10-Q 1 a2225574z10-q.htm 10-Q

Use these links to rapidly review the document
TABLE OF CONTENTS

Table of Contents

 

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


FORM 10-Q

(MARK ONE)    

ý
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2015

OR

o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                        to                       

Commission file number 000-23877

Heritage Commerce Corp
(Exact name of Registrant as Specified in its Charter)

California
(State or Other Jurisdiction of
Incorporation or Organization)		   77-0469558
(I.R.S. Employer Identification No.)

150 Almaden Boulevard, San Jose, California
(Address of Principal Executive Offices)
 
95113
(Zip Code)

(408) 947-6900
(Registrant's Telephone Number, Including Area Code)

N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES ý    NO o

        Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES ý    NO o

        Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o   Accelerated filer ý   Non-accelerated filer o
 (Do not check if a
smaller reporting company)		   Smaller reporting company o

        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES o    NO ý

        The Registrant had 26,596,094 shares of Common Stock outstanding on July 23, 2015.

   

Table of Contents


HERITAGE COMMERCE CORP
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS

 
    
   Page No.

Cautionary Note on Forward-Looking Statements

   3

       

Part I. FINANCIAL INFORMATION

    

       

Item 1.

  

Consolidated Financial Statements (unaudited)

   5

       

 

Consolidated Balance Sheets

   5

       

 

Consolidated Statements of Income

   6

       

 

Consolidated Statements of Comprehensive Income

   7

       

 

Consolidated Statements of Changes in Shareholders' Equity

   8

       

 

Consolidated Statements of Cash Flows

   9

       

 

Notes to Unaudited Consolidated Financial Statements

   10

       

Item 2.

  

Management's Discussion and Analysis of Financial Condition and Results of Operations

   48

       

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

   86

       

Item 4.

  

Controls and Procedures

   86

       

PART II. OTHER INFORMATION

    

       

Item 1.

  

Legal Proceedings

   87

       

Item 1A.

  

Risk Factors

   87

       

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

   90

       

Item 3.

  

Defaults Upon Senior Securities

   90

       

Item 4.

  

Mine Safety Disclosures

   90

       

Item 5.

  

Other Information

   90

       

Item 6.

  

Exhibits

   91

       

SIGNATURES

   92

       

EXHIBIT INDEX

   93

2

Table of Contents

Cautionary Note Regarding Forward-Looking Statements

        This Report on Form 10-Q contains various statements that may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended, Rule 3b-6 promulgated thereunder and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward- looking. These forward-looking statements often can be, but are not always, identified by the use of words such as "assume," "expect," "intend," "plan," "project," "believe," "estimate," "predict," "anticipate," "may," "might," "should," "could," "goal," "potential" and similar expressions. We base these forward-looking statements on our current expectations and projections about future events, our assumptions regarding these events and our knowledge of facts at the time the statements are made. These statements include statements relating to our projected growth, anticipated future financial performance, and management's long-term performance goals, as well as statements relating to the anticipated effects on results of operations and financial condition.

        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:

    •
    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;

    •
    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;

    •
    volatility in credit and equity markets and its effect on the global economy;

    •
    changes in consumer spending, borrowings and saving habits;

    •
    competition for loans and deposits and failure to attract or retain deposits and loans;

    •
    our ability to increase market share and control expenses;

    •
    our ability to develop and promote customer acceptance of new products and services in a timely manner;

    •
    risks associated with concentrations in real estate related loans;

    •
    other-than-temporary impairment charges to our securities portfolio;

    •
    an oversupply of inventory and deterioration in values of California commercial real estate;

    •
    a prolonged slowdown in construction activity;

    •
    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;

    •
    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;

    •
    changes in inflation, interest rates, and market liquidity which may impact interest margins and impact funding sources;

3

Table of Contents

    •
    our ability to raise capital or incur debt on reasonable terms;

    •
    regulatory limits on Heritage Bank of Commerce's ability to pay dividends to the Company;

    •
    the impact of reputational risk on such matters as business generation and retention, funding and liquidity;

    •
    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;

    •
    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;

    •
    significant changes in applicable laws and regulations, including those concerning taxes, banking and securities;

    •
    changes in the competitive environment among financial or bank holding companies and other financial service providers;

    •
    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;

    •
    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;

    •
    the successful completion of the Focus Business Bank merger, integration of the business, employees and operations of Focus Business Bank with the Company and our ability to achieve the projected synergies of this acquisition; and

    •
    our success in managing the risks involved in the foregoing factors.

        We are not able to predict all the factors that may affect future results. You should not place undue reliance on any forward looking statement, which speaks only as of the date of this Report on Form 10-K. Except as required by applicable laws or regulations, we do not undertake any obligation to update or revise any forward looking statement, whether as a result of new information, future events or otherwise.

4

Table of Contents

Part I—FINANCIAL INFORMATION

ITEM 1—CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


HERITAGE COMMERCE CORP

CONSOLIDATED BALANCE SHEETS (Unaudited)

 
   June 30,
2015 		  December 31,
2014 		 
 
   (Dollars in thousands)
  

Assets

              

Cash and due from banks

   $ 36,960   $ 23,256  

Interest-bearing deposits in other financial institutions

     94,308     99,147  
​ ​ ​ ​ ​ ​ ​ ​

Total cash and cash equivalents

     131,268     122,403  

Securities available-for-sale, at fair value

    
209,092		    
206,335		  

Securities held-to-maturity, at amortized cost (fair value of $96,808 at June 30, 2015 and $94,953 at December 31, 2014)

     100,321     95,362  

Loans held-for-sale—SBA, at lower of cost or fair value, including deferred costs

     3,794     1,172  

Loans, net of deferred fees

     1,133,603     1,088,643  

Allowance for loan losses

     (18,757 )   (18,379 )
​ ​ ​ ​ ​ ​ ​ ​

Loans, net

     1,114,846     1,070,264  

Federal Home Loan Bank and Federal Reserve Bank stock, at cost

     10,623     10,598  

Company owned life insurance

     52,053     51,257  

Premises and equipment, net

     7,249     7,451  

Goodwill

     13,055     13,044  

Other intangible assets

     2,898     3,276  

Accrued interest receivable and other assets

     35,007     35,941  
​ ​ ​ ​ ​ ​ ​ ​

Total assets

   $ 1,680,206   $ 1,617,103  
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​

Liabilities and Shareholders' Equity

              

Liabilities:

              

Deposits:

              

Demand, noninterest-bearing

   $ 574,210   $ 517,662  

Demand, interest-bearing

     235,922     225,821  

Savings and money market

     380,398     384,644  

Time deposits-under $250

     55,571     57,443  

Time deposits-$250 and over

     160,106     163,452  

Time deposits-brokered

     26,139     28,116  

CDARS—money market and time deposits

     14,791     11,248  
​ ​ ​ ​ ​ ​ ​ ​

Total deposits

     1,447,137     1,388,386  

Accrued interest payable and other liabilities

     46,030     44,359  
​ ​ ​ ​ ​ ​ ​ ​

Total liabilities

     1,493,167     1,432,745  

Shareholders' equity:

    
 		    
 		  

Preferred stock, no par value; 10,000,000 shares authorized

              

Series C convertible perpetual preferred stock, 21,004 shares issued and outstanding at June 30, 2015 and December 31, 2014 (liquidation preference of $21,004 at June 30, 2015 and December 31, 2014)

     19,519     19,519  

Common stock, no par value; 60,000,000 shares authorized; 26,596,094 shares issued and outstanding at June 30, 2015 and 26,503,505 shares issued and outstanding at December 31, 2014

     134,307     133,676  

Retained earnings

     36,484     33,014  

Accumulated other comprehensive loss

     (3,271 )   (1,851 )
​ ​ ​ ​ ​ ​ ​ ​

Total shareholders' equity

     187,039     184,358  
​ ​ ​ ​ ​ ​ ​ ​

Total liabilities and shareholders' equity

   $ 1,680,206   $ 1,617,103  
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​

   

See notes to unaudited consolidated financial statements

5

Table of Contents


HERITAGE COMMERCE CORP

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

 
   Three Months
Ended
June 30, 		  Six Months
Ended
June 30, 		 
 
   2015   2014   2015   2014  
 
   (Dollars in thousands, except per share data)
  

Interest income:

                          

Loans, including fees

   $ 15,643   $ 11,617   $ 30,647   $ 22,756  

Securities, taxable

     1,937     2,047     3,716     4,217  

Securities, non-taxable

     515     506     1,021     1,012  

Interest-bearing deposits in other financial institutions

     80     22     157     62  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total interest income

     18,175     14,192     35,541     28,047  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Interest expense:

                          

Deposits

     533     506     1,041     1,027  

Short-term borrowings

     —     1     —     1  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total interest expense

     533     507     1,041     1,028  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Net interest income before provision for loan losses

     17,642     13,685     34,500     27,019  

Provision (credit) for loan losses

     22     (198 )   (38 )   (208 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Net interest income after provision for loan losses

     17,620     13,883     34,538     27,227  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Noninterest income:

                          

Service charges and fees on deposit accounts

     715     646     1,338     1,266  

Increase in cash surrender value of life insurance

     396     397     796     795  

Servicing income

     299     313     605     661  

Gain on sales of SBA loans

     186     442     393     599  

Gain on sales of securities

     —     —     —     50  

Other

     568     249     958     693  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total noninterest income

     2,164     2,047     4,090     4,064  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Noninterest expense:

                          

Salaries and employee benefits

     7,712     6,819     15,754     13,062  

Occupancy and equipment

     1,045     987     2,090     1,932  

Acquisition and integration related costs

     439     —     577     —  

Insurance expense

     291     269     582     538  

Software subscriptions

     264     191     591     438  

Correspondent bank charges

     259     183     495     365  

Professional fees

     239     126     333     712  

FDIC deposit insurance premiums

     238     220     476     454  

Data processing

     236     273     539     502  

Advertising and promotion

     216     269     427     418  

Foreclosed assets

     (36 )   —     (206 )   (19 )

Other

     1,714     1,432     3,235     2,913  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total noninterest expense

     12,617     10,769     24,893     21,315  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Income before income taxes

     7,167     5,161     13,735     9,976  

Income tax expense

     2,690     1,837     5,120     3,576  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Net income

     4,477     3,324     8,615     6,400  

Dividends on preferred stock

     (448 )   (224 )   (896 )   (448 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Net income available to common shareholders

   $ 4,029   $ 3,100   $ 7,719   $ 5,952  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Earnings per common share:

                          

Basic

   $ 0.14   $ 0.10   $ 0.27   $ 0.20  

Diluted

   $ 0.14   $ 0.10   $ 0.27   $ 0.20  

   

See notes to unaudited consolidated financial statements

6

Table of Contents


HERITAGE COMMERCE CORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

 
   For the Three
Months Ended
June 30, 		  For the Six
Months Ended
June 30, 		 
 
   2015   2014   2015   2014  
 
   (Dollars in thousands)
  

Net income

   $ 4,477   $ 3,324   $ 8,615   $ 6,400  

Other comprehensive income (loss):

                          

Change in net unrealized holding gains on available-for-sale securities and I/O strips

     (3,404 )   4,133     (2,516 )   6,883  

Deferred income taxes

     1,430     (1,736 )   1,056     (2,891 )

Change in net unamortized unrealized gain on securities available-for-sale that were reclassified to securities held-to-maturity

     (14 )   (13 )   (28 )   (27 )

Deferred income taxes

     6     5     12     11  

Reclassification adjustment for gains realized in income          

     —     —     —     (50 )

Deferred income taxes

     —     —     —     21  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Change in unrealized gains on securities and I/O strips, net of deferred income taxes

     (1,982 )   2,389     (1,476 )   3,947  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Change in net pension and other benefit plan liabilities adjustment

     48     (9 )   96     (18 )

Deferred income taxes

     (20 )   4     (40 )   8  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Change in pension and other benefit plan liabilities net of deferred income taxes

     28     (5 )   56     (10 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Other comprehensive income

     (1,954 )   2,384     (1,420 )   3,937  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total comprehensive income

   $ 2,523   $ 5,708   $ 7,195   $ 10,337  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

   

See notes to unaudited consolidated financial statements

7

Table of Contents


HERITAGE COMMERCE CORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)

 
   Six Months Ended June 30, 2015 and 2014  
 
    
    
    
    
    
   Accumulated
Other
Comprehensive
Income /
(Loss) 		   
  
 
   Preferred Stock   Common Stock    
    
  
 
   Retained
Earnings 		  Total
Shareholders'
Equity 		 
 
   Shares   Amount   Shares   Amount  
 
   (Dollars in thousands, except share data)
  

Balance, January 1, 2014

     21,004   $ 19,519     26,350,938   $ 132,561   $ 25,345   $ (4,029 ) $ 173,396  

Net income

     —     —     —     —     6,400     —     6,400  

Other comprehensive income

     —     —     —     —     —     3,937     3,937  

Issuance of restricted stock awards, net

     —     —     15,000     —     —     —     —  

Amortization of restricted stock awards, net of forfeitures and taxes

     —     —     —     (91 )   —     —     (91 )

Cash dividend declared $0.08 per share

     —     —     —     —     (2,558 )   —     (2,558 )

Stock option expense, net of forfeitures and taxes

     —     —     —     422     —     —     422  

Stock options exercised

     —     —     4,572     19     —     —     19  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Balance, June 30, 2014

     21,004   $ 19,519     26,370,510   $ 132,911   $ 29,187   $ (92 ) $ 181,525  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Balance, January 1, 2015

    
21,004		  
$
19,519		    
26,503,505		  
$
133,676		  
$
33,014		  
$
(1,851
)
$
184,358		  

Net income

     —     —     —     —     8,615     —     8,615  

Other comprehensive loss

     —     —     —     —     —     (1,420 )   (1,420 )

Issuance of restricted stock awards, net

     —     —     68,855     —     —     —     —  

Amortization of restricted stock awards, net of forfeitures and taxes

     —     —     —     34     —     —     34  

Cash dividend declared $0.16 per share

     —     —     —     —     (5,145 )   —     (5,145 )

Stock option expense, net of forfeitures and taxes

     —     —     —     475     —     —     475  

Stock options exercised

     —     —     23,734     122     —     —     122  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Balance, June 30, 2015

     21,004   $ 19,519     26,596,094   $ 134,307   $ 36,484   $ (3,271 ) $ 187,039  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

   

See notes to unaudited consolidated financial statements

8

Table of Contents


HERITAGE COMMERCE CORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 
   Six Months Ended
June 30, 		 
 
   2015   2014  
 
   (Dollars in thousands)
  

CASH FLOWS FROM OPERATING ACTIVITIES:

              

Net income

   $ 8,615   $ 6,400  

Adjustments to reconcile net income to net cash provided by operating activities:

              

Amortization of discounts and premiums on securities

     662     538  

Gain on sales of securities available-for-sale

     —     (50 )

Gain on sales of SBA loans

     (393 )   (599 )

Originations of SBA loans held-for-sale

     4,767     11,331  

Net change in SBA loans originated for sale

     (6,996 )   (9,853 )

Credit provision for loan losses

     (38 )   (208 )

Increase in cash surrender value of life insurance

     (796 )   (795 )

Depreciation and amortization

     366     353  

Gain on sale of foreclosed assets, net

     (106 )   —  

Amortization of intangible assets

     378     230  

Stock option expense, net

     475     422  

Amortization of restricted stock awards, net

     34     (91 )

Gain on proceeds of company owned life insurance

     —     (51 )

Effect of changes in:

              

Accrued interest receivable and other assets

     (831 )   1,564  

Accrued interest payable and other liabilities

     1,051     184  
​ ​ ​ ​ ​ ​ ​ ​

Net cash provided by operating activities

     7,188     9,375  
​ ​ ​ ​ ​ ​ ​ ​

CASH FLOWS FROM INVESTING ACTIVITIES:

              

Purchase of securities available-for-sale

     (19,953 )   (34,775 )

Purchase of securities held-to-maturity

     (6,153 )   (2,347 )

Maturities/paydowns/calls of securities available-for-sale

     14,195     9,859  

Maturities/paydowns/calls of securities held-to-maturity

     1,786     1,217  

Proceeds from sale of securities available-for-sale

     —     50,011  

Net change in loans

     (43,308 )   (75,792 )

Change in Federal Home Loan Bank and Federal Reserve Bank stock

     (25 )   121  

Purchase of premises and equipment

     (164 )   (350 )

Proceeds from sale of foreclosed assets

     1,571     —  

Proceeds from company owned life insurance

     —     406  
​ ​ ​ ​ ​ ​ ​ ​

Net cash used in investing activities

     (52,051 )   (51,650 )
​ ​ ​ ​ ​ ​ ​ ​

CASH FLOWS FROM FINANCING ACTIVITIES:

              

Net change in deposits

     58,751     (18,373 )

Payment of cash dividends

     (5,145 )   (2,558 )

Exercise of stock options

     122     19  
​ ​ ​ ​ ​ ​ ​ ​

Net cash provided by (used in) financing activities

     53,728     (20,912 )
​ ​ ​ ​ ​ ​ ​ ​

Net decrease in cash and cash equivalents

     8,865     (63,187 )

Cash and cash equivalents, beginning of period

     122,403     112,605  
​ ​ ​ ​ ​ ​ ​ ​

Cash and cash equivalents, end of period

   $ 131,268   $ 49,418  
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​

Supplemental disclosures of cash flow information:

              

Interest paid

   $ 1,057   $ 1,039  

Income taxes paid

     3,860     2,060  

Due to broker for securities purchased, settling after quarter-end

     730     —  

Supplemental schedule of non-cash investing activity:

    
 		    
 		  

Loans transferred to foreclosed assets

     1,236     —  

   

See notes to unaudited consolidated financial statements

9

Table of Contents


HERITAGE COMMERCE CORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2015

(Unaudited)

1) Basis of Presentation

        The unaudited consolidated financial statements of Heritage Commerce Corp (the "Company" or "HCC") and its wholly owned subsidiary, Heritage Bank of Commerce (the "Bank" or "HBC"), have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and notes required by accounting principles generally accepted in the United States of America ("GAAP") for annual financial statements are not included herein. The interim statements should be read in conjunction with the consolidated financial statements and notes that were included in the Company's Form 10-K for the year ended December 31, 2014.

        The Company acquired BVF/CSNK Acquisition Corp., a Delaware corporation ("BVF/CSNK") on November 1, 2014, the parent company of CSNK Working Capital Finance Corp. dba Bay View Funding ("BVF"). BVF/CSNK was subsequently merged into BVF and BVF became a wholly owned subsidiary of HBC. BVF's results of operations have been included in the Company's results of operations beginning November 1, 2014.

        HBC is a commercial bank serving customers located in Santa Clara, Alameda, Contra Costa, and San Benito counties of California. BVF provides business-essential working capital factoring financing to various industries throughout the United States. No customer accounts for more than 10 percent of revenue for HBC or the Company. With the acquisition of Bay View Funding, the Company now has two reportable segments consisting of Banking and Factoring. The Company's Chief Executive Officer uses segments results to make operating and strategic decisions.

        In management's opinion, all adjustments necessary for a fair presentation of these consolidated financial statements have been included and are of a normal and recurring nature. All intercompany transactions and balances have been eliminated.

        The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ significantly from these estimates.

        The results for the three and six months ended June 30, 2015 are not necessarily indicative of the results expected for any subsequent period or for the entire year ending December 31, 2015.

Reclassifications

        Certain reclassifications of prior year balances have been made to conform to the current year presentation. These reclassifications had no impact on the Company's consolidated financial position, results of operations or net change in cash and cash equivalents.

Adoption of New Accounting Standards

        In January 2014, the Financial Accounting Standards Board ("FASB") amended existing guidance clarifying that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon

10

Table of Contents


HERITAGE COMMERCE CORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2015

(Unaudited)

1) Basis of Presentation (Continued)

completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. For entities other than public business entities, the amendments in this update are effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015. The Company has adopted the new guidance and it does not have a material impact on the consolidated financial statements.

        In January 2014, the FASB issued guidance for accounting for investments in qualified affordable housing projects, which represents a consensus of the Emerging Issues Task Force and sets forth new accounting for qualifying investments in flow through limited liability entities that invest in affordable housing projects. The new guidance allows a limited liability investor that meets certain conditions to amortize the cost of its investment in proportion to the tax credits and other tax benefits it receives. The new accounting method, referred to as the proportional amortization method, allows amortization of the tax credit investment to be reflected along with the primary benefits, the tax credits and other tax benefits, on a net basis in the income statement within the income tax expense (benefit) line. For public business entities, the guidance is effective for interim and annual periods beginning after December 15, 2014. If elected, the proportional amortization method is required to be applied retrospectively. Early adoption is permitted in the annual period for which financial statements have not been issued.

        The Company adopted the proportional amortization method of accounting for its low income housing investments in the third quarter of 2014. The Company quantified the impact of adopting the proportional amortization method compared to the equity method to its current year and prior period financial statements. The Company determined that the adoption of the proportional amortization method did not have a material impact to its financial statements. The low income housing investment losses, net of the tax benefits received, are included in income tax expense for all periods reflected on the consolidated income statements. See Note 7—Income Taxes for more information on the adoption of the proportional method of accounting for low income housing investments.

        In May 2014, the FASB issued an update to the guidance for accounting for revenue from contracts with customers. The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides steps to follow to achieve the core principle. An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and

11

Table of Contents


HERITAGE COMMERCE CORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2015

(Unaudited)

1) Basis of Presentation (Continued)

uncertainty of revenue and cash flows arising from contracts with customers. Qualitative and quantitative information is required about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. We are evaluating the impact of adopting the new guidance on the consolidated financial statements.

2) Earnings Per Share

        Basic earnings per common share is computed by dividing net income, less dividends and discount accretion on preferred stock, by the weighted average common shares outstanding. The Series C Preferred Stock participates in the earnings of the Company and, therefore, the shares issued on the conversion of the Series C Preferred Stock are considered outstanding under the two class method of computing basic earnings per common share during periods of earnings. Diluted earnings per share reflect potential dilution from outstanding stock options using the treasury stock method. A reconciliation of these factors used in computing basic and diluted earnings per common share is as follows:

 
   For the Three Months Ended
June 30, 		  For the Six Months Ended
June 30, 		 
 
   2015   2014   2015   2014  
 
   (Dollars in thousands, except per share amounts)
  

Net income available to common shareholders

   $ 4,029   $ 3,100   $ 7,719   $ 5,952  

Less: undistributed earnings allocated to Series C Preferred Stock

     (331 )   (358 )   (605 )   (673 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Distributed and undistributed earnings allocated to common shareholders

   $ 3,698   $ 2,742   $ 7,114   $ 5,279  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Weighted average common shares outstanding for basic earnings per common share

     26,573,909     26,370,510     26,541,816     26,365,167  

Dilutive effect of stock options oustanding, using the the treasury stock method

     193,346     132,891     182,444     128,299  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Shares used in computing diluted earnings per common share

     26,767,255     26,503,401     26,724,260     26,493,466  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Basic earnings per share

  
$
0.14		  
$
0.10		  
$
0.27		  
$
0.20		  

Diluted earnings per share

   $ 0.14   $ 0.10   $ 0.27   $ 0.20  

12

Table of Contents


HERITAGE COMMERCE CORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2015

(Unaudited)

3) Accumulated Other Comprehensive Income (Loss) ("AOCI")

        The following table reflects the changes in AOCI by component for the periods indicated:

 
   For the Three Months Ended June 30, 2015 and 2014  
 
   Unrealized
Gains
(Losses) on
Available-
for-Sale
Securities
and I/O
Strips(1) 		  Unamortized
Unrealized
Gain on
Available-
for-Sale
Securities
Reclassified
to Held-to-
Maturity(1) 		  Defined
Benefit
Pension
Plan
Items(1) 		  Total(1)  
 
   (Dollars in thousands)
  

Beginning balance April 1, 2015, net of taxes          

   $ 4,180   $ 427   $ (5,924 ) $ (1,317 )

Other comprehensive income (loss) before reclassification, net of taxes

    
(1,974
)		  
—		    
(2
)		  
(1,976
)

Amounts reclassified from other comprehensive income (loss), net of taxes

     —     (8 )   30     22  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Net current period other comprensive income (loss), net of taxes

     (1,974 )   (8 )   28     (1,954 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Ending balance June 30, 2015, net of taxes

   $ 2,206   $ 419   $ (5,896 ) $ (3,271 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Beginning balance April 1, 2014, net of taxes

  
$
1,136		  
$
458		  
$
(4,070
)
$
(2,476
)

Other comprehensive income (loss) before reclassification, net of taxes

    
2,397		    
—		    
(10
)		  
2,387		  

Amounts reclassified from other comprehensive income (loss), net of taxes

     —     (8 )   5     (3 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Net current period other comprensive income (loss), net of taxes

     2,397     (8 )   (5 )   2,384  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Ending balance June 30, 2014, net of taxes

   $ 3,533   $ 450   $ (4,075 ) $ (92 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
(1)
Amounts in parenthesis indicate debits.

13

Table of Contents


HERITAGE COMMERCE CORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2015

(Unaudited)

3) Accumulated Other Comprehensive Income (Loss) ("AOCI") (Continued)

 
   For the Six Months Ended June 30, 2015 and 2014  
 
   Unrealized
Gains
(Losses) on
Available-
for-Sale
Securities
and I/O
Strips(1) 		  Unamortized
Unrealized
Gain on
Available-
for-Sale
Securities
Reclassified
to Held-to-
Maturity(1) 		  Defined
Benefit
Pension
Plan
Items(1) 		  Total(1)  
 
   (Dollars in thousands)
  

Beginning balance January 1, 2015, net of taxes

   $ 3,666   $ 435   $ (5,952 ) $ (1,851 )

Other comprehensive income (loss) before reclassification, net of taxes

    
(1,460
)		  
—		    
(23
)		  
(1,483
)

Amounts reclassified from other comprehensive income (loss), net of taxes

     —     (16 )   79     63  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Net current period other comprensive income (loss), net of taxes

     (1,460 )   (16 )   56     (1,420 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Ending balance June 30, 2015, net of taxes

   $ 2,206   $ 419   $ (5,896 ) $ (3,271 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Beginning balance January 1, 2014, net of taxes

  
$
(430
)
$
466		  
$
(4,065
)
$
(4,029
)

Other comprehensive (loss) before reclassification, net of taxes

    
3,992		    
—		    
(20
)		  
3,972		  

Amounts reclassified from other comprehensive income (loss), net of taxes

     (29 )   (16 )   10     (35 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Net current period other comprensive income (loss), net of taxes

     3,963     (16 )   (10 )   3,937  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Ending balance June 30, 2014, net of taxes

   $ 3,533   $ 450   $ (4,075 ) $ (92 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
(1)
Amounts in parenthesis indicate debits.

14

Table of Contents


HERITAGE COMMERCE CORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2015

(Unaudited)

3) Accumulated Other Comprehensive Income (Loss) ("AOCI") (Continued)

 
   Amounts
Reclassified
from AOCI(1)
For the Three
Months Ended
June 30, 		   
 
   Affected Line Item Where
Net Income is Presented
Details About AOCI Components
  2015   2014
 
   (Dollars in thousands)
    

Unrealized gains on available-for-sale securities and I/O strips

   $ —   $ —   Realized gains on sale of securities

    —     —   Income tax expense
​ ​ ​ ​ ​ ​ ​ ​ ​

    —     —   Net of tax
​ ​ ​ ​ ​ ​ ​ ​ ​

Amortization of unrealized gain on securities available-for-sale that were reclassified to securities held-to-maturity

     14     13   Interest income on taxable securities

    (6 )   (5 ) Income tax expense
​ ​ ​ ​ ​ ​ ​ ​ ​

    8     8   Net of tax
​ ​ ​ ​ ​ ​ ​ ​ ​

Amortization of defined benefit pension plan items

                

Prior transition obligation

     44     26    

Actuarial losses

     (96 )   (35 )  
​ ​ ​ ​ ​ ​ ​ ​ ​

    (52 )   (9 ) Salaries and employee benefits

    22     4   Income tax expense
​ ​ ​ ​ ​ ​ ​ ​ ​

    (30 )   (5 ) Net of tax
​ ​ ​ ​ ​ ​ ​ ​ ​

Total reclassification for the period

   $ (22 ) $ 3    
​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​
(1)
Amounts in parenthesis indicate debits.

15

Table of Contents


HERITAGE COMMERCE CORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2015

(Unaudited)

3) Accumulated Other Comprehensive Income (Loss) ("AOCI") (Continued)

 
   Amounts
Reclassified
from AOCI(1)
For the Six
Months Ended
June 30, 		   
 
   Affected Line Item Where
Net Income is Presented
Details About AOCI Components
  2015   2014
 
   (Dollars in thousands)
    

Unrealized gains on available-for-sale securities and I/O strips

   $ —   $ 50   Realized gains on sale of securities

    —     (21 ) Income tax expense
​ ​ ​ ​ ​ ​ ​ ​ ​

    —     29   Net of tax
​ ​ ​ ​ ​ ​ ​ ​ ​

Amortization of unrealized gain on securities available-for-sale that were reclassified to securities held-to-maturity

     28     27   Interest income on taxable securities

    (12 )   (11 ) Income tax expense
​ ​ ​ ​ ​ ​ ​ ​ ​

    16     16   Net of tax
​ ​ ​ ​ ​ ​ ​ ​ ​

Amortization of defined benefit pension plan items

                

Prior transition obligation

     56     52    

Actuarial losses

     (192 )   (70 )  
​ ​ ​ ​ ​ ​ ​ ​ ​

    (136 )   (18 ) Salaries and employee benefits

    57     8   Income tax expense
​ ​ ​ ​ ​ ​ ​ ​ ​

    (79 )   (10 ) Net of tax
​ ​ ​ ​ ​ ​ ​ ​ ​

Total reclassification for the period

   $ (63 ) $ 35    
​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​
(1)
Amounts in parenthesis indicate debits.

16

Table of Contents


HERITAGE COMMERCE CORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2015

(Unaudited)

4) Securities

        The amortized cost and estimated fair value of securities at June 30, 2015 and December 31, 2014 were as follows:

June 30, 2015
  Amortized
Cost 		  Gross
Unrealized
Gains 		  Gross
Unrealized
Losses 		  Estimated
Fair
Value 		 
 
   (Dollars in thousands)
  

Securities available-for-sale:

                          

Agency mortgage-backed securities

   $ 155,877   $ 2,736   $ (1,000 ) $ 157,613  

Corporate bonds

     35,853     611     (135 )   36,329  

Trust preferred securities

     15,000     150     —     15,150  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total

   $ 206,730   $ 3,497   $ (1,135 ) $ 209,092  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Securities held-to-maturity:

                          

Agency mortgage-backed securities

   $ 16,845   $ 7   $ (211 ) $ 16,641  

Municipals—tax exempt

     83,476     531     (3,840 )   80,167  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total

   $ 100,321   $ 538   $ (4,051 ) $ 96,808  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

 

December 31, 2014
  Amortized
Cost 		  Gross
Unrealized
Gains 		  Gross
Unrealized
Losses 		  Estimated
Fair
Value 		 
 
   (Dollars in thousands)
  

Securities available-for-sale:

                          

Agency mortgage-backed securities

   $ 150,570   $ 3,867   $ (265 ) $ 154,172  

Corporate bonds

     35,927     959     (23 )   36,863  

Trust preferred securities

     15,000     300     —     15,300  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total

   $ 201,497   $ 5,126   $ (288 ) $ 206,335  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Securities held-to-maturity:

                          

Agency mortgage-backed securities

   $ 15,480   $ 44   $ (118 ) $ 15,406  

Municipals—tax exempt

     79,882     1,011     (1,346 )   79,547  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total

   $ 95,362   $ 1,055   $ (1,464 ) $ 94,953  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

17

Table of Contents


HERITAGE COMMERCE CORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2015

(Unaudited)

4) Securities (Continued)

        Securities with unrealized losses at June 30, 2015 and December 31, 2014, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are as follows:

 
   Less Than 12 Months   12 Months or More   Total  
June 30, 2015
  Fair
Value 		  Unrealized
Losses 		  Fair
Value 		  Unrealized
Losses 		  Fair
Value 		  Unrealized
Losses 		 
 
   (Dollars in thousands)
  

Securities available-for-sale:

                                      

Agency mortgage-backed securities

   $ 63,503   $ (931 ) $ 2,307   $ (69 ) $ 65,810   $ (1,000 )

Corporate bonds

     10,404     (135 )   —     —     10,404     (135 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total

   $ 73,907   $ (1,066 ) $ 2,307   $ (69 ) $ 76,214   $ (1,135 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Securities held-to-maturity:

                                      

Agency mortgage-backed securities

   $ 8,478   $ (107 ) $ 4,518   $ (104 ) $ 12,996   $ (211 )

Municipals—Tax Exempt

     38,745     (1,641 )   22,505     (2,199 )   61,250     (3,840 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total

   $ 47,223   $ (1,748 ) $ 27,023   $ (2,303 ) $ 74,246   $ (4,051 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

 

 
   Less Than 12 Months   12 Months or More   Total  
December 31, 2014
  Fair
Value 		  Unrealized
(Losses) 		  Fair
Value 		  Unrealized
(Losses) 		  Fair
Value 		  Unrealized
(Losses) 		 
 
   (Dollars in thousands)
  

Securities available-for-sale:

                                      

Agency mortgage-backed securities

   $ 12,491   $ (27 ) $ 35,614   $ (238 ) $ 48,105   $ (265 )

Corporate bonds

     —     —     5,148     (23 )   5,148     (23 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total

   $ 12,491   $ (27 ) $ 40,762   $ (261 ) $ 53,253   $ (288 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Securities held-to-maturity:

                                      

Agency mortgage-backed securities

   $ 4,869   $ (29 ) $ 4,974   $ (89 ) $ 9,843   $ (118 )

Municipals—Tax Exempt

     1,884     (16 )   42,867     (1,330 )   44,751     (1,346 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total

   $ 6,753   $ (45 ) $ 47,841   $ (1,419 ) $ 54,594   $ (1,464 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

        There were no holdings of securities of any one issuer, other than the U.S. Government and its sponsored entities, in an amount greater than 10% of shareholders' equity. At June 30, 2015, the Company held 384 securities (144 available-for-sale and 240 held-to-maturity), of which 221 had fair values below amortized cost. At June 30, 2015, there were $2,307,000 of agency mortgage-backed securities available-for-sale, $4,518,000 of agency mortgage-backed securities held-to-maturity, and $22,505,000 of municipals bonds held-to-maturity carried with an unrealized loss for over 12 months. The total unrealized loss for securities over 12 months was $2,372,000 at June 30, 2015. The unrealized losses were due to higher interest rates. The issuers are of high credit quality and all principal amounts are expected to be paid when securities mature. The fair value is expected to recover as the securities approach their maturity date and/or market rates decline. The Company does not believe that it is more likely than not that the Company will be required to sell a security in an unrealized loss position

18

Table of Contents


HERITAGE COMMERCE CORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2015

(Unaudited)

4) Securities (Continued)

prior to recovery in value. The Company does not consider these securities to be other than temporarily impaired at June 30, 2015.

        At December 31, 2014, the Company held 361 securities (130 available-for-sale and 231 held-to-maturity), of which 151 had fair values below amortized cost. At December 31, 2014, there were $35,614,000 of agency mortgage backed securities available-for-sale, $5,148,000 of corporate bonds available for sale, $4,974,000 of agency mortgage backed securities held-to- maturity and $42,867,000 of municipals bonds held to maturity carried with an unrealized loss for over 12 months. The total unrealized loss for securities over 12 months was $1,680,000 at December 31, 2014. The unrealized losses were due to higher interest rates. The issuers are of high credit quality and all principal amounts are expected to be paid when securities mature. The fair value is expected to recover as the securities approach their maturity date and/or market rates decline. The Company does not believe that it is more likely than not that the Company will be required to sell a security in an unrealized loss position prior to recovery in value. The Company does not consider these securities to be other than temporarily impaired at December 31, 2014.

        The proceeds from sales of securities and the resulting gains and losses were as follows for the periods indicated:

 
   Three
Months
Ended
June 30, 		  Six
Months
Ended
June 30, 		 
 
   2015   2014   2015   2014  
 
   (Dollars in thousands)
  

Proceeds

   $ —   $ —   $ —   $ 50,011  

Gross gains

     —     —     —     720  

Gross losses

     —     —     —     (670 )

        The amortized cost and estimated fair values of securities as of June 30, 2015, are shown by contractual maturity below. The expected maturities will differ from contractual maturities if borrowers have the right to call or pre-pay obligations with or without call or pre-payment penalties. Securities not due at a single maturity date are shown separately.

 
   Available-for-sale  
 
   Amortized Cost   Estimated Fair Value  
 
   (Dollars in thousands)
  

Due after one through five years

   $ 6,373   $ 6,708  

Due after five through ten years

     29,480     29,621  

Due after ten years

     15,000     15,150  

Agency mortgage-backed securities

     155,877     157,613  
​ ​ ​ ​ ​ ​ ​ ​

Total

   $ 206,730   $ 209,092  
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​

19

Table of Contents


HERITAGE COMMERCE CORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2015

(Unaudited)

4) Securities (Continued)

 
   Held-to-maturity  
 
   Amortized Cost   Estimated Fair Value  
 
   (Dollars in thousands)
  

Due after five through ten years

   $ 9,708   $ 9,893  

Due after ten years

     73,768     70,274  

Agency mortgage-backed securities

     16,845     16,641  
​ ​ ​ ​ ​ ​ ​ ​

Total

   $ 100,321   $ 96,808  
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​

5) Loans

        Loans were as follows for the periods indicated:

 
   June 30,
2015 		  December 31,
2014 		 
 
   (Dollars in thousands)
  

Loans held-for-investment:

              

Commercial

   $ 471,651   $ 462,403  

Real estate:

              

Commercial and residential

     508,497     478,335  

Land and construction

     68,666     67,980  

Home equity

     71,579     61,644  

Consumer

     13,739     18,867  
​ ​ ​ ​ ​ ​ ​ ​

Loans

     1,134,132     1,089,229  

Deferred loan origination fees, net

     (529 )   (586 )
​ ​ ​ ​ ​ ​ ​ ​

Loans, net of deferred fees

     1,133,603     1,088,643  

Allowance for loan losses

     (18,757 )   (18,379 )
​ ​ ​ ​ ​ ​ ​ ​

Loans, net

   $ 1,114,846   $ 1,070,264  
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​

        Changes in the allowance for loan losses were as follows for the periods indicated:

 
   Three Months Ended June 30, 2015  
 
   Commercial   Real Estate   Consumer   Total  
 
   (Dollars in thousands)
  

Balance, beginning of period

   $ 10,856   $ 7,554   $ 144   $ 18,554  

Charge-offs

     (9 )   —     —     (9 )

Recoveries

     46     114     30     190  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Net recoveries

     37     114     30     181  

Provision (credit) for loan losses

     300     (218 )   (60 )   22  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Balance, end of period

   $ 11,193   $ 7,450   $ 114   $ 18,757  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

20

Table of Contents


HERITAGE COMMERCE CORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2015

(Unaudited)

5) Loans (Continued)


 
   Three Months Ended June 30, 2014  
 
   Commercial   Real Estate   Consumer   Total  
 
   (Dollars in thousands)
  

Balance, beginning of period

   $ 11,846   $ 6,894   $ 77   $ 18,817  

Charge-offs

     (187 )   —     —     (187 )

Recoveries

     144     16     —     160  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Net (charge-offs) recoveries

     (43 )   16     —     (27 )

Provision (credit) for loan losses

     (349 )   159     (8 )   (198 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Balance, end of period

   $ 11,454   $ 7,069   $ 69   $ 18,592  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

 

 
   Six Months Ended June 30, 2015  
 
   Commercial   Real Estate   Consumer   Total  
 
   (Dollars in thousands)
  

Balance, beginning of period

   $ 11,187   $ 7,070   $ 122   $ 18,379  

Charge-offs

     (221 )   (2 )   —     (223 )

Recoveries

     482     127     30     639  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Net recoveries

     261     125     30     416  

Provision (credit) for loan losses

     (255 )   255     (38 )   (38 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Balance, end of period

   $ 11,193   $ 7,450   $ 114   $ 18,757  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

 

 
   Six Months Ended June 30, 2014  
 
   Commercial   Real Estate   Consumer   Total  
 
   (Dollars in thousands)
  

Balance, beginning of period

   $ 12,533   $ 6,548   $ 83   $ 19,164  

Charge-offs

     (595 )   —     —     (595 )

Recoveries

     188     43     —     231  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Net (charge-offs) recoveries

     (407 )   43     —     (364 )

Provision (credit) for loan losses

     (672 )   478     (14 )   (208 )
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Balance, end of period

   $ 11,454   $ 7,069   $ 69   $ 18,592  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

21

Table of Contents


HERITAGE COMMERCE CORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2015

(Unaudited)

5) Loans (Continued)

        The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment, based on the impairment method at the following period-ends:

 
   June 30, 2015  
 
   Commercial   Real Estate   Consumer   Total  
 
   (Dollars in thousands)
  

Allowance for loan losses:

                          

Ending allowance balance attributable to loans:

                          

Individually evaluated for impairment

   $ 106   $ —   $ —   $ 106  

Collectively evaluated for impairment

     11,087     7,450     114     18,651  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total allowance balance

   $ 11,193   $ 7,450   $ 114   $ 18,757  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Loans:

                          

Individually evaluated for impairment

   $ 1,003   $ 3,982   $ 5   $ 4,990  

Collectively evaluated for impairment

     470,648     644,760     13,734     1,129,142  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total loan balance

   $ 471,651   $ 648,742   $ 13,739   $ 1,134,132  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

 

 
   December 31, 2014  
 
   Commercial   Real Estate   Consumer   Total  
 
   (Dollars in thousands)
  

Allowance for loan losses:

                          

Ending allowance balance attributable to loans:

                          

Individually evaluated for impairment

   $ 404   $ —   $ —   $ 404  

Collectively evaluated for impairment

     10,783     7,070     122     17,975  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total allowance balance

   $ 11,187   $ 7,070   $ 122   $ 18,379  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Loans:

                          

Individually evaluated for impairment

   $ 2,701   $ 3,315   $ 6   $ 6,022  

Collectively evaluated for impairment

     459,702     604,644     18,861     1,083,207  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total loan balance

   $ 462,403   $ 607,959   $ 18,867   $ 1,089,229  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

        The following table presents loans held-for-investment individually evaluated for impairment by class of loans as of June 30, 2015 and December 31, 2014. The recorded investment included in the following table represents loan principal net of any partial charge-offs recognized on the loans. The unpaid principal balance represents the recorded balance prior to any partial charge-offs. The recorded investment in consumer loans collateralized by residential real estate property that are in process of

22

Table of Contents


HERITAGE COMMERCE CORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2015

(Unaudited)

5) Loans (Continued)

foreclosure according to local requirements of the applicable jurisdiction are not material as of June 30, 2015 and December 31, 2014.

 
   June 30, 2015   December 31, 2014  
 
   Unpaid
Principal
Balance 		  Recorded
Investment 		  Allowance
for Loan
Losses
Allocated 		  Unpaid
Principal
Balance 		  Recorded
Investment 		  Allowance
for Loan
Losses
Allocated 		 
 
   (Dollars in thousands)
  

With no related allowance recorded:

                                      

Commercial

   $ 215   $ 215   $ —   $ 2,282   $ 1,872   $ —  

Real estate:

                                      

Commercial and residential

     4,019     3,160     —     2,510     1,651     —  

Land and construction

     537     500     —     1,808     1,319     —  

Home Equity

     322     322     —     345     345     —  

Consumer

     5     5     —     6     6     —  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total with no related allowance recorded

     5,098     4,202     —     6,951     5,193     —  

With an allowance recorded:

                                      

Commercial

     788     788     106     829     829     404  

Real estate:

                                      

Commercial and residential

     —     —     —     —     —     —  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total with an allowance recorded

     788     788     106     829     829     404  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total

   $ 5,886   $ 4,990   $ 106   $ 7,780   $ 6,022   $ 404  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

        The following tables present interest recognized and cash-basis interest earned on impaired loans for the periods indicated:

 
   Three Months Ended June 30, 2015  
 
    
   Real Estate    
    
  
 
   Commercial   Commercial
and Residential 		  Land and
Construction 		  Home
Equity 		  Consumer   Total  
 
   (Dollars in thousands)
  

Average of impaired loans during the period

   $ 1,058   $ 3,655   $ 895   $ 330   $ 5   $ 5,943  

Interest income during impairment

   $ —   $ —   $ —   $ —   $ —   $ —  

Cash-basis interest earned

   $ —   $ —   $ —   $ —   $ —   $ —  

23

Table of Contents


HERITAGE COMMERCE CORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2015

(Unaudited)

5) Loans (Continued)


 
   Three Months Ended June 30, 2014  
 
    
   Real Estate    
    
  
 
   Commercial   Commercial
and Residential 		  Land and
Construction 		  Home
Equity 		  Consumer   Total  
 
   (Dollars in thousands)
  

Average of impaired loans during the period

   $ 4,670   $ 3,051   $ 1,703   $ 576   $ 73   $ 10,073  

Interest income during impairment

   $ 56   $ —   $ —   $ —   $ —   $ 56  

Cash-basis interest earned

   $ —   $ —   $ —   $ —   $ —   $ —  

 

 
   Six Months Ended June 30, 2015  
 
    
   Real Estate    
    
  
 
   Commercial   Commercial
and Residential 		  Land and
Construction 		  Home
Equity 		  Consumer   Total  
 
   (Dollars in thousands)
  

Average of impaired loans during the period

   $ 1,606   $ 2,987   $ 1,037   $ 335   $ 5   $ 5,970  

Interest income during impairment

   $ —   $ —   $ —   $ —   $ —   $ —  

Cash-basis interest earned

   $ —   $ —   $ —   $ —   $ —   $ —  

 

 
   Six Months Ended June 30, 2014  
 
    
   Real Estate    
    
  
 
   Commercial   Commercial
and Residential 		  Land and
Construction 		  Home
Equity 		  Consumer   Total  
 
   (Dollars in thousands)
  

Average of impaired loans during the period

   $ 4,749   $ 3,488   $ 1,722   $ 606   $ 90   $ 10,655  

Interest income during impairment

   $ 56   $ —   $ —   $ —   $ —   $ 56  

Cash-basis interest earned

   $ —   $ —   $ —   $ —   $ —   $ —  

        Nonperforming loans include both smaller dollar balance homogenous loans that are collectively evaluated for impairment and individually classified loans. Nonperforming loans were as follows at period-end:

 
   June 30,    
  
 
   December 31,
2014 		 
 
   2015   2014  
 
   (Dollars in thousands)
  

Nonaccrual loans—held-for-investment

   $ 4,832   $ 7,688   $ 5,855  

Restructured and loans over 90 days past due and still accruing

     —     454     —  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total nonperforming loans

   $ 4,832   $ 8,142   $ 5,855  
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Other restructured loans

   $ 158   $ 1,180   $ 167  

Impaired loans, excluding loans held-for-sale

   $ 4,990   $ 9,322   $<