Heritage Commerce Corp (NASDAQ:HTBK) , parent company of Heritage Bank of Commerce, has reported record results for 2006, driven by improved operating efficiencies and an increase in net interest margin. Net income in 2006 increased 20% to $17.3 million, or $1.44 per diluted share, compared to $14.4 million, or $1.19 per diluted share, for the year ended December 31, 2005. Fourth quarter net income rose 2% to $4.4 million, or $0.37 per diluted share, from $4.3 million, or $0.35 per diluted share for the same period in 2005.

The return on average assets (ROAA) for 2006 increased to 1.57% from 1.27% a year ago, and return on average equity (ROAE) was 14.6%, compared to 13.7% for 2005. Annualized returns on average assets and average equity for the fourth quarter of 2006 were 1.59% and 14.3%, respectively, compared with 1.46% and 15.4%, respectively, for the fourth quarter of 2005.

Financial Highlights:
2006

— Diluted earnings per share of $1.44 were up 21% from the previous year.
— Profitability ratios all improved over 2005 levels:
– Net interest margin increased 48 basis points to 5.06%.
– ROAA grew 30 basis points to 1.57%.
– ROAE improved 89 basis points to 14.6%
– The efficiency ratio improved 466 basis points to 56.9 %.

Fourth Quarter 2006

— Net income grew to $4.4 million, up 2% from 4Q05 and remained at the
same record level achieved in 3Q06.
— Diluted earnings per share of $0.37 were up 6% from 4Q05 and 3% from
3Q06.
— Book value per share of $10.54 was up 11% from 4Q05 and 3% from 3Q06.

“The record profitability in 2006 reflects the focus of all our team members on building strong, profitable relationships with our customers,” said Walter T. Kaczmarek, President and Chief Executive Officer. “Interest margin improvement, coupled with solid gains in productivity, generated excellent results for our shareholders. As we look forward to 2007, we believe the economic growth in the local region will provide excellent opportunities for further advances.”

Operating Results

“We remain asset sensitive, which has helped us throughout this period of rising short-term interest rates,” Mr. Kaczmarek continued. Net interest income increased 5% to $50.4 million in 2006, compared to $47.8 million a year ago. Net interest income for the fourth quarter of 2006 was $12.8 million, which remained at the same level as the fourth quarter of 2005. The net interest margin was 5.06% in 2006, compared with 4.58% in 2005. The net

interest margin improved to 5.16% in the fourth quarter of 2006 from 4.82% in the fourth quarter a year ago.

Noninterest income increased 4% to $9.8 million in 2006, from $9.4 million in the preceding year. Noninterest income is primarily comprised of gain on sale of SBA and other government guaranteed business loans, servicing fee income, deposit service charges, and increases in the cash surrender value of life insurance. In addition, the first quarter gain on sale of specialty loans contributed $671,000 to 2006 noninterest income and more than offset the $430,000 generated last year from leasing activities, a business Heritage exited in 2005. Fourth quarter noninterest income was $2.39 million, up 8% from the fourth quarter of 2005, and up 4% from the third quarter of 2006.

The efficiency ratio, a measure of operating expenses relative to revenues, improved to 56.9% in 2006 from 61.5% a year ago. The efficiency ratio was 57.3% in the fourth quarter of 2006, compared to 57.0% in the fourth quarter of 2005 and 55.0% in the third quarter of 2006.

In 2006, noninterest expense declined 3% to $34.3 million from $35.2 million a year ago, including a 2% decline in compensation expense. Fourth quarter noninterest expense increased 2% to $8.70 million, compared to $8.57 million in the fourth quarter of 2005 and was up 5% over the third quarter of 2006. The Bank recognized $120,000 of expenses associated with the conversion of the online banking system during the fourth quarter of 2006. Compensation expense decreased 4% and 5%, respectively, from the fourth quarter of 2005 and the third quarter of 2006. Stock option expense was $230,000 in the fourth quarter of 2006 and totaled $780,000 for the full year. In 2005, stock option expense was not included in the compensation expense, but rather footnoted in the financial statements as a pro forma disclosure.

Balance Sheet, Capital Management and Credit Quality

At December 31, 2006, total assets were $1.0 billion, down 8% from December 31, 2005. “We continue to carefully manage our assets and liabilities to improve profitability and manage interest rate and credit risk,” Mr. Kaczmarek noted. “Our focus will remain on building profitable relationships.” In 2006, total loans (excluding loans held for sale) increased 5% from a year ago levels to $725.8 million, with commercial loans increasing 17% to $300.6 million, or 41% of the portfolio.

Total deposits decreased 10% to $847 million at December 31, 2006, from $940 million at December 31, 2005, primarily due to reductions in real estate exchange company and title company accounts of $67 million as of December 31, 2006.

Asset quality remained strong with nonperforming assets (NPAs) totaling $4.3 million, or 0.42% of total assets at December 31, 2006, compared to $3.7 million, or 0.32% of total assets, at December 31, 2005, and $3.0 million, or 0.28% of total assets, at September 30, 2006. Net charge-offs in the fourth quarter of 2006 were $200,000, or 0.11% of average loans, compared to net charge-offs of $176,000, or 0.10% of average loans in the fourth quarter of 2005, and net recoveries of $281,000, or 0.16%, of average loans, in the third quarter of 2006. The allowance for loan losses at December 31, 2006, was $9.3 million, or 1.28% of total loans, and represented 215% of nonperforming loans. The allowance for loan losses at December 31, 2005, was $10.2 million, or 1.48% of total loans, and represented 278% of nonperforming loans. The allowance for loan losses at September 30, 2006, was $9.4 million, or 1.31% of total loans, and represented 317% of nonperforming loans.

Shareholders’ equity increased 10% to $123 million, or $10.54 book value per share, at December 31, 2006, compared to $112 million, or $9.45 book value per share, a year earlier, and $119 million, or $10.22 book value per share at September 30, 2006. Capital ratios continue to be significantly above the well-capitalized guidelines established by regulatory agencies. The Company’s leverage ratio at December 31, 2006 was 13.47%, compared to 11.55% at December 31, 2005 and 13.24% at September 30, 2006.

Heritage Commerce Corp repurchased 47,400 shares of common stock in the fourth quarter of 2006, bringing the total shares repurchased in the year to 330,300 with an average price of $25.93 for the quarter and $23.88 for the full year. The $10 million common stock repurchase program was approved by the Board of Directors in February, 2006 and expires on June 30, 2007. Shares were purchased on the open market using available cash. The repurchase program, which is financed by available cash, may be modified, suspended or terminated by the Board of Directors at any time without notice. The extent to which the Company repurchases its shares and the timing of such repurchases will depend upon market conditions and other corporate considerations.

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 offices in Los Gatos, Fremont, Danville, Morgan Hill, Gilroy, Mountain View and Los Altos. Heritage Bank of Commerce is also an SBA Preferred Lender operating from offices in San Jose, Chico, Fremont, Fresno, Jackson, Elk Grove, Santa Cruz and Watsonville, California.

Forward Looking Statement Disclaimer

This release may contain forward-looking statements that are subject to risks and uncertainties. Such risks and uncertainties may include, but are not necessarily limited to, the Company’s ability to sustain dividend payments, fluctuations in interest rates and monetary policy established by the Federal Reserve, inflation, government regulations, general economic conditions, competition within the business areas in which the Company is conducting its operations, including the real estate market in California, the ability to recognize identified cost savings, and other factors beyond the Company’s control. Such risks and uncertainties could cause results for subsequent interim periods or for the entire year to differ materially from those indicated. For a discussion of factors which could cause results to differ, please see the Company’s reports on Forms 10-K and 10-Q as filed with the Securities and Exchange Commission and the Company’s press releases. Readers should not place undue reliance on the forward-looking statements, which reflect management’s view only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect subsequent events or circumstances.

Member FDIC

At and For the Three Months Ended:
CONSOLIDATED INCOME STATEMENTS Dec. 31, Sept. 30, Dec. 31,
(in $000′s, unaudited) 2006 2006 2005

Interest Income $18,737 $18,568 $17,588
Interest Expense 5,936 5,754 4,773
Net Interest Income 12,801 12,814 12,815
Provision for Loan Losses 100 0 0
Net Interest income after
Provision for Loan Losses 12,701 12,814 12,815
Noninterest Income:
Gain on Sale of Loans 837 832 711
Servicing Income 539 412 470
Increase in Cash Surrender Value of
Life Insurance 369 363 349
Service Charges and Other Fees on
Deposit Accounts 327 354 348
Gain on Sale of Leased Equipment 0 0 0
Equipment Leasing 0 0 0
Other 318 338 326
Total Noninterest Income 2,390 2,299 2,204

Noninterest Expense:
Salaries & Employee Benefits 4,711 4,941 4,932
Occupancy & Equipment 907 913 933
Other 3,085 2,458 2,702
Total Noninterest Expense 8,703 8,312 8,567
Income Before Income Taxes 6,388 6,801 6,452
Income Tax Expense 2,036 2,448 2,194
Net Income $4,352 $4,353 $4,258

PER SHARE DATA
(unaudited)
Basic Earnings Per Share $0.37 $0.37 $0.36
Diluted Earnings Per Share $0.37 $0.36 $0.35
Common Shares Outstanding at Period
End 11,656,943 11,681,297 11,807,649
Book Value Per Share $10.54 $10.22 $9.45
Tangible Book Value Per Share $10.54 $10.22 $9.45

KEY FINANCIAL RATIOS
(unaudited)
Annualized Return on Average Equity 14.25% 14.43% 15.41%
Annualized Return on Average Assets 1.59% 1.61% 1.46%
Net Interest Margin 5.16% 5.22% 4.82%
Efficiency Ratio 57.29% 55.00% 57.04%

AVERAGE BALANCES
(in $000′s, unaudited)
Average Assets $1,084,440 $1,074,903 $1,155,178
Average Earning Assets $984,146 $973,556 $1,053,901
Average Total Loans $715,257 $706,587 $697,231
Average Loans Held For Sale $23,115 $32,534 $71,789
Average Deposits $892,983 $886,976 $965,574
Average Demand Deposits – Noninterest
Bearing $233,945 $218,766 $258,374
Average Interest Bearing Deposits $659,038 $668,210 $707,200
Average Interest Bearing Liabilities $704,540 $713,712 $763,602
Average Equity $121,202 $119,690 $109,636

Percent Change From:
CONSOLIDATED INCOME STATEMENTS September 30, December 31,
(in $000′s, unaudited) 2006 2005

Interest Income 1% 7%
Interest Expense 3% 24%
Net Interest Income 0% 0%
Provision for Loan Losses N/A N/A
Net Interest income after
Provision for Loan Losses -1% -1%
Noninterest Income:
Gain on Sale of Loans 1% 18%
Servicing Income 31% 15%
Increase in Cash Surrender Value
of Life Insurance 2% 6%
Service Charges and Other Fees on
Deposit Accounts -8% -6%
Gain on Sale of Leased Equipment N/A N/A
Equipment Leasing N/A N/A
Other -6% -2%
Total Noninterest Income 4% 8%

Noninterest Expense:
Salaries & Employee Benefits -5% -4%
Occupancy & Equipment -1% -3%
Other 26% 14%
Total Noninterest Expense 5% 2%
Income Before Income Taxes -6% -1%
Income Tax Expense -17% -7%
Net Income 0% 2%

PER SHARE DATA
(unaudited)
Basic Earnings Per Share 0% 3%
Diluted Earnings Per Share 3% 6%
Common Shares Outstanding at Period
End 0% -1%
Book Value Per Share 3% 11%
Tangible Book Value Per Share 3% 11%

KEY FINANCIAL RATIOS
(unaudited)
Annualized Return on Average Equity -1% -8%
Annualized Return on Average Assets -1% 9%
Net Interest Margin -1% 7%
Efficiency Ratio 4% 0%

AVERAGE BALANCES
(in $000′s, unaudited)
Average Assets 1% -6%
Average Earning Assets 1% -7%
Average Total Loans 1% 3%
Average Loans Held For Sale -29% -68%
Average Deposits 1% -8%
Average Demand Deposits – Noninterest
Bearing 7% -9%
Average Interest Bearing Deposits -1% -7%
Average Interest Bearing Liabilities -1% -8%
Average Equity 1% 11%

At and For the Year Ended:
CONSOLIDATED INCOME STATEMENTS Dec. 31, Dec. 31, Percent
(in $000′s, unaudited) 2006 2005 Change

Interest Income $72,957 $63,756 14%
Interest Expense 22,525 15,907 42%
Net Interest Income 50,432 47,849 5%
Provision for Loan Losses (503) 313 -261%
Net Interest income after
Provision for Loan Losses 50,935 47,536 7%
Noninterest Income:
Gain on Sale of Loans 4,008 2,871 40%
Servicing Income 1,860 1,838 1%
Increase in Cash Surrender Value
of Life Insurance 1,439 1,236 16%
Service Charges and Other Fees on
Deposit Accounts 1,335 1,468 -9%
Gain on Sale of Leased Equipment 0 299 -100%
Equipment Leasing 0 131 -100%
Other 1,198 1,580 -24%
Total Noninterest Income 9,840 9,423 4%

Noninterest Expense:
Salaries & Employee Benefits 19,414 19,845 -2%
Occupancy & Equipment 3,627 3,988 -9%
Other 11,227 11,400 -2%
Total Noninterest Expense 34,268 35,233 -3%
Income Before Income Taxes 26,507 21,726 22%
Income Tax Expense 9,237 7,280 27%
Net Income $17,270 $14,446 20%

PER SHARE DATA
(unaudited)
Basic Earnings Per Share $1.47 $1.22 20%
Diluted Earnings Per Share $1.44 $1.19 21%
Common Shares Outstanding at Period
End 11,656,943 11,807,649 -1%
Book Value Per Share $10.54 $9.45 11%
Tangible Book Value Per Share $10.54 $9.45 11%

KEY FINANCIAL RATIOS
(unaudited)
Annualized Return on Average Equity 14.62% 13.73% 6%
Annualized Return on Average Assets 1.57% 1.27% 24%
Net Interest Margin 5.06% 4.58% 10%
Efficiency Ratio 56.86% 61.52% -8%

AVERAGE BALANCES
(in $000′s, unaudited)
Average Assets $1,098,278 $1,137,185 -3%
Average Earning Assets $996,082 $1,044,043 -5%
Average Total Loans $704,009 $695,769 1%
Average Loans Held For Sale $34,288 $66,559 -48%
Average Deposits $907,095 $945,991 -4%
Average Demand Deposits – Noninterest
Bearing $229,190 $259,881 -12%
Average Interest Bearing Deposits $677,905 $686,110 -1%
Average Interest Bearing Liabilities $727,036 $750,560 -3%
Average Equity $118,095 $105,208 12%

Percent
End of Period: Change From:
CONSOLIDATED BALANCE
SHEETS Dec. 31, Sept. 30, Dec. 31, Sept. 30, Dec. 31,
(in $000′s, unaudited) 2006 2006 2005 2006 2005
ASSETS
Cash and Due from Banks $34,285 $41,438 $35,560 -17% -4%
Federal Funds Sold 15,100 41,000 62,900 -63% -76%
Securities Available-for-
Sale, at Fair Value 172,298 173,723 198,495 -1% -13%
Loans Held For Sale 17,234 23,108 70,147 -25% -75%
Loans:
Commercial 300,611 281,488 256,713 7% 17%
Real Estate-Mortgage 239,041 227,732 237,566 5% 1%
Real Estate-Land and
Construction 143,834 160,137 149,851 -10% -4%
Home Equity 38,976 41,784 41,772 -7% -7%
Consumer 2,422 1,387 1,721 75% 41%
Total Loans 724,884 712,528 687,623 2% 5%
Deferred Loan Costs 870 1,172 1,155 -26% -25%
Loans, Net of Deferred
Costs 725,754 713,700 688,778 2% 5%
Allowance for Loan Losses (9,279) (9,379) (10,224) -1% -9%
Net Loans 716,475 704,321 678,554 2% 6%
Company Owned Life
Insurance 36,174 35,805 34,735 1% 4%
Premises & Equipment, Net 2,539 2,494 2,541 2% 0%
Accrued Interest
Receivable and Other
Assets 43,033 40,939 47,577 5% -10%
Total Assets $1,037,138 $1,062,828 $1,130,509 -2% -8%

LIABILITIES &
SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand Deposits-
Noninterest Bearing $231,841 $226,297 $248,009 2% -7%
Demand Deposits-
Interest Bearing 133,413 133,636 157,330 0% -15%
Savings and Money
Market 307,266 349,436 353,798 -12% -13%
Time Deposits, Under
$100 31,097 31,522 35,209 -1% -12%
Time Deposits, $100
and Over 111,017 101,198 109,373 10% 2%
Brokered Deposits,
$100 and Over 31,959 34,009 36,040 -6% -11%
Total Deposits 846,593 876,098 939,759 -3% -10%
Securities Sold Under
Agreement to Repurchase 21,800 21,800 32,700 0% -33%
Notes Payable To
Subsidiary Grantor Trusts 23,702 23,702 23,702 0% 0%
Accrued Interest Payable
and Other Liabilities 22,223 21,892 22,731 2% -2%
Total Liabilities 914,318 943,492 1,018,892 -3% -10%

Shareholders’ Equity:
Common Stock 62,363 62,959 66,799 -1% -7%
Accumulated Other
Comprehensive Loss (1,995) (2,306) (2,721) -13% -27%
Retained Earnings 62,452 58,683 47,539 6% 31%
Total Shareholders’
Equity 122,820 119,336 111,617 3% 10%
Total Liabilities &
Shareholders’
Equity $1,037,138 $1,062,828 $1,130,509 -2% -8%

CREDIT QUALITY DATA
(in $000′s, unaudited)
Nonaccrual Loans $3,866 $2,083 $3,672 86% 5%
Loans Past Due 90 Days or
More and Still Accruing 451 879 0 -49% N/A
Total Nonperforming Loans 4,317 2,962 3,672 46% 18%
Other Real Estate Owned 0 0 0 N/A N/A
Total Nonperforming
Assets $4,317 $2,962 $3,672 46% 18%
Net Charge-offs
(Recoveries) $200 $(281) $176 171% 14%
Net Charge-offs
(Recoveries) as Percent
of Average Loans 0.11% -0.16% 0.10% 169% 10%
Allowance for Loan Losses
to Total Loans 1.28% 1.31% 1.48% -2% -14%
Allowance for Loan Losses
to Nonperforming Loans 214.94% 316.64% 278.43% -32% -23%
Nonperforming Assets to
Total Assets 0.42% 0.28% 0.32% 50% 31%
Nonperforming Loans to
Total Loans 0.60% 0.42% 0.53% 43% 13%

OTHER PERIOD-END
STATISTICS
(unaudited)
Shareholders Equity /
Total Assets 11.84% 11.23% 9.87% 5% 20%
Loan to Deposit Ratio 85.73% 81.46% 73.29% 5% 17%
Noninterest Bearing
Deposits / Total Deposits 27.39% 25.83% 26.39% 6% 4%
Leverage Ratio 13.47% 13.24% 11.55% 2% 17%

For the Three Months Ended
December 31, 2006
NET INTEREST INCOME AND NET INTEREST Interest Average
MARGIN Average Income/ Yield/
(in $000′s, unaudited) Balance Expense Rate
Assets:
Loans, gross $738,372 $15,836 8.51%
Securities 178,835 2,014 4.47%
Interest bearing deposits in other
financial institutions 2,890 36 4.94%
Federal funds sold 64,049 851 5.27%
Total interest earning assets 984,146 $18,737 7.55%
Cash and due from banks 29,545
Premises and equipment, net 2,607
Other assets 68,142
Total assets $1,084,440

Liabilities and shareholders’ equity:
Deposits:
Demand, interest bearing $135,356 $769 2.25%
Savings and money market 356,489 2,819 3.14%
Time deposits, under $100 30,460 276 3.59%
Time deposits, $100 and over 104,325 1,033 3.93%
Brokered time deposits, $100 and over 32,408 312 3.82%
Notes payable to subsidiary grantor
trusts 23,702 586 9.81%
Securities sold under agreement to
repurchase 21,800 141 2.57%
Total interest bearing liabilities 704,540 $5,936 3.34%
Demand, noninterest bearing 233,945
Other liabilities 24,753
Total liabilities 963,238
Shareholders’ equity: 121,202
Total liabilities and shareholders’
equity $1,084,440

Net interest income / margin $12,801 5.16%

For the Year Ended
December 31, 2006
NET INTEREST INCOME AND NET INTEREST Interest Average
MARGIN Average Income/ Yield/
(in $000′s, unaudited) Balance Expense Rate
Assets:
Loans, gross $738,297 $61,859 8.38%
Securities 191,220 7,796 4.08%
Interest bearing deposits in other
financial institutions 2,826 132 4.67%
Federal funds sold 63,739 3,170 4.97%
Total interest earning assets 996,082 $72,957 7.32%
Cash and due from banks 34,810
Premises and equipment, net 2,482
Other assets 64,904
Total assets $1,098,278

Liabilities and shareholders’ equity:
Deposits:
Demand, interest bearing $145,471 $3,220 2.21%
Savings and money market 358,846 10,274 2.86%
Time deposits, under $100 31,967 1,037 3.24%
Time deposits, $100 and over 107,387 3,762 3.50%
Brokered time deposits, $100 and over 34,234 1,295 3.78%
Notes payable to subsidiary grantor
trusts 23,702 2,310 9.75%
Securities sold under agreement to
repurchase 25,429 627 2.47%
Total interest bearing liabilities 727,036 $22,525 3.10%
Demand, noninterest bearing 229,190
Other liabilities 23,957
Total liabilities 980,183
Shareholders’ equity: 118,095
Total liabilities and shareholders’
equity $1,098,278

Net interest income / margin $50,432 5.06%

For the Three Months Ended
December 31, 2005
NET INTEREST INCOME AND NET INTEREST Interest Average
MARGIN Average Income/ Yield/
(in $000′s, unaudited) Balance Expense Rate
Assets:
Loans, gross $769,020 $15,109 7.79%
Securities 214,123 1,773 3.29%
Interest bearing deposits in other
financial institutions 4,258 39 3.63%
Federal funds sold 66,500 667 3.98%
Total interest earning assets 1,053,901 $17,588 6.62%
Cash and due from banks 39,611
Premises and equipment, net 2,641
Other assets 59,025
Total assets $1,155,178

Liabilities and shareholders’ equity:
Deposits:
Demand, interest bearing $146,244 $622 1.69%
Savings and money market 376,613 2,013 2.12%
Time deposits, under $100 36,147 243 2.67%
Time deposits, $100 and over 111,586 804 2.86%
Brokered time deposits, $100 and over 36,610 344 3.73%
Notes payable to subsidiary grantor
trusts 23,702 555 9.29%
Securities sold under agreement to
repurchase 32,700 192 2.33%
Total interest bearing liabilities 763,602 $4,773 2.48%
Demand, noninterest bearing 258,374
Other liabilities 23,566
Total liabilities 1,045,542
Shareholders’ equity: 109,636
Total liabilities and shareholders’
equity $1,155,178

Net interest income / margin $12,815 4.82%

For the Year Ended
December 31, 2005
Interest Average
NET INTEREST INCOME AND NET INTEREST
MARGIN Average Income/ Yield/
(in $000′s, unaudited) Balance Expense Rate
Assets:
Loans, gross $762,328 $54,643 7.17%
Securities 226,043 7,247 3.21%
Interest bearing deposits in other
financial institutions 3,234 97 3.00%
Federal funds sold 52,438 1,769 3.37%
Total interest earning assets 1,044,043 $63,756 6.11%
Cash and due from banks 38,670
Premises and equipment, net 2,879
Other assets 51,593
Total assets $1,137,185

Liabilities and shareholders’ equity:
Deposits:
Demand, interest bearing $134,412 $1,749 1.30%
Savings and money market 363,570 6,058 1.67%
Time deposits, under $100 37,260 862 2.31%
Time deposits, $100 and over 115,104 2,867 2.49%
Brokered time deposits, $100 and over 35,764 1,313 3.67%
Notes payable to subsidiary grantor
trusts 23,702 2,136 9.01%
Securities sold under agreement to
repurchase 40,748 922 2.26%
Total interest bearing liabilities 750,560 $15,907 2.12%
Demand, noninterest bearing 259,881
Other liabilities 21,536
Total liabilities 1,031,977
Shareholders’ equity: 105,208
Total liabilities and shareholders’
equity $1,137,185

Net interest income / margin $47,849 4.58%

Source: Heritage Commerce Corp