Heritage Commerce Corp Earnings Increased 19% for the Second Quarter of 2014 from the Second Quarter of 2013; Dividend Increased

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| Source: Heritage Commerce Corp

SAN JOSE, Calif., July 24, 2014 (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 19% to $3.3 million, or $0.10 per average diluted common share, for the second quarter of 2014, compared to $2.8 million, or $0.09 per average diluted common share for the second quarter of 2013, and increased 8% from $3.1 million, or $0.10 per average diluted common share for the first quarter of 2014. For the six months ended June 30, 2014, net income increased 29% to $6.4 million, or $0.20 per average diluted common share, from $5.0 million, or $0.16 per average diluted common share, for the six months ended June 30, 2013. All results are unaudited.

"We continue to achieve important strategic and operational progress, demonstrated by our ability to consistently generate solid results," said Walter Kaczmarek, President and Chief Executive Officer. "With 18% year-over-year loan growth, our net interest income grew 11% and net interest margin improved 26 basis points in the first half of 2014, compared to the first half of 2013. Loan growth continues to be an area of strength for us, reflecting our ability to gain market share. The additions to our loan teams have also contributed to our strong loan growth. At the same time, we maintain solid asset quality metrics with nonperforming assets declining 42%, compared with the prior year, and declining 24% on a linked quarter basis."

"Our Board of Directors voted to increase the quarterly common stock dividend to $0.05 per share, from $0.04 per share in the first quarter of 2014, due to continued improved performance. This is a 25% increase from the preceding quarter and up 67% from $0.03 per share paid in November, 2013," commented Mr. Kaczmarek. "We are delighted to be able to increase our dividend again and share our success with our shareholders. Our strong business fundamentals and ongoing ability to leverage our brand in the Bay area continues to be the foundation of our strength. The dividend will be paid to holders of common stock and Series C preferred stock (on an as converted basis) on August 27, 2014, to shareholders of record on August 7, 2014."

Second Quarter 2014 Highlights (as of, or for the period ended June 30, 2014, except as noted):

  • Diluted earnings per share increased 11% to $0.10 for the second quarter of 2014, compared to $0.09 per diluted share for the second quarter of 2013, and remained the same from the first quarter of 2014. Diluted earnings per share increased 25% to $0.20 for the six months ended June 30, 2014, compared to $0.16 per diluted share for the six months ended June 30, 2013.
     
  • Net interest income increased 13% to $13.7 million for the second quarter of 2014, compared to $12.2 million for the second quarter of 2013, and increased 3% from $13.3 million for the first quarter of 2014, driven primarily by loan growth and increases in core deposits. Net interest income increased 11% to $27.0 million for the six months ended June 30, 2014, compared to $24.3 million for the six months ended June 30, 2013.
     
  • The fully tax equivalent ("FTE") net interest margin increased 18 basis points to 4.07% for the second quarter of 2014, from 3.89% for the second quarter of 2013, primarily due to loan growth, higher yields on securities, and a lower cost of funds. The net interest margin increased 2 basis points to 4.07% for the second quarter of 2014 from 4.05% for the first quarter of 2014 mainly due to loan growth.  For the six months ended June 30, 2014, net interest margin increased 26 basis points to 4.06%, from 3.80% for the six months ended June 30, 2013, reflecting loan growth, higher yields on securities, and a lower cost of funds.
     
  • Loans (excluding loans-held-for-sale) increased 18% to $990.3 million at June 30, 2014, compared to $842.0 million at June 30, 2013, and increased 5% from $941.8 million at March 31, 2014.
     
  • Nonperforming assets ("NPAs") declined to $8.7 million, or 0.59% of total assets, at June 30, 2014, compared to $15.0 million, or 1.07% of total assets, at June 30, 2013, and $11.4 million, or 0.77% of total assets, at March 31, 2014.
     
  • Net charge-offs totaled $27,000 for the second quarter of 2014, compared to net recoveries of $270,000 for the second quarter of 2013, and net charge-offs of $337,000 for the first quarter of 2014.
     
  • There was a $198,000 credit to the provision for loan losses for the second quarter of 2014, compared to a $270,000 credit to the provision for loan losses for the second quarter of 2013, and a $10,000 credit to the provision for loan losses for the first quarter of 2014. 
     
  • The allowance for loan losses ("ALLL") decreased to 1.88% of total loans at June 30, 2014, compared to 2.30% at June 30, 2013, and 2.00% at March 31, 2014.
     
  • Deposits totaled $1.27 billion at June 30, 2014, compared to $1.19 billion at June 30, 2013, and $1.26 billion at March 31, 2014Noninterest-bearing demand deposits increased $48.7 million at June 30, 2014 from June 30, 2013, and increased $15.4 million from March 31, 2014, while brokered deposits decreased $43.2 million and $6.8 million, respectively. Deposits (excluding all time deposits and CDARS deposits) increased $129.6 million, or 15%, to $1.0 billion at June 30, 2014, from $873.9 million at June 30, 2013, and increased $11.5 million, or 1%, from $992.0 million at March 31, 2014.
     
  • Capital ratios exceeded regulatory requirements for a well-capitalized financial institution on a holding company and bank level at June 30, 2014:
  Capital Ratios Heritage Commerce
Corp
Heritage Bank of
Commerce
Well-Capitalized
Financial Institution
Regulatory Guidelines 
         
  Total Risk-Based 15.1% 14.1% 10.0%
  Tier 1 Risk-Based 13.9% 12.9% 6.0%
  Leverage 12.0% 11.2% 5.0%

Operating Results

Net interest income increased 13% to $13.7 million for the second quarter of 2014, compared to $12.2 million for the second quarter of 2013, and increased 3% from $13.3 million for the first quarter of 2014, driven primarily by loan growth and increases in core deposits. Net interest income increased 11% to $27.0 million for the six months ended June 30, 2014, compared to $24.3 million for the six months ended June 30, 2013.

The net interest margin (FTE) increased 18 basis points to 4.07% for the second quarter of 2014, from 3.89% for the second quarter of 2013, primarily due to loan growth, higher yields on securities, and a lower cost of funds. The net interest margin increased 2 basis points to 4.07% for the second quarter of 2014 from 4.05% for the first quarter of 2014 mainly due to loan growth. For the six months ended June 30, 2014, net interest margin increased 26 basis points to 4.06%, from 3.80% for the six months ended June 30, 2013.

Favorable credit quality led to a $198,000 credit to the provision for loan losses for the second quarter of 2014, compared to a $270,000 credit to the provision for loan losses for the second quarter of 2013, and a $10,000 credit to the provision for loan losses for the first quarter of 2014. There was a $208,000 credit to the provision for loan losses for the six months ended June 30, 2014 compared to a $270,000 credit to the provision for loan losses for the six months ended June 30, 2013.

Noninterest income was $2.0 million for the second quarter of 2014, compared to $1.9 million for the second quarter of 2013, and $2.0 million for the first quarter of 2014. For the six months ended June 30, 2014, noninterest income was $4.1 million, compared to $3.6 million for the six months ended June 30, 2013. Largely due to a higher gain on sales of Small Business Administration ("SBA") loans, noninterest income was higher for the second quarter and for the six months ended June 30, 2014, compared to the same periods in 2013. "Our SBA team is showing progress as reflected with a gain on sales of SBA loans of $442,000 for the second quarter of 2014, compared to $134,000 for the second quarter of 2013, and $157,000 for the first quarter of 2014. For the six months ended June 30, 2014, there was a gain on sales of SBA loans of $599,000, compared to $270,000 for the six months ended June 30, 2013," added Mr. Kaczmarek.

Noninterest expense for the second quarter of 2014 was $10.9 million, an increase of 5% from $10.4 million for the second quarter of 2013, and an increase of 2% from $10.7 million for the first quarter of 2014. Noninterest expense for the six months ended June 30, 2014 increased 2% to $21.7 million, compared to $21.2 million for the six months ended June 30, 2013.  The increase in noninterest expense for the second quarter and six months ended June 30, 2014 was primarily due to increased salaries and employee benefits expense, partially offset by lower professional fees. Higher salaries and employee benefits expense reflected the growth in staffing for business initiatives, the impact of merit increases, and one-time reorganizational costs in the second quarter of 2014.  Professional fees were lower due to net recoveries in legal fees as a result of the resolution or payoff of certain problem loans in the second quarter of 2014. Full‑time equivalent employees were 203, 191, and 195 at June 30, 2014, June 30, 2013, and March 31, 2014, respectively. 

The efficiency ratio for the second quarter of 2014 improved to 69.50%, compared to 73.85% for the second quarter of 2013, and 69.92% for the first quarter of 2014. The efficiency ratio for the six months ended June 30, 2014 was 69.71%, compared to 75.92% for the six months ended June 30, 2013. The decrease in the efficiency ratio in the second quarter and six months ended June 30, 2014 compared to the same periods in 2013 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 2014 was $1.7 million, compared to $1.2 million for the second quarter of 2013, and $1.6 million for the first quarter of 2014. The effective tax rate for the second quarter of 2014 increased to 33%, compared to 29% for the second quarter of 2013, primarily as a result of reduced income tax credits. The effective tax rate for the first quarter of 2014 was 34%. Income tax expense for the six months ended June 30, 2014 was $3.2 million, compared to $2.0 million for the six months ended June 30, 2013. The effective tax rate for the six months ended June 30, 2014 was 33%, compared to 29% for the six months ended June 30, 2013. 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 Company has net investments of $1.0 million in low-income housing limited partnerships as of June 30, 2014, generating tax credits of approximately $412,000 for 2014, compared to tax credits of approximately $727,000 for 2013. The Company had California Enterprise Zone tax savings of approximately $162,000 for 2013. The California state legislature eliminated the Enterprise Zone tax deductions beginning January 1, 2014.

Balance Sheet Review, Capital Management and Credit Quality

Total assets were $1.48 billion at June 30, 2014, compared to $1.40 billion at June 30, 2013, and $1.47 billion at March 31, 2014.  

The investment securities available-for-sale portfolio totaled $261.5 million at June 30, 2014, compared to $293.8 million at June 30, 2013, and $262.4 million at March 31, 2014. At June 30, 2014, the securities available-for-sale portfolio was comprised of $159.0 million agency mortgage-backed securities (all issued by U.S. Government sponsored entities), $53.9 million of corporate bonds, $27.3 million of asset-backed securities, and $21.3 million of single entity issue trust preferred securities. The pre-tax unrealized gain on securities available-for-sale at June 30, 2014 was $4.5 million, compared to a pre-tax unrealized loss on securities available-for-sale of ($880,000), at June 30, 2013, and a pre-tax unrealized gain on securities available-for-sale of $294,000 at March 31, 2014.  

At June 30, 2014, investment securities held-to-maturity totaled $96.0 million, compared to $81.7 million at June 30, 2013, and $95.5 million at March 31, 2014. At June 30, 2014, the securities held-to-maturity portfolio, at amortized cost, was comprised of $80.0 million tax-exempt municipal bonds and $16.0 million agency mortgage-backed securities.

Loans, excluding loans held-for-sale, increased 18% to $990.3 million at June 30, 2014, from $842.0 million at June 30, 2013, and increased 5% from $941.8 million at March 31, 2014. The loan portfolio remains well-diversified with commercial and industrial ("C&I") loans accounting for 42% of the loan portfolio at June 30, 2014. Commercial and residential real estate loans accounted for 46% of the total loan portfolio, of which 49% 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 5% of total loans at June 30, 2014. C&I line usage was 42% at June 30, 2014, compared to 40% at June 30, 2013, and 36% at March 31, 2014.

The yield on the loan portfolio was 4.78% for the second quarter of 2014, compared to 4.93% for the second quarter of 2013. The yield on the loan portfolio was 4.82% for the six months ended June 30, 2014, compared to 5.03% for the six months ended June 30, 2013. The decrease in the yield on the loan portfolio for the second quarter and six months ended June 30, 2014 compared to the same periods in 2013 was a result of competitive market conditions. The yield on the loan portfolio was 4.78% for the second quarter of 2014, compared to 4.86% for the first quarter of 2014. The yield on the loan portfolio for the first quarter of 2014 included approximately $270,000 of interest recovered on a loan that was previously on nonaccrual status. Excluding this past due interest recovered, the loan yield for the first quarter of 2014 would have been 4.74%.

NPAs decreased to $8.7 million, or 0.59% of total assets, at June 30, 2014, compared to $15.0 million, or 1.07% of total assets, at June 30, 2013, and $11.4 million, or 0.77% of total assets, at March 31, 2014.  The following is a breakout of NPAs at June 30, 2014: 

NONPERFORMING ASSETS    
(in $000's, unaudited) Balance % of Total
SBA loans  $ 2,963 34%
Commercial real estate loans  1,693 20%
Land and construction loans  1,688 19%
Commercial and industrial loans  766 9%
Home equity and consumer loans  578 7%
Foreclosed assets  525 6%
Restructured and loans over 90 days past due and accruing  454 5%
Total nonperforming assets  $ 8,667 100%

At June 30, 2014, the $8.7 million of NPAs included $590,000 of loans guaranteed by the SBA and $454,000 of restructured loans still accruing interest income. Foreclosed assets were $525,000 at June 30, 2014, compared to $659,000 at June 30, 2013, and $551,000 at March 31, 2014.

Classified assets (net of SBA guarantees) were $23.1 million at June 30, 2014, compared to $23.8 million at June 30, 2013, and $20.2 million at March 31, 2014.

The following table summarizes the allowance for loan losses:

  For the Quarter Ended
ALLOWANCE FOR LOAN LOSSES June 30, March 31, June 30,
(in $000's, unaudited) 2014 2014 2013
Balance at beginning of period  $ 18,817  $ 19,164  $ 19,342
Provision (credit) for loan losses during the period  (198)  (10)  (270)
Net (charge-offs) recoveries during the period  (27)  (337)  270
Balance at end of period  $ 18,592  $ 18,817  $ 19,342
       
Total loans  $ 990,341  $ 941,759  $ 841,950
Total nonperforming loans  $ 8,142  $ 10,824  $ 14,378
       
Allowance for loan losses to total loans 1.88% 2.00% 2.30%
Allowance for loan losses to total nonperforming loans 228.35% 173.85% 134.52%

The ALLL decreased to 1.88% of total loans at June 30, 2014, compared to 2.30% at June 30, 2013, and 2.00% at March 31, 2014. The decrease in the ALLL to total loans at June 30, 2014 was primarily due to increasing loan balances while the allowance for loan losses declined slightly.

Total deposits increased $78.8 million to $1.27 billion at June 30, 2014, compared to $1.19 billion at June 30, 2013, and increased $5.9 million from $1.26 billion at March 31, 2014. Noninterest-bearing demand deposits increased $48.7 million at June 30, 2014 from June 30, 2013, and increased $15.4 million from March 31, 2014, while brokered deposits decreased $43.2 million and $6.8 million, respectively. Deposits (excluding all time deposits and CDARS deposits) increased $129.6 million, or 15%, to $1.0 billion at June 30, 2014, from $873.9 million at June 30, 2013, and increased $11.5 million, or 1%, from $992.0 million at March 31, 2014.

The total cost of deposits decreased five basis points to 0.16% for the second quarter of 2014, from 0.21% for the second quarter of 2013, and decreased one basis point from 0.17% for the first quarter of 2014.  The total cost of deposits decreased 4 basis points to 0.17% for the six months ended June 30, 2014, from 0.21% for the six months ended June 30, 2013.

Tangible equity was $180.2 million at June 30, 2014, compared to $165.9 million at June 30, 2013 and $175.4 million at March 31, 2014. Tangible book value per common share was $6.09 at June 30, 2014, compared to $5.56 at June 30, 2013, and $5.91 at March 31, 2014. There were 21,004 shares of Series C Preferred Stock outstanding at June 30, 2014, June 30, 2013, and March 31, 2014, 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 $5.64 at June 30, 2014, compared to $5.19 at June 30, 2013, and $5.49 at March 31, 2014.

Accumulated other comprehensive loss was ($92,000) at June 30, 2014, compared to accumulated other comprehensive loss of ($4.7) million a year ago, and accumulated other comprehensive loss of ($2.5) million at March 31, 2014. The unrealized gain (loss) on securities available-for-sale included in other comprehensive loss was an unrealized gain of $2.6 million, net of taxes, at June 30, 2014, compared to an unrealized loss of ($507,000), net of taxes, at June 30, 2013, and an unrealized gain of $171, 000, net of taxes, at March 31, 2014. The components of other comprehensive loss, net of taxes, at June 30, 2014 include the following: an unrealized gain on available-for-sale securities of $2.6 million; the remaining unamortized unrealized gain on securities available-for-sale transferred to held-to-maturity of $449,000; a liability adjustment on split dollar insurance contracts of ($1.9) million; a liability adjustment on the supplemental executive retirement plan of ($2.2) million; and an unrealized gain on interest-only strip from SBA loans of $948,000.

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 with an additional Loan Production Office in Lincoln, California. 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) Delay in the pace of economic recovery and stagnant or decreasing employment levels; (3) 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, which could negatively affect our customers' ability to meet certain credit obligations; (4) Volatility in credit or equity markets and its effect on the global economy; (5) Changes in consumer spending, borrowing or saving habits; (6) Competition for loans and deposits and failure to attract or retain deposits or loans; (7) The ability to increase market share and control expenses; (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, charge offs, or 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 of the enactment of the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 and the rules and regulations to be promulgated by supervisory and oversight agencies implementing the legislation taking into account that the precise timing, extent and nature of such rules and regulations and the impact on the Company are uncertain; (20) The impact of revised capital requirements under Basel III; (21) Significant changes in applicable laws and regulations, including those concerning taxes, banking and securities; (22) Changes in the competitive environment among financial or bank holding companies and other financial service providers; (23) The effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, 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; and (25) Our success in managing the risks involved in the foregoing factors. For a discussion of factors which could cause results to differ, please see the Company's reports on Forms 10-K and10-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) 2014 2014 2013 2014 2013 2014 2013 Change
Interest income  $ 14,192  $ 13,855  $ 12,838 2% 11%  $ 28,047  $ 25,705 9%
Interest expense  507  521  685 -3% -26%  1,028  1,399 -27%
Net interest income before provision for loan losses  13,685  13,334  12,153 3% 13%  27,019  24,306 11%
Provision (credit) for loan losses  (198)  (10)  (270) -1880% 27%  (208)  (270) 23%
Net interest income after provision for loan losses  13,883  13,344  12,423 4% 12%  27,227  24,576 11%
Noninterest income:                
Service charges and fees on deposit accounts  646  620  618 4% 5%  1,266  1,195 6%
Gain on sales of SBA loans  442  157  134 182% 230%  599  270 122%
Increase in cash surrender value of life insurance  397  398  410 0% -3%  795  826 -4%
Servicing income  313  348  385 -10% -19%  661  750 -12%
Gain on sales of securities  --   50  7 -100% -100%  50  38 32%
Other  249  444  361 -44% -31%  693  499 39%
Total noninterest income  2,047  2,017  1,915 1% 7%  4,064  3,578 14%
                 
Noninterest expense:                
Salaries and employee benefits  6,819  6,243  5,864 9% 16%  13,062  11,875 10%
Occupancy and equipment  987  945  1,028 4% -4%  1,932  2,096 -8%
Professional fees  126  586  400 -78% -69%  712  1,382 -48%
Other  3,002  2,960  3,097 1% -3%  5,962  5,817 2%
Total noninterest expense  10,934  10,734  10,389 2% 5%  21,668  21,170 2%
Income before income taxes  4,996  4,627  3,949 8% 27%  9,623  6,984 38%
Income tax expense  1,672  1,551  1,156 8% 45%  3,223  2,011 60%
Net income  3,324  3,076  2,793 8% 19%  6,400  4,973 29%
Dividends on preferred stock  (224)  (224)  --  0% N/A  (448)  --  N/A
Net income available to common shareholders  3,100  2,852  2,793 9% 11%  5,952  4,973 20%
Undistributed earnings allocated to Series C Preferred Stock  (358)  (315)  (489) 14% -27%  (673)  (871) -23%
Distributed and undistributed earnings allocated to common shareholders  $ 2,742  $ 2,537  $ 2,304 8% 19%  $ 5,279  $ 4,102 29%
                 
PER COMMON SHARE DATA                
(unaudited)                
Basic earnings per share  $ 0.10  $ 0.10  $ 0.09 0% 11%  $ 0.20  $ 0.16 25%
Diluted earnings per share  $ 0.10  $ 0.10  $ 0.09 0% 11%  $ 0.20  $ 0.16 25%
Weighted average shares outstanding - basic  26,370,510  26,359,825  26,336,244 0% 0%  26,365,167  26,332,793 0%
Weighted average shares outstanding - diluted  26,503,401  26,483,088  26,371,892 0% 0%  26,493,466  26,378,916 0%
Common shares outstanding at period-end  26,370,510  26,370,510  26,338,521 0% 0%  26,370,510  26,338,521 0%
Pro forma common shares outstanding at period-end, assuming Series C preferred stock was converted into common stock  31,971,510  31,971,510  31,939,521 0% 0%  31,971,510  31,939,521 0%
Book value per share  $ 6.14  $ 5.96  $ 5.62 3% 9%  $ 6.14  $ 5.62 9%
Tangible book value per share  $ 6.09  $ 5.91  $ 5.56 3% 10%  $ 6.09  $ 5.56 10%
Pro forma tangible book value per share, assuming Series C preferred stock was converted into common stock  $ 5.64  $ 5.49  $ 5.19 3% 9%  $ 5.64  $ 5.19 9%
                 
KEY FINANCIAL RATIOS                
(unaudited)                
Annualized return on average equity 7.45% 7.10% 6.53% 5% 14% 7.28% 5.88% 24%
Annualized return on average tangible equity 7.51% 7.16% 6.60% 5% 14% 7.33% 5.94% 23%
Annualized return on average assets 0.91% 0.86% 0.82% 6% 11% 0.88% 0.71% 24%
Annualized return on average tangible assets 0.91% 0.86% 0.82% 6% 11% 0.88% 0.71% 24%
Net interest margin 4.07% 4.05% 3.89% 0% 5% 4.06% 3.80% 7%
Efficiency ratio 69.50% 69.92% 73.85% -1% -6% 69.71% 75.92% -8%
                 
AVERAGE BALANCES                
(in $000's, unaudited)                
Average assets  $ 1,469,085  $ 1,458,875  $ 1,373,202 1% 7%  $ 1,464,008  $ 1,407,872 4%
Average tangible assets  $ 1,467,718  $ 1,457,391  $ 1,371,372 1% 7%  $ 1,462,583  $ 1,405,980 4%
Average earning assets  $ 1,373,957  $ 1,361,923  $ 1,273,769 1% 8%  $ 1,367,973  $ 1,307,366 5%
Average loans held-for-sale  $ 4,135  $ 3,296  $ 5,189 25% -20%  $ 3,717  $ 4,227 -12%
Average total loans  $ 970,538  $ 927,042  $ 812,376 5% 19%  $ 948,911  $ 803,674 18%
Average deposits  $ 1,257,121  $ 1,250,128  $ 1,158,479 1% 9%  $ 1,253,644  $ 1,192,622 5%
Average demand deposits - noninterest-bearing  $ 436,018  $ 428,944  $ 392,122 2% 11%  $ 432,501  $ 426,424 1%
Average interest-bearing deposits  $ 821,103  $ 821,184  $ 766,357 0% 7%  $ 821,143  $ 766,198 7%
Average interest-bearing liabilities  $ 822,660  $ 821,242  $ 775,924 0% 6%  $ 821,955  $ 775,684 6%
Average equity  $ 178,963  $ 175,773  $ 171,475 2% 4%  $ 177,377  $ 170,684 4%
Average tangible equity  $ 177,596  $ 174,289  $ 169,645 2% 5%  $ 175,952  $ 168,792 4%
     
     
  End of Period: Percent Change From:
CONSOLIDATED BALANCE SHEETS June 30, March 31, June 30, March 31, June 30,
(in $000's, unaudited) 2014 2014 2013 2014 2013
ASSETS          
Cash and due from banks  $ 32,162  $ 30,666  $ 33,890 5% -5%
Federal funds sold and interest-bearing deposits in other financial institutions  17,256  54,333  51,872 -68% -67%
Securities available-for-sale, at fair value  261,489  262,375  293,778 0% -11%
Securities held-to-maturity, at amortized cost  95,972  95,548  81,731 0% 17%
Loans held-for-sale - SBA, including deferred costs  2,269  2,894  6,321 -22% -64%
Loans:          
Commercial  415,557  390,650  383,068 6% 8%
Real estate:          
Commercial and residential  454,676  436,562  370,620 4% 23%
Land and construction  47,758  42,889  26,705 11% 79%
Home equity  56,743  56,289  48,667 1% 17%
Consumer  16,112  15,829  13,097 2% 23%
Loans  990,846  942,219  842,157 5% 18%
Deferred loan fees  (505)  (460)  (207) 10% 144%
Total loans, net of deferred fees  990,341  941,759  841,950 5% 18%
Allowance for loan losses  (18,592)  (18,817)  (19,342) -1% -4%
Loans, net  971,749  922,942  822,608 5% 18%
Company owned life insurance  50,452  50,055  49,184 1% 3%
Premises and equipment, net  7,237  7,186  7,541 1% -4%
Intangible assets  1,297  1,412  1,763 -8% -26%
Accrued interest receivable and other assets  40,736  42,699  50,818 -5% -20%
Total assets  $ 1,480,619  $ 1,470,110  $ 1,399,506 1% 6%
           
LIABILITIES AND SHAREHOLDERS' EQUITY          
Liabilities:          
Deposits:          
Demand, noninterest-bearing  $ 456,235  $ 440,864  $ 407,516 3% 12%
Demand, interest-bearing  193,041  198,141  171,027 -3% 13%
Savings and money market  354,175  352,977  295,336 0% 20%
Time deposits - under $100  20,379  20,669  23,062 -1% -12%
Time deposits -- $100 and over  195,619  195,769  197,718 0% -1%
Time deposits - brokered  33,614  40,440  76,800 -17% -56%
CDARS - money market and time deposits  14,785  13,135  17,580 13% -16%
Total deposits  1,267,848  1,261,995  1,189,039 0% 7%
Subordinated debt  --   --   9,279 N/A -100%
Accrued interest payable and other liabilities  31,246  31,298  33,568 0% -7%
Total liabilities  1,299,094  1,293,293  1,231,886 0% 5%
           
Shareholders' Equity:          
Series C preferred stock, net  19,519  19,519  19,519 0% 0%
Common stock  132,911  132,631  132,097 0% 1%
Retained earnings  29,187  27,143  20,694 8% 41%
Accumulated other comprehensive loss  (92)  (2,476)  (4,690) 96% 98%
Total shareholders' equity  181,525  176,817  167,620 3% 8%
Total liabilities and shareholders' equity  $ 1,480,619  $ 1,470,110  $ 1,399,506 1% 6%
     
     
  End of Period: Percent Change From:
  June 30, March 31, June 30, March 31, June 30,
  2014 2014 2013 2014 2013
CREDIT QUALITY DATA          
(in $000's, unaudited)          
Nonaccrual loans - held-for-investment  $ 7,688  $ 9,546  13,868 -19% -45%
Restructured and loans over 90 days past due and still accruing  454  1,278  510 -64% -11%
Total nonperforming loans  8,142  10,824  14,378 -25% -43%
Foreclosed assets 525 551 659 -5% -20%
Total nonperforming assets  $ 8,667  $ 11,375  $ 15,037 -24% -42%
Other restructured loans still accruing  $ 1,180  $ --   $ 668 N/A 77%
Net charge-offs (recoveries) during the quarter  $ 27  $ 337  $ (270) -92% 110%
Provision (credit) for loan losses during the quarter  $ (198)  $ (10)  $ (270) -1880% 27%
Allowance for loan losses  $ 18,592  $ 18,817  $ 19,342 -1% -4%
Classified assets*  $ 23,092  $ 20,198  $ 23,780 14% -3%
Allowance for loan losses to total loans 1.88% 2.00% 2.30% -6% -18%
Allowance for loan losses to total nonperforming loans 228.35% 173.85% 134.52% 31% 70%
Nonperforming assets to total assets 0.59% 0.77% 1.07% -23% -45%
Nonperforming loans to total loans 0.82% 1.15% 1.71% -29% -52%
Classified assets* to Heritage Commerce Corp Tier 1 capital plus allowance for loan losses 12% 11% 13% 9% -8%
Classified assets* to Heritage Bank of Commerce Tier 1 capital plus allowance for loan losses 13% 11% 13% 18% 0%
           
OTHER PERIOD-END STATISTICS          
(in $000's, unaudited)          
Heritage Commerce Corp:          
Tangible equity  $ 180,228  $ 175,405  $ 165,857 3% 9%
Tangible common equity  $ 160,709  $ 155,886  $ 146,338 3% 10%
Shareholders' equity / total assets 12.26% 12.03% 11.98% 2% 2%
Tangible equity / tangible assets 12.18% 11.94% 11.87% 2% 3%
Tangible common equity / tangible assets 10.86% 10.61% 10.47% 2% 4%
Loan to deposit ratio 78.11% 74.62% 70.81% 5% 10%
Noninterest-bearing deposits / total deposits 35.98% 34.93% 34.27% 3% 5%
Total risk-based capital ratio 15.1% 15.4% 16.4% -2% -8%
Tier 1 risk-based capital ratio 13.9% 14.2% 15.1% -2% -8%
Leverage ratio 12.0% 11.9% 12.4% 1% -3%
           
Heritage Bank of Commerce:          
Total risk-based capital ratio 14.1% 14.2% 15.6% -1% -10%
Tier 1 risk-based capital ratio 12.9% 13.0% 14.3% -1% -10%
Leverage ratio 11.2% 10.9% 11.7% 3% -4%
           
*Net of SBA guarantees          
           
           
  For the Quarter Ended  For the Quarter Ended 
  June 30, 2014 June 30, 2013
    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)  $ 974,673  $ 11,617 4.78%  $ 817,565  $ 10,051 4.93%
Securities - taxable 287,841 2,047 2.85% 358,532 2,399 2.68%
Securities - tax exempt(2) 79,845 779 3.91%  58,474 550 3.77%
Federal funds sold and interest-bearing deposits in other financial institutions 31,598 22 0.28% 39,198 30 0.31%
Total interest earning assets(2)  1,373,957  14,465 4.22%  1,273,769  13,030 4.10%
Cash and due from banks  23,919      22,658    
Premises and equipment, net  7,212      7,611    
Intangible assets  1,367      1,830    
Other assets  62,630      67,334    
Total assets  $ 1,469,085      $ 1,373,202    
             
Liabilities and shareholders' equity:            
Deposits:            
Demand, noninterest-bearing  $ 436,018      $ 392,122    
             
Demand, interest-bearing  199,010  82 0.17%  167,726  57 0.14%
Savings and money market  354,826  166 0.19%  281,565  124 0.18%
Time deposits - under $100  20,610  16 0.31%  23,292  21 0.36%
Time deposits -- $100 and over  194,483  157 0.32%  194,738  194 0.40%
Time deposits - brokered  37,766  83 0.88%  81,118  197 0.97%
CDARS - money market and time deposits  14,408  2 0.06%  17,918  2 0.04%
Total interest-bearing deposits  821,103  506 0.25%  766,357  595 0.31%
Total deposits  1,257,121  506 0.16%  1,158,479  595 0.21%
             
Subordinated debt  --   --   --   9,279  90 3.89%
Short-term borrowings  1,557  1 0.26%  288  --  0.00%
Total interest-bearing liabilities  822,660  507 0.25%  775,924  685 0.35%
Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds  1,258,678  507 0.16%  1,168,046  685 0.24%
Other liabilities  31,444      33,681    
Total liabilities  1,290,122      1,201,727    
Shareholders' equity  178,963      171,475    
Total liabilities and shareholders' equity  $ 1,469,085      $ 1,373,202    
             
Net interest income(2) / margin    13,958 4.07%    12,345 3.89%
Less tax equivalent adjustment(2)    (273)      (192)  
Net interest income    $ 13,685      $ 12,153  
             
(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, 2014 June 30, 2013
    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)  $ 952,628  $ 22,756 4.82%  $ 807,901  $ 20,140 5.03%
Securities - taxable 287,946 4,217 2.95% 372,044 4,860 2.63%
Securities - tax exempt(2) 79,895 1,557 3.93%  49,563  932 3.79%
Federal funds sold and interest-bearing deposits in other financial institutions 47,504 62 0.26% 77,858 99 0.26%
Total interest earning assets(2)  1,367,973  28,592 4.21%  1,307,366  26,031 4.02%
Cash and due from banks  24,323      23,104    
Premises and equipment, net  7,224      7,566    
Intangible assets  1,425      1,892    
Other assets  63,063      67,944    
Total assets  $ 1,464,008      $ 1,407,872    
             
Liabilities and shareholders' equity:            
Deposits:            
Demand, noninterest-bearing  $ 432,501      $ 426,424    
             
Demand, interest-bearing  199,207  159 0.16%  166,073  116 0.14%
Savings and money market  346,251  317 0.18%  282,392  244 0.17%
Time deposits - under $100  20,887  33 0.32%  23,940  43 0.36%
Time deposits -- $100 and over  194,644  316 0.33%  192,518  398 0.42%
Time deposits - brokered  43,384  199 0.92%  86,561  416 0.97%
CDARS - money market and time deposits  16,770  3 0.04%  14,714  3 0.04%
Total interest-bearing deposits  821,143  1,027 0.25%  766,198  1,220 0.32%
Total deposits  1,253,644  1,027 0.17%  1,192,622  1,220 0.21%
             
Subordinated debt  --   --   --   9,279  178 3.87%
Short-term borrowings  812  1 0.25%  207  1 0.97%
Total interest-bearing liabilities  821,955  1,028 0.25%  775,684  1,399 0.36%
Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds  1,254,456  1,028 0.17%  1,202,108  1,399 0.23%
Other liabilities  32,175      35,080    
Total liabilities  1,286,631      1,237,188    
Shareholders' equity  177,377      170,684    
Total liabilities and shareholders' equity  $ 1,464,008      $ 1,407,872    
             
Net interest income(2) / margin    27,564 4.06%    24,632 3.80%
Less tax equivalent adjustment(2)    (545)      (326)  
Net interest income    $ 27,019      $ 24,306  
             
(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