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Heritage Commerce Corp Earns $2.8 Million in Second Quarter of 2013

SAN JOSE, Calif., July 25, 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 $2.8 million for the second quarter of 2013, or $0.09 per average diluted common share, driven by solid loan and deposit growth, stable net interest margin, and lower credit costs. Net income was $2.7 million, or $0.08 per average diluted common share, for the second quarter of 2012. There were no dividends or discount accretion on preferred stock in the second quarter of 2013 and 2012. For the six months ended June 30, 2013, net income available to common shareholders was $5.0 million, or $0.16 per average diluted common share, an increase of 40% from $3.5 million, or $0.11 per average diluted common share, for the six months ended June 30, 2012. All results are unaudited.

"Our improving earnings trend gained further momentum in the second quarter of 2013," said Walter Kaczmarek, President and Chief Executive Officer. "The steady economy in the greater San Francisco Bay Area has increased loan demand from local small-to-medium sized businesses. Our total loans increased $40.0 million, or 5%, at June 30, 2013, compared to March 31, 2013, while our net interest margin remained stable. Additionally, our deposit growth continued and credit quality once again meaningfully improved. Both nonperforming assets and classified assets decreased substantially year-over-year, and we received net recoveries on loans in the second quarter totaling $270,000."

"In June, we announced plans to redeem our floating-rate subordinated debt totaling $9 million during the third quarter of this year. We incurred charges of $167,000 related to the redemptions in the second quarter of 2013 and anticipate savings of $90,000 per quarter in interest expense starting in the fourth quarter. These redemptions eliminate all of the subordinated debt from our capital structure," Mr. Kaczmarek added. "During the second quarter of 2013, we also completed the repurchase of the common stock warrant issued to the U.S. Department of the Treasury in 2008 for $140,000."

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

  • Diluted earnings per share increased 13% to $0.09 for the second quarter of 2013, compared to $0.08 per diluted share for the second quarter of 2012, and increased 29% from $0.07 for the first quarter of 2013. Diluted earnings per share increased 45% to $0.16 for the first half of 2013, compared to $0.11 per diluted share for the first half of 2012.
  • The net interest margin decreased six basis points to 3.89% for the second quarter of 2013, from 3.95% for the second quarter of 2012, primarily due to lower yields on loans and securities, partially offset by a lower cost of funds. The net interest margin increased 18 basis points from 3.71% for the first quarter of 2013, primarily due to a higher average balance of loans and a lower average balance of overnight funds at the Federal Reserve.
  • Total deposits grew 8% to $1.19 billion at June 30, 2013, compared to $1.10 billion at June 30, 2012, and increased 2% from $1.17 billion at March 31, 2013.

  • Loans (excluding loans-held-for-sale) increased 5% to $842.0 million at June 30, 2013, compared to $798.1 million at June 30, 2012, and increased 5% from $801.9 million at March 31, 2013.
  • Credit quality remained strong with nonperforming assets declining 16% to $15.0 million at June 30, 2013, compared to $17.8 million at June 30, 2012, and declining 14% from $17.4 million at March 31, 2012.
  • Classified assets, net of Small Business Administration ("SBA") guarantees, decreased 57% to $23.8 million at June 30, 2013, from $54.9 million at June 30, 2012, and decreased 24% from $31.2 million at March 31, 2013.
  • Net recoveries totaled $270,000 for the second quarter of 2013, compared to net charge-offs of $1.1 million for the second quarter of 2012, and net recoveries of $315,000 for the first quarter of 2013.
  • There was a credit to the provision for loan losses of $270,000 for the second quarter of 2013, compared to a provision for loan losses of $815,000 for the second quarter of 2012, and no provision for the first quarter of 2013.
  • The allowance for loan losses ("ALLL") was 2.30% of total loans at June 30, 2013, compared to 2.51% at June 30, 2012, and 2.41% at March 31, 2013.
  • Accumulated other comprehensive loss was ($4.7) million at June 30, 2013, compared to accumulated other comprehensive income of $3.2 million a year ago, and accumulated other comprehensive income of $1.4 million at March 31, 2013. The decrease was primarily due to an unrealized loss on securities available-for-sale of ($507,000), net of taxes, at June 30, 2013, compared to an unrealized gain on securities available-for-sale of $7.1 million, net of taxes, at June 30, 2012, and an unrealized gain on securities available-for-sale of $5.6 million, net of taxes, at March 31, 2013.
  • Capital ratios exceeded regulatory requirements for a well-capitalized financial institution on a holding company and bank level at June 30, 2013:

Capital Ratios Heritage Commerce
Corp
Heritage Bank of
Commerce
Well-Capitalized
Financial Institution
Regulatory Guidelines
Total Risk-Based 16.4% 15.6% 10.0%
Tier 1 Risk-Based 15.1% 14.3% 6.0%
Leverage 12.4% 11.7% 5.0%

Operating Results

Net interest income increased slightly to $12.2 million for the second quarter of 2013, compared to $12.1 million for the second quarter of 2012, primarily due to a higher average volume of loans and securities. Net interest income for the first quarter of 2013 was $12.2 million. For the six months ended June 30, 2013, net interest income remained flat at $24.3 million, compared to the six months ended June 30, 2012.

The net interest margin decreased six basis points to 3.89% for the second quarter of 2013, from 3.95% for the second quarter of 2012, primarily due to lower yields on loans and securities, partially offset by a lower cost of funds. The net interest margin increased 18 basis points from 3.71% for the first quarter of 2013, primarily due to a higher average balance of loans and a lower average balance of overnight funds at the Federal Reserve. For the first six months of 2013, the net interest margin decreased 21 basis points to 3.80%, compared to 4.01% for the first six months of 2012, primarily due to lower yields on loans and securities and a higher average balance of excess deposits at the Federal Reserve, partially offset by a higher average balance of loans and a lower cost of funds.

Improving overall asset quality and net recoveries in the first half of 2013 led to a $270,000 credit to the provision for loan losses for the second quarter of 2013, and no provision for loan losses for the first quarter of 2013. Net recoveries totaled $270,000 for the second quarter and $585,000 for the first half of 2013. The provision for loan losses was $815,000 for the second quarter and $915,000 for the first six months of 2012.

Noninterest income was $1.9 million for the second quarter of 2013, compared to $2.1 million for the second quarter of 2012, and $1.7 million for the first quarter of 2013. In the first six months of 2013, noninterest income was $3.6 million, compared to $3.8 million in the first six months of 2012. Noninterest income was lower in the second quarter and first six months of 2013, compared to the same periods in 2012, primarily due to a lower gain on sales of SBA loans and servicing income.

Total noninterest expense for the second quarter of 2013 was $10.4 million, an increase of 10% from $9.5 million for the second quarter of 2012, and a decrease of 4% from $10.8 million for the first quarter of 2013. Noninterest expense for the first six months of 2013 increased 4% to $21.2 million, compared to $20.3 million for the first six months of 2012. The increase in noninterest expense for the second quarter and first six months of 2013, compared to the same periods a year ago, was primarily due to increased salaries and employee benefits expense due to annual salary increases and hiring of additional lending relationship officers, and a $167,000 charge in the second quarter of 2013 related to the redemption of the floating-rate subordinated debt. The decrease in noninterest expense for the second quarter of 2013, compared to the first quarter of 2013, was primarily due to lower professional fees and salaries and employee benefits expense.

Income tax expense for the second quarter of 2013 was $1.2 million, compared to $1.2 million for the second quarter of 2012, and $855,000 for the first quarter of 2013. The effective tax rate for the second quarter of 2013 decreased to 29%, compared to 31% for the second quarter of 2012, primarily due to the impact of tax-exempt interest income earned on municipal bonds. The effective tax rate for the first quarter of 2013 was 28%. Income tax expense for the first six months of 2013 was $2.0 million, compared to $2.2 million for the first six months of 2012. The effective tax rate for the six months ended June 30, 2013 was 29%, compared to 31% for the six months ended June 30, 2012. 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 second quarter of 2013 was 73.85%, compared to 66.70% for the second quarter of 2012, and 78.03% for the first quarter of 2013. The efficiency ratio was 75.92% for the first six months of 2013, compared to 72.13% for the first six months of 2012.

Balance Sheet Review, Capital Management and Credit Quality

The Company's total assets increased 6% to $1.40 billion at June 30, 2013, from $1.32 billion a year ago, and increased 1% from $1.38 billion at March 31, 2013.

The investment securities available-for-sale portfolio totaled $293.8 million at June 30, 2013, compared to $389.8 million at June 30, 2012, and $346.8 million at March 31, 2013. At June 30, 2013, the securities available-for-sale portfolio was comprised of $225.4 million agency mortgage-backed securities (all issued by U.S. Government sponsored entities), $47.7 million of corporate bonds, and $20.7 million of single entity issue trust preferred securities. The pre-tax unrealized loss on securities available-for-sale at June 30, 2013 was ($880,000), compared to a pre-tax unrealized gain on securities available-for-sale at June 30, 2012 of $12.3 million, and a pre-tax unrealized gain on securities available-for-sale at March 31, 2013 of $9.6 million.

At June 30, 2013, investment securities held-to-maturity totaled $81.7 million, compared to no investment securities held-to-maturity at June 30, 2012, and $68.3 million at March 31, 2013. At June 30, 2013, the securities held-to-maturity portfolio, at amortized cost, was comprised of $67.5 million tax-exempt municipal bonds and $14.2 million agency mortgage-backed securities.

Loans, excluding loans held-for-sale, totaled $842.0 million at June 30, 2013, an increase of 5% from $798.1 million at June 30, 2012, and also an increase of 5% from $801.9 million at March 31, 2013. The loan portfolio remains well-diversified with commercial and industrial ("C&I") loans accounting for 46% of the portfolio at June 30, 2013. Commercial and residential real estate loans accounted for 44% of the total loan portfolio, of which 50% 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 3% of total loans at June 30, 2013.

The yield on the loan portfolio was 4.93% for the second quarter of 2013, compared to 5.23% for the same period in 2012, and 5.13% for the first quarter of 2013. The yield on the loan portfolio was 5.03% for the first six months of 2013, compared to 5.32% for the same period in 2012.

Nonperforming assets ("NPAs") were $15.0 million, or 1.07% of total assets, at June 30, 2013, compared to $17.8 million, or 1.35% of total assets, a year ago. NPAs were $17.4 million, or 1.26% of total assets at March 31, 2013. The following is a detail of NPAs at June 30, 2013:

June 30, 2013
Balance % of Total
Commercial real estate loans $ 5,069 34%
SBA loans 2,915 20%
Home equity and consumer loans 2,506 17%
Land and construction loans 2,129 14%
Commercial and industrial loans 1,249 8%
Foreclosed assets 659 4%
Restructured and loans over 90 days past due and accruing 510 3%
$ 15,037 100%

At June 30, 2013, the $15.0 million of NPAs included $458,000 of loans guaranteed by the SBA and $510,000 of restructured loans still accruing interest income. Foreclosed assets were $659,000 at June 30, 2013, compared to $3.1 million at June 30, 2012, and $738,000 at March 31, 2013.

Classified assets (net of SBA guarantees) decreased to $23.8 million at June 30, 2013, from $54.9 million at June 30, 2012, and $31.2 million at March 31, 2013.

The following table summarizes the allowance for loan losses:

For the Quarter Ended:
June 30, March 31, June 30,
2013 2013 2012
ALLOWANCE FOR LOAN LOSSES
(in $000's, unaudited)
Balance at beginning of quarter $ 19,342 $ 19,027 $ 20,306
Provision (credit) for loan losses during the quarter (270) -- 815
Net recoveries (charge-offs) during the quarter 270 315 (1,098)
Balance at end of quarter $ 19,342 $ 19,342 $ 20,023
Total loans $ 841,950 $ 801,925 $ 798,106
Total nonperforming loans $ 14,378 $ 16,664 $ 14,732
Allowance for loan losses to total loans 2.30% 2.41% 2.51%
Allowance for loan losses to total nonperforming loans, excluding nonaccrual loans - held-for-sale 134.52% 116.07% 137.57%

Deposits totaled $1.19 billion at June 30, 2013, compared to $1.10 billion at June 30, 2012, and $1.17 billion at March 31, 2013. Noninterest-bearing deposits increased 11% to $407.5 million at June 30, 2013, from $367.9 million at June 30, 2012, and increased 3% from $397.2 million at March 31, 2013. Interest-bearing demand deposits increased 15% to $171.0 million at June 30, 2013, from $148.8 million at June 30, 2012, and increased 1% from $169.7 million at March 31, 2013. At June 30, 2013, brokered deposits decreased 21% to $76.8 million, from $97.7 million at June 30, 2012, and decreased 8% from $83.8 million at March 31, 2013. Total deposits, excluding brokered deposits, were $1.11 billion at June 30, 2013, compared to $1.01 billion at June 30, 2012, and $1.08 billion at March 31, 2013.

The total cost of deposits decreased 6 basis points to 0.21% during the second quarter of 2013, from 0.27% during the second quarter of 2012, and remained the same as 0.21% for the first quarter of 2013. The total cost of deposits decreased 6 basis points to 0.21% during the first six months of 2013, from 0.27% during the first six months of 2012.

Subordinated debt decreased to $9.3 million at June 30, 2013, compared to $23.7 million at June 30, 2012, as a result of the redemption of $14 million fixed-rate subordinated debt during the third quarter of 2012. Subordinated debt was also $9.3 million at March 31, 2013. In June, 2013, the Company announced that it will redeem the remaining $9.3 million of subordinated debt in the third quarter of 2013.

Tangible equity was $165.9 million at June 30, 2013, compared to $162.4 million at June 30, 2012 and $169.0 million at March 31, 2013. Tangible book value per common share was $5.56 at June 30, 2013, compared to $5.44 a year ago, and $5.67 at March 31, 2013. There were 21,004 shares of Series C Preferred Stock outstanding at June 30, 2013, June 30, 2012, and March 31, 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 $5.19 at June 30, 2013, compared to $5.09 a year ago, and $5.29 at March 31, 2013.

Accumulated other comprehensive loss was ($4.7) million at June 30, 2013, compared to accumulated other comprehensive income of $3.2 million a year ago, and $1.4 million at March 31, 2013. The components of other comprehensive loss, net of taxes, at June 30, 2013 include the following: an unrealized loss on available-for-sale securities of ($507,000); the remaining unamortized unrealized gain on securities available-for-sale transferred to held-to-maturity of $481,000; 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 $1.0 million.

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 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) 2013 2013 2012 2013 2012 2013 2012 Change
Interest income $ 12,838 $ 12,867 $ 13,296 0% -3% $ 25,705 $ 26,745 -4%
Interest expense 685 714 1,212 -4% -43% 1,399 2,402 -42%
Net interest income before provision for loan losses 12,153 12,153 12,084 0% 1% 24,306 24,343 0%
Provision (credit) for loan losses (270) -- 815 N/A -133% (270) 915 -130%
Net interest income after provision for loan losses 12,423 12,153 11,269 2% 10% 24,576 23,428 5%
Noninterest income:
Service charges and fees on deposit accounts 618 577 601 7% 3% 1,195 1,191 0%
Increase in cash surrender value of life insurance 410 416 429 -1% -4% 826 858 -4%
Servicing income 385 365 447 5% -14% 750 907 -17%
Gain on sales of SBA loans 134 136 376 -1% -64% 270 412 -34%
Gain on sales of securities 7 31 32 -77% -78% 38 59 -36%
Other 361 138 205 162% 76% 499 386 29%
Total noninterest income 1,915 1,663 2,090 15% -8% 3,578 3,813 -6%
Noninterest expense:
Salaries and employee benefits 5,864 6,011 5,377 -2% 9% 11,875 11,044 8%
Occupancy and equipment 1,028 1,068 967 -4% 6% 2,096 1,963 7%
Professional fees 400 982 470 -59% -15% 1,382 1,681 -18%
Other 3,097 2,720 2,640 14% 17% 5,817 5,622 3%
Total noninterest expense 10,389 10,781 9,454 -4% 10% 21,170 20,310 4%
Income before income taxes 3,949 3,035 3,905 30% 1% 6,984 6,931 1%
Income tax expense 1,156 855 1,226 35% -6% 2,011 2,177 -8%
Net income 2,793 2,180 2,679 28% 4% 4,973 4,754 5%
Dividends and discount accretion on preferred stock -- -- -- N/A N/A -- (1,206) -100%
Net income available to common shareholders $ 2,793 $ 2,180 $ 2,679 28% 4% $ 4,973 $ 3,548 40%
PER COMMON SHARE DATA
(unaudited)
Basic earnings per share $ 0.09 $ 0.07 $ 0.08 29% 13% $ 0.16 $ 0.11 45%
Diluted earnings per share $ 0.09 $ 0.07 $ 0.08 29% 13% $ 0.16 $ 0.11 45%
Common shares outstanding at period-end 26,338,521 26,333,368 26,293,277 0% 0% 26,338,521 26,293,277 0%
Pro forma common shares outstanding at period-end, assuming Series C preferred stock was converted into common stock 31,939,521 31,934,368 31,894,277 0% 0% 31,939,521 31,894,277 0%
Book value per share $ 5.62 $ 5.75 $ 5.52 -2% 2% $ 5.62 $ 5.52 2%
Tangible book value per share $ 5.56 $ 5.67 $ 5.44 -2% 2% $ 5.56 $ 5.44 2%
Pro forma tangible book value per share, assuming Series C preferred stock was converted into common stock $ 5.19 $ 5.29 $ 5.09 -2% 2% $ 5.19 $ 5.09 2%
KEY FINANCIAL RATIOS
(unaudited)
Annualized return on average equity 6.53% 5.20% 6.61% 26% -1% 5.88% 5.44% 8%
Annualized return on average tangible equity 6.60% 5.26% 6.71% 25% -2% 5.94% 5.52% 8%
Annualized return on average assets 0.82% 0.61% 0.81% 34% 1% 0.71% 0.72% -1%
Annualized return on average tangible assets 0.82% 0.61% 0.81% 34% 1% 0.71% 0.72% -1%
Net interest margin 3.89% 3.71% 3.95% 5% -2% 3.80% 4.01% -5%
Efficiency ratio 73.85% 78.03% 66.70% -5% 11% 75.92% 72.13% 5%
AVERAGE BALANCES
(in $000's, unaudited)
Average assets $ 1,373,202 $ 1,442,928 $ 1,331,774 -5% 3% $ 1,407,872 $ 1,321,879 7%
Average tangible assets $ 1,371,372 $ 1,440,974 $ 1,329,458 -5% 3% $ 1,405,980 $ 1,319,501 7%
Average earning assets $ 1,273,769 $ 1,341,337 $ 1,231,311 -5% 3% $ 1,307,366 $ 1,221,421 7%
Average loans held-for-sale $ 5,189 $ 3,255 $ 4,762 59% 9% $ 4,227 $ 3,059 38%
Average total loans $ 812,376 $ 794,876 $ 786,898 2% 3% $ 803,674 $ 775,581 4%
Average deposits $ 1,158,479 $ 1,227,146 $ 1,110,053 -6% 4% $ 1,192,622 $ 1,088,553 10%
Average demand deposits - noninterest-bearing $ 392,122 $ 461,108 $ 370,086 -15% 6% $ 426,424 $ 358,689 19%
Average interest-bearing deposits $ 766,357 $ 766,038 $ 739,967 0% 4% $ 766,198 $ 729,864 5%
Average interest-bearing liabilities $ 775,924 $ 775,402 $ 766,865 0% 1% $ 775,684 $ 755,184 3%
Average equity $ 171,475 $ 169,883 $ 162,918 1% 5% $ 170,684 $ 175,719 -3%
Average tangible equity $ 169,645 $ 167,929 $ 160,602 1% 6% $ 168,792 $ 173,341 -3%
End of Period: Percent Change From:
CONSOLIDATED BALANCE SHEETS June 30, March 31, June 30, March 31, June 30,
(in $000's, unaudited) 2013 2013 2012 2013 2012
ASSETS
Cash and due from banks $ 33,890 $ 19,779 $ 21,885 71% 55%
Federal funds sold and interest-bearing deposits in other financial institutions 51,872 57,090 24,476 -9% 112%
Securities available-for-sale, at fair value 293,778 346,800 389,820 -15% -25%
Securities held-to-maturity, at amortized cost 81,731 68,283 -- 20% N/A
Loans held-for-sale - SBA, including deferred costs 6,321 4,394 2,714 44% 133%
Loans held-for-sale - other, including deferred costs -- -- 177 N/A -100%
Loans:
Commercial 383,068 356,688 384,260 7% 0%
Real estate:
Commercial and residential 370,620 361,340 333,048 3% 11%
Land and construction 26,705 24,611 19,822 9% 35%
Home equity 48,667 45,347 47,813 7% 2%
Consumer 13,097 14,036 13,024 -7% 1%
Loans 842,157 802,022 797,967 5% 6%
Deferred loan (fees) costs, net (207) (97) 139 -113% -249%
Total loans, including deferred fees and costs 841,950 801,925 798,106 5% 5%
Allowance for loan losses (19,342) (19,342) (20,023) 0% -3%
Loans, net 822,608 782,583 778,083 5% 6%
Company owned life insurance 49,185 48,774 47,496 1% 4%
Premises and equipment, net 7,541 7,632 7,740 -1% -3%
Intangible assets 1,763 1,882 2,246 -6% -22%
Accrued interest receivable and other assets 50,817 46,347 50,065 10% 2%
Total assets $ 1,399,506 $ 1,383,564 $ 1,324,702 1% 6%
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand, noninterest-bearing $ 407,516 $ 397,198 $ 367,937 3% 11%
Demand, interest-bearing 171,027 169,681 148,777 1% 15%
Savings and money market 295,336 286,784 290,867 3% 2%
Time deposits - under $100 23,062 23,835 28,009 -3% -18%
Time deposits - $100 and over 197,718 189,779 164,056 4% 21%
Time deposits - brokered 76,800 83,763 97,680 -8% -21%
CDARS - money market and time deposits 17,580 15,850 5,427 11% 224%
Total deposits 1,189,039 1,166,890 1,102,753 2% 8%
Subordinated debt 9,279 9,279 23,702 0% -61%
Accrued interest payable and other liabilities 33,568 36,560 33,556 -8% 0%
Total liabilities 1,231,886 1,212,729 1,160,011 2% 6%
Shareholders' Equity:
Series C preferred stock, net 19,519 19,519 19,519 0% 0%
Common stock 132,097 131,998 131,443 0% 0%
Retained earnings 20,694 17,901 10,566 16% 96%
Accumulated other comprehensive income (loss) (4,690) 1,417 3,163 -431% -248%
Total shareholders' equity 167,620 170,835 164,691 -2% 2%
Total liabilities and shareholders' equity $ 1,399,506 $ 1,383,564 $ 1,324,702 1% 6%
End of Period: Percent Change From:
June 30, March 31, June 30, March 31, June 30,
2013 2013 2012 2013 2012
CREDIT QUALITY DATA
(in $000's, unaudited)
Nonaccrual loans - held-for-sale $ -- $ -- $ 177 N/A -100%
Nonaccrual loans - held-for-investment 13,868 16,115 12,890 -14% 8%
Restructured and loans over 90 days past due and still accruing 510 549 1,665 -7% -69%
Total nonperforming loans 14,378 16,664 14,732 -14% -2%
Foreclosed assets 659 738 3,098 -11% -79%
Total nonperforming assets $ 15,037 $ 17,402 $ 17,830 -14% -16%
Other restructured loans still accruing $ 668 $ 1,717 $ 416 -61% 61%
Net (recoveries) charge-offs during the quarter $ (270) $ (315) $ 1,098 -14% -125%
Provision (credit) for loan losses during the quarter $ (270) $ -- $ 815 N/A -133%
Allowance for loan losses $ 19,342 $ 19,342 $ 20,023 0% -3%
Classified assets* $ 23,780 $ 31,228 $ 54,880 -24% -57%
Allowance for loan losses to total loans 2.30% 2.41% 2.51% -5% -8%
Allowance for loan losses to total nonperforming loans 134.52% 116.07% 135.92% 16% -1%
Allowance for loan losses to total nonperforming loans, excluding nonaccrual loans - held-for-sale 134.52% 116.07% 137.57% 16% -2%
Nonperforming assets to total assets 1.07% 1.26% 1.35% -15% -21%
Nonperforming loans to total loans plus nonaccrual loans - held-for-sale 1.71% 2.08% 1.85% -18% -8%
Classified assets* to Heritage Commerce Corp Tier 1 capital plus allowance for loan losses 13% 17% 30% -24% -57%
Classified assets* to Heritage Bank of Commerce Tier 1 capital plus allowance for loan losses 13% 18% 31% -28% -58%
OTHER PERIOD-END STATISTICS
(in $000's, unaudited)
Heritage Commerce Corp:
Tangible equity $ 165,857 $ 168,953 $ 162,445 -2% 2%
Tangible common equity $ 146,338 $ 149,434 $ 142,926 -2% 2%
Shareholders' equity / total assets 11.98% 12.35% 12.43% -3% -4%
Tangible equity / tangible assets 11.87% 12.23% 12.28% -3% -3%
Tangible common equity / tangible assets 10.47% 10.82% 10.81% -3% -3%
Loan to deposit ratio 70.81% 68.72% 72.37% 3% -2%
Noninterest-bearing deposits / total deposits 34.27% 34.04% 33.37% 1% 3%
Total risk-based capital ratio 16.4% 16.7% 17.3% -2% -5%
Tier 1 risk-based capital ratio 15.1% 15.5% 16.0% -3% -6%
Leverage ratio 12.4% 11.5% 12.7% 8% -2%
Heritage Bank of Commerce:
Total risk-based capital ratio 15.6% 15.9% 16.2% -2% -4%
Tier 1 risk-based capital ratio 14.3% 14.6% 14.9% -2% -4%
Leverage ratio 11.7% 10.9% 11.9% 7% -2%
*Net of SBA guarantees
For the Three Months Ended For the Three Months Ended
June 30, 2013 June 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) $ 817,565 $ 10,051 4.93% $ 791,660 $ 10,292 5.23%
Securities - taxable 358,532 2,399 2.68% 398,143 2,975 3.01%
Securities - tax exempt(2) 58,474 550 3.77% -- -- --
Federal funds sold and interest-bearing deposits in other financial institutions 39,198 30 0.31% 41,508 29 0.28%
Total interest earning assets(2) 1,273,769 13,030 4.10% 1,231,311 13,296 4.34%
Cash and due from banks 22,658 21,191
Premises and equipment, net 7,611 7,841
Intangible assets 1,830 2,316
Other assets 67,334 69,115
Total assets $ 1,373,202 $ 1,331,774
Liabilities and shareholders' equity:
Deposits:
Demand, noninterest-bearing $ 392,122 $ 370,086
Demand, interest-bearing 167,726 57 0.14% 147,767 56 0.15%
Savings and money market 281,565 124 0.18% 298,544 179 0.24%
Time deposits - under $100 23,292 21 0.36% 28,011 35 0.50%
Time deposits - $100 and over 194,738 194 0.40% 166,486 246 0.59%
Time deposits - brokered 81,118 197 0.97% 93,259 219 0.94%
CDARS - money market and time deposits 17,918 2 0.04% 5,900 3 0.20%
Total interest-bearing deposits 766,357 595 0.31% 739,967 738 0.40%
Total deposits 1,158,479 595 0.21% 1,110,053 738 0.27%
Subordinated debt 9,279 90 3.89% 23,702 472 8.01%
Short-term borrowings 288 -- 0.00% 3,196 2 0.25%
Total interest-bearing liabilities 775,924 685 0.35% 766,865 1,212 0.64%
Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds 1,168,046 685 0.24% 1,136,951 1,212 0.43%
Other liabilities 33,681 31,905
Total liabilities 1,201,727 1,168,856
Shareholders' equity 171,475 162,918
Total liabilities and shareholders' equity $ 1,373,202 $ 1,331,774
Net interest income(2) / margin 12,345 3.89% 12,084 3.95%
Less tax equivalent adjustment(2) (192) --
Net interest income $ 12,153 $ 12,084
(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, 2013 June 30, 2012
Interest Average Interest Average
NET INTEREST INCOME AND NET INTEREST MARGIN Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
(Dollars in thousands)
Assets:
Loans, gross(1) $ 807,901 $ 20,140 5.03% $ 778,640 $ 20,608 5.32%
Securities - taxable 372,044 4,860 2.63% 394,031 6,072 3.10%
Securities - tax exempt(2) 49,563 932 3.79% -- -- --
Federal funds sold and interest-bearing deposits in other financial institutions 77,858 99 0.26% 48,750 65 0.27%
Total interest earning assets(2) 1,307,366 26,031 4.02% 1,221,421 26,745 4.40%
Cash and due from banks 23,104 21,089
Premises and equipment, net 7,566 7,909
Intangible assets 1,892 2,378
Other assets 67,944 69,082
Total assets $ 1,407,872 $ 1,321,879
Liabilities and shareholders' equity:
Deposits:
Demand, noninterest-bearing $ 426,424 $ 358,689
Demand, interest-bearing 166,073 116 0.14% 145,208 109 0.15%
Savings and money market 282,392 244 0.17% 293,374 345 0.24%
Time deposits - under $100 23,940 43 0.36% 28,117 73 0.52%
Time deposits - $100 and over 192,518 398 0.42% 168,090 501 0.60%
Time deposits - brokered 86,561 416 0.97% 88,992 420 0.95%
CDARS - money market and time deposits 14,714 3 0.04% 6,083 6 0.20%
Total interest-bearing deposits 766,198 1,220 0.32% 729,864 1,454 0.40%
Total deposits 1,192,622 1,220 0.21% 1,088,553 1,454 0.27%
Subordinated debt 9,279 178 3.87% 23,702 946 8.03%
Short-term borrowings 207 1 0.97% 1,618 2 0.25%
Total interest-bearing liabilities 775,684 1,399 0.36% 755,184 2,402 0.64%
Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds 1,202,108 1,399 0.23% 1,113,873 2,402 0.43%
Other liabilities 35,080 32,287
Total liabilities 1,237,188 1,146,160
Shareholders' equity 170,684 175,719
Total liabilities and shareholders' equity $ 1,407,872 $ 1,321,879
Net interest income(2) / margin 24,632 3.80% 24,343 4.01%
Less tax equivalent adjustment(2) (326) --
Net interest income $ 24,306 $ 24,343
(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