Heritage Commerce Corp Reports Financial Results for Third Quarter 2009

• Press Release
• Source: Heritage Bank of Commerce
• On 7:10 pm EDT, Thursday October 22, 2009

SAN JOSE, Calif., Oct. 22, 2009 (GLOBE NEWSWIRE) -- Heritage Commerce Corp (Nasdaq:HTBK - News), parent company of Heritage Bank of Commerce, reported today a third quarter 2009 net loss allocable to common shareholders of $2.7 million, or $(0.23) per diluted common share. The third quarter of 2009 reflects a $7.1 million provision for loan losses and $599,000 in dividends and discount accretion on preferred stock. In the third quarter a year ago, the Company reported net income of $2.4 million, or $0.21 per diluted common share. For the first nine months of 2009, net loss allocable to common shareholders was $13.2 million, or $(1.12) per diluted common share, compared to net income of $1.1 million, or $0.09 per diluted common share, for the same period a year ago.

Related Quotes

Symbol	Price	Change
HTBK	3.87	-0.17

{"s" : "htbk","k" : "c10,l10,p20,t10","o" : "","j" : ""}

"We continue to see strong demand for Small Business Administration loans, and improvement in the secondary market for SBA loans allowed us to sell some of these loans, contributing to our third quarter and year-to-date noninterest income in 2009. We also saw solid sales activity in our residential housing portfolios, resulting in a continued reduction in our land and construction loan portfolio," said Walter Kaczmarek, President and Chief Executive Officer. "Additionally, we have seen our net interest margin improve for the second consecutive quarter and our nonperforming loans remained relatively flat in the third quarter. These factors helped in reducing our loss in the third quarter significantly from the second quarter. Our capital ratios improved and continue to exceed regulatory well-capitalized standards," Mr. Kaczmarek noted.

Third Quarter Developments

 * The net interest margin increased 7 basis points to 3.62% in the
   third quarter of 2009 from 3.55% in the second quarter of 2009.

 * Heritage Bank of Commerce remains well-capitalized with a
   leverage ratio of 9.82%, a tier 1 risk-based capital ratio of
   11.24%, and a total risk-based capital ratio of 12.51% at
   September 30, 2009.

 * On a consolidated basis, the Company remains well-capitalized
   with a leverage ratio of 10.08%, a tier 1 risk-based capital
   ratio of 11.55%, and a total risk-based capital ratio of 12.82%
   at September 30, 2009.

 * The Company has tangible common equity to tangible assets of
   6.69% at September 30, 2009.

 * Total assets were $1.37 billion at September 30, 2009, a decrease
   of 10% from a year ago and a decrease of 5% over the past quarter.

 * Gains on sale of SBA loans contributed $643,000 to noninterest
   income in both the third quarter and nine months ended September
   30, 2009.

 * Loans, excluding loans held-for-sale, decreased 13% to $1.08
   billion at September 30, 2009 from $1.25 billion a year ago and
   decreased 7% from $1.16 billion at June 30, 2009.

 * Land and construction loans decreased $33.4 million to $197.4
   million, or 18% of the total loan portfolio compared to $230.8
   million or 20% of total loans at June 30, 2009.

 * Nonperforming assets decreased $3.5 million to $58.2 million, or
   4.26% of total assets, from $61.7 million, or 4.30% of total
   assets at June 30, 2009.

 * The allowance for loan losses increased to $29.0 million, or
   2.68% of total loans, compared to $22.3 million, or 1.79%, a
   year ago, and decreased from $31.4 million, or 2.70%, at June
   30, 2009.

 * Net charge-offs increased to $9.6 million in the third quarter
   of 2009, compared to $129,000 in the third quarter of 2008 and
   $3.2 million in the second quarter of 2009.

 * The Federal Reserve Bank completed the field work portion of its
   regularly scheduled examination of Heritage Commerce Corp and
   Heritage Bank of Commerce in September 2009.

Balance Sheet, Capital Management and Credit Quality

At September 30, 2009, the Company's assets totaled $1.37 billion, compared to $1.51 billion a year ago and $1.44 billion at June 30, 2009. Loans, excluding loans held-for-sale, totaled $1.08 billion at September 30, 2009, compared to $1.25 billion at September 30, 2008 and $1.16 billion at June 30, 2009. SBA loans not held-for-sale, which are included in commercial loans or owner occupied commercial real estate loans, totaled $88.6 million at September 30, 2009, compared to $104.9 million a year ago.

Commercial and industrial loans account for 38% of the total loan portfolio. Commercial real estate loans account for another 38% of the portfolio, of which 51% were owner occupied by businesses. Land and construction loans decreased to 18% of the portfolio. Consumer and home equity loans account for the remaining 6% of the total. "We continue to see progress in the re-balancing of our loan portfolio, particularly in our reduction of land and construction loans," said Mr. Kaczmarek.

The securities portfolio of $96.6 million at September 30, 2009 consisted primarily of U.S. government sponsored entities' debt securities, short-term U.S. Treasury securities, mortgage-backed securities, collateralized mortgage obligations, and municipal bonds. "All of our mortgage-backed securities and collateralized mortgage obligations are issued by U.S. government sponsored entities. These high quality securities investments are managed to provide maximum liquidity," commented Mr. Kaczmarek.

Nonperforming assets decreased to $58.2 million at September 30, 2009 from $61.7 million at June 30, 2009. Nonperforming assets were $25.1 million at September 30, 2008. Nonperforming assets were 4.26% of total assets at September 30, 2009, 4.30% at June 30, 2009 and 1.66% at September 30, 2008. At September 30, 2009, land and construction loans were 52% of nonperforming assets, commercial and industrial loans were 20%, commercial real estate loans were 13%, SBA loans were 10% and other real estate owned ("OREO") was 5%.

Total OREO was $3.0 million at September 30, 2009 and $3.1 million at June 30, 2009. In the third quarter of 2009, three properties moved from nonaccrual status into OREO and four OREO properties were sold. The sales consisted of two SBA properties, one commercial real estate parcel and one land and construction property resulting in a loss of $44,000 in the third quarter of 2009.

The allowance for loan losses at September 30, 2009 was $29.0 million, or 2.68% of total loans, and 52.4% of nonperforming loans, while the allowance for loan losses a year ago was $22.3 million, or 1.79% of total loans, and 92.6% of nonperforming loans. The allowance for loan losses at June 30, 2009, was $31.4 million, or 2.70% of total loans, and 53.5% of nonperforming loans.

Deposits totaled $1.12 billion at September 30, 2009, compared to $1.19 billion at September 30, 2008 and $1.16 billion at June 30, 2009. Savings and money market deposits decreased $76.3 million, or 19%, from September 30, 2008. The decreases in savings and money market deposits were primarily due to lower balances in title insurance company, escrow, and real estate exchange facilitators' accounts. At September 30, 2009, title insurance company, escrow, and real estate exchange facilitators' accounts were $32.9 million, compared to $82.5 million at September 30, 2008. Time deposits $100,000 and over decreased $33.8 million, or 20% from September 30, 2008 and $36.3 million, or 21%, from June 30, 2009, primarily due to a reduction of public funds.

Heritage Bank of Commerce is a member of the Certificate of Deposit Account Registry Service ("CDARS") program. The CDARS program allows customers with deposits in excess of FDIC insured limits to obtain coverage on time deposits through a network of banks within the CDARS program. Deposits gathered through this program have been considered brokered deposits under regulatory guidelines. Deposits in the CDARS program totaled $41.4 million at September 30, 2009, and $14.2 million at June 30, 2009. There were no deposits in the CDARS program at September 30, 2008.

Shareholders' equity was $173.4 million, or $11.44 book value per common share, at September 30, 2009, compared to $144.3 million, or $12.21 book value per common share, a year ago. The increase in shareholders' equity was due to the issuance of $40 million in preferred stock to the U.S. Treasury as a participant in its Capital Purchase Program during the fourth quarter of 2008. Shareholders' equity was $174.6 million, or $11.55 book value per common share, at June 30, 2009. The Company's consolidated leverage ratio at September 30, 2009, was 10.08%, compared to 8.48% at September 30, 2008, and 9.96% at June 30, 2009.

Operating Results

Operating results in 2009 compared to 2008 have been adversely impacted by net interest margin compression, reversals of interest income on nonaccrual loans and a higher provision for loan losses.

Net interest income decreased to $11.6 million for the third quarter of 2009 from $13.0 million for the third quarter of 2008 and remained flat compared to the second quarter of 2009. The net interest margin was 3.62% for the third quarter of 2009, compared to 3.83% for the third quarter a year ago and 3.55% for the second quarter of 2009. The 7 basis point increase in the net interest margin for the third quarter of 2009 compared to the second quarter of 2009 was primarily due to the higher average loan yields (a 14 basis points improvement) and a four basis points decline in the average cost of funds. The decrease in the net interest margin from the third quarter of 2008 was primarily the result of the 175 basis point decline in short-term interest rates from October 8, 2008 through December 16, 2008.

Noninterest income was $2.4 million for the third quarter of 2009, compared to $1.7 million for the third quarter of 2008 and $1.6 million for the second quarter of 2009. In the first nine months of 2009, noninterest income was $5.6 million, compared to $5.0 million in the first nine months a year ago. The increase in noninterest income in third quarter and first nine months of 2009 compared to the same periods in 2008 was primarily due to $643,000 in gains on sales of SBA loans.

The Company had a provision for loan losses of $7.1 million for the third quarter of 2009, compared to $1.6 million for the third quarter of 2008, and $10.7 million for the second quarter of 2009. The Company had a provision for loan losses of $28.3 million for the nine months ended September 30, 2009 and $11.0 million for the nine months ended September 30, 2008. The significant increase in provision for loan losses in 2009 reflects a higher volume of classified and nonperforming loans and an increase in loan charge-offs caused by challenging conditions in commercial lending and the residential housing market, turmoil in the financial markets, and the prolonged downturn in the overall economy.

Noninterest expense was $10.7 million for the third quarter of 2009, compared to $10.4 million in the third quarter of 2008 and $12.1 million in the second quarter of 2009. In the first nine months of 2009, noninterest expense was $34.2 million, compared to $32.0 million in the first nine months a year ago. Deposit insurance premiums and regulatory assessments were $631,000 in the third quarter of 2009, compared to $238,000 in the third quarter of 2008, and $1.2 million in the second quarter of 2009, which included a $657,000 charge for the FDIC special assessment levied on all FDIC insured banks. Professional fees were $691,000 in the third quarter of 2009, compared to $468,000 in the third quarter of 2008, and $1.2 million in the second quarter of 2009. Higher professional fees in the second quarter of 2009 related to problem loans and a branch acquisition transaction that was terminated.

The income tax benefit for the quarter ended September 30, 2009 was $1.8 million, as compared to an income tax expense of $309,000 in the third quarter a year ago, and an income tax benefit of $4.1 million in the second quarter of 2009. 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, tax credits related to investments in low income housing limited partnerships, and interest income from tax-free municipal securities.

The efficiency ratio was 76.89% in the third quarter of 2009, compared to 70.56% in the third quarter of 2008 and 90.90% in the second quarter of 2009. The efficiency ratio for the first nine months of 2009 increased to 85.38% from 72.48% a year ago. The efficiency ratio increased in 2009 primarily due to compression of the net interest margin and an increase in noninterest expense, as discussed above.

Recent Regulatory Examination

The Company also announced that the Federal Reserve Board ("FRB") recently completed the field work portion of its regularly scheduled examination in September 2009. As a result of the Company's losses in 2009, primarily due to higher provisions for loan losses because of credit quality deterioration, the Company expects to enter into a written agreement with the FRB. The agreement will require the Company to develop an updated strategic plan to improve the quality of assets, maintain adequate capital and ensure sustained earnings, and to take some other actions to improve our appraisal policies, capital planning and liquidity contingency funding plan. The Company will also be required to request the approval of the FRB prior to incurring or increasing any debt, paying dividends on common and preferred stock, paying interest on trust preferred securities, repurchasing capital stock and making certain changes to its directors or senior executive officers. The Company believes the FRB will be finalizing the written agreement within the next 60 to 90 days.

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 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 non-performing 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 an anticipated written agreement to be entered into by the Company and the Board of Governors of the Federal Reserve System; (8) significant decline in the market value of the Company that could result in an impairment of goodwill; (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; 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.

 CONSOLIDATED INCOME STATEMENTS
 (in $000's, unaudited)
                                                         Percent
                       For the Three Months Ended:     Change From:
                   ---------------------------------- ----------------
                   Sept. 30,     June 30,   Sept. 30, June 30, Sept.30,
                      2009         2009       2008      2009    2008
 ---------------------------------------------------- ----------------
 Interest Income  $   15,495   $   15,824  $   19,197    -2%    -19%
 Interest Expense      3,872        4,135       6,151    -6%    -37%
                  -----------------------------------
   Net Interest
    Income            11,623       11,689      13,046    -1%    -11%
 Provision for
  Loan Losses          7,129       10,704       1,587   -33%    349%
                  -----------------------------------
   Net Interest
    Income after
    Provision for
    Loan Losses        4,494          985      11,459   356%    -61%
 Noninterest
  Income:
   Gain on Sale of
    Loans                643           --          --   N/A     N/A
   Servicing
    Income               382          408         491    -6%    -22%
   Increase in
    Cash Surrender
    Value of Life
    Insurance            420          415         416     1%      1%
   Service Charges
    and Other Fees
    on Deposit
    Accounts             557          537         505     4%     10%
   Other                 348          241         276    44%     26%
                  -----------------------------------
 Total Noninterest
  Income               2,350        1,601       1,688    47%     39%
                  -----------------------------------
 Noninterest
  Expense:
   Salaries and
    Employee
    Benefits           5,730        5,643       5,665     2%      1%
   Professional
    Fees                 691        1,229         468    -44%    48%
   Deposit
    Insurance
    Premiums and
    Regulatory
    Assessments          631        1,220         238   -48%    165%
   Occupancy and
    Equipment          1,005          972       1,348     3%    -25%
   Other               2,687        3,016       2,678   -11%      0%
                  -----------------------------------
 Total Noninterest
   Expense            10,744       12,080      10,397   -11%      3%
                  -----------------------------------
 Income (Loss)
  Before Income
  Taxes               (3,900)      (9,494)      2,750    59%   -242%
 Income Tax
  Expense
  (Benefit)           (1,824)      (4,113)        309   -56%   -690%
                  -----------------------------------
 Net Income
  (Loss)          $   (2,076)  $   (5,381) $    2,441    61%   -185%
 Dividends and
  Discount
  Accretion
  on Preferred
  Stock                 (599)        (591)         --     1%    N/A
                  -----------------------------------
 Net Income (Loss)
  Allocable to
  Common
  Shareholders    $   (2,675)  $   (5,972) $    2,441    55%   -210%
                  ===================================

 PER COMMON SHARE
  DATA
 (unaudited)
 Basic Earnings
  (Loss) Per
  Share           $    (0.23)  $    (0.51) $     0.21    54%   -210%
 Diluted Earnings
  (Loss) Per
  Share           $    (0.23)  $    (0.51) $     0.21    54%   -210%
 Common Shares
  Outstanding at
  Period-End      11,820,509   11,820,509  11,820,509     0%      0%
 Book Value Per
  Share           $    11.44   $    11.55  $    12.21    -1%     -6%
 Tangible Book
  Value Per Share $     7.47   $     7.56  $     8.18    -1%     -9%

 KEY FINANCIAL
  RATIOS
 (unaudited)
 Annualized Return
  on Average Equity    -4.67%      -11.90%       6.78%   61%   -169%
 Annualized Return
  on Average
  Tangible Equity      -6.38%      -16.08%      10.15%   60%   -163%
 Annualized Return
  on Average Assets    -0.58%       -1.48%       0.65%   61%   -189%
 Annualized Return
  on Average
  Tangible Assets      -0.60%       -1.53%       0.67%   61%   -190%
 Net Interest
  Margin                3.62%        3.55%       3.83%    2%     -6%
 Efficiency Ratio      76.89%       90.90%      70.56%  -15%      9%

 AVERAGE BALANCES
 (in $000's,
  unaudited)
 Average Assets   $1,411,954   $1,457,162  $1,499,734    -3%     -6%
 Average
  Tangible
  Assets          $1,364,926   $1,409,973  $1,452,044    -3%     -6%
 Average
  Earning
  Assets          $1,272,341   $1,320,604  $1,353,730    -4%     -6%
 Average Loans
   Held-for-Sale  $   17,596   $      225          --  7709%    N/A
 Average Total
  Loans           $1,131,654   $1,206,254  $1,231,931    -6%     -8%
 Average
  Deposits        $1,153,103   $1,150,220  $1,191,151     0%     -3%
 Average Demand
  Deposits
  - Noninterest
  Bearing         $  267,528   $  255,011  $  261,578     5%      2%
 Average Interest
  Bearing
  Deposits        $ 885,575    $ 895,209   $  929,573    -1%     -5%
 Average Interest
  Bearing
  Liabilities     $  937,212   $  992,010  $1,066,264    -6%    -12%
 Average Equity   $  176,198   $  181,396  $  143,318    -3%     23%
 Average Tangible
  Equity          $  129,170   $  134,207  $   95,628    -4%     35%



                        For the Nine
                        Months Ended:
                  -----------------------
                   Sept. 30,    Sept. 30,     Percent
                      2009        2008        Change
                  -----------------------     -------
 Interest Income  $   47,351   $   57,791        -18%
 Interest Expense     12,888       18,673        -31%
                  -----------------------
   Net Interest
    Income            34,463       39,118        -12%
 Provision for
  Loan Losses         28,253       11,037        156%
                  -----------------------
   Net Interest
    Income after
    Provision for
    Loan Losses        6,210       28,081        -78%
 Noninterest
  Income:
   Gain on Sale of
    Loans                643           --        N/A
   Servicing
    Income             1,210        1,347        -10%
   Increase in
    Cash Surrender
    Value of Life
    Insurance          1,248        1,232          1%
   Service Charges
    and Other Fees
    on Deposit
    Accounts           1,665        1,457         14%
   Other                 808          958        -16%
                  -----------------------
 Total Noninterest
  Income               5,574        4,994         12%
                  -----------------------
 Noninterest
  Expense:
   Salaries and
    Employee
    Benefits          17,831       17,694          1%
   Professional
    Fees               2,833        2,112         34%
   Deposit
    Insurance
    Premiums and
    Regulatory
    Assessments        2,590          626        314%
   Occupancy and
    Equipment          2,893        3,511        -18%
   Other               8,038        8,031          0%
                  -----------------------

 Total
  Noninterest
  Expense             34,185       31,974          7%
                  -----------------------
 Income (Loss)
  Before Income
  Taxes              (22,401)       1,101      -2135%
 Income Tax Expense
  (Benefit)          (10,990)          39     -28279%
                  -----------------------
 Net Income
  (Loss)          $  (11,411)  $    1,062      -1174%
 Dividends and
  Discount
  Accretion
  on Preferred
  Stock               (1,776)          --        N/A
                  -----------------------
 Net Income (Loss)
  Allocable to
  Common
  Shareholders    $  (13,187)  $    1,062      -1342%
                  =======================

 PER COMMON SHARE
  DATA
 (unaudited)
 Basic Earnings
  (Loss) Per
  Share           $    (1.12)  $     0.09      -1344%
 Diluted Earnings
  (Loss) Per
  Share           $    (1.12)  $     0.09      -1344%
 Common Shares
  Outstanding at
  Period-End      11,820,509   11,820,509          0%
 Book Value Per
  Share           $    11.44   $    12.21         -6%
 Tangible Book
  Value Per Share $     7.47   $     8.18         -9%

 KEY FINANCIAL
  RATIOS
 (unaudited)
 Annualized Return
  on Average Equity    -8.43%        0.95%      -987%
 Annualized Return
  on Average
  Tangible Equity     -11.40%        1.39%      -920%
 Annualized Return
  on Average Assets    -1.05%        0.10%     -1150%
 Annualized Return
  on Average
  Tangible Assets      -1.09%        0.10%     -1190%
 Net Interest
  Margin                3.51%        4.04%       -13%
 Efficiency Ratio      85.38%       72.48%        18%

 AVERAGE BALANCES
 (in $000's,
  unaudited)
 Average Assets   $1,450,959   $1,443,641          1%
 Average Tangible
  Assets          $1,403,771   $1,395,761          1%
 Average Earning
   Assets         $1,314,599   $1,292,758          2%
 Average Loans
   Held-for-Sale  $    6,005           --        N/A
 Average Total
  Loans           $1,191,034   $1,159,535          3%
 Average
  Deposits        $1,155,586   $1,154,705          0%
 Average Demand
  Deposits
  - Noninterest
  Bearing         $  258,725   $  257,054          1%
 Average Interest
  Bearing
  Deposits        $  896,861   $  897,651          0%
 Average Interest
  Bearing
  Liabilities     $  981,581   $1,008,692         -3%
 Average Equity   $  180,975   $  150,110         21%
 Average Tangible
  Equity          $  133,787   $  102,230         31%




 CONSOLIDATED BALANCE SHEETS
                                                          Percent
                              End of Period:            Change From:
                  ----------------------------------- ----------------
 (in $000's,       Sept. 30,    June 30,   Sept. 30,  June 30, Sept. 30
  unaudited)          2009        2009        2008      2009    2008
 ---------------------------------------------------- ----------------
 ASSETS
 Cash and Due
  from Banks      $   42,105  $   31,315   $   35,718    34%      18%
 Federal Funds
  Sold                   150         150          100     0%      50%
 Securities
  Available-for-
  Sale,at Fair
  Value               96,618     101,837      107,565    -5%     -10%
 Loans
  Held-for-Sale,
  Including
  Deferred Costs      21,976      20,506           --     7%     N/A
 Loans:
   Commercial
    Loans            414,441     457,981      532,367   -10%     -22%
   Real Estate-
    Mortgage         405,486     412,430      405,897    -2%       0%
   Real Estate-
    Land and
    Construction     197,374     230,798      253,134   -14%     -22%
   Home Equity        51,768      55,372       51,981    -7%       0%
   Consumer Loans     11,476       3,596        5,549   219%     107%
                  -----------------------------------
     Loans         1,080,545   1,160,177    1,248,928    -7%     -13%
 Deferred Loan
   Costs, net          1,023       1,489        1,412   -31%     -28%
                  -----------------------------------
   Total Loans,
    Including
    Deferred
    Costs          1,081,568   1,161,666    1,250,340    -7%     -13%
 Allowance for
   Loan Losses       (28,976)    (31,398)     (22,323)   -8%      30%
                  -----------------------------------
   Net Loans       1,052,592   1,130,268    1,228,017    -7%     -14%
 Company Owned
   Life Insurance     41,897      41,476       40,236     1%       4%
 Premises &
  Equipment, net       9,182       9,312        9,318    -1%      -1%
 Goodwill             43,181      43,181       43,181     0%       0%
 Intangible
  Assets               3,750       3,910        4,407    -4%     -15%
 Accrued Interest
  Receivable and
  Other Assets        56,159      55,069       43,339     2%      30%
                  -----------------------------------
   Total Assets   $1,367,610  $1,437,024   $1,511,881    -5%     -10%
                  ===================================

 LIABILITIES AND
  SHAREHOLDERS' EQUITY
 Liabilities:
   Deposits
     Demand Deposits
      -Noninterest
      Bearing     $  250,515  $  258,464   $  257,739    -3%      -3%
     Demand
      Deposits
      -Interest
      Bearing        139,919     134,318      139,377     4%       0%
     Savings and
      Money Market   324,611     331,444      400,863    -2%     -19%
     Time Deposits,
      Under $100      43,559      43,772       34,792     0%      25%
     Time Deposits,
      $100 and Over  134,533     170,858      168,361   -21%     -20%
     Time Deposits -
      CDARS           41,418      14,216           --   191%     N/A
     Time
      Deposits
      Brokered       181,819     210,475      185,052   -14%      -2%
                  -----------------------------------
 Total Deposits    1,116,374   1,163,547    1,186,184    -4%      -6%
 Securities Sold
  under Agreement
  to Repurchase       25,000      30,000       35,000   -17%     -29%
 Note payable             --          --       15,000   N/A     -100%
 Other Short-
  term Borrowing          --      15,000       80,000  -100%    -100%
 Notes Payable
  To Subsidiary
  Grantor Trusts      23,702      23,702       23,702     0%       0%
 Accrued Interest
  Payable and
  Other
  Liabilities         29,111      30,193       27,711    -4%       5%
                  -----------------------------------
 Total
  Liabilities      1,194,187   1,262,442    1,367,597    -5%     -13%

 Shareholders'
  Equity:
   Preferred
    Stock, Net        38,159      38,070           --     0%     N/A
   Common Stock       79,884      79,524       76,490     0%       4%
   Accumulated
    Other
    Comprehensive
    Income (Loss)     (2,183)     (3,250)      (3,694)  -33%     -41%
   Retained
    Earnings          57,563      60,238       71,488    -4%     -19%
                  -----------------------------------
 Total
  Shareholders'
  Equity             173,423     174,582      144,284    -1%      20%
                  -----------------------------------
   Total
    Liabilities
    and
    Shareholders'
    Equity        $1,367,610  $1,437,024   $1,511,881    -5%     -10%
                  ===================================

 CREDIT
  QUALITY DATA
 (in $000's,
  unaudited)
 Nonaccrual
  Loans           $   55,120  $   57,889   $   23,095    -5%     139%
   Loans Over 90
    Days Past Due
    and Still
    Accruing             144         786        1,016   -82%     -86%
                  -----------------------------------
   Total
    Nonperforming
    Loans             55,264      58,675       24,111    -6%     129%
 Other Real
  Estate Owned         2,973       3,062          970    -3%     206%
                  -----------------------------------
   Total
    Nonperforming
    Assets        $   58,237  $   61,737   $   25,081    -6%     132%
                  ===================================
 Net Charge-offs  $    9,551  $    3,206   $      129   198%    7304% 
 Allowance for
  Loan Losses to
  Total Loans           2.68%       2.70%        1.79%   -1%      50%
 Allowance for
  Loan Losses to
  Nonperforming
  Loans                52.43%      53.51%       92.58%   -2%     -43%
 Nonperforming
  Assets to
  Total Assets          4.26%       4.30%        1.66%   -1%     157%
 Nonperforming
  Loans to
  Total Loans           5.11%       5.05%        1.93%    1%     165%

 OTHER PERIOD-END
  STATISTICS
 (unaudited)
 Shareholders'
  Equity / Total
  Assets               12.68%      12.15%        9.54%    4%      33%
 Tangible Common
  Equity /
  Tangible
  Assets                6.69%       6.43%        6.60%    4%       1%
 Loan to Deposit
  Ratio                96.88%      99.84%      105.41%   -3%      -8%
 Noninterest
  Bearing
  Deposits /
  Total Deposits       22.44%      22.21%       21.73%    1%       3%
 Leverage Ratio        10.08%       9.96%        8.48%    1%      19%



 

 NET INTEREST INCOME
  AND NET INTEREST MARGIN

             For the Three Months Ended      For the Three Months Ended
                September 30, 2009             September 30, 2008
             ---------------------------   ----------------------------
                       Interest  Average               Interest Average
 (in $000's, Average    Income/   Yield/     Average    Income/  Yield/
  unaudited) Balance    Expense    Rate      Balance    Expense  Rate
 --------------------  --------- -------   ----------   -------- ------
 Assets:
 Loans,
  gross    $1,149,250   $ 14,727   5.08%   $1,231,931   $ 17,919  5.79%
 Securities   100,439        754   2.98%      119,582      1,267  4.22%
 Interest
  bearing
  deposits
  in other
  financial
  institutions 21,347         14   0.26%          182          1  2.19%
 Federal
  funds
  sold          1,305         --   0.00%        2,035         10  1.95%
           ----------  ---------           ----------   --------
 Total
  interest
  earning
  assets    1,272,341     15,495   4.83%    1,353,730     19,197  5.64%
                       ---------                        --------
 Cash and
  due from
  banks        24,665                          34,234
 Premises
  and
  equipment,
  net           9,276                           9,185
 Goodwill
  and other
  intangible
  assets       47,028                          47,690
 Other
  assets       58,644                          54,895
           ----------                      ----------
 Total
  assets   $1,411,954                      $1,499,734
           ==========                      ==========

 Liabilities and
  shareholders' equity:
 Deposits:
   Demand,
    interest
    bearing $ 133,301         74   0.22%   $  144,809        308  0.85%
   Savings
    and
    money
    market    332,922        589   0.70%      415,826      1,624  1.55%
   Time
    deposits,
    under
    $100       43,527        240   2.19%       33,893        224  2.63%
   Time
    deposits,
    $100
    and over  141,401        646   1.81%      170,045      1,138  2.66%
   Time
    deposits
    Brokered  234,424      1,679   2.84%      165,000      1,617  3.90%
   Notes
    payable
    to
    subsidiary
    grantor
    trusts     23,702        476   7.97%       23,702        527  8.85%
   Securities
    sold under
    agreement
    to
    repurchase 27,663        168   2.41%       35,000        264  3.00%

 Note
  payable          --         --    N/A        14,315        100  2.78%
 Other
  short-term
  borrowings      272         --   0.00%       63,674        349  2.18%
           ----------  ---------           ----------   --------
   Total
    interest
    bearing
    liabil-
    ities     937,212      3,872   1.64%    1,066,264      6,151  2.29%
                       ---------                        --------
 Demand,
  noninterest
  bearing     267,528                         261,578
 Other
  liabil-
  ities        31,016                          28,574
           ----------                      ----------
   Total
    liabil-
    ities   1,235,756                       1,356,416
 Share-
  holders'
  equity      176,198                         143,318
           ----------                      ----------
   Total
    liabilities
    and
    share-
    holders'
    equity $1,411,954                      $1,499,734
           ==========                      ==========
 Net
  interest
  income
  /margin              $  11,623   3.62%                $ 13,046  3.83%
                       =========                        ========




NET INTEREST INCOME
 AND NET INTEREST MARGIN

             For the Nine Months Ended      For the Nine Months Ended
                September 30, 2009             September 30, 2008
             ---------------------------   ----------------------------
                       Interest  Average               Interest Average
 (in $000's, Average    Income/   Yield/     Average    Income/  Yield/
  unaudited) Balance    Expense    Rate      Balance    Expense  Rate
 --------------------  --------- -------   ----------   -------- ------
 Assets:
 Loans,
  gross    $1,197,039  $  44,619   4.98%   $1,159,535   $ 53,524  6.17%
 Securities   105,886      2,711   3.42%      129,570      4,201  4.33%
 Interest
  bearing
  deposits
  in other
  financial
  institu-
  tions        11,130         21   0.25%          571         10  2.34%
 Federal
  funds sold      544         --   0.00%        3,082         56  2.43%
           ----------  ---------           ----------   --------
   Total
    interest
    earning
    assets  1,314,599     47,351   4.82%    1,292,758     57,791  5.97%
                       ---------                        --------
 Cash and
  due from
  banks        24,138                          36,085
 Premises
  and
  equipment,
  net           9,374                           9,200
 Goodwill
  and other
  intangible
  assets       47,188                          47,880
 Other
  assets       55,660                          57,718
           ----------                      ----------
   Total
    assets $1,450,959                      $1,443,641
           ==========                      ==========

 Liabilities and
  shareholders' equity:
 Deposits:
   Demand,
    interest
    bearing $ 134,576        252   0.25%   $  149,451      1,276  1.14%
   Savings
    and
    money
    market    342,156      2,043   0.80%      453,146      6,375  1.88%
   Time
    deposits,
    under
    $100       44,740        794   2.37%       34,340        815  3.17%
   Time
    deposits,
    $100
    and over  162,601      2,239   1.84%      163,793      3,891  3.17% 
   Time
    deposits
    Brokered  212,788      5,324   3.35%       96,921      2,928  4.04%
 Notes
  payable
  to
  subsidiary
  grantor
  trusts       23,702      1,463   8.25%       23,702      1,610  9.07%
 Securities
  sold under
  agreement
  to
  repurchase   30,110        638   2.83%       31,033        674  2.90%

 Note payable   3,388         82   3.24%        8,646        184  2.84%
 Other
  short-term
  borrowings   27,520         53   0.26%       47,660        920  2.58%
           ----------  ---------           ----------   --------
   Total
    interest
    bearing
    liabil-
    ities     981,581     12,888   1.76%    1,008,692     18,673  2.47%
                       ---------                        --------
 Demand,
  noninterest
  bearing     258,725                         257,054
 Other
  liabil-
  ities        29,678                          27,785
           ----------                      ----------
   Total
    liabil-
    ities   1,269,984                       1,293,531
 Share-
  holders'
  equity      180,975                         150,110
           ----------                      ----------
   Total
    liabil-
    ities
    and
    share-
    holders'
    equity $1,450,959                      $1,443,641
           ==========                      ==========
 Net
  interest
  income
  /margin              $  34,463   3.51%                $ 39,118  4.04%
                       =========                        ========

Heritage Commerce Corp
Janet Walworth, SVP, General Counsel / Corporate Secretary
408.792.4024