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Heritage Commerce Corp Earns $2.5 Million In The Third Quarter Of 2012

Third Quarter 2012 Highlights (at or for the periods ended September 30, 2012, compared to September 30, 2011, and June 30, 2012)

  • Third Quarter Earnings – The Company posted its ninth consecutive quarter of profitability. Net income available to common shareholders for the third quarter of 2012 was $2.5 million, compared to $4.3 million for the third quarter of 2011 (after taking into account a $2.5 million tax benefit). Income before income taxes for the third quarter of 2012 was $3.4 million, compared to $2.3 million for the third quarter of 2011.
  • Growing Deposit Base – Total deposits increased 13% to $1.1 billion at September 30, 2012, from September 30, 2011, and a 3% increase from the second quarter of 2012. Core deposits (excluding all time deposits) increased 13% to $846.8 million at September 30, 2012, an increase of $94.9 million from $751.9 million at September 30, 2011, and increased 5% from $807.6 million at June 30, 2012.
    • Noninterest-bearing demand deposits increased 18% to $405.9 million at September 30, 2012, from $344.5 million at September 30, 2011, and increased 10% from $367.9 million at June 30, 2012.
    • Interest-bearing demand deposits increased 20% to $159.4 million at September 30, 2012, from $133.0 million at September 30, 2011, and increased 7% from $148.8 million at June 30, 2012.
    • Savings and money market deposits increased 3% to $281.6 million at September 30, 2012, from $274.5 million at September 30, 2011, and decreased 3% from $290.9 million at June 30, 2012.
  • Lower Cost of Deposits – The total cost of deposits decreased 10 basis points to 0.24% during the third quarter of 2012 from 0.34% during the third quarter of 2011, primarily as a result of maturing higher-cost wholesale funding and growth in core deposits. The total cost of deposits decreased 3 basis points when compared to the second quarter of 2012.
  • Loan Demand – Loans (excluding loans held-for-sale) increased 3% to $799.4 million at September 30, 2012, compared to $776.7 million at September 30, 2011, and increased slightly from $798.1 million at June 30, 2012.
  • Redemption of Subordinated Debt – The Company completed the redemption of approximately $14 million fixed-rate subordinated debt, which will save approximately $1.5 million of interest expense on an annual basis. The early payoff premium on the redemption of the subordinated debt resulted in a charge of $601,300 in the third quarter of 2012.
  • Gain on Sales of Securities – The Company sold $22.6 million of agency mortgage-backed securities for a gain on the sales of securities of $1.1 million during the third quarter of 2012, compared to no gain on the sales of securities during the third quarter of 2011, and a $32,000 gain on the sales of securities during the second quarter of 2012.
  • Net Interest Margin – The net interest margin was 3.77% for the third quarter of 2012, compared to 4.01% for the third quarter of 2011, and 3.95% for the second quarter of 2012. The decline in the net interest margin was primarily a result of lower yields on the securities portfolio and lower yields on the loan portfolio, partially offset by a lower cost of deposits. The lower yields on the securities portfolio during the third quarter of 2012 resulted from the sale of $22.6 million of higher yield mortgage-backed securities, the redemption of $20.1 million of higher yield trust preferred securities, and lower interest rates on reinvested funds. The lower yields on the loan portfolio during the third quarter of 2012 were primarily the result of lower rates on loan renewals.
  • Asset Quality – Asset quality is reflected in the following metrics:
    • Nonperforming assets were $22.0 million, or 1.62% of total assets at September 30, 2012, compared to $19.2 million, or 1.53% of total assets at September 30, 2011, and $17.8 million, or 1.35% of total assets at June 30, 2012.
    • Classified assets (net of SBA guarantees) decreased 36% to $46.0 million at September 30, 2012, from $72.4 million at September 30, 2011, and decreased 16% from $54.9 million at June 30, 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 27% and 28% at September 30, 2012, respectively, compared to 33% and 37% at September 30, 2011, and 30% and 31% at June 30, 2012.
    • The provision for loan losses was $1.2 million for the third quarter of 2012, compared to $1.5 million for the third quarter of 2011, and $815,000 for the second quarter of 2012.
    • The allowance for loan losses totaled $19.1 million, or 2.39% of total loans at September 30, 2012, compared to $21.0 million, or 2.71% of total loans at September 30, 2011, and $20.0 million, or 2.51% of total loans at June 30, 2012.
    • Net charge-offs declined in the third quarter of 2012 to $2.1 million, compared to $3.6 million in the third quarter of 2011, and increased from $1.1 million in the second quarter of 2012.
  • Capital ratios exceed regulatory requirements for a well-capitalized financial institution at the holding company and bank level at September 30, 2012.
                         
      Heritage Commerce       Heritage Bank of       Well-Capitalized
Capital Ratios Corp Commerce Financial Institution
                        Regulatory Guidelines
Total Risk-Based 16.1%

15.1%
10.0%
Tier 1 Risk-Based

14.8%
13.8% 6.0%
Leverage      

11.6%
     

10.9%
      5.0%
 

“Our operating results benefited from a solid balance sheet and an increase in noninterest income as a result of the gain on sales of securities, netting $1.1 million during the third quarter of 2012,” added Mr. Kaczmarek. “We continue to maintain strong capital ratios allowing our capital position to be a source of strength for future growth.”

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