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Heritage Commerce Corp Earnings Increased 28% To $2.7 Million In The Second Quarter Of 2012 Compared To Second Quarter Of 2011

Heritage Commerce Corp (Nasdaq:HTBK), the holding company (“the Company” or “HCC”) for Heritage Bank of Commerce (“the Bank” or “HBC”), today reported net income increased 28% to $2.7 million for the second quarter of 2012, compared to $2.1 million for the second quarter of 2011. Loan and deposit growth and continued improvements in asset quality contributed to solid profitability in the second quarter and in the first six months of 2012.

Following the redemption of its Series A Preferred Stock in the first quarter of 2012, the Company does not have any preferred dividends and discount accretion on preferred stock in the second quarter of 2012. Net income available to common shareholders was $2.7 million, or $0.08 per average diluted common share, for the second quarter of 2012. After accrued dividends and discount accretion on preferred stock of $604,000, net income available to common shareholders was $1.5 million, or $0.05 per average diluted common share, for the second quarter a year ago. For the six months ended June 30, 2012, net income available to common shareholders was $3.5 million, or $0.11 per average diluted common share, up from $2.5 million, or $0.08 per average diluted common share, for the same period a year ago. All results are unaudited.

“The Company experienced significant loan growth and continued deposit growth during the second quarter of 2012,” said Walter Kaczmarek, President and Chief Executive Officer. “The growth we experienced was due to hard work performed in previous quarters by our lending staff that finally closed and funded. Our second quarter income marks our eighth consecutive quarter of profitability. Despite our strong second quarter success, we continue to be concerned about the potentially negative effects of the weak national and international economies.”

Second Quarter 2012 Highlights (at or for the periods ended June 30, 2012, compared to June 30, 2011, and March 31, 2012)
  • Strong Second Quarter Earnings – Earnings per average diluted common share increased to $0.08 in the second quarter of 2012, compared to $0.05 per average diluted common share in the second quarter of 2011, and $0.03 per average diluted common share in the first quarter of 2012.
  • Solid Deposit Base – Total deposits increased to $1.1 billion, a 10% increase from June 30, 2011, and a 2% increase from the preceding quarter. Core deposits (excluding all time deposits) grew 9% to $807.6 million at June 30, 2012, an increase of $69.4 million from June 30, 2011, and increased 2% from $792.6 million at March 31, 2012.
    • Noninterest-bearing demand deposits increased 10% to $367.9 million at June 30, 2012, from $333.2 million at June 30, 2011, and increased 3% from $356.6 million at March 31, 2012.
    • Interest-bearing demand deposits increased 16% to $148.8 million at June 30, 2012, from $128.5 million at June 30, 2011, and increased 3% from $144.0 million at March 31, 2012.
    • Savings and money market deposits increased 5% to $290.9 million at June 30, 2012, from $276.5 million at June 30, 2011, and remained relatively flat from $292.0 million at March 31, 2012.
  • Lower Cost of Deposits – The total cost of deposits decreased 15 basis points to 0.27% during the second quarter of 2012 from 0.42% during the second quarter of 2011, primarily as a result of maturing higher-cost wholesale funding and growth in core deposits. The total cost of deposits remained the same at 0.27% when compared to the first quarter of 2012.
  • Loan Demand Improved – Loans increased 2% to $798.1 million at June 30, 2012, compared to $782.1 million at June 30, 2011, and rose 5% from $756.9 million at March 31, 2012.
  • Net Interest Margin – The net interest margin remained flat at 3.95% for the second quarter of 2012, compared to the second quarter of 2011, and decreased 11 basis points from 4.06% for the first quarter of 2012, primarily as a result of lower yields on loans and investment securities.
  • Strong Asset Quality – Asset quality remained strong as reflected in the following metrics:
    • Nonperforming assets declined 23% year-over-year to $17.8 million, or 1.35% of total assets at June 30, 2012, from $23.1 million, or 1.83% of total assets at June 30, 2011, and decreased 9% from $19.5 million, or 1.49% of total assets at March 31, 2012.
    • Classified assets (net of SBA guarantees) decreased 28% to $54.9 million at June 30, 2012, from $76.1 million at June 30, 2011, and increased 1% from $54.2 million at March 31, 2012.
    • Classified assets (net of SBA guarantees) to Tier 1 capital plus the allowance for loans losses at the holding company and the bank level were 30% and 31% at June 30, 2012, respectively, compared to 35% and 39% at June 30, 2011, and 30% and 31% at March 31, 2012.
    • The provision for loan losses was $815,000 for the second quarter of 2012, compared to $955,000 for the second quarter of 2011, and $100,000 for the first quarter of 2012.
    • The allowance for loan losses totaled $20.0 million, or 2.51% of total loans at June 30, 2012, compared to $23.2 million, or 2.96% of total loans at June 30, 2011, and $20.3 million, or 2.68% of total loans at March 31, 2012.
    • The allowance for loan losses to total nonperforming loans (excluding nonaccrual loans held-for-sale) improved to 137.57% at June 30, 2012, compared to 102.15% at June 30, 2011, and 125.66% at March 31, 2012.
    • Net charge-offs declined in the second quarter of 2012 to $1.1 million, compared to $1.8 million in the second quarter of 2011, and increased from $494,000 in the first quarter of 2012.
  • Capital ratios substantially exceed regulatory requirements for a well-capitalized financial institution at the holding company and bank level at June 30, 2012 (see “Redemption of Subordinated Debt” below):
                                   
Capital Ratios           Well-Capitalized         Heritage Commerce         Heritage Bank of
            Regulatory Guidelines         Corp         Commerce
 
Total Risk-Based 10.0% 17.3% 16.2%
Tier 1 Risk-Based 6.0% 16.0% 14.9%
Leverage           5.0%         12.7%         11.9%
 

Operating Results

Net interest income increased 5% to $12.1 million for the second quarter of 2012, compared to $11.5 million for the second quarter a year ago, primarily due to an increase in the average balance of investment securities. Net interest income for the second quarter of 2012 decreased 1% from $12.3 million for the first quarter of 2012, primarily as a result of lower yields on loans and investment securities, partially offset by higher average balances of loans and investment securities.

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