UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 8-K

CURRENT REPORT
Pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):  April 23, 2015
HERITAGE COMMERCE CORP
(Exact name of registrant as specified in its charter)

California
000-23877
77-0469558
(State or other jurisdiction of incorporation)
(Commission File Number)
(IRS Employer Identification No.)
 
150 Almaden Boulevard, San Jose, California
 
95113
(Address of principal executive offices)
(Zip Code)
 
Registrant’s telephone number, including area code:  (408) 947-6900
 
Not Applicable
(Former name or former address, if changed since last report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (See General Instruction A.2. below):
x Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 

ITEM 2.02   RESULTS OF OPERATIONS AND FINANCIAL CONDITION

On April 23, 2015, Heritage Commerce Corp, the holding company (the “Company”) of Heritage Bank of Commerce (the “Bank”) issued a press release announcing preliminary unaudited results for the first quarter ended March 31, 2015.  A copy of the press release is attached as Exhibit 99.1 to this Current Report and is incorporated herein by reference.

The information in this report set forth under this Item 2.02 shall not be treated as "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference into any registration statement or other document pursuant to the Securities Act of 1933 or the Securities Act of 1934, except as expressly stated by specific reference in such filing.
 
ITEM 8.01   OTHER EVENTS

QUARTERLY DIVIDEND

On April 23, 2015, the Company announced that its Board of Directors declared a $0.08 per share quarterly cash dividend to holders of common stock and Series C preferred stock (on an as converted basis).  The dividend will be paid on May 28, 2015, to shareholders of record on May 14, 2015.  A copy of the press release is attached as Exhibit 99.2 to this Current Report and is incorporated herein by reference.
 
ITEM 9.01   FINANCIAL STATEMENTS AND EXHIBITS

(D) Exhibits.

99.1 Press Release, dated April 23, 2015, entitled “Heritage Commerce Corp Earnings Increase 35% to $4.1 Million for the First Quarter of 2015 from the First Quarter of 2014”
 
99.2 Press Release, dated April 23, 2015, entitled “Heritage Commerce Corp Declares Quarterly Cash Dividend of $0.08 Per Share”
 
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: April 23, 2015                                                                                    

Heritage Commerce Corp


By:  /s/ Lawrence D. McGovern
Name: Lawrence D. McGovern
Executive Vice President and Chief Financial Officer
 

 

INDEX TO EXHIBITS

EXHIBIT NO.                                        DESCRIPTION

99.1
Press Release, dated April 23, 2015, entitled “Heritage Commerce Corp Earnings Increase 35% to $4.1 Million for the First Quarter of 2015 from the First Quarter of 2014” 
 
99.2
Press Release, dated April 23, 2015, entitled “Heritage Commerce Corp Declares Quarterly Cash Dividend of $0.08 Per Share”
 
 
 


Exhibit 99.1

Heritage Commerce Corp Earnings increase 35% to $4.1 Million for the First Quarter of 2015 from the First Quarter of 2014
 
San Jose, CA – April 23, 2015 — Heritage Commerce Corp (Nasdaq: HTBK), the holding company (the “Company”) for Heritage Bank of Commerce (the “Bank” or “HBC”), today reported that net income increased 35% to $4.1 million, or $0.13 per average diluted common share, for the first quarter of 2015, compared to $3.1 million, or $0.10 per average diluted common share for the first quarter of 2014, and increased 15% from $3.6 million, or $0.11 per average diluted common share for the fourth quarter of 2014.  All results are unaudited.

“After delivering solid profitability in 2014, our first quarter earnings showed significant growth and were amongst the highest we have produced in more than six years,” said Walter Kaczmarek, President and Chief Executive Officer.  “Benefitting from a full quarter of revenues from the year-end acquisition of Bay View Funding, our net interest income increased 26% and net interest margin improved 53 basis points for the first quarter of 2015, compared to the first quarter of 2014.”  Bay View Funding operations have been included in the Company’s results of operations beginning November 1, 2014.

“We continue to foster sound customer relationships, as the economic environment in the San Francisco Bay Area continues to perform well.  Our customers look to us as a strong and stable banking partner to help them achieve their financial objectives,” added Mr. Kaczmarek.  “Total deposits increased 13% year-over-year, with noninterest-bearing deposits increasing 23% from the first quarter a year ago.  We continue to improve upon our performance metrics, with a return on average tangible assets of 1.04%, a return on average tangible equity of 9.89%, and an improved efficiency ratio of 65.35% for the first quarter of 2015.  This solid financial performance is a reflection of the hard work of our employees and their commitment to our customers.”

First Quarter 2015 Highlights (as of, or for the period ended March 31, 2015, except as noted):

¨
Diluted earnings per share increased 30% to $0.13 for the first quarter of 2015, compared to $0.10 for the first quarter of 2014, and increased 18% from $0.11 for the fourth quarter of 2014.
¨
Net interest income increased 26% to $16.9 million for the first quarter of 2015, compared to $13.3 million for the first quarter of 2014, and increased 5% from $16.1 million for the fourth quarter of 2014.
¨
Professional fees decreased to $95,000 at March 31, 2015, compared to $586,000 at March 31, 2014, and $562,000 at December 31, 2014, primarily due to the recovery of legal expenses on two problem loans that were paid off during the first quarter of 2015.
¨
The fully tax equivalent (“FTE”) net interest margin increased 53 basis point to 4.58% for the first quarter of 2015, from 4.05% for the first quarter of 2014 and increased 25 basis points from 4.33% for the fourth quarter of 2014.
¨
Loans (excluding loans-held-for-sale) increased 17% to $1.10 billion at March 31, 2015, compared to $941.8 million at March 31, 2014, and increased 1% from $1.09 billion at December 31, 2014.
¨
Nonperforming assets (“NPAs”) at March 31, 2015 were $8.4 million, or 0.51% of total assets, compared to $11.4 million, or 0.77% of total assets, at March 31, 2014, and $6.6 million, or 0.41% of total assets, at December 31, 2014.  The increase in NPAs at March 31, 2015 from December 31, 2014 was the result of a $3.6 million real estate secured loan that was a classified loan and placed on nonperforming loan status during the quarter due to lack of performance by the borrower.
¨
Classified assets, net of Small Business Administration (“SBA”) guarantees, decreased 18% to $16.6 million at March 31, 2015, from $20.2 million at March 31, 2014, and increased 4% from $16.0 million at December 31, 2014.
¨
The Company had net recoveries of $235,000 for the first quarter of 2015, compared to net charge-offs of $337,000 for the first quarter of 2014, and net charge-offs of $56,000 for the fourth quarter of 2014.
¨
There was a $60,000 credit provision for loan losses for the first quarter of 2015, compared to a $10,000 credit provision for loan losses for the first quarter of 2014, and a $106,000 credit provision for loan losses for the fourth quarter of 2014.
¨
The allowance for loan losses (“ALLL”) was 1.68% of total loans at March 31, 2015, compared to 2.00% at March 31, 2014, and 1.69% at December 31, 2014.
¨
Deposits totaled $1.42 billion at March 31, 2015, compared to $1.26 billion at March 31, 2014, and $1.39 billion at December 31, 2014Deposits (excluding all time deposits and CDARS deposits) increased $174.3 million, or 18%, to $1.17 billion at March 31, 2015, from $992.0 million at March 31, 2014, and increased $38.2 million, or 3%, from $1.13 billion at December 31, 2014.
¨
As of January 1, 2015, we along with other community banking organizations became subject to new capital requirements, and certain provisions of the new rules will be phased in from 2015 through 2019.   The Federal Banking regulators approved the new rules to implement the revised capital adequacy standards of the Basel Committee on Banking Supervision, commonly called Basel III, and address relevant provisions of The Dodd Frank Wall Street Reform and Consumer Protection Act of 2010, as amended. The Company’s consolidated capital ratios and the Bank’s capital ratios exceeded the regulatory guidelines for a well-capitalized financial institution under the Basel III regulatory requirements at March 31, 2015.
 
 
 
Capital Ratios
 
 
Heritage Commerce Corp
 
 
Heritage Bank of Commerce
 
Well-Capitalized Financial Institution Basel III Regulatory Guidelines
Total Risk-Based
13.0%
12.3%
10.0%
Tier 1 Risk-Based
11.7%
11.0%
8.0%
Common Equity Tier 1 Risk-based
10.4%
11.0%
6.5%
Leverage
10.5%
10.0%
5.0%
 
Operating Results
As a result of growth in the loan portfolio, contribution to revenue from a full quarter of operations from Bay View Funding, and increases in core deposits, net interest income increased 26% to $16.9 million for the first quarter of 2015, compared to $13.3 million for the first quarter of 2014, and increased 5% from $16.1 million for the fourth quarter of 2014.
The net interest margin (FTE) improved to 4.58% for the first quarter of 2015, compared to 4.05% for the first quarter of 2014, and 4.33% for the fourth quarter of 2014.  The increase for the first quarter of 2015 was primarily due to a full quarter of revenue from the higher yielding Bay View Funding factored receivables portfolio.
There was a $60,000 credit provision for loan losses for the first quarter of 2015, compared to a $10,000 credit provision for loan losses for the first quarter of 2014, and a $106,000 credit provision for loan losses for the fourth quarter of 2014.
Noninterest income was $1.9 million for the first quarter of 2015, compared to $2.0 million for the first quarter of 2014, and $1.8 million for the fourth quarter of 2014.  Noninterest income was lower for the first quarter ended March 31, 2015, compared to the same period in 2014, primarily due to a $50,000 gain on sales of securities and higher servicing income in the first quarter of 2014.  Noninterest income was higher for the first quarter of 2015 compared to fourth quarter of 2014 due to a higher gain on sales of SBA loans.
Total noninterest expense for the first quarter of 2015 increased to $12.3 million, from $10.5 million for the first quarter of 2014, and decreased from $12.4 million for the fourth quarter of 2014.  The increase in noninterest expense for the first quarter of 2015, compared to the first quarter of 2014, was primarily due to the operating costs of Bay View Funding. The increase was partially offset by the recovery of legal expenses on two problem loans that were paid off in the first quarter of 2015.  The decrease in noninterest expense in the first quarter of 2015, compared to the fourth quarter of 2014, was primarily due to one-time costs related to the Bay View Funding acquisition incurred in the fourth quarter of 2014, and lower professional fees, partially offset by a full quarter of operating costs of Bay View Funding, and increased compensation expenses, consistent with cyclical salaries and employee benefits expense in prior years.  Full time equivalent employees were 251, 195, and 242 at March 31, 2015, March 31, 2014, and December 31, 2014, respectively.
Primarily due to a higher net interest income, the efficiency ratio for the first quarter of 2015 improved to 65.35%, compared to 68.70% for the first quarter of 2014, and 69.34% for the fourth quarter of 2014.
Income tax expense for the first quarter of 2015 was $2.4 million, compared to $1.7 million for the first quarter of 2014, and $2.0 million for the fourth quarter of 2014. The effective tax rate for the first quarter of 2015 increased to 37.0%, compared to 36.1% for the first quarter of 2014 and 35.6% for the fourth quarter of 2014.  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 (net of low income housing investment losses), and tax-exempt interest income earned on municipal bonds.  The increase in the effective tax rate for the first quarter of 2015, compared to the first and fourth quarters of 2014 was primarily due to higher pre-tax income, while the net credits related to investment in low income housing limited partnerships and tax-exempt interest income earned on municipal bonds remained relatively flat.
Balance Sheet Review, Capital Management and Credit Quality


Total assets were $1.65 billion at March 31, 2015, compared to $1.47 billion at March 31, 2014, and $1.62 billion at December 31, 2014.
The investment securities available-for-sale portfolio totaled $200.8 million at March 31, 2015, compared to $262.4 million at March 31, 2014, and $206.3 million at December 31, 2014.  At March 31, 2015, the securities available-for-sale portfolio was comprised of $148.1 million agency mortgage-backed securities (all issued by U.S. Government sponsored entities), $37.2 million of corporate bonds, and $15.5 million of single entity issue trust preferred securities.  The pre-tax unrealized gain on securities available-for-sale at March 31, 2015 was $5.7 million, compared to a pre-tax unrealized gain on securities available-for-sale of $294,000 at March 31, 2014, and a pre-tax unrealized gain on securities available-for-sale of $4.8 million at December 31, 2014.
At March 31, 2015, investment securities held-to-maturity totaled $94.6 million, compared to $95.5 million at March 31, 2014, and $95.4 million at December 31, 2014.  At March 31, 2015, the securities held-to-maturity portfolio, at amortized cost, was comprised of $79.9 million tax-exempt municipal bonds and $14.7 million agency mortgage-backed securities.
Loans, excluding loans held-for-sale, increased 17% to $1.10 billion at March 31, 2015, from $941.8 million at March 31, 2014, and increased 1% from $1.09 billion at December 31, 2014. The loan portfolio remains well-diversified with commercial and industrial (“C&I”) loans accounting for 42% of the loan portfolio at March 31, 2015, which included the $44.6 million of factored receivables at Bay View Funding. Commercial and residential real estate loans accounted for 44% of the total loan portfolio, of which 50% 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 7% of total loans at March 31, 2015.  C&I line usage was 37% at March 31, 2015, compared to 36% at March 31, 2014, and 42% at December 31, 2014.
The yield on the loan portfolio was 5.71% for the first quarter of 2015, compared to 4.86% for the first quarter of 2014, and 5.39% for the fourth quarter of 2014.  The increase in the yield on the loan portfolio for the first quarter of 2015, from the first and fourth quarters of 2014, primarily reflects the higher yielding Bay View Funding portfolio.
NPAs at March 31, 2015 were $8.4 million, or 0.51% of total assets, compared to $11.4 million, or 0.77% of total assets, at March 31, 2014, and $6.6 million, or 0.41% of total assets, at December 31, 2014.  The increase in NPAs at March 31, 2015 from December 31, 2014 was the result of a $3.6 million real estate secured loan that was a classified loan and placed on nonperforming loan status during the quarter due to lack of performance by the borrower.  At March 31, 2015, the NPAs also included $79,000 of loans guaranteed by the SBA.  Foreclosed assets were $1.7 million at March 31, 2015, compared to $551,000 at March 31, 2014, and $696,000 at December 31, 2014.  The following is a breakout of NPAs at the periods indicated:
 
 
End of Period:
NONPERFORMING ASSETS
 
March 31, 2015
 
December 31, 2014
 
March 31, 2014
(in $000's, unaudited)
 
Balance
 
% of Total
 
Balance
 
% of Total
 
Balance
 
% of Total
Commercial real estate loans
 
$
4,151
 
49%
 
$
1,651
 
25%
 
$
3,227
 
29%
Land and construction loans
   
1,290
 
15%
   
1,320
 
20%
   
1,718
 
15%
SBA loans
   
799
 
10%
   
2,335
 
36%
   
3,064
 
27%
Home equity and consumer loans
   
342
 
4%
   
350
 
5%
   
722
 
6%
Commercial and industrial loans
   
151
 
2%
   
199
 
3%
   
815
 
7%
Foreclosed assets
   
1,716
 
20%
   
696
 
11%
   
551
 
5%
Restructured and loans over 90 days past due and accruing
   
-
 
0%
   
-
 
0%
   
1,278
 
11%
   Total nonperforming assets
 
$
8,449
 
100%
 
$
6,551
 
100%
 
$
11,375
 
100%
 
                             

 
Classified assets (net of SBA guarantees) were $16.6 million at March 31, 2015, compared to $20.2 million at March 31, 2014, and $16.0 million at December 31, 2014.
The following table summarizes the allowance for loan losses:
 
 
 
For the Quarter Ended
ALLOWANCE FOR LOAN LOSSES
 
March 31,
 
December 31,
 
March 31,
(in $000's, unaudited)
 
2015
 
2014
 
2014
Balance at beginning of period
 
$
18,379
 
$
18,541
 
$
19,164
Provision (credit) for loan losses during the period
   
(60)
   
(106)
   
(10)
Net (charge-offs) recoveries during the period
   
235
   
(56)
   
(337)
   Balance at end of period
 
$
18,554
 
$
18,379
 
$
18,817
 
                 
Total loans
 
$
1,101,991
 
$
1,088,643
 
$
941,759
Total nonperforming loans
 
$
6,733
 
$
5,855
 
$
10,824
 
                 
Allowance for loan losses to total loans
   
1.68%
   
1.69%
   
2.00%
Allowance for loan losses to total nonperforming loans
   
275.57%
   
313.90%
   
173.85%


The ALLL at March 31, 2015 was 1.68% of total loans, compared to 2.00% at March 31, 2014, and 1.69% at December 31, 2014.  The decrease in the ALLL to total loans at March 31, 2015 from March 31, 2014 was primarily due to increasing loan balances.  The ALLL to total nonperforming loans was 275.57% at March 31, 2015, compared to 173.85% at March 31, 2014, and 313.90% at December 31, 2014.
Total deposits increased $161.7 million to $1.42 billion at March 31, 2015, compared to $1.26 billion at March 31, 2014, and increased $35.3 million from $1.39 billion at December 31, 2014.  Noninterest-bearing demand deposits increased $103.5 million at March 31, 2015 from March 31, 2014, and increased $26.7 million from December 31, 2014.  Interest-bearing demand deposits increased $43.3 million at March 31, 2015 from March 31, 2014, and increased $15.7 million from December 31, 2014.  Brokered deposits decreased $12.3 million at March 31, 2015 from March 31, 2014, and remained flat from December 31, 2014.  Deposits (excluding all time deposits and CDARS deposits) increased $174.3 million, or 18%, to $1.17 billion at March 31, 2015, from $992.0 million at March 31, 2014, and increased $38.2 million, or 3%, from $1.13 billion at December 31, 2014.
The total cost of deposits decreased 2 basis points to 0.15% for the first quarter of 2015, from 0.17% for the first quarter of 2014, and remained the same from the fourth quarter of 2014.
Tangible equity was $170.6 million at March 31, 2015, compared to $175.4 million at March 31, 2014 and $168.0 million at December 31, 2014.  The decrease in tangible equity at March 31, 2015 from March 31, 2014 was primarily due to the addition of goodwill in other intangible assets from the Bay View Funding acquisition, partially offset by an increase in retained earnings, and a decrease in accumulated other comprehensive loss.  Tangible book value per common share was $5.70 at March 31, 2015, compared to $5.91 at March 31, 2014, and $5.60 at December 31, 2014.  There were 21,004 shares of Series C Preferred Stock outstanding at March 31, 2015, March 31, 2014, and December 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 $5.31 at March 31, 2015, compared to $5.49 at March 31, 2014, and $5.23 at December 31, 2014.
Accumulated other comprehensive loss was ($1.3) million at March 31, 2015, compared to accumulated other comprehensive loss of ($2.5) million a year ago, and accumulated other comprehensive loss of ($1.9) million at December 31, 2014. The unrealized gain on securities available-for-sale included in accumulated other comprehensive loss was an unrealized gain of $3.3 million, net of taxes, at March 31, 2015, compared to an unrealized gain of $171,000 net of taxes, at March 31, 2014, and an unrealized gain of $2.8 million, net of taxes, at December 31, 2014.  The components of accumulated other comprehensive loss, net of taxes, at March 31, 2015 include the following: an unrealized gain on available-for-sale securities of $3.3 million; the remaining unamortized unrealized gain on securities available-for-sale transferred to held-to-maturity of $426,000; a split dollar insurance contracts liability of ($2.1) million; a supplemental executive retirement plan liability of ($3.8) million; and an unrealized gain on interest-only strip from SBA loans of $866,000.
 
 
 
 
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.  Bay View Funding, a subsidiary of Heritage Bank of Commerce, is based in Santa Clara and provides business‑essential working capital factoring financing to various industries throughout the United States. 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) 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 and could negatively affect our customers’ ability to meet certain credit obligations; (3) volatility in credit and equity markets and its effect on the global economy; (4) changes in consumer spending, borrowings and saving habits; (5) competition for loans and deposits and failure to attract or retain deposits and loans; (6) our ability to increase market share and control expenses; (7) our ability to develop and promote customer acceptance of new products and services in a timely manner; (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 and charge‑offs and 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 and uncertain impact on the Company of the enactment of the Dodd‑Frank Wall Street Reform and Consumer Protection Act of 2010 and the rules and regulations promulgated by supervisory and oversight agencies implementing the new legislation; (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, as well as 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; (25) the successful integration of the business, employees and operations of Bay View Funding with the Company and our ability to achieve the projected synergies of this acquisition; and (26) our success in managing the risks involved in the foregoing factors.
 
 
Member FDIC
 

 
 
For the Quarter Ended:
 
Percent Change From:
CONSOLIDATED INCOME STATEMENTS
 
March 31,
 
December 31,
 
March 31,
 
December 31,
 
March 31,
(in $000's, unaudited)
 
2015
 
2014
 
2014
 
2014
 
2014
Interest income
 
$
17,366
 
$
16,717
 
$
13,855
 
4%
 
25%
Interest expense
   
508
   
625
   
521
 
-19%
 
-2%
    Net interest income before provision for loan losses
   
16,858
   
16,092
   
13,334
 
5%
 
26%
Provision (credit) for loan losses
   
(60)
   
(106)
   
(10)
 
43%
 
-500%
    Net interest income after provision for loan losses
   
16,918
   
16,198
   
13,344
 
4%
 
27%
Noninterest income:
                         
   Service charges and fees on deposit accounts
   
623
   
622
   
620
 
0%
 
0%
   Increase in cash surrender value of life insurance
   
400
   
404
   
398
 
-1%
 
1%
   Servicing income
   
306
   
319
   
348
 
-4%
 
-12%
   Gain on sales of SBA loans
   
207
   
113
   
157
 
83%
 
32%
   Gain on sales of securities
   
-
   
-
   
50
 
N/A
 
-100%
   Other
   
390
   
354
   
444
 
10%
 
-12%
      Total noninterest income
   
1,926
   
1,812
   
2,017
 
6%
 
-5%
 
                         
Noninterest expense:
                         
   Salaries and employee benefits
   
8,042
   
6,960
   
6,243
 
16%
 
29%
   Occupancy and equipment
   
1,045
   
1,072
   
945
 
-3%
 
11%
   Professional fees
   
95
   
562
   
586
 
-83%
 
-84%
   Other
   
3,094
   
3,821
   
2,772
 
-19%
 
12%
      Total noninterest expense
   
12,276
   
12,415
   
10,546
 
-1%
 
16%
Income before income taxes
   
6,568
   
5,595
   
4,815
 
17%
 
36%
Income tax expense
   
2,430
   
1,993
   
1,739
 
22%
 
40%
Net income
   
4,138
   
3,602
   
3,076
 
15%
 
35%
Dividends on preferred stock
   
(448)
   
(280)
   
(224)
 
60%
 
100%
Net income available to common shareholders
   
3,690
   
3,322
   
2,852
 
11%
 
29%
Undistributed earnings allocated to Series C preferred stock
   
(274)
   
(349)
   
(315)
 
-21%
 
-13%
Distributed and undistributed earnings allocated to common
                   
    shareholders
 
$
3,416
 
$
2,973
 
$
2,537
 
15%
 
35%
 
                         
PER COMMON SHARE DATA
                         
(unaudited)
                         
Basic earnings per share
 
$
0.13
 
$
0.11
 
$
0.10
 
18%
 
30%
Diluted earnings per share
 
$
0.13
 
$
0.11
 
$
0.10
 
18%
 
30%
Weighted average shares outstanding - basic
   
26,509,723
   
26,460,519
   
26,359,825
 
0%
 
1%
Weighted average shares outstanding - diluted
   
26,680,253
   
26,615,743
   
26,483,088
 
0%
 
1%
Common shares outstanding at period-end
   
26,522,739
   
26,503,505
   
26,370,510
 
0%
 
1%
Pro forma common shares outstanding at period-end, assuming
                   
   Series C preferred stock was converted into common stock
   
32,123,739
   
32,104,505
   
31,971,510
 
0%
 
0%
Book value per share
 
$
6.31
 
$
6.22
 
$
5.96
 
1%
 
6%
Tangible book value per share
 
$
5.70
 
$
5.60
 
$
5.91
 
2%
 
-4%
Pro forma tangible book value per share, assuming Series C
                   
    preferred stock was converted into common stock
 
$
5.31
 
$
5.23
 
$
5.49
 
2%
 
-3%
 
                         
KEY FINANCIAL RATIOS
                         
(unaudited)
                         
Annualized return on average equity
   
9.04%
   
7.72%
   
7.10%
 
17%
 
27%
Annualized return on average tangible equity
   
9.89%
   
8.20%
   
7.16%
 
21%
 
38%
Annualized return on average assets
   
1.03%
   
0.88%
   
0.86%
 
17%
 
20%
Annualized return on average tangible assets
   
1.04%
   
0.89%
   
0.86%
 
17%
 
21%
Annualized return before income taxes and provision (credit) for
             
    loan losses to average assets
   
1.61%
   
1.37%
   
1.34%
 
18%
 
20%
Net interest margin
   
4.58%
   
4.33%
   
4.05%
 
6%
 
13%
Efficiency ratio
   
65.35%
   
69.34%
   
68.70%
 
-6%
 
-5%
 
                         
AVERAGE BALANCES
                         
(in $000's, unaudited)
                         
Average assets
 
$
1,634,923
 
$
1,619,881
 
$
1,458,875
 
1%
 
12%
Average tangible assets
 
$
1,619,006
 
$
1,609,068
 
$
1,457,391
 
1%
 
11%
Average earning assets
 
$
1,516,284
 
$
1,500,270
 
$
1,361,923
 
1%
 
11%
Average loans held-for-sale
 
$
987
 
$
813
 
$
3,296
 
21%
 
-70%
Average total loans
 
$
1,064,849
 
$
1,057,866
 
$
927,042
 
1%
 
15%
Average deposits
 
$
1,403,636
 
$
1,376,503
 
$
1,250,128
 
2%
 
12%
Average demand deposits - noninterest-bearing
 
$
530,552
 
$
515,209
 
$
428,944
 
3%
 
24%
Average interest-bearing deposits
 
$
873,084
 
$
861,294
 
$
821,184
 
1%
 
6%
Average interest-bearing liabilities
 
$
873,135
 
$
875,525
 
$
821,242
 
0%
 
6%
Average equity
 
$
185,620
 
$
185,107
 
$
175,773
 
0%
 
6%
Average tangible equity
 
$
169,703
 
$
174,294
 
$
174,289
 
-3%
 
-3%
 

 
 
 
 
End of Period:
 
 
Percent Change From:
CONSOLIDATED BALANCE SHEETS
 
March 31,
 
December 31,
 
March 31,
 
December 31,
 
March 31,
(in $000's, unaudited)
 
2015
 
2014
 
2014
 
2014
 
2014
ASSETS
 
 
 
 
 
Cash and due from banks
 
$
27,388
 
$
23,256
 
$
30,666
 
18%
 
-11%
Federal funds sold and interest-bearing
                         
   deposits in other financial institutions
   
124,388
   
99,147
   
54,333
 
25%
 
129%
Securities available-for-sale, at fair value
   
200,768
   
206,335
   
262,375
 
-3%
 
-23%
Securities held-to-maturity, at amortized cost
   
94,588
   
95,362
   
95,548
 
-1%
 
-1%
Loans held-for-sale - SBA, including deferred costs
   
1,390
   
1,172
   
2,894
 
19%
 
-52%
Loans:
                         
   Commercial
   
458,498
   
462,403
   
390,650
 
-1%
 
17%
   Real estate:
                         
      Commercial and residential
   
487,475
   
478,335
   
436,562
 
2%
 
12%
      Land and construction
   
74,972
   
67,980
   
42,889
 
10%
 
75%
      Home equity
   
65,243
   
61,644
   
56,289
 
6%
 
16%
   Consumer
   
16,200
   
18,867
   
15,829
 
-14%
 
2%
        Loans
   
1,102,388
   
1,089,229
   
942,219
 
1%
 
17%
   Deferred loan fees
   
(397)
   
(586)
   
(460)
 
-32%
 
-14%
       Total loans, net of deferred fees
   
1,101,991
   
1,088,643
   
941,759
 
1%
 
17%
Allowance for loan losses
   
(18,554)
   
(18,379)
   
(18,817)
 
1%
 
-1%
    Loans, net
   
1,083,437
   
1,070,264
   
922,942
 
1%
 
17%
Company owned life insurance
   
51,657
   
51,257
   
50,055
 
1%
 
3%
Premises and equipment, net
   
7,340
   
7,451
   
7,186
 
-1%
 
2%
Goodwill
   
13,054
   
13,044
   
-
 
0%
 
N/A
Other intangible assets
   
3,087
   
3,276
   
1,412
 
-6%
 
119%
Accrued interest receivable and other assets
   
45,790
   
46,539
   
42,699
 
-2%
 
7%
     Total assets
 
$
1,652,887
 
$
1,617,103
 
$
1,470,110
 
2%
 
12%
 
                         
LIABILITIES AND SHAREHOLDERS' EQUITY
                         
Liabilities:
                         
  Deposits:
                         
    Demand, noninterest-bearing
 
$
544,339
 
$
517,662
 
$
440,864
 
5%
 
23%
    Demand, interest-bearing
   
241,477
   
225,821
   
198,141
 
7%
 
22%
    Savings and money market
   
380,486
   
384,644
   
352,977
 
-1%
 
8%
    Time deposits - under $100
   
19,229
   
20,005
   
20,669
 
-4%
 
-7%
    Time deposits - $100 and over
   
199,584
   
200,890
   
195,769
 
-1%
 
2%
    Time deposits - brokered
   
28,126
   
28,116
   
40,440
 
0%
 
-30%
    CDARS - money market and time deposits
   
10,408
   
11,248
   
13,135
 
-7%
 
-21%
         Total deposits
   
1,423,649
   
1,388,386
   
1,261,995
 
3%
 
13%
Accrued interest payable and other liabilities
   
42,461
   
44,359
   
31,298
 
-4%
 
36%
     Total liabilities
   
1,466,110
   
1,432,745
   
1,293,293
 
2%
 
13%
 
                         
Shareholders' Equity:
                         
   Series C preferred stock, net
   
19,519
   
19,519
   
19,519
 
0%
 
0%
   Common stock
   
133,992
   
133,676
   
132,631
 
0%
 
1%
   Retained earnings
   
34,583
   
33,014
   
27,143
 
5%
 
27%
   Accumulated other comprehensive loss
   
(1,317)
   
(1,851)
   
(2,476)
 
29%
 
47%
        Total shareholders' equity
   
186,777
   
184,358
   
176,817
 
1%
 
6%
    Total liabilities and shareholders' equity
 
$
1,652,887
 
$
1,617,103
 
$
1,470,110
 
2%
 
12%
 
                       
 

 
 
 
End of Period:
 
Percent Change From:
 
 
March 31,
 
December 31,
 
March 31,
 
December 31,
 
March 31,
 
 
2015
 
2014
 
2014
 
2014
 
2014
CREDIT QUALITY DATA
 
 
 
 
 
(in $000's, unaudited)
 
 
 
 
 
Nonaccrual loans - held-for-investment
 
$
6,733
 
$
5,855
 
$
9,546
   
15%
 
-29%
Restructured and loans over 90 days past due and still accruing
   
-
   
-
   
1,278
   
N/A
 
-100%
    Total nonperforming loans
   
6,733
   
5,855
   
10,824
   
15%
 
-38%
Foreclosed assets
   
1,716
   
696
   
551
   
147%
 
211%
    Total nonperforming assets
 
$
8,449
 
$
6,551
 
$
11,375
   
29%
 
-26%
Other restructured loans still accruing
 
$
163
 
$
167
 
$
-
   
-2%
 
N/A
Net (recoveries) charge-offs during the quarter
 
$
(235)
 
$
56
 
$
337
   
-520%
 
-170%
Provision (credit) for loan losses during the quarter
 
$
(60)
 
$
(106)
 
$
(10)
   
43%
 
-500%
Allowance for loan losses
 
$
18,554
 
$
18,379
 
$
18,817
   
1%
 
-1%
Classified assets(1)
 
$
16,647
 
$
15,978
 
$
20,198
   
4%
 
-18%
Allowance for loan losses to total loans
   
1.68%
   
1.69%
   
2.00%
   
-1%
 
-16%
Allowance for loan losses to total nonperforming loans
   
275.57%
   
313.90%
   
173.85%
   
-12%
 
59%
Nonperforming assets to total assets
   
0.51%
   
0.41%
   
0.77%
   
24%
 
-34%
Nonperforming loans to total loans
   
0.61%
   
0.54%
   
1.15%
   
13%
 
-47%
Classified assets* to Heritage Commerce Corp Tier 1
                           
   capital plus allowance for loan losses
   
9%
   
9%
   
11%
   
0%
 
-18%
Classified assets* to Heritage Bank of Commerce Tier 1
                     
   capital plus allowance for loan losses
   
9%
   
9%
   
11%
   
0%
 
-18%
 
                           
OTHER PERIOD-END STATISTICS
                           
(in $000's, unaudited)
                           
Heritage Commerce Corp:
                           
   Tangible equity
 
$
170,636
 
$
168,038
 
$
175,405
   
2%
 
-3%
   Tangible common equity
 
$
151,117
 
$
148,519
 
$
155,886
   
2%
 
-3%
   Shareholders' equity / total assets
   
11.30%
   
11.40%
   
12.03%
   
-1%
 
-6%
   Tangible equity / tangible assets
   
10.43%
   
10.50%
   
11.94%
   
-1%
 
-13%
   Tangible common equity / tangible assets
   
9.23%
   
9.28%
   
10.61%
   
-1%
 
-13%
   Loan to deposit ratio
   
77.41%
   
78.41%
   
74.62%
   
-1%
 
4%
   Noninterest-bearing deposits / total deposits
   
38.24%
   
37.29%
   
34.93%
   
3%
 
9%
   Total risk-based capital ratio(2)
   
13.0%
   
13.9%
   
15.4%
   
-6%
 
-16%
   Tier 1 risk-based capital ratio(2)
   
11.7%
   
12.6%
   
14.2%
   
-7%
 
-18%
   Common Equity Tier 1 risk-based capital ratio(2)
   
10.4%
   
N/A
   
N/A
   
N/A
 
N/A
   Leverage ratio(2)
   
10.5%
   
10.6%
   
11.9%
   
-1%
 
-12%
 
                         
Heritage Bank of Commerce:
                           
   Total risk-based capital ratio(2)
   
12.3%
   
13.1%
   
14.2%
   
-6%
 
-13%
   Tier 1 risk-based capital ratio(2)
   
11.0%
   
11.9%
   
13.0%
   
-8%
 
-15%
   Common Equity Tier 1 risk-based capital ratio(2)
   
11.0%
   
N/A
   
N/A
   
N/A
 
N/A
   Leverage ratio(2)
   
10.0%
   
9.9%
   
10.9%
   
1%
 
-8%
 
                           
(1)Net of SBA guarantees
                           
(2)March 31, 2015 capital ratios are based on the Basel III regulatory requirements;
         
December 31, 2014 and March 31, 2014 capital ratios are based on the pre-Basel III regulatory requirements
 

 
 
For the Quarter Ended 
 
 
For the Quarter Ended
 
 
March 31, 2015
 
March 31, 2014
 
 
 
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)
 
$
1,065,836
 
$
15,004
 
5.71%
 
$
930,338
 
$
11,139
 
4.86%
Securities - taxable
   
230,456
   
1,779
 
3.13%
   
288,054
   
2,170
 
3.06%
Securities - tax exempt(2)
   
79,872
   
779
 
3.96%
   
79,945
   
778
 
3.95%
Federal funds sold and interest-bearing
                               
  deposits in other financial institutions
   
140,120
   
77
 
0.22%
   
63,586
   
40
 
0.26%
    Total interest earning assets(2)
   
1,516,284
   
17,639
 
4.72%
   
1,361,923
   
14,127
 
4.21%
Cash and due from banks
   
27,338
             
24,731
         
Premises and equipment, net
   
7,403
             
7,236
         
Goodwill and other intangible assets
   
15,917
             
1,484
         
Other assets
   
67,981
             
63,501
         
  Total assets
 
$
1,634,923
           
$
1,458,875
         
 
                               
Liabilities and shareholders' equity:
                               
Deposits:
                               
    Demand, noninterest-bearing
 
$
530,552
           
$
428,944
         
 
                               
    Demand, interest-bearing
   
231,453
   
100
 
0.18%
   
199,405
   
77
 
0.16%
    Savings and money market
   
382,015
   
185
 
0.20%
   
337,582
   
151
 
0.18%
    Time deposits - under $100
   
19,680
   
15
 
0.31%
   
21,167
   
17
 
0.33%
    Time deposits - $100 and over
   
200,947
   
151
 
0.30%
   
194,807
   
159
 
0.33%
    Time deposits - brokered
   
28,117
   
55
 
0.79%
   
49,065
   
116
 
0.96%
    CDARS - money market and time deposits
   
10,872
   
2
 
0.07%
   
19,158
   
1
 
0.02%
        Total interest-bearing deposits
   
873,084
   
508
 
0.24%
   
821,184
   
521
 
0.26%
                Total deposits
   
1,403,636
   
508
 
0.15%
   
1,250,128
   
521
 
0.17%
 
                               
Short-term borrowings
   
51
   
-
 
0.00%
   
58
   
-
 
0.00%
  Total interest-bearing liabilities
   
873,135
   
508
 
0.24%
   
821,242
   
521
 
0.26%
      Total interest-bearing liabilities and demand,
                               
         noninterest-bearing / cost of funds
   
1,403,687
   
508
 
0.15%
   
1,250,186
   
521
 
0.17%
Other liabilities
   
45,616
             
32,916
         
  Total liabilities
   
1,449,303
             
1,283,102
         
Shareholders' equity
   
185,620
             
175,773
         
  Total liabilities and shareholders' equity
 
$
1,634,923
           
$
1,458,875
         
 
                               
Net interest income(2) / margin
         
17,131
 
4.58%
         
13,606
 
4.05%
Less tax equivalent adjustment(2)
         
(273)
             
(272)
   
   Net interest income
       
$
16,858
           
$
13,334
   
 
                               
(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.
               
 




Exhibit 99.2

Heritage Commerce Corp Declares Quarterly Cash Dividend of $0.08 Per Share

San Jose, California – April 23, 2015 – Heritage Commerce Corp (Nasdaq:HTBK), today announced that its Board of Directors declared a quarterly cash dividend of $0.08 per share to holders of common stock and Series C Preferred Stock (on an as converted basis).  The dividend will be payable on May 28, 2015, to shareholders of record on May 14, 2015.

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.  Bay View Funding, a subsidiary of Heritage Bank of Commerce, is based in Santa Clara and provides business‑essential working capital factoring financing to various industries throughout the United States. For more information, please visit www.heritagecommercecorp.com.


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