79,918 4.55% 1,419,926 60,346 4.25%
Cash and due from banks 34,196 25,829
Premises and equipment, net 7,463 7,343
Goodwill and other intangible assets 29,780 3,746
Other assets 83,090 66,428
Total assets $ 1,912,421 $ 1,523,272
Liabilities and shareholders' equity:
Deposits:
Demand, noninterest-bearing $ 630,198 $ 463,134
Demand, interest-bearing 317,219 585 0.18% 207,359 341 0.16%
Savings and money market 433,123 894 0.21% 363,903 671 0.18%
Time deposits - under $100 20,631 61 0.30% 20,448 63 0.31%
Time deposits - $100 and over 204,982 658 0.32% 196,118 629 0.32%
Time deposits - brokered 25,154 199 0.79% 36,440 319 0.88%
CDARS - money market and time deposits 12,078 6 0.05% 15,380 9 0.06%
Total interest-bearing deposits 1,013,187 2,403 0.24% 839,648 2,032 0.24%
Total deposits 1,643,385 2,403 0.15% 1,302,782 2,032 0.16%
Short-term borrowings 629 19 3.02% 4,003 121 3.02%
Total interest-bearing liabilities 1,013,816 2,422 843,651 2,153
Total interest-bearing liabilities and demand,
noninterest-bearing / cost of funds 1,644,014 2,422 0.15% 1,306,785 2,153 0.16%
Other liabilities 63,253 35,973
Total liabilities 1,707,267 1,342,758
Shareholders' equity 205,154 180,514
Total liabilities and shareholders' equity $ 1,912,421 $ 1,523,272
Net interest income(2) / margin 77,496 4.41% 58,193 4.10%
Less tax equivalent adjustment(2) (1,175) (1,090)
Net interest income $ 76,321 $ 57,103
(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.


Heritage Commerce Corp Debbie Reuter, EVP, Corporate Secretary (408) 494-4542

Source:Heritage Commerce Corp