SAN JOSE, Calif., July 22, 2010 (GLOBE NEWSWIRE) -- Heritage Commerce Corp (Nasdaq:HTBK), the holding company for Heritage Bank of Commerce, announced its financial results for the second quarter and six months ended June 30,2010.

"During the second quarter of 2010, we successfully executed several actions that strengthen our balance sheet, position us for a return to profitability more quickly, permit us to capitalize on the economic recovery in the Bay area and  take advantage of opportunities to grow our franchise," said Walter Kaczmarek, President and Chief Executive Officer. "First, we raised $75 million of new equity capital to strengthen our capital and liquidity position, mitigate risk from a continued downturn in the economy, and provide additional capital to take advantage of opportunities that may be created by disruption in the market. Second, we identified $31.0 million of problem real estate related loans that the Company intends to sell in the third quarter. The transfer to held-for-sale resulted in $13.9 million of charge-offs in the second quarter of 2010. This action strengthens our balance sheet and positions our loan portfolio for increased profitability. In addition, the reduction in problem loans will help free up our loan officers to focus on growing our business."

Mr. Kaczmarek continued, "due to the continued downturn in the economy and the amount by which the Company's book value exceeded the market value per common share, we determined that our $43.2 million of goodwill was fully impaired. This one-time non-cash charge had no effect on the Company's or the Bank's cash balances, liquidity, or regulatory capital ratios. Also, after an analysis of both the positive and negative evidence regarding the realization of the deferred tax asset, we recorded a $3.7 million partial valuation allowance on the Company's deferred tax asset." 

As a result of the aforementioned actions, the Company had a net loss allocable to common shareholders of $55.1 million, or $(4.66) per diluted common share for the quarter ended June 30, 2010. On a net operating basis that excludes the non-cash goodwill impairment, the Company had a net operating loss allocable to common shareholders of $11.9 million, or $(1.01) per diluted common share for the quarter ended June 30, 2010. 

The Company had a net loss allocable to common shareholders of $59.8 million, or $(5.06) per diluted common share, for the six months ended June 30, 2010. On a net operating basis that excludes the non-cash goodwill impairment, the Company had a net operating loss allocable to common shareholders of $16.6 million, or $(1.41) per diluted common share for the six months ended June 30, 2010. 

Significant Second Quarter Events

$75 Million Capital Raise

As previously announced, the Company completed the closing of a private placement totaling $75 million of convertible preferred stock on June 21, 2010. Net proceeds from the offering were approximately $70 million after the payment of a placement agent fee and other professional costs and expenses. 

As a result of our private placement, all of the regulatory capital ratios for both the Company, on a consolidated basis, and Heritage Bank of Commerce, substantially exceed the regulatory well-capitalized guidelines at June 30, 2010.  The following table summarizes the capital ratios for the periods indicated:
  End of Period: Well-Capitalized
CAPITAL RATIOS June 30, March 31, June 30, Regulatory
(unaudited) 2010 2010 2009 Requirements
Heritage Commerce Corp:        
Total risk-based capital ratio 18.66% 13.14% 12.27% 10.00%
Tier 1 risk-based capital ratio 10.73% 11.88% 11.00% 6.00%
Leverage ratio 8.65% 10.19% 9.96% N/A
         
Heritage Bank of Commerce:        
Total risk-based capital ratio 15.75% 13.00% 11.99% 10.00%
Tier 1 risk-based capital ratio 14.49% 11.73% 10.72% 6.00%
Leverage ratio 11.68% 10.07% 9.71% 5.00%

     

Problem Loans Transferred to Loans Held-for-Sale

During the second quarter of 2010, we strategically identified $31.0 million of problem loans that the Company intends to sell. These loans were written down by $13.9 million, to reflect the estimated sale proceeds, resulting in a net balance of $17.1 million which was transferred into the loans held-for-sale portfolio. "We intend to sell these loans in the third quarter of 2010 to reduce problem loans, enhance balance sheet strength, and enhance profitability," Mr. Kaczmarek noted. The following table shows the detail of the problem loans transferred to the loans held-for-sale portfolio at June 30, 2010:  
   June 30, 2010 
       Balance 
   Balance     Transferred 
PROBLEM LOANS TRANSFERRED TO LOANS HELD-FOR-SALE  Prior to   Amount   to Loans 
(in 000's, unaudited)  Transfer   Charged-off   Held-for-Sale 
Real estate-mortgage  $ 9,893  $ (2,781)  $ 7,112
Real estate-land and construction  21,112  (11,145)  9,967
Total  $ 31,005  $ (13,926)  $ 17,079

    

Goodwill

At June 30, 2010, based on management's analysis, with the assistance of an independent valuation firm, the Company determined it was appropriate to write-off the entire $43.2 million of goodwill related to the acquisition of Diablo Valley Bank in June 2007. This was due to the continued deteriorating economic conditions and the length of time and amount by which the Company's book value exceeded market value per share. This goodwill impairment was a non-cash charge that had no effect on the Company's and the Bank's cash balances, liquidity, or tangible equity capital. Similarly, since goodwill is excluded when calculating regulatory capital, the Company's and the Bank's regulatory capital ratios were not affected by the non-cash charge.

Valuation Allowance for Deferred Tax Asset

The Company recorded a $5.9 million income tax benefit for the six months ended June 30, 2010, which included $3.7 million additional income tax expense to establish a partial deferred tax valuation allowance. At June 30, 2010, the Company determined a partial valuation allowance was necessary, primarily because of the cumulative loss in the most recent three-year period principally caused by the loan loss provisions recorded during the three-year period. Management is required to re-evaluate the deferred tax asset and the related valuation allowance quarterly.

The net deferred tax asset, after the partial valuation allowance, at June 30, 2010 was $24.6 million. The remaining deferred tax asset was supported by available tax planning strategies and projected future taxable income.

Non-GAAP Financial Measures

The Company uses certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company's operational performance and to enhance investors' overall understanding of such financial performance. These non-GAAP measures are presented for supplemental informational purposes only for understanding the Company's operating results and should not be considered a substitute for financial information presented in accordance with United States generally accepted accounting principles ("GAAP"). Please refer to the table at the end of this release for a presentation of performance ratios in accordance with GAAP and a reconciliation of the non-GAAP financial measurement. The discussion in this release on net loss, loss per share, performance ratios and comparisons to prior periods will be based on net operating loss, which does not include the charge for the impairment of goodwill, as shown in the following table. 

    
  For the Three Months Ended: For the Six Months Ended:
RESULTS OF OPERATIONS June 30, March 31, June 30, June 30, June 30,
(in $000's, unaudited) 2010 2010 2009 2010 2009
Net operating loss, excluding goodwill impairment, allocable to common shareholders  $ (11,921)  $ (4,711)  $ (5,972)  $ (16,632)  $ (10,512)
Impairment of goodwill  (43,181)  --   --   (43,181)  -- 
Net loss allocable to common shareholders, as reported  $ (55,102)  $ (4,711)  $ (5,972)  $ (59,813)  $ (10,512)
           
Diluted net operating loss, excluding goodwill impairment, per share  $ (1.01)  $ (0.40)  $ (0.51)  $ (1.41)  $ (0.89)
Diluted loss per share, as reported  $ (4.66)  $ (0.40)  $ (0.51)  $ (5.06)  $ (0.89)
           
Net interest margin 3.88% 3.81% 3.55% 3.85% 3.45%

Mr. Kaczmarek said, "We have made significant progress in the second quarter by improving operations with an expanded net interest margin, lower operating expenses and higher noninterest income. While the non-routine items for impairment of goodwill and loans held-for-sale in the second quarter of 2010 took a significant toll on the bottom line, on a go-forward basis, these items will strengthen the balance sheet and provide a foundation for improved profitability."

Second Quarter Highlights

  • The $75 million of new capital raised in June increased the total risk-based capital ratio to 18.66% at the holding company level and 15.75% at the Bank level at June 30, 2010.  
  • The proposed sale of $17.1 million of real estate and land and construction problem loans will reduce classified assets and improve overall asset quality.   
  • A $43.2 million non-cash charge was recorded during the second quarter of 2010 to reflect an impairment of goodwill related to a prior acquisition.  
  • The deferred tax asset reflects a $3.7 million partial valuation allowance.  
  • The net interest margin expanded to 3.88% for the second quarter of 2010, compared to 3.55% for the second quarter of 2009, and 3.81% for the first quarter of 2010.  
  • The provision for loan losses was $18.6 million in the second quarter of 2010, compared to $10.7 million in the second quarter of 2009, and $5.1 million in the first quarter of 2010.  
  • Noninterest expense, excluding the $43.2 million impairment of goodwill, decreased to $11.4 million for the second quarter of 2010, compared to $12.1 million in the second quarter of 2009 and $12.2 million in the first quarter of 2010.   
  • The loan to deposit ratio improved to 90.39% at June 30, 2010, compared to 99.84% at June 30, 2009, and 93.04% at March 31, 2010.  
  • Cash and securities increased to $250.7 million at June 30, 2010, from $133.3 million at June 30, 2009, and $192.7 million at March 31, 2010.  
  • Tangible equity increased to $182.3 million at June 30, 2010, from $127.5 million at June 30, 2009, and $121.5 million at March 31, 2010.  
  • Loans, excluding loans held-for-sale, decreased 19% to $937.8 million at June 30, 2010, from $1.16 billion at June 30, 2009, and decreased 7% from $1.01 billion at March 31, 2010.  
  • Land and construction loans decreased $120.6 million to $110.2 million, or 12% of total loans at June 30, 2010, from $230.8 million, or 20% of total loans at June 30, 2009, and decreased $43.6 million from $153.8 million, or 15% of total loans at March 31, 2010.  
  • Nonperforming assets decreased to $60.1 million (including $9.8 million of the problem loans transferred to the loans held-for-sale portfolio), or 4.61% of total assets at June 30, 2010, compared to $61.7 million, or 4.30% of total assets at June 30, 2009, and $69.0 million, or 5.17% of total assets at March 31, 2010.   
  • The allowance for loan losses was $26.8 million, or 2.85% of total loans at June 30, 2010, compared to $31.4 million, or 2.70% of total loans at June 30, 2009, and $26.5 million, or 2.64% of total loans at March 31, 2010.  
  • Net charge-offs were $18.4 million in the second quarter of 2010, of which $13.9 million related to the problem loans transferred to the loans held-for-sale portfolio, and $4.5 million related to the remaining loan portfolio. Net charge-offs were $3.2 million in the second quarter of 2009, and $7.3 million in the first quarter of 2010.  
  • Brokered deposits decreased to $163.7 million at June 30, 2010, compared to $212.8 million at June 30, 2009, and $174.5 million at March 31, 2010.

Balance Sheet, Capital Management and Credit Quality

The Company's total assets declined to $1.30 billion at June 30, 2010, from $1.44 billion at June 30, 2009, and $1.34 billion at March 31, 2010.

The investment securities portfolio totaled $142.2 million at the end of the second quarter of 2010, up 40% from $101.8 million a year ago. At June 30, 2010, the investment portfolio was comprised primarily of debt securities, mortgage-backed securities, and collateralized mortgage obligations, all of which were issued by U. S. Government sponsored entities.

Loans, excluding loans held-for-sale, decreased 19% to $937.8 million at June 30, 2010, from $1.16 billion at June 30, 2009, and decreased 7% from $1.01 billion at March 31, 2010. At June 30, 2010, commercial and industrial loans accounted for 41% of the total loan portfolio. Commercial real estate loans accounted for another 40% of the total loan portfolio at June 30, 2010, of which 51% were owner occupied by businesses. Land and construction loans continued to decrease and accounted for 12% of the total loan portfolio, and consumer and home equity loans accounted for the remaining 7% of total loans at June 30, 2010. 

Nonperforming assets decreased to $60.1 million, or 4.61% of total assets at June 30, 2010, which included $9.8 million of the problem loans transferred to the loans held-for-sale portfolio. Excluding the loans held-for-sale, nonperforming assets were $50.3 million, or 3.86% of total assets at June 30, 2010. Nonperforming assets were $61.7 million, or 4.30% of total assets at June 30, 2009, and $69.0 million, or 5.17% of total assets at March 31, 2010. At June 30, 2010, nonperforming assets consisted of: 36% land and construction loans; 23% commercial real estate loans; 16% loans held-for-sale; 13% commercial and industrial loans; 9% SBA loans; 2% consumer and home equity loans; and 1% other real estate owned ("OREO"). Nonperforming assets consist of nonaccrual loans, accruing loans 90 days or more past due, restructured loans and OREO. Total OREO decreased to $555,000 at June 30, 2010, compared to $3.1 million at June 30, 2009, and $1.8 million at March 31, 2010.

The allowance for loan losses at June 30, 2010 was $26.8 million, or 2.85% of total loans, and represented 44.90% of nonperforming loans, and 53.74% of nonperforming loans excluding nonaccrual loans in the loans held-for-sale portfolio. The allowance for loan losses a year ago was $31.4 million, or 2.70% of total loans and 53.51% of nonperforming loans. The allowance for loan losses at March 31, 2010, was $26.5 million, or 2.64% of total loans and 39.47% of nonperforming loans.

Total deposits decreased by 11% to $1.04 billion at June 30, 2010, compared to $1.16 billion at June 30, 2009, and decreased by 4% from $1.08 billion at March 31, 2010.  The Company's noninterest-bearing and low interest-bearing demand deposit accounts increased $9.4 million, or 2%, at June 30, 2010 from June 30, 2009, and decreased $9.8 million, or 2%, from March 31, 2010. At June 30, 2010, brokered deposits were $163.7 million, compared to $212.8 million at June 30, 2009, and $174.5 million at March 31, 2010.  

Tangible equity was $182.3 million at June 30, 2010, compared to $127.5 million at June 30, 2009, and $121.5 million at March 31, 2010. The significant increase in tangible equity in the second quarter of 2010 was primarily due to the issuance of $75 million of convertible preferred stock, as previously discussed. 

Operating Results

The Company's net interest margin was 3.88% for the second quarter of 2010, a 33 basis point improvement compared to the second quarter of 2009 and a 7 basis point improvement compared to the first quarter of 2010. The 7 basis point increase in the net interest margin in the second quarter of 2010 compared to the first quarter of 2010 was primarily due to lower deposit and borrowing costs. Net interest income was $11.4 million in the second quarter of 2010, compared to $11.7 million for the second quarter of 2009, and $11.4 million for the first quarter of 2010. 

The Company recorded an $18.6 million provision for loan losses in the second quarter of 2010, compared to $10.7 million in the second quarter of 2009, and $5.1 million in the first quarter of 2010. The Company had a provision for loan losses of $23.7 million for the six months ended June 30, 2010 and $21.1 million for the six months ended June 30, 2009. 

Noninterest income was $1.9 million for the second quarter of 2010, compared to $1.6 million for the second quarter of 2009 and $1.7 million for the first quarter of 2010. In the first six months of 2010, noninterest income was $3.6 million, compared to $3.2 million in the first six months a year ago. The increase in the first six months of 2010 was primarily due to a $277,000 gain on sale of loans, compared to no gain on sale of loans in the first six months of 2009.

Noninterest expense, excluding the $43.2 million impairment of goodwill, decreased to $11.4 million for the second quarter of 2010, compared to $12.1 million in the second quarter of 2009 and $12.2 million in the first quarter of 2010. In the first six months of 2010, noninterest expense excluding the $43.2 million impairment of goodwill was $23.6 million, compared to $23.4 million in the first six months a year ago. Salaries and employee benefits were $5.5 million in the second quarter of 2010, compared to $5.6 million in the second quarter of 2009, and $5.9 million in the first quarter of 2010. Professional fees were $1.1 million in the second quarter of 2010, compared to $1.2 million in the second quarter of 2009, and $1.3 million in the first quarter of 2010. FDIC deposit insurance premiums were $1.0 million in the second quarter of 2010, compared to $1.2 million in the second quarter of 2009 and first quarter of 2010. OREO related expenses were $69,000 in the second quarter of 2010, compared to $107,000 in the second quarter of 2009, and $418,000 in the first quarter of 2010.  

The income tax benefit for the quarter ended June 30, 2010 was $5.8 million, which included a $3.7 million of additional income tax expense to establish a partial valuation allowance on the Company's net deferred tax asset. The income tax benefit was $4.1 million in the second quarter a year ago, and $120,000 in the first quarter of 2010. In the first six months of 2010, the income tax benefit was $5.9 million, compared to $9.2 million in the first six months a year ago. The negative effective income tax rates are due to the loss before income taxes. The difference in the effective tax rate 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, and tax credits related to investments in low income housing limited partnerships. 

The efficiency ratio, excluding the $43.2 million impairment of goodwill, was 85.46% in the second quarter of 2010, compared to 90.90% in the second quarter of 2009 and 93.45% in the first quarter of 2010. The efficiency ratio decreased in the second quarter of 2010 primarily due to a higher gain sale of SBA loans and lower noninterest expenses. 

Investor Conference

Heritage Commerce Corp is scheduled to present at the Keefe, Bruyette & Woods 11th Annual Community Bank Investor Conference in New York. Walter T. Kaczmarek, President and Chief Executive Officer, and Lawrence D. McGovern, Chief Financial Officer, are scheduled to present on Tuesday, July 27th at 11:30 a.m. EDT. The presentation will be archived for 60 days after the conference, and can be viewed at http://www.kbw.com/news/conferences.html.

Special Shareholders' Meeting Scheduled

A Special Shareholders' Meeting is scheduled for September 15, 2010 to consider and approve proposals required by the Company's recently completed private placement. August 2, 2010 has been set as the record date for the meeting.

In connection with certain matters related to the private placement, on July 16, 2010, the Company filed with the Securities and Exchange Commission (the "SEC") a preliminary proxy statement with respect to the shareholder approval of the conversion of the preferred stock, as described above. The Company will mail the definitive proxy statement, when available, to its shareholders. Investors and security holders are urged to read the proxy statement with regards to certain matters related to the private placement when it becomes available because it will contain important information. You may obtain a free copy of the proxy statement (when available) and other related documents filed by the Company with the SEC at the SEC's website at www.sec.gov or from the Company's website at www.heritagecommercecorp.com.

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 Los Gatos, Fremont, Danville, Pleasanton, Walnut Creek, Morgan Hill, Gilroy, Mountain View, and Los Altos. Heritage Bank of Commerce is an SBA Preferred Lender with additional Loan Production Offices in Sacramento, Oakland and Santa Rosa, California. 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) our ability to attract new deposits and loans; (2) local, regional, and national economic conditions and events and the impact they may have on us and our customers; (3) risks associated with concentrations in real estate related loans; (4) increasing levels of classified assets, including nonperforming assets, which could adversely affect our earnings and liquidity; (5) market interest rate volatility; (6) stability of funding sources and continued availability of borrowings; (7) changes in legal or regulatory requirements or the results of regulatory examinations that could restrict growth and constrain our activities, including the terms of our written agreement entered into with the Board of Governors of the Federal Reserve System and the California Department of Financial Institutions; (8) changes in accounting standards and interpretations; (9) regulatory limits on the Heritage Bank of Commerce's ability to pay dividends to the Company; (10) effectiveness of the Emergency Economic Stabilization Act of 2008, the American Recovery and Reinvestment Act of 2009 and other legislative and regulatory efforts to help stabilize the U.S. financial markets; (11) future legislative or administrative changes to the U.S. Treasury Capital Purchase Program enacted under the Emergency Economic Stabilization Act of 2008; (12) the impact of the Emergency Economic Stabilization Act of 2008 and the American Recovery and Reinvestment Act of 2009 and related rules and regulations on our business operations and competitiveness, including the impact of executive compensation restrictions, which may affect our ability to retain and recruit executives in competition with other firms who do not operate under those restrictions; (13) the impact of the Dodd-Frank Wall Street Consumer Protection Act signed by President Obama on July 21, 2010, and (14) 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 Three Months Ended: Percent Change From: For the Six Months Ended:  
CONSOLIDATED STATEMENTS OF OPERATIONS June 30, March 31, June 30, March 31, June 30, June 30, June 30, Percent 
(in $000's, unaudited) 2010 2010 2009 2010 2009 2010 2009 Change
Interest income  $ 14,212  $ 14,346  $ 15,824 -1% -10%  $ 28,559  $ 31,857 -10%
Interest expense  2,784  2,977  4,135 -6% -33%  5,762  9,016 -36%
Net interest income  11,428  11,369  11,689 1% -2%  22,797  22,841 0%
Provision for loan losses  18,600  5,095  10,704 265% 74%  23,695  21,124 12%
Net interest income (loss) after provision for loan losses  (7,172)  6,274  985 -214% -828%  (898)  1,717 -152%
Noninterest income:                
Service charges and other fees on deposit accounts  579  548  537 6% 8%  1,128  1,108 2%
Servicing income  425  421  408 1% 4%  846  828 2%
Increase in cash surrender value of life insurance  413  409  415 1% 0%  822  827 -1%
Gain on sale of loans  163  114  --  43% N/A  277  --  N/A
Other  298  192  241 55% 24%  489  461 6%
Total noninterest income  1,878  1,684  1,601 12% 17%  3,562  3,224 10%
                 
Noninterest expense:                
Salaries and employee benefits  5,491  5,881  5,643 -7% -3%  11,373  12,101 -6%
Professional fees   1,144  1,278  1,229 -10% -7%  2,421  2,142 13%
FDIC deposit insurance premiums   1,019  1,191  1,220 -14% -16%  2,210  1,959 13%
Occupancy and equipment  983  959  972 3% 1%  1,942  1,888 3%
Impairment of goodwill  43,181  --   --  N/A N/A  43,181  --  N/A
Other  2,734  2,889  3,016 -5% -9%  5,624  5,352 5%
Total noninterest expense  54,552  12,198  12,080 347% 352%  66,751  23,442 185%
Loss before income taxes  (59,846)  (4,240)  (9,494) -1311% -530%  (64,087)  (18,501) -246%
Income tax benefit  (5,753)  (120)  (4,113) -4694% -40%  (5,874)  (9,165) 36%
Net loss  $ (54,093)  $ (4,120)  $ (5,381) -1213% -905%  $ (58,213)  $ (9,336) -524%
Dividends and discount accretion on preferred stock  (1,009)  (591)  (591) 71% 71%  (1,600)  (1,176) 36%
Net loss allocable to common shareholders  $ (55,102)  $ (4,711)  $ (5,972) -1070% -823%  $ (59,813)  $ (10,512) -469%
                 
PER COMMON SHARE                
DATA                
(unaudited)                
Basic loss per share  $ (4.66)  $ (0.40)  $ (0.51) -1065% -814%  $ (5.06)  $ (0.89) -469%
Diluted loss per share  $ (4.66)  $ (0.40)  $ (0.51) -1065% -814%  $ (5.06)  $ (0.89) -469%
Common shares outstanding at period-end 11,820,509 11,820,509 11,820,509 0% 0% 11,820,509 11,820,509 0%
Book value per share   $ 6.53  $ 10.98  $ 11.55 -41% -43%  $ 6.53  $ 11.55 -43%
Tangible book value per share  $ 6.25  $ 7.03  $ 7.56 -11% -17%  $ 6.25  $ 7.56 -17%
                 
KEY FINANCIAL RATIOS                
(unaudited)                
Annualized loss on average equity -121.78% -9.61% -11.90% -1167% -923% -66.70% -10.27% -549%
Annualized loss on average tangible equity -164.27% -13.15% -16.08% -1149% -922% -90.59% -13.83% -555%
Annualized loss on average assets -16.28% -1.23% -1.48% -1224% -1000% -8.74% -1.28% -583%
Annualized loss on average tangible assets -16.86% -1.28% -1.53% -1217% -1002% -9.05% -1.32% -586%
Net interest margin 3.88% 3.81% 3.55% 2% 9% 3.85% 3.45% 12%
Efficiency ratio, excluding impairment of goodwill 85.46% 93.45% 90.90% -9% -6% 89.42% 89.94% -1%
                 
AVERAGE BALANCES                
(in $000's, unaudited)                
Average assets  $ 1,332,927  $ 1,354,031  $ 1,457,162 -2% -9%  $ 1,343,401  $ 1,470,782 -9%
Average tangible assets  $ 1,286,839  $ 1,307,317  $ 1,409,973 -2% -9%  $ 1,297,001  $ 1,423,513 -9%
Average earning assets  $ 1,181,932  $ 1,208,635  $ 1,320,604 -2% -11%  $ 1,193,847  $ 1,336,162 -11%
Average loans held-for-sale  $ 11,407  $ 11,914  $ 225 -4% 4962%  $ 12,090  $ 113 10571%
Average total loans  $ 991,580  $ 1,052,014  $ 1,206,254 -6% -18%  $ 1,021,180  $ 1,221,216 -16%
Average deposits  $ 1,070,704  $ 1,074,137  $ 1,150,220 0% -7%  $ 1,072,410  $ 1,156,848 -7%
Average demand deposits - noninterest bearing  $ 258,902  $ 254,415  $ 255,011 2% 2%  $ 256,671  $ 254,250 1%
Average interest bearing deposits  $ 811,802  $ 819,722  $ 895,209 -1% -9%  $ 815,739  $ 902,598 -10%
Average interest bearing liabilities  $ 860,897  $ 887,006  $ 992,010 -3% -13%  $ 873,859  $ 1,004,134 -13%
Average equity  $ 178,167  $ 173,789  $ 181,396 3% -2%  $ 175,989  $ 183,401 -4%
Average tangible equity  $ 132,079  $ 127,075  $ 134,207 4% -2%  $ 129,589  $ 136,132 -5%
     
  End of Period: Percent Change From:
CONSOLIDATED BALANCE SHEETS June 30, March 31, June 30, March 31, June 30,
(in $000's, unaudited) 2010 2010 2009 2010 2009
ASSETS          
Cash and due from banks  $ 108,310  $ 53,080  $ 31,315 104% 246%
Federal funds sold  100  125  150 -20% -33%
Interest-bearing deposits in other financial institutions  90  90  --  0% N/A
Securities available-for-sale, at fair value  142,212  139,387  101,837 2% 40%
Loans held-for-sale, including deferred costs - SBA  12,291  11,123  20,506 11% -40%
Loans held-for-sale, including deferred costs - Other   17,079  --   --  N/A N/A
Loans:          
Commercial loans  388,471  395,399  457,981 -2% -15%
Real estate-mortgage  373,000  393,168  412,430 -5% -10%
Real estate-land and construction  110,194  153,811  230,798 -28% -52%
Home equity  52,419  51,369  55,372 2% -5%
Consumer loans  12,837  11,943  3,596 7% 257%
Loans  936,921  1,005,690  1,160,177 -7% -19%
Deferred loan costs, net  852  755  1,489 13% -43%
Total loans, including deferred costs  937,773  1,006,445  1,161,666 -7% -19%
Allowance for loan losses  (26,753)  (26,527)  (31,398) 1% -15%
Loans, net  911,020  979,918  1,130,268 -7% -19%
Company owned life insurance  42,827  42,722  41,476 0% 3%
Premises & equipment, net  8,726  8,861  9,312 -2% -6%
Goodwill  --   43,181  43,181 -100% -100%
Intangible assets  3,302  3,445  3,910 -4% -16%
Accrued interest receivable and other assets  57,803  54,644  55,069 6% 5%
Total assets  $ 1,303,760  $ 1,336,576  $ 1,437,024 -2% -9%
           
LIABILITIES AND SHAREHOLDERS' EQUITY          
Liabilities:          
Deposits:          
Demand, noninterest bearing  $ 249,017  $ 261,047  $ 258,464 -5% -4%
Demand, interest-bearing  153,173  150,923  134,318 1% 14%
Savings and money market   281,619  306,688  331,444 -8% -15%
Time deposits - under $100  38,201  38,856  43,772 -2% -13%
Time deposits - $100 and Over  133,443  131,220  170,858 2% -22%
Time deposits - CDARS  18,240  18,490  11,867 -1% 54%
Time deposits - brokered   163,732  174,471  212,824 -6% -23%
Total deposits  1,037,425  1,081,695  1,163,547 -4% -11%
Securities sold under agreement to repurchase  20,000  20,000  30,000 0% -33%
Short-term borrowings  3,992  3,892  15,000 3% -73%
Subordinated debt  23,702  23,702  23,702 0% 0%
Accrued interest payable and other liabilities  32,997  39,198  30,193 -16% 9%
Total liabilities  1,118,116  1,168,487  1,262,442 -4% -11%
           
Shareholders' Equity:          
Series A preferred stock, net  38,431  38,339  38,070 0% 1%
Series B preferred stock, net  50,385  --   --  N/A N/A
Series C preferred stock, net  19,599  --   --  N/A N/A
Common stock  80,810  80,484  79,524 0% 2%
Retained earnings / (Accumulated deficit)  (3,012)  51,678  57,056 -106% -105%
Accumulated other comprehensive loss  (569)  (2,412)  (68) 76% -737%
Total shareholders' equity  185,644  168,089  174,582 10% 6%
Total liabilities and shareholders' equity  $ 1,303,760  $ 1,336,576  $ 1,437,024 -2% -9%
     
  End of Period: Percent Change From:
  June 30, March 31, June 30, March 31, June 30,
  2010 2010 2009 2010 2009
CREDIT QUALITY DATA          
(in $000's, unaudited)          
Nonaccrual loans - loans held-for-sale portfolio  $ 9,806  $ --   $ --  N/A N/A
Nonaccrual loans - loan portfolio  47,263  65,026  57,889 -27% -18%
Restructured and loans over 90 days past due and still accruing  2,516  2,176 786 16% 220%
Total nonperforming loans  59,585  67,202  58,675 -11% 2%
Other real estate owned 555 1,835 3,062 -70% -82%
Total nonperforming assets  $ 60,140  $ 69,037  $ 61,737 -13% -3%
Net charge-offs   $ 18,374  $ 7,337  $ 3,206 150% 473%
Allowance for loan losses to total loans 2.85% 2.64% 2.70% 8% 6%
Allowance for loan losses to total nonperforming loans 44.90% 39.47% 53.51% 14% -16%
Allowance for loan losses to total nonperforming loans, excluding nonaccrual loans - loans held-for-sale portfolio 53.74% 39.47% 53.51% 36% 0%
Nonperforming assets to total assets 4.61% 5.17% 4.30% -11% 7%
Nonperforming loans to total loans and nonaccrual loans - loans held-for-sale portfolio 6.29% 6.68% 5.05% -6% 25%
           
OTHER PERIOD-END STATISTICS          
(unaudited)          
Tangible equity  $ 182,342  $ 121,463  $ 127,491 50% 43%
Tangible common equity  $73,927  $83,124  $89,421 -11% -17%
Shareholders' equity / total assets 14.24% 12.58% 12.15% 13% 17%
Tangible equity / tangible assets 14.02% 9.42% 9.17% 49% 53%
Tangible common equity / tangible assets 5.68% 6.44% 6.43% -12% -12%
Loan to deposit ratio 90.39% 93.04% 99.84% -3% -9%
Noninterest bearing deposits / total deposits 24.00% 24.13% 22.21% -1% 8%
Total risk-based capital ratio 18.66% 13.14% 12.27% 43% 53%
Tier 1 risk-based capital ratio 10.73% 11.88% 11.00% -9% -1%
Leverage ratio 8.65% 10.19% 9.96% -14% -12%
             
  For the Three Months Ended  For the Three Months Ended 
  June 30, 2010 June 30, 2009
    Interest Average   Interest Average
  Average Income/ Yield/ Average Income/ Yield/
NET INTEREST INCOME AND NET INTEREST MARGIN Balance Expense Rate Balance Expense Rate
   (Dollars in thousands, unaudited) 
Assets:            
Loans, gross*  $ 1,002,987  $ 12,737 5.09%  $ 1,206,479  $ 14,862 4.94%
Securities 151,875 1,459 3.85% 107,158 958 3.59%
Federal funds sold 100  --  0.00% 139  --  0.00%
Interest-bearing deposits in other financial institutions 26,970 16 0.24% 6,828 4 0.23%
Total interest earning assets  1,181,932  14,212 4.82% 1,320,604  15,824 4.81%
Cash and due from banks  34,875      23,090    
Premises and equipment, net  8,825      9,380    
Goodwill and other intangible assets  46,088      47,189    
Other assets  61,207      56,899    
Total assets  $ 1,332,927      $ 1,457,162    
             
Liabilities and shareholders' equity:            
Deposits:            
Demand, interest-bearing  $ 150,565  83 0.22%  $ 134,141  79 0.24%
Savings and money market   294,628  363 0.49%  346,847  662 0.77%
Time deposits - under $100  38,514  133 1.39%  44,612  259 2.33%
Time deposits -- $100 and Over  132,062  470 1.43%  169,954  718 1.69%
Time deposits - CDARS  18,849  48 1.02%  12,124  42 1.39%
Time deposits - brokered   177,184  1,060 2.40%  187,531  1,634 3.49%
Subordinated debt  23,702  468 7.92%  23,702  487 8.24%
Securities sold under agreement to repurchase  20,000  113 2.27%  30,000  227 3.03%
Short-term borrowings  5,393  46 3.42%  43,099  27 0.25%
Total interest bearing liabilities  860,897  2,784 1.30%  992,010  4,135 1.67%
Demand, noninterest bearing  258,902      255,011    
Other liabilities  34,961      28,745    
Total liabilities  1,154,760      1,275,766    
Shareholders' equity  178,167      181,396    
Total liabilities and shareholders' equity  $ 1,332,927      $ 1,457,162    
             
Net interest income / margin    $ 11,428 3.88%    $ 11,689 3.55%
             
             
  For the Six Months Ended  For the Six Months Ended 
  June 30, 2010 June 30, 2009
    Interest Average   Interest Average
  Average Income/  Yield/ Average Income/ Yield/
  Balance Expense Rate Balance Expense Rate
   (Dollars in thousands, unaudited) 
Assets:            
Loans, gross*  $ 1,033,270  $ 25,911 5.06%  $ 1,221,329  $ 29,892 4.94%
Securities 138,190 2,622 3.83% 108,655 1,957 3.63%
Federal funds sold 101  --  0.00%  157  --  0.00%
Interest-bearing deposits in other financial institutions 22,286 26 0.24% 6,021 8 0.27%
Total interest earning assets  1,193,847  28,559 4.82%  1,336,162  31,857 4.81%
Cash and due from banks  27,977      23,786    
Premises and equipment, net  8,891      9,424    
Goodwill and other intangible assets  46,400      47,269    
Other assets  66,286      54,141    
Total assets  $ 1,343,401      $ 1,470,782    
             
Liabilities and shareholders' equity:            
Deposits:            
Demand, interest-bearing  $ 149,966  169 0.23%  $ 135,223  178 0.27%
Savings and money market   298,111  762 0.52%  346,851  1,454 0.85%
Time deposits - under $100  39,036  281 1.45%  45,356  555 2.47%
Time deposits -- $100 and Over  132,215  968 1.48%  173,377  1,592 1.85%
Time deposits - CDARS  19,110  101 1.07%  11,479  89 1.56%
Time deposits - brokered   177,301  2,240 2.55%  190,312  3,556 3.77%
Subordinated debt  23,702  934 7.95%  23,702  987 8.40%
Securities sold under agreement to repurchase  21,354  244 2.30%  31,354  469 3.02%
Note payable  --   --  N/A  5,110  82 3.24%
Short-term borrowings  13,064  63 0.97%  41,370  54 0.26%
Total interest bearing liabilities  873,859  5,762 1.33%  1,004,134  9,016 1.81%
Demand, noninterest bearing  256,671      254,250    
Other liabilities  36,882      28,997    
Total liabilities  1,167,412      1,287,381    
Shareholders' equity  175,989      183,401    
Total liabilities and shareholders' equity  $ 1,343,401      $ 1,470,782    
             
Net interest income / margin    $ 22,797 3.85%    $ 22,841 3.45%
             
             
*Includes loans held-for-sale. Yield amounts earned on loans include loan fees and costs. Nonaccrual loans are included in average balance.
CONTACT:  Heritage Commerce Corp          Debbie Reuter, SVP, Corporate Secretary          (408) 494-4542