Unassociated Document

Exhibit 99.1

Heritage Commerce Corp Earns $2.4 Million in Third Quarter

San Jose, CA – October 23, 2008 — Heritage Commerce Corp (Nasdaq: HTBK), parent company of Heritage Bank of Commerce, today reported net income of $2.4 million, or $0.21 per diluted share in the third quarter ended September 30, 2008, compared to $3.2 million, or $0.24 per diluted share, for the same quarter a year ago, and a net loss of $3.1 million, or ($0.26) per diluted share for the second quarter of 2008. For the first nine months of 2008, net income was $1.1 million, or $0.09 per diluted share, compared to $11.3 million, or $0.91 per diluted share, for the same period a year ago.

Third Quarter 2008 Financial Highlights

¨	Total assets were $1.51 billion, an increase of 14% from September 30, 2007, and 2% from June 30, 2008.

¨	Loans increased 31% to $1.25 billion, an increase of $295 million from the third quarter of 2007 and an increase of $41 million or 3% compared to June 30, 2008.

¨	Commercial loans accounted for 43% of the loan portfolio, compared to 40% a year ago.

¨	The Company has no direct exposure to subprime loans or securities, nor does it own any Fannie Mae or Freddie Mac equity securities.

¨	Capital ratios qualify as well capitalized by regulatory standards. The leverage ratio was 8.27% at September 30, 2008.

¨	The regular quarterly cash dividend of $0.08 per share was maintained in the quarter.

“Despite poor economic conditions and a volatile rate environment, I am happy to report that our third quarter earnings demonstrate solid performance, primarily due to the continued focus of our people on our customers,” said Walter Kaczmarek, President and Chief Executive Officer.

Balance Sheet and Capital Management

Heritage’s assets totaled $1.51 billion at September 30, 2008, compared to $1.33 billion a year ago, and $1.49 billion at June 30, 2008. Total loans were $1.25 billion at September 30, 2008, compared to $0.95 billion at September 30, 2007, and $1.21 billion at June 30, 2008. Deposits totaled $1.19 billion at September 30, 2008, compared to $1.10 billion at September 30, 2007, and $1.16 billion at June 30, 2008.

The securities portfolio of $107.6 million at September 30, 2008 consisted primarily of short term U.S. Treasury securities, U.S. government sponsored entities’ debt securities, mortgage-backed securities, collateralized mortgage obligations, and municipal bonds.

The Company’s loan portfolio at September 30, 2008 consisted of 43% commercial loans, 32% commercial real estate mortgage loans, 20% land and construction, and 5% consumer and other loans.

The Company’s deposits increased by 8% in the past year.

The Company’s loan growth in the nine months ended September 30, 2008 outpaced deposit growth, resulting in an increase in brokered deposits of $145 million for the first nine months of 2008, and $76 million for the third quarter of 2008. The Company’s noncore funding (which consists of time deposits, $100,000 and over, brokered deposits, securities sold under agreement to repurchase, and other short-term borrowings) to total assets ratio was 32% at September 30, 2008, compared to 15% a year ago. The Company’s loan to deposit ratio was 105% at September 30, 2008, compared to 87% a year ago.

Shareholders’ equity decreased to $144.3 million, or $8.18 tangible book value per share, at September 30, 2008, compared to $168.4 million, or $9.18 tangible book value per share, a year ago, and increased from $141.7 million, or $7.96 tangible book value per share, at June 30, 2008. Shareholders’ equity and regulatory capital ratios were lower at September 30, 2008, compared to the prior year because of the buyback of 1.4 million common shares during the period for $23.9 million. Capital ratios continue to be above the well-capitalized guidelines established by regulatory agencies. The leverage ratio at September 30, 2008 was 8.27%, compared to 11.19% at September 30, 2007, and 8.36% at June 30, 2008.

Credit Quality

Primarily due to a softening in the real estate market, which is expected to continue well into 2009, nonperforming assets (“NPAs”) increased by $10.8 million from June 30, 2008 to September 30, 2008. Nonperforming assets totaled $25.1 million, or 1.66% of total assets, at September 30, 2008, compared to $3.4 million, or 0.25% of total assets at September 30, 2007, and $14.3 million, or 0.96% of total assets at June 30, 2008.

Net charge-offs in the third quarter of 2008 were $129,000 or 0.04% of average loans, compared to net recoveries of $868,000 or (0.37%) of average loans in the third quarter of 2007. Net charge-offs in the second quarter of 2008 were $370,000 or 0.13% of average loans.

The Company’s provision for loan losses in the third quarter of 2008 was $1.6 million, which is primarily due to the $41 million in loan growth for the quarter, and additional risk in the loan portfolio reflected in the increase in nonperforming loans. The Company had a reverse provision of $500,000 in the third quarter of 2007. The provision for loan losses was $7.8 million in the second quarter of 2008. The total allowance for loan losses was $22.3 million at September 30, 2008, compared to $11.5 million at September 30, 2007, and $20.9 million at June 30, 2008.

Operating Results

Net income during 2008 has been impacted by net interest margin compression, a higher provision for loan losses, and lower noninterest income resulting from the Company’s strategic decision to retain, rather than sell, SBA loan production.

Net interest income decreased to $13.0 million for the third quarter of 2008 from $13.8 million for the third quarter of 2007 and increased by $78,000 from the second quarter of 2008. The third quarter of 2008 net interest margin was 3.83%, down 17 basis points, compared to 4.00% for the second quarter this year, and 82 basis points from 4.65% in the third quarter a year ago. For 2008 year-to-date, the net interest margin decreased 88 basis points to 4.04% from 4.92% for the first nine months of 2007. Decreases in the net interest margin are primarily the result of the 325 basis points decline in short-term interest rates from September 1, 2007 through April 30, 2008. On October 8, 2008, the Federal Reserve lowered the targeted federal funds rate by another 50 basis points, to 1.50%.

Noninterest income was $1.7 million for the third quarter of 2008, compared to $1.6 million for the third quarter of 2007, and $1.8 million for the prior quarter. In the first nine months of 2008, noninterest income was $5.0 million, compared to $6.4 million in the first nine months a year ago. Gains on sales of SBA loans were $1.8 million in the first nine months of 2007, with no corresponding income in 2008. Noninterest income was primarily comprised of loan servicing income, the increase in cash surrender value of Company owned life insurance, and service charges on deposit accounts.

Noninterest expense was $10.4 million for the third quarter of 2008, compared to $10.5 million for the third quarter of 2007, and $11.0 million for the second quarter of 2008. In the first nine months of 2008, noninterest expense increased to $32.0 million from $27.3 million for the first nine months a year ago. Operating expenses increased in 2008 due to the acquisition of Diablo Valley Bank on June 20, 2007, the new office in Walnut Creek, the addition of experienced banking professionals, and the write-off of leasehold improvements in the third quarter of 2008 due to the consolidation of our two offices in Los Altos.

Income tax expense for the quarter and nine months ended September 30, 2008 was $309,000 and $39,000, respectively, as compared to income tax expense of $2.2 million and $6.5 million for the same periods in 2007. The effective income tax rate for the quarter and nine months ended September 30, 2008 was 11.2% and 3.5%, respectively, as compared to an effective income tax rate of 40.0% and 36.4% for the same periods in 2007. For the quarter ended June 30, 2008, there was an income tax benefit of $955,000, due to the pre-tax loss of $4.0 million. 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 investments in tax-free municipal securities. The effective tax rates in 2008 are lower compared to 2007 because pre-tax income decreased substantially while benefits from tax advantaged investments did not.

The efficiency ratio was 70.56% in the third quarter of 2008, compared to 74.51% in the second quarter of 2008, and 68.21% in the third quarter of 2007. The efficiency ratio for the first nine months of 2008 increased to 72.48% from 61.64% a year ago. The efficiency ratio increased in 2008 primarily due to compression of the net interest margin, a decrease in noninterest income, and an increase in expenses, as discussed above.

The annualized returns on average assets (ROAA) and average equity (ROAE) for the third quarter of 2008 were 0.65% and 6.78%, compared to 0.96% and 7.56% for the quarter ended September 30, 2007, respectively. ROAA and ROAE for the first nine months of 2008 were 0.10% and 0.95%, compared to 1.31% and 10.60% for the first nine months of 2007, respectively. The annualized returns on average tangible assets (ROATA) and average tangible equity (ROATE) for the third quarter of 2008 were 0.67% and 10.15%, compared to 1.00% and 10.55% for the quarter ended September 30, 2007, respectively. ROATA and ROATE for the first nine months of 2008 were 0.10% and 1.39%, compared to 1.33% and 12.12% for the first nine months of 2007, respectively.

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 Fresno, Sacramento, Oakland, and Santa Rosa, California. For more information, please visit www.heritagecommercecorp.com.

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

	For the Three Months Ended:						Percent Change From:				For the Nine Months Ended:
CONSOLIDATED INCOME STATEMENTS	Sept. 30,		June 30,		Sept. 30,		June 30,		Sept. 30,		Sept. 30,		Sept. 30,		Percent
(in $000's, unaudited)	2008		2008		2007		2008		2007		2008		2007		Change
Interest Income	$	19,197	$	18,699	$	22,105		3%		-13%	$	57,791	$	57,656		0%
Interest Expense		6,151		5,731		8,324		7%		-26%		18,673		19,751		-5%
Net Interest Income		13,046		12,968		13,781		1%		-5%		39,118		37,905		3%
Provision for Loan Losses		1,587		7,800		(500)		-80%		417%		11,037		(736)		1600%
Net Interest Income after Provision for Loan Losses		11,459		5,168		14,281		122%		-20%		28,081		38,641		-27%
Noninterest Income:
Gain on Sale of SBA Loans		0		0		60		N/A		-100%		0		1,766		-100%
Servicing Income		491		377		546		30%		-10%		1,347		1,596		-16%
Increase in Cash Surrender Value of Life Insurance		416		418		374		0%		11%		1,232		1,071		15%
Service Charges and Fees on Deposit Accounts		505		537		344		-6%		47%		1,457		954		53%
Other		276		460		315		-40%		-12%		958		1,028		-7%
Total Noninterest Income		1,688		1,792		1,639		-6%		3%		4,994		6,415		-22%

Noninterest Expense:
Salaries & Employee Benefits		5,665		5,970		5,840		-5%		-3%		17,694		15,413		15%
Occupancy & Equipment		1,348		1,044		1,168		29%		15%		3,511		2,933		20%
Other		3,384		3,984		3,510		-15%		-4%		10,769		8,972		20%
Total Noninterest Expense		10,397		10,998		10,518		-5%		-1%		31,974		27,318		17%
Income (Loss) Before Income Taxes		2,750		(4,038)		5,402		168%		-49%		1,101		17,738		-94%
Income Tax Expense (Benefit)		309		(955)		2,162		132%		-86%		39		6,450		-99%
Net Income (Loss)	$	2,441	$	(3,083)	$	3,240		179%		-25%	$	1,062	$	11,288		-91%

PER SHARE DATA
(unaudited)
Basic Earnings (Loss) Per Share	$	0.21	$	(0.26)	$	0.24		181%		-13%	$	0.09	$	0.92		-90%
Diluted Earnings (Loss) Per Share	$	0.21	$	(0.26)	$	0.24		181%		-13%	$	0.09	$	0.91		-90%
Common Shares Outstanding at Period End		11,820,509		11,806,167		13,123,396		0%		-10%		11,820,509		13,123,396		-10%
Book Value Per Share	$	12.21	$	12.01	$	12.83		2%		-5%	$	12.21	$	12.83		-5%
Tangible Book Value Per Share	$	8.18	$	7.96	$	9.18		3%		-11%	$	8.18	$	9.18		-11%

KEY FINANCIAL RATIOS
(unaudited)
Annualized Return on Average Equity		6.78%		-8.34%		7.56%		181%		-10%		0.95%		10.60%		-91%
Annualized Return on Average Tangible Equity		10.15%		-12.30%		10.55%		183%		-4%		1.39%		12.12%		-89%
Annualized Return on Average Assets		0.65%		-0.85%		0.96%		176%		-32%		0.10%		1.31%		-92%
Annualized Return on Average Tangible Assets		0.67%		-0.88%		1.00%		176%		-33%		0.10%		1.33%		-92%
Net Interest Margin		3.83%		4.00%		4.65%		-4%		-18%		4.04%		4.92%		-18%
Efficiency Ratio		70.56%		74.51%		68.21%		-5%		3%		72.48%		61.64%		18%

AVERAGE BALANCES
(in $000's, unaudited)
Average Assets	$	1,499,734	$	1,456,396	$	1,336,195		3%		12%	$	1,443,641	$	1,150,486		25%
Average Tangible Assets	$	1,452,044	$	1,408,536	$	1,287,936		3%		13%	$	1,395,761	$	1,132,664		23%
Average Earning Assets	$	1,353,730	$	1,304,987	$	1,175,396		4%		15%	$	1,292,758	$	1,029,042		26%
Average Total Loans	$	1,231,931	$	1,170,274	$	933,675		5%		32%	$	1,159,535	$	788,180		47%
Average Loans Held-For-Sale	$	0	$	0	$	5,348		N/A		-100%	$	0	$	12,288		-100%
Average Deposits	$	1,191,151	$	1,169,860	$	1,107,662		2%		8%	$	1,154,705	$	944,822		22%
Average Demand Deposits - Noninterest Bearing	$	261,578	$	260,361	$	263,465		0%		-1%	$	257,054	$	234,943		9%
Average Interest Bearing Deposits	$	929,573	$	909,499	$	844,197		2%		10%	$	897,651	$	709,879		26%
Average Interest Bearing Liabilities	$	1,066,264	$	1,018,685	$	878,799		5%		21%	$	1,008,692	$	749,847		35%
Average Equity	$	143,318	$	148,660	$	170,136		-4%		-16%	$	150,110	$	142,377		5%
AverageTangible Equity	$	95,628	$	100,800	$	121,877		-5%		-22%	$	102,230	$	124,555		-18%

	End of Period:									Percent Change From:
CONSOLIDATED BALANCE SHEETS	Sept. 30,			June 30,			Sept. 30,			June 30,			Sept. 30,
(in $000's, unaudited)	2008			2008			2007			2008			2007
ASSETS
Cash and Due from Banks	$	35,718		$	42,642		$	51,627			-16	%		-31	%
Federal Funds Sold		100			150			42,600			-33	%		-100	%
Securities Available-for-Sale, at Fair Value		107,565			116,594			150,116			-8	%		-28	%
Loans:
Commercial Loans		532,367			509,887			378,777			4	%		41	%
Real Estate-Mortgage		405,897			403,526			325,327			1	%		25	%
Real Estate-Land and Construction		253,134			243,731			205,925			4	%		23	%
Home Equity		51,981			45,991			39,771			13	%		31	%
Consumer Loans		5,549			4,686			4,131			18	%		34	%
Loans		1,248,928			1,207,821			953,931			3	%		31	%
Deferred Loan Costs, Net		1,412			1,301			727			9	%		94	%
Total Loans, Net of Deferred Costs		1,250,340			1,209,122			954,658			3	%		31	%
Allowance for Loan Losses		(22,323	)		(20,865	)		(11,472	)		7	%		95	%
Net Loans		1,228,017			1,188,257			943,186			3	%		30	%
Company Owned Life Insurance		40,236			39,819			38,270			1	%		5	%
Premises & Equipment, Net		9,318			9,052			9,441			3	%		-1	%
Goodwill		43,181			43,181			42,996			0	%		0	%
Intangible Assets		4,407			4,584			4,863			-4	%		-9	%
Accrued Interest Receivable and Other Assets		43,339			42,708			43,320			1	%		0	%
Total Assets	$	1,511,881		$	1,486,987		$	1,326,419			2	%		14	%

LIABILITIES & SHAREHOLDERS' EQUITY
Liabilities:
Deposits
Demand Deposits-Noninterest Bearing	$	257,739		$	262,813		$	263,244			-2	%		-2	%
Demand Deposits-Interest Bearing		139,377			145,151			146,410			-4	%		-5	%
Savings and Money Market		400,863			435,754			468,263			-8	%		-14	%
Time Deposits, Under $100		34,792			33,911			32,341			3	%		8	%
Time Deposits, $100 and Over		168,361			173,766			138,327			-3	%		22	%
Brokered Deposits		185,052			108,623			52,179			70	%		255	%
Total Deposits		1,186,184			1,160,018			1,100,764			2	%		8	%
Securities Sold Under Agreement to Repurchase		35,000			35,000			10,900			0	%		221	%
Other Short-term Borrowings		95,000			98,000			0			-3	%		N/	A
Notes Payable To Subsidiary Grantor Trusts		23,702			23,702			23,702			0	%		0	%
Accrued Interest Payable and Other Liabilities		27,711			28,518			22,678			-3	%		22	%
Total Liabilities		1,367,597			1,345,238			1,158,044			2	%		18	%

Shareholders' Equity:
Common Stock		76,490			75,941			98,093			1	%		-22	%
Accumulated Other Comprehensive Loss		(512	)		(930	)		(1,258	)		-45	%		-59	%
Retained Earnings		68,306			66,738			71,540			2	%		-5	%
Total Shareholders' Equity		144,284			141,749			168,375			2	%		-14	%
Total Liabilities & Shareholders' Equity	$	1,511,881		$	1,486,987		$	1,326,419			2	%		14	%


CREDIT QUALITY DATA
(in $000's, unaudited)
Nonaccrual Loans	$	23,095		$	12,226		$	2,862			89	%		707	%
Loans Over 90 Days Past Due and Still Accruing		1,016			1,488			18			-32	%		5544	%
Total Nonperforming Loans		24,111			13,714			2,880			76	%		737	%
Other Real Estate Owned		970			580			487			67	%		99	%
Total Nonperforming Assets	$	25,081		$	14,294		$	3,367			75	%		645	%
Net Charge-offs (Recoveries)	$	129		$	370		$	(868	)		-65	%		115	%
Net Charge-offs as Percent of Average Loans		0.04	%		0.13	%		-0.37	%		-69	%		111	%
Allowance for Loan Losses to Total Loans		1.79	%		1.73	%		1.20	%		3	%		49	%
Allowance for Loan Losses to Nonperforming Loans		92.58	%		152.14	%		398.33	%		-39	%		-77	%
Nonperforming Assets to Total Assets		1.66	%		0.96	%		0.25	%		73	%		564	%
Nonperforming Loans to Total Loans		1.93	%		1.13	%		0.30	%		71	%		543	%

OTHER PERIOD-END STATISTICS
(unaudited)
Shareholders' Equity / Total Assets		9.54	%		9.53	%		12.69	%		0	%		-25	%
Loan to Deposit Ratio		105.41	%		104.23	%		86.73	%		1	%		22	%
Noninterest Bearing Deposits / Total Deposits		21.73	%		22.66	%		23.91	%		-4	%		-9	%
Leverage Ratio		8.27	%		8.36	%		11.19	%		-1	%		-26	%

	For the Three Months Ended							For the Three Months Ended
	September 30, 2008							September 30, 2007
			Interest		Average					Interest		Average
NET INTEREST INCOME AND NET INTEREST MARGIN	Average		Income/		Yield/			Average		Income/		Yield/
(in $000's, unaudited)	Balance		Expense		Rate			Balance		Expense		Rate
Assets:
Loans, gross	$	1,231,931	$	17,919		5.79	%	$	939,023	$	19,282		8.15	%
Securities		119,582		1,267		4.22	%		166,782		1,919		4.56	%
Interest bearing deposits in other financial institutions		182		1		2.19	%		2,908		31		4.23	%
Federal funds sold		2,035		10		1.95	%		66,683		873		5.19	%
Total interest earning assets		1,353,730	$	19,197		5.64	%		1,175,396	$	22,105		7.46	%
Cash and due from banks		34,234							40,334
Premises and equipment, net		9,185							9,430
Goodwill and other intangible assets		47,690							48,264
Other assets		54,895							62,771
Total assets	$	1,499,734						$	1,336,195

Liabilities and shareholders' equity:
Deposits:
Demand, interest bearing	$	144,809	$	308		0.85	%	$	153,352	$	863		2.23	%
Savings and money market		415,826		1,624		1.55	%		460,596		3,981		3.43	%
Time deposits, under $100		33,893		224		2.63	%		33,379		327		3.89	%
Time deposits, $100 and over		170,045		1,138		2.66	%		137,605		1,786		5.15	%
Brokered time deposits		165,000		1,617		3.90	%		59,265		706		4.73	%
Notes payable to subsidiary grantor trusts		23,702		527		8.85	%		23,702		585		9.79	%
Securities sold under agreement to repurchase		35,000		264		3.00	%		10,900		76		2.77	%
Other short-term borrowings		77,989		449		2.29	%		0		0		N	/A
Total interest bearing liabilities		1,066,264	$	6,151		2.29	%		878,799	$	8,324		3.76	%
Demand, noninterest bearing		261,578							263,465
Other liabilities		28,574							23,795
Total liabilities		1,356,416							1,166,059
Shareholders' equity:		143,318							170,136
Total liabilities and shareholders' equity	$	1,499,734						$	1,336,195

Net interest income / margin			$	13,046		3.83	%			$	13,781		4.65	%

	For the Nine Months Ended							For the Nine Months Ended
	September 30, 2008							September 30, 2007
			Interest		Average					Interest		Average
NET INTEREST INCOME AND NET INTEREST MARGIN	Average		Income/		Yield/			Average		Income/		Yield/
(in $000's, unaudited)	Balance		Expense		Rate			Balance		Expense		Rate
Assets:
Loans, gross	$	1,159,535	$	53,524		6.17	%	$	800,468	$	49,541		8.27	%
Securities		129,570		4,201		4.33	%		170,650		5,853		4.59	%
Interest bearing deposits in other financial institutions		571		10		2.34	%		2,928		104		4.75	%
Federal funds sold		3,082		56		2.43	%		54,996		2,158		5.25	%
Total interest earning assets		1,292,758	$	57,791		5.97	%		1,029,042	$	57,656		7.49	%
Cash and due from banks		36,085							36,299
Premises and equipment, net		9,200							5,116
Goodwill and other intangible assets		47,880							17,981
Other assets		57,718							62,048
Total assets	$	1,443,641						$	1,150,486

Liabilities and shareholders' equity:
Deposits:
Demand, interest bearing	$	149,451	$	1,276		1.14	%	$	143,685	$	2,409		2.24	%
Savings and money market		453,146		6,375		1.88	%		369,268		8,721		3.16	%
Time deposits, under $100		34,340		815		3.17	%		31,873		917		3.85	%
Time deposits, $100 and over		163,793		3,891		3.17	%		113,694		3,865		4.55	%
Brokered time deposits		96,921		2,928		4.04	%		51,359		1,757		4.57	%
Notes payable to subsidiary grantor trusts		23,702		1,610		9.07	%		23,702		1,749		9.87	%
Securities sold under agreement to repurchase		31,033		674		2.90	%		16,266		333		2.74	%
Other short-term borrowings		56,306		1,104		2.62	%		0		0		N/	A
Total interest bearing liabilities		1,008,692	$	18,673		2.47	%		749,847	$	19,751		3.52	%
Demand, noninterest bearing		257,054							234,943
Other liabilities		27,785							23,319
Total liabilities		1,293,531							1,008,109
Shareholders' equity:		150,110							142,377
Total liabilities and shareholders' equity	$	1,443,641						$	1,150,486

Net interest income / margin			$	39,118		4.04	%			$	37,905		4.92	%