Credit Quality Improves with a Reduction in Net Charge-offs and Loan Loss Provision

Bank Reports Strong Capital and Liquidity to Support Future Growth

SAN JOSE, Calif., Oct. 26, 2010 (GLOBE NEWSWIRE) -- Heritage Commerce Corp (Nasdaq:HTBK), the holding company ("the Company") for Heritage Bank of Commerce ("the Bank"), today reported third quarter 2010 net income of $651,000, compared to a net loss of $2.1 million in the third quarter a year ago, and a net loss of $54.1 million in the preceding quarter. For the third quarter of 2010, a $2.1 million provision for loan losses, a $1.1 million write-down of loans held-for-sale, and an $887,000 loss on the sale of other loans, was partially offset by a $1.5 million gain on sale of securities. After accrued dividends on preferred stock, the Company reported net income allocable to common shareholders of $458,000, or $0.01 per average diluted common share, for the third quarter of 2010. In the third quarter of 2009, the net loss allocable to common shareholders was $2.7 million, or ($0.23) per average diluted common share. For the nine months ended September 30, 2010, the net loss allocable to common shareholders was $58.9 million, or ($4.67) per average diluted common share, which included a $43.2 million non-cash goodwill impairment charge in the second quarter of 2010. For the nine months ended September 30, 2009, the net loss allocable to common shareholders was $13.2 million, or ($1.12) per average diluted common share.  The weighted average diluted common shares for the third quarter of 2010 and first nine months of 2010 were 31,830,372 and 12,623,743, respectively. 

"Our return to profitability in the third quarter of 2010 reflects the hard work of our team to address the difficulties encountered due to the challenging economic environment of the past two years and the slow economic recovery now underway," said Walter Kaczmarek, President and Chief Executive Officer. "Our $75 million capital raise in the second quarter of 2010 and aggressive management of problem assets has resulted in strong capital and liquidity ratios, positioning us for future growth."

"Total loans continued to decline during the third quarter of 2010 as we continued to reduce our real estate-based loans," Mr. Kaczmarek continued. "At the same time, momentum in core deposit growth continued, allowing us to reduce our reliance on wholesale funding sources."

In the third quarter of 2010, the Company's shareholders approved the issuance of common stock upon the conversion of the Series B Preferred Stock and the Series C Preferred Stock.  As a result of the shareholder approval, no cumulative dividends at the per annum rate of 20% will be paid on the Series B Preferred Stock and the Series C Preferred Stock. Dividends and accretion on preferred stock decreased to $193,000 in the third quarter of 2010, compared to $1.0 million in the second quarter of 2010, due to $411,000 of accrued dividends in the second quarter of 2010 for the Series B Preferred Stock and the Series C Preferred Stock that will not have to be paid.

Third Quarter 2010 Highlights and Significant Events (at or for the period ending September 30, 2010)
  • Capital ratios substantially exceed regulatory requirements for a well-capitalized financial institution, both at the holding company level and the bank level. The leverage ratio at the holding company level was 14.17%, with a Tier 1 risk-based capital ratio of 18.83% and a total risk-based capital ratio of 20.10%. Heritage Bank of Commerce reported a leverage ratio of 11.95%, a Tier 1 risk-based capital ratio of 15.89%, and a total risk-based capital ratio of 17.16%.  
  • After receiving shareholder approval in September 2010, the outstanding Series B preferred stock automatically converted into approximately 14.4 million shares of the Company's common stock. The Series C Preferred stock remains outstanding until converted to common stock upon the transfer of the Series C Preferred Stock in accordance with its terms.  
  • Cash, Federal funds sold, interest-bearing deposits in other financial institutions and securities available-for-sale increased 146% to $342.0 million at September 30, 2010, from $138.9 million a year ago and increased 36% from $250.7 million at June 30, 2010.  
  • The Company sold $25.7 million of investment securities for total gross proceeds of $27.2 million resulting in a $1.5 million gain on sale of securities for the third quarter of 2010.  
  • Asset quality statistics improved substantially reflecting the following metrics:
  • Nonperforming assets declined to $49.7 million, or 3.73% of total assets at September 30, 2010, from $58.2 million, or 4.26% of total assets a year earlier, and $60.1 million, or 4.61% of total assets at June 30, 2010.  
  • Net charge-offs decreased 63% in the third quarter of 2010 to $3.5 million from $9.6 million in the third quarter a year ago, and decreased 81% from $18.4 million in the preceding quarter.  
  • The provision for loan losses in the third quarter of 2010 was $2.1 million compared to $7.1 million in the third quarter of 2009 and $18.6 million in the second quarter of 2010.  
  • The allowance for loan losses at September 30, 2010 totaled $25.3 million, or 2.85% of total loans, compared to $29.0 million, or 2.68% of total loans in the year ago quarter and $26.8 million, or 2.85% of total loans at June 30, 2010.
  • During the third quarter of 2010, the sale of $11.2 million of the $17.1 million problem real estate loans held-for-sale resulted in net proceeds of $10.3 million, with a loss on sale of loans of $887,000. The remaining $5.9 million of problem real estate loans held-for-sale were written down by an additional $1.1 million during the third quarter of 2010 to $4.8 million.  Problem real estate loans included commercial real estate loans of $1.2 million and land and construction loans of $3.6 million at September 30, 2010.  
  • Total deposits increased $27.7 million at September 30, 2010, compared to June 30, 2010.  
  • Brokered deposits decreased to $132.4 million at September 30, 2010, compared to $181.8 million at September 30, 2009, and $163.7 million at June 30, 2010.  
  • The net interest margin decreased 3 basis points to 3.59% in the third quarter of 2010, from 3.62% in the same quarter a year ago and declined 29 basis points from 3.88% in the second quarter of 2010.  The 29 basis point decline in the third quarter of 2010 compared to the previous quarter was primarily due to investment of proceeds from the second quarter of 2010 capital raise in short-term investments and deposits at the Federal Reserve Bank, partially offset by maturing higher-cost wholesale funding and a more cost-effective blend of core deposits.  

Balance Sheet Review, Capital Management and Credit Quality

Heritage Commerce Corp's total assets declined 3% to $1.33 billion at September 30, 2010, from $1.37 billion at September 30, 2009, and increased 2% from $1.30 billion at June 30, 2010.

The investment securities portfolio totaled $111.5 million at the end of the third quarter of 2010, an increase of 15% from $96.6 million a year ago. The portfolio decreased 22% from $142.2 million at June 30, 2010, primarily due to the sale of $25.7 million of securities available-for-sale during the third quarter of 2010, resulting in a gain of $1.5 million. At September 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.

During the second quarter of 2010, we strategically identified $31.0 million of problem loans for sale. These loans were written down by $13.9 million to reflect the estimated proceeds from the sale, resulting in a net balance of $17.1 million which was transferred into the loans held-for-sale portfolio. 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

Of the $17.1 million loans held-for-sale at June 30, 2010, $11.2 million of loans were sold during the third quarter of 2010, which resulted in a loss on sale of other loans of $887,000.  The remaining $5.9 million of problem real estate loans held-for-sale were written down by an additional $1.1 million during the third quarter of 2010 to $4.8 million, after obtaining bids and broker indications on the sale of these loans. "Loan demand continued to lag as businesses and consumers remained cautious in this economic environment," said Mr. Kaczmarek. "We also continued to reduce our construction and land development loans and focus on improving asset quality." Loans, excluding loans held-for-sale, decreased 18% to $886.6 million at September 30, 2010, from $1.08 billion at September 30, 2009, and decreased 5% from $937.8 million at June 30, 2010. The total loan portfolio remains well diversified with commercial and industrial loans accounting for 42% of the portfolio at September 30, 2010. Commercial real estate loans accounted for 40% of the total loan portfolio at September 30, 2010, of which 57% were owner-occupied by businesses. Land and construction loans continued to decrease, accounting for 10% of the portfolio at September 30, 2010, compared to 18% and 12% of the total loan portfolio at September 30, 2009 and June 30, 2010, respectively. Consumer and home equity loans accounted for the remaining 8% of total loans at September 30, 2010.

"We worked diligently to manage credit risk," added Mr. Kaczmarek. "As a result, we have seen the provision for loan losses and charge-offs decline in the third quarter of 2010, reflecting an improvement in our overall credit quality." Nonperforming assets decreased to $49.7 million (including $4.6 million in loans held-for-sale), or 3.73% of total assets at September 30, 2010, compared to $58.2 million (none in loans held-for-sale), or 4.26% of total assets at September 30, 2009, and $60.1 million (including $9.8 million in loans held-for-sale), or 4.61% of total assets at June 30, 2010. Excluding the loans held-for-sale, nonperforming assets were $45.1 million, or 3.39% of total assets at September 30, 2010, compared to $58.2 million, or 4.26% of total assets at September 30, 2009, and $50.3 million or 3.86% of total assets at June 30, 2010. At September 30, 2010, 55% of the nonperforming assets were land and construction loans; 15% commercial and industrial loans; 13% commercial real estate loans; 9% SBA loans; 5% restructured and loans over 90 days past due and still accruing; 2% consumer and home equity loans; and 1% other real estate owned ("OREO"). Total OREO was $657,000 at September 30, 2010, compared to $3.0 million a year ago, and $555,000 at June 30, 2010.

The allowance for loan losses at the end of the third quarter of 2010 was $25.3 million, or 2.85% of total loans and 51.62% of nonperforming loans, and represented 56.90% of nonperforming loans excluding nonaccrual loans in loans held-for-sale. The allowance for loan losses for the comparable period in 2009 was $29.0 million, or 2.68% of total loans and 52.43% of nonperforming loans. The allowance for loan losses at June 30, 2010, was $26.8 million, or 2.85% of total loans and 44.90% of nonperforming loans and represented 53.74% of nonperforming loans excluding nonaccrual loans in loans held-for-sale. 

Deposits totaled $1.07 billion at September 30, 2010, compared to $1.12 billion at September 30, 2009 and $1.04 billion at June 30, 2010. At September 30, 2010, brokered deposits were $132.4 million, compared to $181.8 million a year ago and $163.7 million at June 30, 2010. Total deposits, excluding brokered deposits, were $932.7 million at September 30, 2010, compared to $934.6 million at September 2009 and $873.7 million at June 30, 2010, or a 7% increase in the third quarter of 2010 from the previous quarter. "As our core deposits continue to increase, we will become much less dependent on the high cost of brokered certificates of deposits," said Mr. Kaczmarek.

Tangible equity was $181.9 million at September 30, 2010, compared to $126.5 million a year ago, and $182.3 million at June 30, 2010. The increase in tangible equity in the second and third quarters of 2010 from the third quarter of 2009 was due to the $75 million private placement in the second quarter of 2010. Tangible book value per common share was $4.72 at September 30, 2010, compared to $7.47 a year ago, and $6.25 at June 30, 2010. The decrease in tangible book value per common share in the third quarter of 2010 was primarily due to the conversion of the Series B Preferred Stock into approximately 14.4 million shares of common stock of the Company.

Operating Results

The net interest margin was 3.59% for the third quarter of 2010, a decrease of 3 basis points from 3.62% for the third quarter a year ago and down 29 basis points from 3.88% for the second quarter of 2010. The 29 basis point decline in the third quarter of 2010 compared to the previous quarter was primarily due to investment of proceeds from the second quarter of 2010 capital raise in short-term investments and deposits at the Federal Reserve Bank, partially offset by maturing higher-cost wholesale funding and a more cost-effective blend of core deposits. In the third quarter of 2010, the Company had $113 million of average balances deposited with the Federal Reserve Bank, compared to $27 million of average balances deposited with the Federal Reserve Bank in the second quarter of 2010. The excess liquidity position was held to reduce high-cost brokered deposits as they mature.  In the fourth quarter of 2010, the Company has approximately $34 million in brokered deposits maturing.

Net interest income decreased to $10.8 million in the third quarter of 2010 from $11.6 million in the third quarter of 2009 and $11.4 million in the second quarter of 2010. Net interest income decreased to $33.6 million for the nine months ended September 30, 2010,  from $34.5 million for the same period a year ago. The decrease in net interest income in the third quarter and first nine months of 2010 was primarily the result of decreases in both the average loan balances and net interest margin, partially offset by a reduction in the rate paid on interest-bearing liabilities. 

The provision for loan losses of $2.1 million for the third quarter of 2010 was substantially less than the $7.1 million provision for loan losses reported in the third quarter of 2009, and the $18.6 million provision for loan losses reported in the second quarter this year. For the nine months ended September 30, 2010, the provision for loan losses totaled $25.8 million compared to $28.3 million for the same period a year ago. 

Noninterest income was $2.7 million for the third quarter of 2010, compared to $2.4 million for the third quarter of 2009 and $1.9 million for the second quarter of 2010. In the first nine months of 2010, noninterest income was $6.3 million, compared to $5.6 million in the first nine months a year ago. The increase in noninterest income in the third quarter and first nine months of 2010 was primarily due to a $1.5 million gain on sale of securities, partially offset by the $887,000 loss on sale of other loans. 

Noninterest expense was $11.2 million for the third quarter of 2010, compared to $10.7 million for the third quarter of 2009 and $11.4 million, excluding the $43.2 million impairment of goodwill, for the second quarter of 2010.  In the first nine months of 2010, noninterest expense was $34.8 million, excluding the $43.2 million impairment of goodwill, compared to $34.2 million in the first nine months a year ago.  Noninterest expense for the third quarter of 2010 and first nine months of 2010 included the $1.1 million write-down of loans held-for-sale. Salaries and benefits declined to $16.6 million for the first nine months of 2010, compared to $17.8 million for the same period a year ago, primarily due to lower full-time equivalent employees. FDIC deposit insurance premiums were $3.1 million in the first nine months of 2010, compared to $2.5 million for the same period in 2009. Professional fees were $3.2 million in the first nine months of 2010, compared to $2.8 million for the same period in 2009, primarily due to additional costs incurred for loan workouts.

The income tax benefit for the quarter ended September 30, 2010 was $398,000, as compared to an income tax benefit of $1.8 million in the third quarter a year ago, and an income tax benefit of $5.8 million in the second quarter of 2010.  The second quarter of 2010 income tax benefit included $3.7 million of  income tax expense to establish a partial valuation allowance on the Company's net deferred tax asset. The negative effective income tax rates are due to the loss before income taxes for the first nine months of 2010 and 2009. 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.

Heritage Commerce Corp's efficiency ratio was 82.96% in the third quarter of 2010, compared to 76.89% in the third quarter a year ago and 85.46% in the second quarter of 2010, excluding the $43.2 million impairment of goodwill. The efficiency ratio for the first nine months of 2010 increased to 87.22%, excluding the $43.2 million impairment of goodwill, from 85.38% a year ago. The efficiency ratio increased in 2010 primarily due to a decrease in net interest income from lower loan balances and a lower net interest margin, and an increase in noninterest expense primarily a result of the write-down of loans held-for-sale, increase in FDIC insurance premiums and professional fees, which was partially offset by the $1.5 million gain on sale of securities.

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 Federal Reserve Bank of San Francisco and the California Department of Financial Institutions; (8) changes in accounting standards and interpretations; (9) our ability to raise capital or incur debt on reasonable terms; (10) regulatory limits on the Heritage Bank of Commerce's ability to pay dividends to the Company; (11) 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; (12) future legislative or administrative changes to the U.S. Treasury Capital Purchase Program enacted under the Emergency Economic Stabilization Act of 2008; (13) 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; (14) the impact of the Dodd-Frank Wall Street Consumer Protection Act signed by President Obama on July 21, 2010, and (15) 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 Nine Months Ended:  
CONSOLIDATED STATEMENTS OF OPERATIONS                
(in $000's, unaudited) September 30, 2010 June 30, 2010 September 30, 2009 June 30, 2010 September 30, 2009 September 30, 2010 September 30, 2009 Percent  Change
Interest income  $ 13,361  $ 14,212  $ 15,495 -6% -14%  $ 41,920  $ 47,351 -11%
Interest expense  2,530  2,784  3,872 -9% -35%  8,292  12,888 -36%
Net interest income  10,831  11,428  11,623 -5% -7%  33,628  34,463 -2%
Provision for loan losses  2,058  18,600  7,129 -89% -71%  25,754  28,253 -9%
Net interest income (loss) after provision for loan losses  8,773  (7,172)  4,494 222% 95%  7,874  6,210 27%
Noninterest income:                
Gain on sale of securities  1,492  --   --  N/A N/A  1,492  --  N/A
Service charges and other fees on deposit accounts  536  579  557 -7% -4%  1,664  1,665 0%
Servicing income  442  425  382 4% 16%  1,288  1,210 6%
Gain on sale of SBA loans  429  163  643 163% -33%  707  643 10%
Loss on sale of other loans (887)  --   --  N/A N/A  (887) --  N/A
Increase in cash surrender value of life insurance  428  413  420 4% 2%  1,249  1,248 0%
Other  288  298  348 -3% -17%  777  808 -4%
Total noninterest income  2,728  1,878  2,350 45% 16%  6,290  5,574 13%
                 
Noninterest expense:                
Salaries and employee benefits  5,272  5,491  5,730 -4% -8%  16,645  17,831 -7%
Occupancy and equipment  1,081  983  1,005 10% 8%  3,023  2,893 4%
Writedown of loans held-for-sale  1,080  --   --  N/A N/A  1,080  --  N/A
FDIC deposit insurance premiums   849  1,019  598 -17% 42%  3,059  2,490 23%
Professional fees   780  1,144  691 -32% 13%  3,202  2,833 13%
Impairment of goodwill  --   43,181  --  -100% N/A  43,181  --  N/A
Other  2,186  2,734  2,720 -20% -20%  7,808  8,138 -4%
Total noninterest expense  11,248  54,552  10,744 -79%  5%  77,998  34,185 128%
Income (loss) before income taxes  253  (59,846)  (3,900) 100% 106%  (63,834)  (22,401) -185%
Income tax expense (benefit)  (398)  (5,753)  (1,824) 93% 78%  (6,272)  (10,990) 43%
Net income (loss)  $ 651  $ (54,093)  $ (2,076) 101% 131%  $ (57,562)  $ (11,411) -404%
Dividends and discount accretion on preferred stock  (193)  (1,009)  (599) -81% -68%  (1,381)  (1,776) -22%
Net income (loss) allocable to common shareholders  $ 458  $ (55,102)  $ (2,675) 101% 117%  $ (58,943)  $ (13,187) -347%
                 
PER COMMON SHARE DATA                
(unaudited)                
Basic earnings (loss) per share  $ 0.01  $ (4.66)  $ (0.23) 100% 104%  $ (4.67)  $ (1.12) -317%
Diluted earnings (loss) per share  $ 0.01  $ (4.66)  $ (0.23) 100% 104%  $ (4.67)  $ (1.12) -317%
Common shares outstanding at period-end 26,233,001 11,820,509 11,820,509 122% 122% 26,233,001 11,820,509 122%
Book value per share   $ 4.84  $ 6.53  $ 11.44 -26% -58%  $ 4.84  $ 11.44 -58%
Tangible book value per share  $ 4.72  $ 6.25  $ 7.47 -24% -37%  $ 4.72  $ 7.47 -37%
                 
KEY FINANCIAL RATIOS                
(unaudited)                
Annualized return (loss) on average equity 1.38% -121.78% -4.67% 101% 130% -42.78% -8.43% -407%
Annualized return (loss) on average tangible equity 1.40% -164.27% -6.38% 101% 122% -51.99% -11.40% -356%
Annualized return (loss) on average assets 0.20% -16.28% -0.58% 101% 134% -5.76% -1.05% -449%
Annualized return (loss) on average tangible assets 0.20% -16.86% -0.60% 101% 133% -5.90% -1.09% -441%
Net interest margin 3.59% 3.88% 3.62% -7% -1% 3.76% 3.51% 7%
Efficiency ratio, excluding impairment of goodwill 82.96% 85.46% 76.89% -3% 8% 87.22% 85.38% 2%
                 
AVERAGE BALANCES                
(in $000's, unaudited)                
Average assets  $ 1,322,259  $ 1,332,927  $ 1,411,954 -1% -6%  $ 1,336,269  $ 1,450,959 -8%
Average tangible assets  $ 1,319,010  $ 1,286,839  $ 1,364,926 3% -3%  $ 1,304,411  $ 1,403,771 -7%
Average earning assets  $ 1,195,959  $ 1,181,932  $ 1,272,341 1% -6%  $ 1,194,220  $ 1,314,599 -9%
Average loans held-for-sale  $ 24,696  $ 11,407  $ 17,596 116% 40%  $ 16,052  $ 6,005 167%
Average total loans  $ 912,221  $ 991,580  $ 1,131,654 -8% -19%  $ 984,739  $ 1,191,034 -17%
Average deposits  $ 1,056,905  $ 1,070,704  $ 1,153,103 -1% -8%  $ 1,067,186  $ 1,155,586 -8%
Average demand deposits - noninterest bearing  $ 266,190  $ 258,902  $ 267,528 3% -1%  $ 259,879  $ 258,725 0%
Average interest bearing deposits  $ 790,715  $ 811,802  $ 885,575 -3% -11%  $ 807,307  $ 896,861 -10%
Average interest bearing liabilities  $ 835,681  $ 860,897  $ 937,212 -3% -11%  $ 860,986  $ 981,581 -12%
Average equity  $ 187,594  $ 178,167  $ 176,198 5% 6%  $ 179,900  $ 180,975 -1%
Average tangible equity  $ 184,345  $ 132,079  $ 129,170 40% 43%  $ 148,042  $ 133,787 11%
     
  End of Period: Percent Change From:
CONSOLIDATED BALANCE SHEETS September 30, June 30, September 30, June 30, September 30,
(in $000's, unaudited) 2010 2010 2009 2010 2009
ASSETS          
Cash and due from banks  $ 230,365  $ 108,310  $ 42,105 113% 447%
Federal funds sold  100  100  150 0% -33%
Interest-bearing deposits in other financial institutions  90  90  --  0% N/A
Securities available-for-sale, at fair value  111,459  142,212  96,618 -22% 15%
Loans held-for-sale, including deferred costs - SBA  7,967  12,291  21,976 -35% -64%
Loans held-for-sale, including deferred costs - Other   4,788  17,079  --  -72% N/A
Loans:          
Commercial  370,939  388,471  414,441 -5% -10%
Real estate-mortgage  353,565  373,000  405,486 -5% -13%
Real estate-land and construction  91,706  110,194  197,374 -17% -54%
Home equity  53,772  52,419  51,768 3% 4%
Consumer  15,793  12,837  11,476 23% 38%
Loans  885,775  936,921  1,080,545 -5% -18%
Deferred loan costs, net  841  852  1,023 -1% -18%
Total loans, including deferred costs  886,616  937,773  1,081,568 -5% -18%
Allowance for loan losses  (25,290)  (26,753)  (28,976) -5% -13%
Loans, net  861,326  911,020  1,052,592 -5% -18%
Company owned life insurance  43,255  42,827  41,897 1% 3%
Premises & equipment, net  8,577  8,726  9,182 -2% -7%
Goodwill  --   --   43,181 N/A -100%
Intangible assets  3,158  3,302  3,750 -4% -16%
Accrued interest receivable and other assets  59,785  57,803  56,159 3% 6%
Total assets  $ 1,330,870  $ 1,303,760  $ 1,367,610 2% -3%
           
LIABILITIES AND SHAREHOLDERS' EQUITY          
Liabilities:          
Deposits:          
Demand, noninterest bearing  $ 269,482  $ 249,017  $ 250,515 8% 8%
Demand, interest-bearing  156,912  153,173  139,919 2% 12%
Savings and money market   318,221  281,619  324,611 13% -2%
Time deposits - under $100  38,909  38,201  43,559 2% -11%
Time deposits -- $100 and Over  132,862  133,443  134,533 0% -1%
Time deposits - CDARS  16,297  18,240  41,418 -11% -61%
Time deposits - brokered   132,435  163,732  181,819 -19% -27%
Total deposits  1,065,118  1,037,425  1,116,374 3% -5%
Securities sold under agreement to repurchase  15,000  20,000  25,000 -25% -40%
Short-term borrowings  4,315  3,992  --  8% N/A
Subordinated debt  23,702  23,702  23,702 0% 0%
Accrued interest payable and other liabilities  37,635  32,997  29,111 14% 29%
Total liabilities  1,145,770  1,118,116  1,194,187 2% -4%
           
Shareholders' Equity:          
Series A preferred stock, net  38,524  38,431  38,159 0% 1%
Series B preferred stock, net  --   50,385  --  -100% N/A
Series C preferred stock, net  19,538  19,599  --  0% N/A
Common stock  131,329  80,810  79,884 63% 64%
Retained earnings / (Accumulated deficit)  (2,965)  (3,012)  57,563 2% -105%
Accumulated other comprehensive loss  (1,326)  (569)  (2,183) -133% 39%
Total shareholders' equity  185,100  185,644  173,423 0% 7%
Total liabilities and shareholders' equity  $ 1,330,870  $ 1,303,760  $ 1,367,610 2% -3%
     
  End of Period: Percent Change From:
  September 30, 2010 June 30, 2010 September 30, 2009 June 30, 2010 September 30, 2009
CREDIT QUALITY DATA          
(in $000's, unaudited)          
Nonaccrual loans - loans held-for-sale  $ 4,552  $ 9,806  $ --  -54% N/A
Nonaccrual loans  41,757  47,263  55,120 -12% -24%
Restructured and loans over 90 days past due and still accruing  2,687  2,516 144 7% 1766%
Total nonperforming loans  48,996  59,585  55,264 -18% -11%
Other real estate owned 657 555 2,973 18% -78%
Total nonperforming assets  $ 49,653  $ 60,140  $ 58,237 -17% -15%
Net charge-offs   $ 3,521  $ 18,374  $ 9,551 -81% -63%
Allowance for loan losses to total loans 2.85% 2.85% 2.68% 0% 6%
Allowance for loan losses to total nonperforming loans 51.62% 44.90% 52.43% 15% -2%
Allowance for loan losses to total nonperforming loans, excluding nonaccrual loans - loans held-for-sale 56.90% 53.74% 52.43% 6% 9%
Nonperforming assets to total assets 3.73% 4.61% 4.26% -19% -12%
Nonperforming loans to total loans plus nonaccrual loans - loans held-for-sale 5.50% 6.29% 5.11% -13% 8%
           
OTHER PERIOD-END STATISTICS          
(in $000's, unaudited)          
Heritage Commerce Corp:          
Tangible equity  $ 181,942  $ 182,342  $ 126,492 0% 44%
Tangible common equity  $ 123,880  $ 73,927  $ 88,333 68% 40%
Shareholders' equity / total assets 13.91% 14.24% 12.68% -2% 10%
Tangible equity / tangible assets 13.70% 14.02% 9.58% -2% 43%
Tangible common equity / tangible assets 9.33% 5.68% 6.69% 64% 39%
Loan to deposit ratio 83.24% 90.39% 96.88% -8% -14%
Noninterest bearing deposits / total deposits 25.30% 24.00% 22.44% 5% 13%
Total risk-based capital ratio 20.10% 18.66% 12.82% 8% 57%
Tier 1 risk-based capital ratio 18.83% 10.73% 11.55% 75% 63%
Leverage ratio 14.17% 8.65% 10.08% 64% 41%
           
Heritage Bank of Commerce:          
Total risk-based capital ratio 17.16% 15.75% 12.51% 9% 37%
Tier 1 risk-based capital ratio 15.89% 14.49% 11.24% 10% 41%
Leverage ratio 11.95% 11.68% 9.82% 2% 22%
     
  For the Three Months Ended  September 30, 2010 For the Three Months Ended  September 30, 2009
NET INTEREST INCOME AND NET INTEREST MARGIN Average Balance Interest Income/ Expense Average Yield/ Rate Average Balance Interest Income/ Expense Average Yield/ Rate
   (Dollars in thousands, unaudited) 
Assets:            
Loans, gross*  $ 936,917  $ 12,041 5.10%  $ 1,149,250  $ 14,727 5.08%
Securities 146,061 1,247 3.39% 100,439 754 2.98%
Federal funds sold 100  --  0.00% 21,347 14 0.26%
Interest-bearing deposits in other financial institutions 112,881 73 0.26% 1,305  --  0.00%
Total interest earning assets  1,195,959  13,361 4.43% 1,272,341  15,495 4.83%
Cash and due from banks  44,904      24,665    
Premises and equipment, net  8,677      9,276    
Goodwill and other intangible assets  3,249      47,028    
Other assets  69,470      58,644    
Total assets  $ 1,322,259      $ 1,411,954    
             
Liabilities and shareholders' equity:            
Deposits:            
Demand, interest-bearing  $ 157,501  87 0.22%  $ 133,301  74 0.22%
Savings and money market   290,711  343 0.47%  332,922  589 0.70%
Time deposits - under $100  38,316  125 1.29%  43,527  240 2.19%
Time deposits -- $100 and Over  135,204  470 1.38%  141,401  646 1.81%
Time deposits - CDARS  17,624  32 0.72%  37,048  103 1.10%
Time deposits - brokered   151,359  872 2.29%  197,376  1,576 3.17%
Subordinated debt  23,702  473 7.92%  23,702  476 7.97%
Securities sold under agreement to repurchase  17,663  97 2.18%  27,663  168 2.41%
Short-term borrowings  3,601  31 3.42%  272  --  0.00%
Total interest bearing liabilities  835,681  2,530 1.20%  937,212  3,872 1.64%
Demand, noninterest bearing  266,190      267,528    
Other liabilities  32,794      31,016    
Total liabilities  1,134,665      1,235,756    
Shareholders' equity  187,594      176,198    
Total liabilities and shareholders' equity  $ 1,322,259      $ 1,411,954    
             
Net interest income / margin    $ 10,831 3.59%    $ 11,623 3.62%
             
             
  For the Nine Months Ended  September 30, 2010 For the Nine Months Ended  September 30, 2009
  Average Balance Interest Income/  Expense Average Yield/ Rate Average Balance Interest Income/ Expense Average Yield/ Rate
   (Dollars in thousands, unaudited) 
Assets:            
Loans, gross*  $ 1,000,791  $ 37,952 5.07%  $ 1,197,039  $ 44,619 4.98%
Securities 140,843 3,869 3.67% 105,886 2,711 3.42%
Federal funds sold 101  --  0.00% 11,130  21 0.25%
Interest-bearing deposits in other financial institutions 52,485 99 0.25% 544  --  0.00%
Total interest earning assets  1,194,220  41,920 4.69%  1,314,599  47,351 4.82%
Cash and due from banks  33,981      24,138    
Premises and equipment, net  8,818      9,374    
Goodwill and other intangible assets  31,858      47,188    
Other assets  67,392      55,660    
Total assets  $ 1,336,269      $ 1,450,959    
             
Liabilities and shareholders' equity:            
Deposits:            
Demand, interest-bearing  $ 152,505  256 0.22%  $ 134,576  252 0.25%
Savings and money market   295,617  1,105 0.50%  342,156  2,043 0.80%
Time deposits - under $100  38,794  407 1.40%  44,740  794 2.37%
Time deposits -- $100 and Over  133,223  1,438 1.44%  162,601  2,239 1.84%
Time deposits - CDARS  18,609  133 0.96%  20,096  192 1.28%
Time deposits - brokered   168,559  3,112 2.47%  192,692  5,132 3.56%
Subordinated debt  23,702  1,407 7.94%  23,702  1,463 8.25%
Securities sold under agreement to repurchase  20,110  341 2.27%  30,110  638 2.83%
Note payable  --   --  N/A  3,388  82 3.24%
Short-term borrowings  9,867  93 1.26%  27,520  53 0.26%
Total interest bearing liabilities  860,986  8,292 1.29%  981,581  12,888 1.76%
Demand, noninterest bearing  259,879      258,725    
Other liabilities  35,504      29,678    
Total liabilities  1,156,369      1,269,984    
Shareholders' equity  179,900      180,975    
Total liabilities and shareholders' equity  $ 1,336,269      $ 1,450,959    
             
Net interest income / margin    $ 33,628 3.76%    $ 34,463 3.51%
             
*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

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