10-Q

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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 March 31, 2013
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 26,333,368 shares of Common Stock outstanding on April 18, 2013.

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 Statement of Changes in Shareholders' Equity	8
	Consolidated Statements of Cash Flows	9
	Notes to Consolidated Financial Statements	10
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	36
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	65
Item 4.	Controls and Procedures	65
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	67
Item 1A.	Risk Factors	67
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	67
Item 3.	Defaults Upon Senior Securities	67
Item 4.	Mine Safety Disclosures	67
Item 5.	Other Information	67
Item 6.	Exhibits	68
SIGNATURES		69
EXHIBIT INDEX		70

2

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, and Section 21E of the Securities Exchange Act of 1934, as amended, 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:

•

Competition for loans and deposits and failure to attract or retain deposits and loans;

•

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;

•

Risks associated with concentrations in real estate related loans;

•

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;

•

Stability of funding sources and continued availability of borrowings;

•

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;

•

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

•

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

•

Oversupply of inventory and continued deterioration in values of California commercial real estate;

•

A prolonged slowdown in construction activity;

•

The effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities, and executive compensation) which we must comply, including but not limited to, the Dodd-Frank Act of 2010;

•

The effects of security breaches and computer viruses that may affect our computer systems;

•

Changes in consumer spending, borrowings and saving habits;

3

•

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 ability to increase market share and control expenses; and

•

Our success in managing the risks involved in the foregoing items.

        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-Q. 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

Part I—FINANCIAL INFORMATION

ITEM 1—CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

HERITAGE COMMERCE CORP

CONSOLIDATED BALANCE SHEETS (Unaudited)

	March 31, 2013			December 31, 2012
	(Dollars in thousands)
Assets
Cash and due from banks	$	19,779		$	16,520
Interest-bearing deposits in other financial institutions		57,090			357,045
Total cash and cash equivalents		76,869			373,565
Securities available-for-sale, at fair value		346,800			367,912
Securities held-to-maturity, at amortized cost (fair value of $65,659 at March 31, 2013 and $50,964 at December 31, 2012)		68,283			51,472
Loans held-for-sale—SBA, at lower of cost or fair value, including deferred costs		4,394			3,409
Loans, including deferred fees and costs		801,925			812,313
Allowance for loan losses		(19,342	)		(19,027	)
Loans, net		782,583			793,286
Federal Home Loan Bank and Federal Reserve Bank stock, at cost		10,764			10,728
Company owned life insurance		48,774			48,358
Premises and equipment, net		7,632			7,469
Intangible assets		1,882			2,000
Accrued interest receivable and other assets		35,583			35,113
Total assets	$	1,383,564		$	1,693,312
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Demand, noninterest-bearing	$	397,198		$	727,684
Demand, interest-bearing		169,681			155,951
Savings and money market		286,784			272,047
Time deposits—under $100		23,835			25,157
Time deposits—$100 and over		189,779			190,502
Time deposits—brokered		83,763			97,807
CDARS—money market and time deposits		15,850			10,220
Total deposits		1,166,890			1,479,368
Subordinated debt		9,279			9,279
Accrued interest payable and other liabilities		36,560			34,924
Total liabilities		1,212,729			1,523,571
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 March 31, 2013 and December 31, 2012 (liquidation preference of $21,004 at March 31, 2013 and December 31, 2012)		19,519			19,519
Common stock, no par value; 60,000,000 shares authorized; 26,333,368 shares issued and outstanding at March 31, 2013 and 26,322,147 shares issued and outstanding at December 31, 2012		131,998			131,820
Retained earnings		17,901			15,721
Accumulated other comprehensive income		1,417			2,681
Total shareholders' equity		170,835			169,741
Total liabilities and shareholders' equity	$	1,383,564		$	1,693,312

See notes to consolidated financial statements

5

HERITAGE COMMERCE CORP

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

	Three Months Ended March 31,
	2013			2012
	(Dollars in thousands, except per share data)
Interest income:
Loans, including fees	$	10,089			10,316
Securities, taxable		2,462			3,097
Securities, non-taxable		248			—
Interest-bearing deposits in other financial institutions		68			36
Total interest income		12,867			13,449
Interest expense:
Deposits		625			716
Subordinated debt		88			474
Short-term borrowings		1			—
Total interest expense		714			1,190
Net interest income before provision for loan losses		12,153			12,259
Provision for loan losses		—			100
Net interest income after provision for loan losses		12,153			12,159
Noninterest income:
Service charges and fees on deposit accounts		577			590
Increase in cash surrender value of life insurance		416			429
Servicing income		365			460
Gain on sales of SBA loans		136			36
Gain on sales of securities		31			27
Other		138			181
Total noninterest income		1,663			1,723
Noninterest expense:
Salaries and employee benefits		6,011			5,667
Occupancy and equipment		1,068			996
Professional fees		982			1,211
Low income housing investment losses		311			269
Software subscriptions		291			290
FDIC deposit insurance premiums		259			225
Insurance expense		254			224
Data processing		252			245
Correspondent bank charges		164			143
Foreclosed assets, net		(155	)		115
Other		1,344			1,471
Total noninterest expense		10,781			10,856
Income before income taxes		3,035			3,026
Income tax expense		855			951
Net income		2,180			2,075
Dividends and discount accretion on preferred stock		—			(1,206	)
Net income available to common shareholders	$	2,180		$	869
Earnings per common share:
Basic	$	0.07		$	0.03
Diluted	$	0.07		$	0.03

See notes to consolidated financial statements

6

HERITAGE COMMERCE CORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

	For the Three Months Ended March 31,
	2013			2012
	(Dollars in thousands)
Net income	$	2,180		$	2,075
Other comprehensive income (loss):
Change in net unrealized holding gains on available-for-sale securities and I/O strips		(2,164	)		372
Deferred income taxes		909			(156	)
Change in net unamortized unrealized gain on securities available-for-sale that were reclassified to securities held-to-maturity		(14	)		—
Deferred income taxes		6			—
Reclassification adjustment for (gains) realized in income		(31	)		(27	)
Deferred income taxes		13			11
Change in unrealized gains (loss) on securities and I/O strips, net of deferred income taxes		(1,281	)		200
Change in net pension and other benefit plan liability adjustment		29			57
Deferred income taxes		(12	)		(24	)
Change in pension and other benefit plan liability, net of deferred income taxes		17			33
Other comprehensive income (loss)		(1,264	)		233
Total comprehensive income	$	916		$	2,308

See notes to consolidated financial statements

7

HERITAGE COMMERCE CORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)

	Three Months Ended March 31, 2013 and 2012
	Preferred Stock									Common Stock								Accumulated Other Comprehensive Income
															Retained Earnings						Total Shareholders' Equity
	Shares			Amount			Discount			Shares			Amount
	(Dollars in thousands)
Balance, January 1, 2012		61,004		$	59,365		$	(833	)		26,295,001		$	131,172	$	7,172		$	955		$	197,831
Net income		—			—			—			—			—		2,075			—			2,075
Other comprehensive income		—			—			—			—			—		—			233			233
Repurchase of Series A preferred stock		(40,000	)		(40,000	)		—			—			—		—			—			(40,000	)
Series A preferred stock capitalized offering costs		—			154			—			—			—		(154	)		—			—
Forfeitures of restricted stock awards		—			—			—			(8,500	)		—		—			—			—
Amortization of restricted stock awards, net of forfeitures and taxes		—			—			—			—			28		—			—			28
Cash dividends paid on Series A preferred stock		—			—			—			—			—		(373	)		—			(373	)
Accretion of discount on Series A preferred stock		—			—			833			—			—		(833	)		—			—
Stock option expense, net of forfeitures and taxes		—			—			—			—			102		—			—			102
Balance, March 31, 2012		21,004		$	19,519		$	—			26,286,501		$	131,302	$	7,887		$	1,188		$	159,896
Balance, January 1, 2013		21,004		$	19,519		$	—			26,322,147		$	131,820	$	15,721		$	2,681		$	169,741
Net income		—			—			—			—			—		2,180			—			2,180
Other comprehensive loss		—			—			—			—			—		—			(1,264	)		(1,264	)
Issuance of restricted stock awards		—			—			—			10,000			—		—			—			—
Amortization of restricted stock awards, net of forfeitures and taxes		—			—			—			—			45		—			—			45
Stock option expense, net of forfeitures and taxes		—			—			—			—			129		—			—			129
Stock options exercised		—			—			—			1,221			4		—			—			4
Balance, March 31, 2013		21,004		$	19,519		$	—			26,333,368		$	131,998	$	17,901		$	1,417		$	170,835

See notes to consolidated financial statements

8

HERITAGE COMMERCE CORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Three Months Ended March 31,
	2013			2012
	(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	2,180		$	2,075
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of discounts and premiums on securities		756			533
Gain on sales of securities available-for-sale		(31	)		(27	)
Gain on sales of SBA loans		(136	)		(36	)
Proceeds from sale of SBA loans originated for sale		1,774			632
Net change in SBA loans originated for sale		(2,643	)		(4,621	)
Provision for loan losses		—			100
Increase in cash surrender value of life insurance		(416	)		(429	)
Depreciation and amortization		177			195
Amortization of intangible assets		118			123
Gains on sale of foreclosed assets, net		(198	)		(31	)
Stock option expense, net		129			102
Amortization of restricted stock awards, net		45			28
Effect of changes in:
Accrued interest receivable and other assets		(88	)		818
Accrued interest payable and other liabilities		1,806			(609	)
Net cash provided by (used in) operating activities		3,473			(1,147	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities available-for-sale		(8,334	)		(19,943	)
Purchase of securities held-to-maturity		(18,433	)		—
Maturities/paydowns/calls of securities available-for-sale		23,056			18,858
Maturities/paydowns/calls of securities held-to-maturity		1,429			—
Proceeds from sale of securities available-for-sale		3,530			2,280
Net change in loans		10,690			5,239
Change in Federal Home Loan Bank and Federal Reserve Bank stock		(36	)		(3	)
Purchase of premises and equipment		(340	)		(98	)
Proceeds from sale of foreclosed assets		743			188
Proceeds from sale of other loans transferred to held-for-sale		—			220
Purchases of company owned life insurance		—			(250	)
Net cash provided by investing activities		12,305			6,491
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits		(312,478	)		30,822
Repayment of preferred stock		—			(40,000	)
Payment of cash dividends—preferred stock		—			(373	)
Exercise of stock options		4			—
Net cash used in financing activities		(312,474	)		(9,551	)
Net decrease in cash and cash equivalents		(296,696	)		(4,207	)
Cash and cash equivalents, beginning of period		373,565			72,872
Cash and cash equivalents, end of period	$	76,869		$	68,665
Supplemental disclosures of cash flow information:
Interest paid	$	709		$	1,557
Income taxes paid		1,025			800
Supplemental schedule of non-cash investing activity:
Due to broker for securities purchased	$	3,351		$	11,921
Loans transferred to foreclosed assets		33			1,973
Transfer of loans held-for-sale to loan portfolio		20			—

See notes to consolidated financial statements

9

HERITAGE COMMERCE CORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

(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, 2012. The Company has also established the following unconsolidated subsidiary grantor trusts: Heritage Capital Trust I; Heritage Statutory Trust I; Heritage Statutory Trust II; and Heritage Commerce Corp Statutory Trust III, which are Delaware Statutory business trusts formed for the exclusive purpose of issuing and selling trust preferred securities. During the third quarter of 2012 the Company dissolved the Heritage Statutory Trust I and the Heritage Capital Trust I.

        HBC is a commercial bank serving customers located in Santa Clara, Alameda, and Contra Costa counties of California. No customer accounts for more than 10 percent of revenue for HBC or the Company. Management evaluates the Company's performance as a whole and does not allocate resources based on the performance of different lending or transaction activities. Accordingly, the Company and its subsidiary operate as one business segment.

        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 months ended March 31, 2013 are not necessarily indicative of the results expected for any subsequent period or for the entire year ending December 31, 2013.

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 February 2013, the FASB issued an accounting standards update with the primary objective of improving the reporting of reclassifications out of accumulated other comprehensive income ("AOCI"). For significant reclassifications that are required to be presented in their entirety in net income in the same reporting period by U.S. GAAP, the update requires an entity to report the effect of these reclassifications out of AOCI on the respective line items of net income either on the face of the

10

HERITAGE COMMERCE CORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2013

(Unaudited)

1) Basis of Presentation (Continued)

statement that reports net income or in the financial statement notes. For AOCI items that that are not reclassified to net income in their entirety, presentation in the financial statement notes is required. This update is effective for public companies for fiscal years and interim periods within those years beginning after December 15, 2012, or the first quarter of 2013 for calendar year-end companies, and is required to be applied prospectively. The effect of adopting this standard did not have a material effect on the Company's operating results or financial condition, but the additional disclosures are included in Note 3.

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. On June 21, 2010, the Company issued to various institutional investors 21,004 shares of Series C Convertible Perpetual Preferred Stock ("Series C Preferred Stock"). The Series C Preferred Stock is convertible into 5,601,000 shares of common stock when transferred in accordance with its terms. The Series C Preferred Stock participate 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 and common stock warrants, using the treasury stock method. The common stock warrant was antidilutive at March 31, 2013 and 2012. A reconciliation of these factors used in computing basic and diluted earnings per common share is as follows:

	For the Three Months Ended March 31,
	2013		2012
	(Dollars in thousands)
Net income available to common shareholders	$	2,180	$	869
Less: net income allocated to Series C Preferred Stock		382		153
Net income allocated to common shareholders	$	1,798	$	716
Weighted average common shares outstanding for basic earnings per common share		26,329,343		26,289,334
Dilutive effect of stock options oustanding, using the the treasury stock method		49,114		27,220
Shares used in computing diluted earnings per common share		26,378,457		26,316,554
Basic earnings per share	$	0.07	$	0.03
Diluted earnings per share	$	0.07	$	0.03

11

HERITAGE COMMERCE CORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2013

(Unaudited)

3) Accumulated Other Comprehensive Income ("AOCI")

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

	For the Three Months Ended March 31, 2013 and 2012
	Unrealized Gains 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, 2013, net of taxes	$	7,887		$	497		$	(5,703	)	$	2,681
Other comprehensive (loss) before reclassification, net of taxes		(1,255	)		—			(24	)		(1,279	)
Amounts reclassified from other comprehensive income (loss), net of taxes		(18	)		(8	)		41			15
Net current period other comprensive income (loss), net of taxes		(1,273	)		(8	)		17			(1,264	)
Ending balance March 31, 2013, net of taxes	$	6,614		$	489		$	(5,686	)	$	1,417
Beginning balance January 1, 2012, net of taxes	$	6,210		$	—		$	(5,255	)	$	955
Other comprehensive income (loss) before reclassification, net of taxes		216			—			(8	)		208
Amounts reclassified from other comprehensive income (loss), net of taxes		(16	)		—			41			25
Net current period other comprensive income, net of taxes		200			—			33			233
Ending balance March 31, 2012, net of taxes	$	6,410		$	—		$	(5,222	)	$	1,188

(1)

Amounts in parenthesis indicate debits.

12

HERITAGE COMMERCE CORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2013

(Unaudited)

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

	Amounts Reclassified from AOCI(1) For the Three Months Ended March 31,
							Affected Line Item Where Net Income is Presented
Details About AOCI Components	2013			2012
	(Dollars in thousands)
Unrealized gains on available-for-sale securities and I/O strips	$	31		$	27		Realized gains on sale of securities
		(13	)		(11	)	Income tax expense
		18			16		Net of tax
Amortization of unrealized gain on securities available-for-sale that were reclassified to securities held-to-maturity		14			—		Interest income on taxable securities
		(6	)		—		Income tax expense
		8			—		Net of tax
Amortization of defined benefit pension plan items(2)
Prior service cost		—			(7	)
Actuarial losses		(71	)		(63	)
		(71	)		(70	)	Income before income tax
		30			29		Income tax expense
		(41	)		(41	)	Net of tax
Total reclassification for the period	$	(15	)	$	(25	)

(1)

Amounts in parenthesis indicate debits.

(2)

This AOCI component is included in the computation of net periodic benefit cost (see Note 7—Benefit Plans).

13

HERITAGE COMMERCE CORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2013

(Unaudited)

4) Securities

        The amortized cost and estimated fair value of securities at March 31, 2013 and December 31, 2012 were as follows:

March 31, 2013	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(Dollars in thousands)
Securities available-for-sale:
Agency mortgage-backed securities	$	262,710	$	8,444	$	(77	)	$	271,077
Corporate bonds		53,681		1,269		(58	)		54,892
Trust preferred securities		20,789		150		(108	)		20,831
Total	$	337,180	$	9,863	$	(243	)	$	346,800
Securities held-to-maturity:
Agency mortgage-backed securities	$	15,185	$	6	$	(298	)	$	14,893
Municipals—tax exempt		53,098		1		(2,333	)		50,766
Total	$	68,283	$	7	$	(2,631	)	$	65,659

December 31, 2012	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(Dollars in thousands)
Securities available-for-sale:
Agency mortgage-backed securities	$	281,598	$	9,668	$	(22	)	$	291,244
Corporate bonds		53,739		1,849		—			55,588
Trust preferred securities		20,769		375		(64	)		21,080
Total	$	356,106	$	11,892	$	(86	)	$	367,912
Securities held-to-maturity:
Agency mortgage-backed securities	$	16,659	$	2	$	(177	)	$	16,484
Municipals—tax exempt		34,813		80		(413	)		34,480
Total	$	51,472	$	82	$	(590	)	$	50,964

        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 March 31, 2013, the Company held 320 securities (169 available-for-sale and 151 held-to-maturity), of which 143 had fair values below amortized cost. No securities had been carried with an unrealized loss for over 12 months. 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 intend to sell any securities with an unrealized loss and 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

14

HERITAGE COMMERCE CORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2013

(Unaudited)

4) Securities (Continued)

value. The Company does not consider these securities to be other-than-temporarily impaired at March 31, 2013.

        At December 31, 2012, the Company held 269 securities (168 available-for-sale and 101 held-to-maturity), of which 70 had fair values below amortized cost. No securities had been carried with an unrealized loss for over 12 months. The Company does not consider these securities to be other-than-temporarily impaired at December 31, 2012.

        The amortized cost and estimated fair values of securities as March 31, 2013, by contractual maturity, are shown 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	$	924	$	963
Due after five through ten years		52,757		53,929
Due after ten years		20,789		20,831
Agency mortgage-backed securities	$	262,710		271,077
Total	$	337,180	$	346,800

	Held-to-maturity
	Amortized Cost		Estimated Fair Value
	(Dollars in thousands)
Due after five through ten years	$	1,085	$	1,060
Due after ten years		52,013		49,706
Agency mortgage-backed securities		15,185		14,893
Total	$	68,283	$	65,659

15

HERITAGE COMMERCE CORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2013

(Unaudited)

5) Loans

        Loans were as follows:

	March 31, 2013			December 31, 2012
	(Dollars in thousands)
Loans held-for-investment:
Commercial	$	356,688		$	375,469
Real estate:
Commercial and residential		361,340			354,934
Land and construction		24,611			22,352
Home equity		45,347			43,865
Consumer		14,036			15,714
Loans		802,022			812,334
Deferred loan origination (fees) costs, net		(97	)		(21	)
Loans, including deferred fees and costs		801,925			812,313
Allowance for loan losses		(19,342	)		(19,027	)
Loans, net	$	782,583		$	793,286

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

	Three Months Ended March 31, 2013
	Commercial			Real Estate		Consumer			Total
	(Dollars in thousands)
Balance, beginning of period	$	12,866		$	6,034	$	127		$	19,027
Charge-offs		(840	)		—		—			(840	)
Recoveries		1,150			5		—			1,155
Net recoveries		310			5		—			315
Provision (credit) for loan losses		(721	)		731		(10	)		—
Balance, end of period	$	12,455		$	6,770	$	117		$	19,342

	Three Months Ended March 31, 2012
	Commercial			Real Estate			Consumer		Total
	(Dollars in thousands)
Balance, beginning of period	$	13,215		$	7,338		$	147	$	20,700
Charge-offs		(910	)		(45	)		—		(955	)
Recoveries		461			—			—		461
Net charge-offs		(449	)		(45	)		—		(494	)
Provision (credit) for loan losses		968			(884	)		16		100
Balance, end of period	$	13,734		$	6,409		$	163	$	20,306

16

HERITAGE COMMERCE CORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2013

(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:

	March 31, 2013
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	2,031	$	977	$	18	$	3,026
Collectively evaluated for impairment		10,424		5,793		99		16,316
Total allowance balance	$	12,455	$	6,770	$	117	$	19,342
Loans:
Individually evaluated for impairment	$	8,128	$	10,112	$	141	$	18,381
Collectively evaluated for impairment		348,560		421,186		13,895		783,641
Total loan balance	$	356,688	$	431,298	$	14,036	$	802,022

	December 31, 2012
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	1,963	$	760	$	17	$	2,740
Collectively evaluated for impairment		10,903		5,274		110		16,287
Total allowance balance	$	12,866	$	6,034	$	127	$	19,027
Loans:
Individually evaluated for impairment	$	10,161	$	9,336	$	147	$	19,644
Collectively evaluated for impairment		365,308		411,815		15,567		792,690
Total loan balance	$	375,469	$	421,151	$	15,714	$	812,334

17

HERITAGE COMMERCE CORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2013

(Unaudited)

5) Loans (Continued)

        The following table presents loans held-for-investment individually evaluated for impairment by class of loans as of March 31, 2013 and December 31, 2012. 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.

	March 31, 2013						December 31, 2012
	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	$	3,939	$	3,939	$	—	$	7,829	$	6,978	$	—
Real estate:
Commercial and residential		3,622		3,622		—		2,755		2,741		—
Land and construction		2,177		2,177		—		2,310		2,223		—
Home Equity		2,137		2,137		—		2,141		2,141		—
Total with no related allowance recorded		11,875		11,875		—		15,035		14,083		—
With an allowance recorded:
Commercial		4,272		4,189		2,031		3,678		3,182		1,963
Real estate:
Commercial and residential		1,882		1,882		683		3,183		1,937		465
Home Equity		294		294		294		295		295		295
Consumer		141		141		18		147		147		17
Total with an allowance recorded		6,589		6,506		3,026		7,303		5,561		2,740
Total	$	18,464	$	18,381	$	3,026	$	22,338	$	19,644	$	2,740

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

	Three Months Ended March 31, 2013
			Real Estate
	Commercial		Commercial and Residential		Land and Construction		Home Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	9,145	$	5,090	$	2,200	$	2,434	$	144	$	19,013
Interest income during impairment	$	—	$	—	$	—	$	—	$	—	$	—
Cash-basis interest earned	$	—	$	—	$	—	$	—	$	—	$	—

18

HERITAGE COMMERCE CORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2013

(Unaudited)

5) Loans (Continued)

	Three Months Ended March 31, 2012
			Real Estate
	Commercial		Commercial and Residential		Land and Construction		Home Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	11,450	$	2,773	$	3,002	$	16	$	11	$	17,252
Interest income during impairment	$	—	$	1	$	14	$	—	$	—	$	15
Cash-basis interest earned	$	—	$	1	$	14	$	—	$	—	$	15

        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:

	March 31,
					December 31, 2012
	2013		2012
	(Dollars in thousands)
Nonaccrual loans—held-for-sale	$	—	$	184	$	—
Nonaccrual loans—held-for-investment		16,115		14,005		17,335
Restructured and loans over 90 days past due and still accruing		549		2,155		859
Total nonperforming loans	$	16,664	$	16,344	$	18,194
Other restructured loans	$	1,717	$	431	$	1,450
Impaired loans, excluding loans held-for-sale	$	18,381	$	16,591	$	19,644

        The following table presents the nonperforming loans by class as of March 31, 2013 and December 31, 2012:

	March 31, 2013						December 31, 2012
	Nonaccrual		Restructured and Loans Over 90 Days Past Due and Still Accruing		Total		Nonaccrual		Restructured and Loans Over 90 Days Past Due and Still Accruing		Total
	(Dollars in thousands)
Commercial	$	5,863	$	549	$	6,412	$	7,852	$	859	$	8,711
Real estate:
Commercial and residential		5,503		—		5,503		4,676		—		4,676
Land and construction		2,177		—		2,177		2,223		—		2,223
Home equity		2,431		—		2,431		2,437		—		2,437
Consumer		141		—		141		147		—		147
Total	$	16,115	$	549	$	16,664	$	17,335	$	859	$	18,194

19

HERITAGE COMMERCE CORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2013

(Unaudited)

5) Loans (Continued)

        The following table presents the aging of past due loans as of March 31, 2013 by class of loans:

	March 31, 2013
	30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Loans Not Past Due		Total
	(Dollars in thousands)
Commercial	$	1,445	$	646	$	4,368	$	6,459	$	350,229	$	356,688
Real estate:
Commercial and residential		—		—		3,485		3,485		357,855		361,340
Land and construction		—		—		69		69		24,542		24,611
Home equity		87		—		2,043		2,130		43,217		45,347
Consumer		103				—		103		13,933		14,036
Total	$	1,635	$	646	$	9,965	$	12,246	$	789,776	$	802,022

        The following table presents the aging of past due loans as of December 31, 2012 by class of loans:

	December 31, 2012
	30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Loans Not Past Due		Total
	(Dollars in thousands)
Commercial	$	1,699	$	355	$	5,120	$	7,174	$	368,295	$	375,469
Real estate:
Commercial and residential		1,603		—		3,290		4,893		350,041		354,934
Land and construction		—		—		78		78		22,274		22,352
Home equity		742		—		2,045		2,787		41,078		43,865
Consumer		—		—		—		—		15,714		15,714
Total	$	4,044	$	355	$	10,533	$	14,932	$	797,402	$	812,334

        Past due loans 30 days or greater totaled $12,246,000 and $14,932,000 at March 31, 2013 and December 31, 2012, respectively, of which $11,267,000 and $12,020,000 were on nonaccrual. At March 31, 2013, there were also $4,848,000 loans less than 30 days past due included in nonaccrual loans held-for-investment. At December 31, 2012, there were also $5,315,000 loans less than 30 days past due included in nonaccrual loans held-for-investment. Management's classification of a loan as "nonaccrual" is an indication that there is reasonable doubt as to the full recovery of principal or interest on the loan. At that point, the Company stops accruing interest income, and reverses any uncollected interest that had been accrued as income. The Company begins recognizing interest income only as cash interest payments are received and it has been determined the collection of all outstanding principal is not in doubt. The loans may or may not be collateralized, and collection efforts are pursued.

20

HERITAGE COMMERCE CORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2013

(Unaudited)

5) Loans (Continued)

Credit Quality Indicators

        Concentrations of credit risk arise when a number of clients are engaged in similar business activities, or activities in the same geographic region, or have similar features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. The Company's loan portfolio is concentrated in commercial (primarily manufacturing, wholesale, and service) and real estate lending, with the balance in consumer loans. While no specific industry concentration is considered significant, the Company's lending operations are located in the Company's market areas that are dependent on the technology and real estate industries and their supporting companies. Thus, the Company's borrowers could be adversely impacted by a continued downturn in these sectors of the economy which could reduce the demand for loans and adversely impact the borrowers' ability to repay their loans.

        The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a quarterly basis. Nonclassified loans generally include those loans that are expected to be repaid in accordance with contractual loans terms. Classified loans are those loans that are assigned a substandard, substandard-nonaccrual, or doubtful risk rating using the following definitions:

        Substandard.    Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

        Substandard-Nonaccrual.    Loans classified as substandard-nonaccrual are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. In addition, the Company no longer accrues interest on the loan because of the underlying weaknesses.

        Doubtful.    Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

        Loss.    Loans classified as loss are considered uncollectable or of so little value that their continuance as assets is not warranted. This classification does not necessarily mean that a loan has no recovery or salvage value; but rather, there is much doubt about whether, how much, or when the recovery would occur. Loans classified as loss are immediately charged off against the allowance for loan losses. Therefore, there is no balance to report at March 31, 2013 or December 31, 2012.

21

HERITAGE COMMERCE CORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2013

(Unaudited)

5) Loans (Continued)

        The following table provides a summary of the loan portfolio by loan type and credit quality classification at March 31, 2013 and December 31, 2012:

	March 31, 2013						December 31, 2012
	Nonclassified		Classified		Total		Nonclassified		Classified		Total
	(Dollars in thousands)
Commercial	$	340,372	$	16,316	$	356,688	$	355,440	$	20,029	$	375,469
Real estate:
Commercial and residential		351,911		9,429		361,340		345,045		9,889		354,934
Land and construction		22,433		2,178		24,611		18,858		3,494		22,352
Home equity		42,591		2,756		45,347		41,187		2,678		43,865
Consumer		13,656		380		14,036		15,321		393		15,714
Total	$	770,963	$	31,059	$	802,022	$	775,851	$	36,483	$	812,334

        In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company's underwriting policy.

        The recorded investment of troubled debt restructurings at March 31, 2013 was $3,662,000, which included $1,396,000 of nonaccrual loans and $2,266,000 of accruing loans. The book balance of troubled debt restructurings at December 31, 2012 was $4,107,000, which included $1,798,000 of nonaccrual loans and $2,309,000 of accruing loans. Approximately $920,000 and $1,152,000 in specific reserves were established with respect to these loans as of March 31, 2013 and December 31, 2012, respectively. As of March 31, 2013 and December 31, 2012, the Company had no additional amounts committed on any loan classified as a troubled debt restructuring.

        There were no loans modified as troubled debt restructuring during the three months ended March 31, 2013. The following table presents loans by class modified as troubled debt restructurings during the three month period ended March 31, 2012:

	During the Three Months Ended March 31, 2012
Troubled Debt Restructurings:	Number of Contracts		Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment
	(Dollars in thousands)
Commercial		2	$	412	$	412
Total		2	$	412	$	412

        The troubled debt restructurings described above increased the allowance for loan losses by $27,000 through the allocation of specific reserves, and resulted in no net charge-offs during the three month period ended March 31, 2012.

22

HERITAGE COMMERCE CORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2013

(Unaudited)

5) Loans (Continued)

        A loan is considered to be in payment default when it is 30 days contractually past due under the modified terms. There were no defaults on troubled debt restructurings, within twelve months following the modification, during the three month ended March 31, 2013 or 2012.

        A loan that is a troubled debt restructuring on nonaccrual status may return to accruing status after a period of at least six months of consecutive payments in accordance with the modified terms.

6) Income Taxes

        Some items of income and expense are recognized in different years for tax purposes than when applying generally accepted accounting principles, leading to timing differences between the Company's actual tax liability and the amount accrued for this liability based on book income. These temporary differences comprise the "deferred" portion of the Company's tax expense or benefit, which is accumulated on the Company's books as a deferred tax asset or deferred tax liability until such time as they reverse.

        Realization of the Company's deferred tax assets is primarily dependent upon the Company generating sufficient taxable income to obtain benefit from the reversal of net deductible temporary differences and utilization of tax credit carryforwards and the net operating loss carryforwards for Federal and California state income tax purposes. The amount of deferred tax assets considered realizable is subject to adjustment in future periods based on estimates of future taxable income. Under generally accepted accounting principles, a valuation allowance is required to be recognized if it is "more likely than not" that a deferred tax asset will not be realized. The determination of the realizability of the deferred tax assets is highly subjective and dependent upon judgment concerning management's evaluation of both positive and negative evidence, including forecasts of future income, cumulative losses, applicable tax planning strategies, and assessments of current and future economic and business conditions.

        The Company had net deferred tax assets of $20,237,000, and $19,264,000, at March 31, 2013, and December 31, 2012, respectively. After consideration of the matters in the preceding paragraph, the Company determined that it is more likely than not that the net deferred tax asset at March 31, 2013 and December 31, 2012 will be fully realized in future years.

7) Benefit Plans

Supplemental Retirement Plan

        The Company has a supplemental retirement plan (the "Plan") covering current and former key executives and directors. The Plan is a nonqualified defined benefit plan. Benefits are unsecured as

23

HERITAGE COMMERCE CORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2013

(Unaudited)

7) Benefit Plans (Continued)

there are no Plan assets. The following table presents the amount of periodic cost recognized for the periods indicated:

	Three Months Ended March 31,
	2013		2012
	(Dollars in thousands)
Components of net periodic benefit cost:
Service cost	$	304	$	294
Interest cost		196		193
Amortization of prior service cost		—		7
Amortization of net actuarial loss		71		63
Net periodic benefit cost	$	571	$	557

Split-Dollar Life Insurance Benefit Plan

        The Company maintains life insurance policies for current and former directors and officers that are subject to split-dollar life insurance agreements. The following table sets forth the funded status of the split-dollar life insurance benefits for the periods indicated:

	March 31, 2013		December 31, 2012
	(Dollars in thousands)
Change in projected benefit obligation
Projected benefit obligation at beginning of year	$	4,717	$	4,525
Interest cost		44		185
Actuarial gain		3		7
Projected benefit obligation at end of period	$	4,764	$	4,717

        Amounts recognized in accumulated other comprehensive income at March 31, 2013 and December 31, 2012 consist of the following:

	March 31, 2013		December 31, 2012
	(Dollars in thousands)
Net actuarial loss	$	669	$	624
Prior transition obligation		1,665		1,685
Accumulated other comprehensive loss	$	2,334	$	2,309

24

HERITAGE COMMERCE CORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2013

(Unaudited)

8) Preferred Stock

Series A Preferred Stock

        On November 21, 2008, the Company issued 40,000 shares of Series A Fixed Rate Cumulative Perpetual Preferred Stock ("Series A Preferred Stock") to the U.S. Treasury under the terms of the U.S. Treasury Capital Purchase Program for $40,000,000 with a liquidation preference of $1,000 per share. On March 7, 2012, in accordance with approvals received from the U.S. Treasury and the Federal Reserve Board, the Company repurchased all of the Series A Preferred Stock and paid all of the related accrued and unpaid dividends. HCC used available cash and proceeds from a $30,000,000 distribution approved by the California Department of Financial Institutions from HBC to HCC. The repurchase of the Series A Preferred Stock accelerated the accretion of the remaining issuance discount on the Series A Preferred Stock. Total dividends and discount accretion on Preferred Stock, including accelerated accretion of approximately $765,000, reduced net income available to common shareholders by $1,206,000 in the first quarter of 2012. The Company did not repurchase the related warrant that was issued to the U.S. Treasury, and the warrant remains outstanding as of the date of this report.

Series C Preferred Stock

        On June 21, 2010, the Company issued to various institutional investors 21,004 shares of Series C Convertible Perpetual Preferred Stock ("Series C Preferred Stock"). The Series C Preferred Stock is mandatorily convertible into common stock at a conversion price of $3.75 per share upon a subsequent transfer of the Series C Preferred Stock to third parties not affiliated with the holder in a widely dispersed offering. The Series C Preferred Stock is non-voting except in the case of certain transactions that would affect the rights of the holders of the Series C Preferred Stock or applicable law. Holders of Series C Preferred Stock will receive dividends if and only to the extent dividends are paid to holders of common stock. The Series C Preferred Stock is not redeemable by the Company or by the holders and has a liquidation preference of $1,000 per share. The Series C Preferred Stock ranks senior to the Company's common stock.

9) Fair Value

        Accounting guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

        Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

        Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data (for example, interest rates and yield curves observable at commonly quoted intervals, prepayment speeds, credit risks, and default rates).

        Level 3: Significant unobservable inputs that reflect a reporting entity's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

25

HERITAGE COMMERCE CORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2013

(Unaudited)

9) Fair Value (Continued)

Financial Assets and Liabilities Measured on a Recurring Basis

        The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2 inputs).

        The fair value of interest-only ("I/O") strip receivable assets is based on a valuation model used by a third party. The Company is able to compare the valuation model inputs and results to widely available published industry data for reasonableness (Level 2 inputs).

			Fair Value Measurements Using
	Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Assets at March 31, 2013:
Available-for-sale securities:
Agency mortgage-backed securities	$	271,077		—	$	271,077		—
Corporate bonds		54,892		—		54,892		—
Trust preferred securities		20,831		—		20,831		—
I/O strip receivables		1,777		—		1,777		—
Assets at December 31, 2012:
Available-for-sale securities:
Agency mortgage-backed securities	$	291,244		—	$	291,244		—
Corporate bonds		55,588		—		55,588		—
Trust preferred securities		21,080		—		21,080		—
I/O strip receivables		1,786				1,786		—

        There were no transfers between Level 1 and Level 2 during the period for assets measured at fair value on a recurring basis.

Assets and Liabilities Measured on a Non-Recurring Basis

        The fair value of loans held-for-sale is generally based on obtaining bids and broker indications on the estimated value of these loans held-for-sale, resulting in a Level 2 classification.

        The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. The appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

26

HERITAGE COMMERCE CORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2013

(Unaudited)

9) Fair Value (Continued)

        Foreclosed assets are valued at the time the loan is foreclosed upon and the asset is transferred to foreclosed assets. The fair value is based primarily on third party appraisals, less costs to sell. The appraisals may utilize a single valuation approach or a combination of approaches including the comparable sales and income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.

			Fair Value Measurements Using
	Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Assets at March 31, 2013:
Impaired loans—held-for-investment:
Commercial	$	2,982		—		—	$	2,982
Real estate:
Commercial and residential		3,217		—		—		3,217
Land and construction		1,685		—		—		1,685
Consumer		122		—		—		122
	$	8,006		—		—	$	8,006
Foreclosed assets:
Commercial	$	81		—		—	$	81
Land and construction		657		—		—		657
	$	738		—		—	$	738
Assets at December 31, 2012:
Impaired loans—held-for-investment:
Commercial	$	3,645		—		—	$	3,645
Real estate:
Commercial and residential		3,674		—		—		3,674
Land and construction		1,723		—		—		1,723
Consumer		130		—		—		130
	$	9,172		—		—	$	9,172
Foreclosed assets:
Commercial	$	83		—		—	$	83
Land and construction		1,187		—		—		1,187
	$	1,270		—		—	$	1,270

27

HERITAGE COMMERCE CORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2013

(Unaudited)

9) Fair Value (Continued)

        The following table shows the detail of the impaired loans held-for-investment and the impaired loans held-for-investment carried at fair value for the periods indicated:

	March 31, 2013			December 31, 2012
	(Dollars in thousands)
Impaired loans held-for-investment:
Book value of impaired loans held-for-investment carried at fair value	$	11,032		$	11,912
Book value of impaired loans held-for-investment carried at cost		7,349			7,732
Total impaired loans held-for-investment	$	18,381		$	19,644
Impaired loans held-for-investment carried at fair value:
Book value of impaired loans held-for-investment carried at fair value	$	11,032		$	11,912
Specific valuation allowance		(3,026	)		(2,740	)
Impaired loans held-for-investment carried at fair value, net	$	8,006		$	9,172

        Impaired loans held-for-investment which are measured primarily for impairment using the fair value of the collateral were $18,381,000 at March 31, 2013, after partial charge-offs of $83,000 in the first three months of 2013. In addition, these loans had a specific valuation allowance of $3,026,000 at March 31, 2013. Impaired loans held-for-investment totaling $11,032,000 at March 31, 2013 were carried at fair value as a result of the aforementioned partial charge-offs and specific valuation allowances at period-end. The remaining $7,349,000 of impaired loans were carried at cost at March 31, 2013, as the fair value of the collateral exceeded the cost basis of each respective loan. Partial charge-offs and changes in specific valuation allowances during the first three months of 2013 on impaired loans held-for-investment carried at fair value at March 31, 2013 resulted in an additional provision for loan losses of $757,000.

        Foreclosed assets measured at fair value less costs to sell, had a carrying amount of $738,000, with no valuation allowance at March 31, 2013.

        Impaired loans held-for-investment of $19,644,000 at December 31, 2012, after partial charge-offs of $2,694,000 in 2012, were analyzed for additional impairment primarily using the fair value of collateral. In addition, these loans had a specific valuation allowance of $2,740,000 at December 31, 2012. Impaired loans held-for-investment totaling $11,912,000 at December 31, 2012 were carried at fair value as a result of the aforementioned partial charge-offs and specific valuation allowances at year-end. The remaining $7,732,000 of impaired loans were carried at cost at December 31, 2012, as the fair value of the collateral exceeded the cost basis of each respective loan. Partial charge-offs and changes in specific valuation allowances during 2012 on impaired loans held-for-investment carried at fair value at December 31, 2012 resulted in an additional provision for loan losses of $3,856,000.

28

HERITAGE COMMERCE CORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2013

(Unaudited)

9) Fair Value (Continued)

        At December 31, 2012, foreclosed assets had a carrying amount of $1,270,000, with no valuation allowance at December 31, 2012.

        The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at the periods indicated:

	March 31, 2013
	Fair Value		Valuation Techniques	Unobservable Inputs	Range (Weighted Average)
	(Dollars in thousands)
Impaired loans—held-for-investment:
Commercial	$	2,982	Market Approach	Discount adjustment for differences between comparable sales	0% to 3% (2%)
Real estate:
Commercial and residential		3,217	Market Approach	Discount adjustment for differences between comparable sales	0% to 13% (1%)
Land and construction		1,685	Market Approach	Discount adjustment for differences between comparable sales	1% to 4% (2%)
Foreclosed assets:
Land and construction		657	Market Approach	Discount adjustment for differences between comparable sales	1% to 16% (7%)

	December 31, 2012
	Fair Value		Valuation Techniques	Unobservable Inputs	Range (Weighted Average)
	(Dollars in thousands)
Impaired loans—held-for-investment:
Commercial	$	3,645	Market Approach	Discount adjustment for differences between comparable sales	0% to 4% (1%)
Real estate:
Commercial and residential		3,674	Market Approach	Discount adjustment for differences between comparable sales	0% to 13% (1%)
Land and construction		1,723	Market Approach	Discount adjustment for differences between comparable sales	1% to 4% (2%)
Foreclosed assets:
Land and construction		1,187	Market Approach	Discount adjustment for differences between comparable sales	0% to 23% (6%)

29

HERITAGE COMMERCE CORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2013

(Unaudited)

9) Fair Value (Continued)

        The Company obtains third party appraisals on its impaired loans held-for-investment and foreclosed assets to determine fair value. Generally, the third party appraisals apply the "market approach," which is a valuation technique that uses prices and other relevant information generated by market transactions involving identical or comparable (that is, similar) assets, liabilities, or a group of assets and liabilities, such as a business. Adjustments are then made based on the type of property, age of appraisal, current status of property and other related factors to estimate the current value of collateral.

        The carrying amounts and estimated fair values of financial instruments at March 31, 2013 are as follows:

			Estimated Fair Value
	Carrying Amounts		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	76,869	$	76,869	$	—	$	—	$	76,869
Securities available-for-sale		346,800		—		346,800		—		346,800
Securities held-to-maturity		68,283		—		65,659		—		65,659
Loans (including loans held-for-sale), net		786,977		—		4,394		783,126		787,520
FHLB and FRB stock		10,764		—		—		—		N/A
Accrued interest receivable		4,309		—		1,919		2,390		4,309
Loan servicing rights and I/O strips receivables		2,447		—		4,680		—		4,680
Liabilities:
Time deposits	$	302,476	$	—	$	303,282	$	—	$	303,282
Other deposits		864,414		—		864,414		—		864,414
Subordinated debt		9,279		—		—		5,400		5,400
Accrued interest payable		281		—		281		—		281

30

HERITAGE COMMERCE CORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2013

(Unaudited)

9) Fair Value (Continued)

        The carrying amounts and estimated fair values of the Company's financial instruments at December 31, 2012:

			Estimated Fair Value
	Carrying Amounts		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	373,565	$	373,565	$	—	$	—	$	373,565
Securities available-for-sale		367,912		—		367,912		—		367,912
Securities held-to-maturity		51,472		—		50,964		—		50,964
Loans (including loans held-for-sale), net		796,695		—		3,409		793,911		797,320
FHLB and FRB stock		10,728		—		—		—		N/A
Accrued interest receivable		3,773		—		1,514		2,259		3,773
Loan servicing rights and I/O strips receivables		2,495		—		4,715		—		4,715
Liabilities:
Time deposits	$	318,664	$	—	$	319,476	$	—	$	319,476
Other deposits		1,160,704		—		1,160,704		—		1,160,704
Subordinated debt		9,279		—		—		5,400		5,400
Accrued interest payable		277		—		277		—		277

        The methods and assumptions, not previously discussed, used to estimate the fair value are described as follows:

Cash and Cash Equivalents

        The carrying amounts of cash on hand, noninterest and interest bearing due from bank accounts, and Fed funds sold approximate fair values and are classified as Level 1.

Loans

        The fair value of loans held-for-sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.

        Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

31

HERITAGE COMMERCE CORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2013

(Unaudited)

9) Fair Value (Continued)

FHLB and FRB Stock

        It was not practical to determine the fair value of FHLB and FRB stock due to restrictions placed on their transferability.

Accrued Interest Receivable/Payable

        The carrying amounts of accrued interest approximate fair value resulting in a Level 2 or Level 3 classification.

Deposits

        The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 2 classification. The carrying amounts of variable rate, fixed-term money market accounts approximate their fair values at the reporting date resulting in a Level 2 classification. The carrying amounts of variable rate, certificates of deposit approximate their fair values at the reporting date resulting in a Level 2 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

Subordinated Debt

        The fair values of the subordinated debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

Off-balance Sheet Instruments

        Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The fair value of commitments is not material.

Limitations

        Fair value estimates are made at a specific point in time, based on relevant market information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

32

HERITAGE COMMERCE CORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2013

(Unaudited)

10) Equity Plan

        The Company has an Amended and Restated 2004 Equity Plan (the "Equity Plan") for directors, officers, and key employees. The Equity Plan provides for the grant of incentive and non-qualified stock options and restricted stock. The Equity Plan provides that the option price for both incentive and non-qualified stock options will be determined by the Board of Directors at no less than the fair value at the date of grant. Options granted vest on a schedule determined by the Board of Directors at the time of grant. Generally, options vest over four years. All options expire no later than ten years from the date of grant. As of March 31, 2013, there are 349,071 shares available for future grants under the Equity Plan.

        Stock option activity under the Equity Plan is as follows:

Total Stock Options	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value
Outstanding at January 1, 2013		1,314,347		$	12.90
Granted		15,000		$	6.51
Exercised		(1,221	)	$	3.57
Forfeited or expired		(4,159	)	$	4.96
Outstanding at March 31, 2013		1,323,967		$	12.80		5.6	$	794,000
Vested or expected to vest		1,257,769					5.6	$	755,000
Exercisable at March 31, 2013		1,011,067					4.6	$	484,000

        As of March 31, 2013, there was $1,066,000 of total unrecognized compensation cost related to nonvested stock options granted under the Equity Plan. That cost is expected to be recognized over a weighted-average period of approximately 2.79 years.

        Restricted stock activity under the Equity Plan is as follows:

Total Restricted Stock Award	Number of Shares		Weighted Average Grant Date Fair Value
Nonvested shares at January 1, 2013		88,000	$	5.74
Granted		10,000	$	6.51
Vested		—	$	—
Forfeited		—	$	—
Nonvested shares at March 31, 2013		98,000	$	5.82

        As of March 31, 2013, there was $266,000 of total unrecognized compensation cost related to nonvested restricted stock awards granted under the Equity Plan. The cost is expected to be recognized over a weighted-average period of approximately 11 months.

33

HERITAGE COMMERCE CORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2013

(Unaudited)

11) Subordinated Debt

        The Company has supported its growth through the issuance of trust preferred securities from special purpose trusts and accompanying sales of subordinated debt to these trusts. The subordinated debt that we issued to the trusts is senior to our shares of common stock and Series C Preferred Stock. As a result, we must make payments on the subordinated debt before any dividends can be paid on our common stock and Series C Preferred Stock. Under the terms of the subordinated debt, we may defer interest payments for up to five years. Interest payments on the subordinated notes payable to the Company's subsidiary grantor Trusts are deductible for tax purposes. The subordinated debt is not registered with the Securities and Exchange Commission. For regulatory reporting purposes, the subordinated debt qualifies for Tier 1 capital treatment. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, certain trust preferred securities will no longer be eligible to be included as Tier 1 capital for regulatory purposes. The trust preferred securities continued to be eligible for Tier 1 capital under Dodd-Frank for bank holding companies with less than $15,000,000,000 of assets; however, under proposed rules implementing Basel III trust preferred securities would lose eligibility for Tier 1 capital over a ten year period. Therefore, our trust preferred securities will continue to be eligible to be treated as Tier 1 capital, subject to other rules and limitations.

        During the third quarter of 2012, the Company redeemed its 10.875% fixed-rate subordinated debentures in the amount of $7,000,000 issued to Heritage Capital Trust I (and the related premium cost of $304,500) and the Company's 10.600% fixed-rate subordinated debentures in the amount of $7,000,000 issued to Heritage Statutory Trust I (and the related premium cost of $296,800). The related trust securities issued by Capital Trust I and Statutory Trust I were also redeemed in connection with the subordinated debt redemption and the trusts were dissolved. A $15,000,000 distribution from the Bank to the HCC provided the cash for the redemption. The Company incurred a charge of $601,300 in 2012 for the early payoff premium on the redemption of the subordinated debt.

        The table below summarizes the Company's subordinated debt as of the periods indicated:

	March 31, 2013		December 31, 2012
	(Dollars in thousands)
Subordinated debentures due to Heritage Statutory Trust II with interest payable quarterly based on 3-month Libor plus 3.58% (3.86% at March 31, 2013), redeemable with a premium beginning July 31, 2006 and with no premium beginning July 31, 2011, due July 31, 2031	$	5,155	$	5,155
Subordinated debentures due to Heritage Statutory Trust III with interest payable quarterly based on 3-month Libor plus 3.40% (3.68% at March 31, 2013), redeemable with a premium beginning September 26, 2007 and due September 26, 2032		4,124		4,124
Total	$	9,279	$	9,279

34

HERITAGE COMMERCE CORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2013

(Unaudited)

12) Loss Contingencies

        The Company's policy is to accrue for legal costs associated with both asserted and unasserted claims when it probable that such costs will be incurred and such costs can be reasonably estimated. The Company had previously accrued for such costs associated with an unasserted claim arising from an apparent transfer of funds for personal use by an authorized signatory of a customer. During the first quarter of 2013, a legal claim was asserted on this matter and the Company accrued an additional $266,000 for additional legal costs that are expected to be incurred to defend this matter. The litigation is in the very early stages and the Company intends to vigorously defend the litigation. At this time it is not possible to determine the amount of the loss, if any, arising from the claim in excess of the legal expenses expected to be incurred in defense of the litigation.

35

ITEM 2—MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The following discussion provides information about the results of operations, financial condition, liquidity, and capital resources of Heritage Commerce Corp (the "Company" or "HCC") and its wholly owned subsidiary, Heritage Bank of Commerce (sometimes referred to as the "Bank" or "HBC"). This information is intended to facilitate the understanding and assessment of significant changes and trends related to our financial condition and the results of operations. This discussion and analysis should be read in conjunction with our consolidated financial statements and the accompanying notes presented elsewhere in this report. Unless we state otherwise or the context indicates otherwise, references to the "Company," "Heritage," "we," "us," and "our," in this Report on Form 10-Q refer to Heritage Commerce Corp and Heritage Bank of Commerce.

CRITICAL ACCOUNTING POLICIES

        Critical accounting policies are discussed in our Form 10-K for the year ended December 31, 2012. There are no changes to these policies as of March 31, 2013.

EXECUTIVE SUMMARY

        This summary is intended to identify the most important matters on which management focuses when it evaluates the financial condition and performance of the Company. When evaluating financial condition and performance, management looks at certain key metrics and measures. The Company's evaluation includes comparisons with peer group financial institutions and its own performance objectives established in the internal planning process.

        The primary activity of the Company is commercial banking. The Company's operations are located entirely in the southern and eastern regions of the general San Francisco Bay Area of California in the counties of Santa Clara, Alameda and Contra Costa. The largest city in this area is San Jose and the Company's market includes the headquarters of a number of technology based companies in the region known commonly as Silicon Valley. The Company's customers are primarily closely held businesses and professionals.

Performance Overview

        For the three months ended March 31, 2013, net income was $2.2 million, compared to $2.1 million for the three months ended March 31, 2012. Net income available to common shareholders was $2.2 million, or $0.07 per average diluted common share for the three months ended March 31, 2013. After accrued dividends and discount accretion on preferred stock of $1.2 million, net income available to shareholders was $869,000, or $0.03 per average common share for the three months ended March 31, 2012. Beginning in the second quarter of 2012, there were no dividends or discount accretion on preferred stock, following the redemption of the Company's $40 million of Series A Fixed Rate Cumulative Perpetual Preferred Stock ("Series A Preferred Stock") issued to the U.S. Treasury Department under the TARP Capital Purchase Program. The Company's annualized return on average assets was 0.61% and annualized return on average equity was 5.20% for the three months ended March 31, 2013, compared to 0.64% and 4.43%, respectively, for the three months ended March 31, 2012.

        Late in the fourth quarter of 2012, the Company received short-term demand deposits in the amount of $467.5 million from one customer for specific transactions. Of this amount, $195.6 million was subsequently withdrawn, for a net outstanding balance of $271.9 million at December 31, 2012. The outstanding balance of the short-term demand deposits was $24.3 million at March 31, 2013. Because of the short-term nature of these funds, the excess liquidity was placed in low-interest earning deposits at the Federal Reserve Bank.

36

        The following are major factors that impacted the Company's results of operations:

•

The net interest margin was 3.71% for the first quarter of 2013, compared to 4.06% for the first quarter of 2012. The decline in the net interest margin for the first quarter of 2013 was primarily due to the increased short-term deposits at the Federal Reserve Bank as a result of the aforementioned short-term demand deposits of one customer. The net interest margin for the first quarter of 2013 was also impacted by a decline in loan and security yields, partially offset by a lower cost of funds. Excluding the impact to the net interest margin as a result of the large short-term demand deposits from one customer, and favorable benefit on the repayment of interest income from paid-off nonaccrual loans, the net interest margin was 3.78% for the first quarter of 2013.

•

Net interest income was $12.2 million for the first quarter of 2013, compared to $12.3 million for the first quarter of 2012, primarily due to a lower net interest margin.

•

The Company did not record a provision for loan losses in the first quarter of 2013 because of the loan recoveries and the reduced credit risk from the reduction in nonperforming assets and classified assets at March 31, 2013. The loan loss provision for the first quarter of 2012 was $100,000.

•

Noninterest income was $1.7 million for both the first quarter of 2013 and the first quarter of 2012.

•

Noninterest expense for the first quarter of 2013 was $10.8 million, compared to $10.9 million for the first quarter of 2012.

•

Income tax expense for the first quarter ended March 31, 2013 was $855,000, compared to $951,000 for the first quarter of 2012.

•

The efficiency ratio was 78.03% for the first quarter of 2013, compared to 77.64% for the first quarter of 2012.

        The following are important factors in understanding our current financial condition and liquidity position:

•

Cash, Federal funds sold, interest-bearing deposits in other financial institutions and securities available-for-sale decreased 7% to $423.7 million at March 31, 2013, from $454.5 million at March 31, 2012, and decreased 43% from $741.5 million at December 31, 2012. Excluding the short-term deposits at the Federal Reserve Bank offsetting the short-term demand deposits from one customer of $24.3 million at March 31, 2013 and $271.9 million at December 31, 2012, total cash, Federal funds sold, interest-bearing deposits in other financial institutions and securities available-for-sale decreased 12% to $399.3 million at March 31, 2013, from $454.5 million at March 31, 2012, and decreased 15% from $469.6 million at December 31, 2012.

•

Securities held-to-maturity, at amortized cost, were $68.3 million at Mach 31, 2013, compared to no securities held-to-maturity at March 31, 2012. Securities held-to-maturity, at amortized cost, were $51.5 million at December 31, 2012.

•

Total loans, excluding loans held-for-sale, increased $45.0 million, or 6%, to $801.9 million at March 31, 2013, compared to $756.9 million at March 31, 2012, and decreased $10.4 million, or 1%, from $812.3 million at December 31, 2012.

•

Nonperforming assets were $17.4 million, or 1.26% of total assets at March 31, 2013, compared to $19.5 million or 1.49% of total assets at March 31, 2012, and $19.5 million, or 1.15% of total assets at December 31, 2012. Nonperforming assets were 1.28% of total assets at March 31, 2013, compared to 1.37% of total assets at December 31, 2012, excluding the short-term deposits

37

of $24.3 million and $271.9 million, respectively, at the Federal Reserve Bank offsetting the short-term demand deposits from one customer.

•

Classified assets, net of Small Business Administration ("SBA") guarantees, decreased 42% to $31.2 million at March 31, 2013 from $54.2 million at March 31, 2012, and decreased 15% from $36.8 million at December 31, 2012.

•

Net recoveries totaled $315,000 for the first quarter of 2013, compared to net charge-offs of $494,000 for the first quarter of 2012, and net charge-offs of $766,000 for the fourth quarter of 2012.

•

The allowance for loan losses at March 31, 2013 was $19.3 million, or 2.41% of total loans, representing 116.07% of nonperforming loans (there were no nonaccrual loans in loans held-for-sale at March 31, 2013). The allowance for loan losses at March 31, 2012 was $20.3 million, or 2.68% of total loans, representing 125.66% of nonperforming loans excluding nonaccrual loans in loans held-for-sale. The allowance for loan losses at December 31, 2012 was $19.0 million, or 2.34% of total loans, representing 104.58% of nonperforming loans (there were no nonaccrual loans in loans held-for-sale at December 31, 2012).

•

Total deposits, excluding brokered deposits and short-term demand deposits from one customer of $24.3 million at March 31, 2013 and $271.9 million at December 31, 2012, were $1.06 billion at March 31, 2013, compared to $995.5 million at March 31, 2012, and $1.11 billion at December 31, 2012.

•

The ratio of noncore funding (which consists of time deposits—$100,000 and over, CDARS deposits, brokered deposits, securities under agreement to repurchase and short-term borrowings) to total assets was 20.92% at March 31, 2013, compared to 19.89% at March 31, 2012, and 17.63% at December 31, 2012. The ratio of noncore funding to total assets was 21.29% at March 31, 2013 and 21.00% at December 31, 2012, excluding the short-term deposits of $24.3million and $271.9 million, respectively, at the Federal Reserve Bank offsetting the short-term demand deposits from one customer.

•

The loan to deposit ratio was 68.72% at March 31, 2013, compared to 70.07% at March 31, 2012, and 54.91% at December 31, 2012. The loan to deposit ratio was 70.19% at March 31, 2013 and 67.27% at December 31, 2012, excluding the $24.3 million and $271.9 million, respectively, of short-term demand deposits from one customer.

•

Capital ratios exceed regulatory requirements for a well-capitalized financial institution, both on a consolidated basis and at the bank level at March 31, 2013:

Capital Ratios	Heritage Commerce Corp			Heritage Bank of Commerce			Well-Capitalized Financial Institution Regulatory Guidelines
Total Risk-Based		16.7	%		15.9	%		10.0	%
Tier 1 Risk-Based		15.5	%		14.6	%		6.0	%
Leverage		11.5	%		10.9	%		5.0	%

Deposits

        The composition and cost of the Company's deposit base are important in analyzing the Company's net interest margin and balance sheet liquidity characteristics. Except for brokered and State of California time deposits, the Company's depositors are generally located in its primary market area. Depending on loan demand and other funding requirements, the Company also obtains deposits from wholesale sources including deposit brokers. The Company had $83.8 million in brokered deposits at March 31, 2013, compared to $84.7 million at March 31, 2012, and $97.8 million at December 31,

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2012. Deposits from title insurance companies, escrow accounts and real estate exchange facilitators decreased to $20.2 million at March 31, 2013, compared to $30.6 million at March 31 2012, and $21.4 million at December 31, 2012. Certificates of deposit from the State of California totaled $85.0 million at March 31, 2013, compared to $50.0 million at March 31, 2012, and $85.0 million at December 31, 2012. Total deposits at March 31, 2013 were $1.17 billion, compared to $1.08 billion at March 31, 2012 and $1.48 billion at December 31, 2012. Core deposits (excluding all time deposits, CDARS deposits, and the short-term demand deposits from one customer of $24.3 million at March 31, 2013 and $271.9 million at December 31, 2012) increased to $829.3 million at March 31, 2013, an increase of $36.7 million, or 5% from $792.6 million at March 31, 2012, and decreased $54.5 million, or 6%, from $883.8 million at December 31, 2012. The Company has a policy to monitor all deposits that may be sensitive to interest rate changes to help assure that liquidity risk does not become excessive due to concentrations.

        HBC is a member of the Certificate of Deposit Account Registry Service ("CDARS") program. The CDARS program allows customers with deposits in excess of FDIC insured limits to obtain coverage on time deposits through a network of banks within the CDARS program. Deposits gathered through this program are considered brokered deposits under regulatory guidelines. Deposits in the CDARS program totaled $15.9 million at March 31, 2013, compared to $6.2 million at March 31, 2012, and $10.2 million at December 31, 2012.

Liquidity

        Our liquidity position refers to our ability to maintain cash flows sufficient to fund operations and to meet obligations and other commitments in a timely fashion. At March 31, 2013, we had $76.9 million in cash and cash equivalents and approximately $328.9 million in available borrowing capacity from various sources including the Federal Home Loan Bank ("FHLB"), the Federal Reserve Bank of San Francisco ("FRB"), and Federal funds facilities with several financial institutions. The Company also had $276.9 million in unpledged securities available at March 31, 2013. Our loan to deposit ratio decreased to 68.72% at March 31, 2013, compared to 70.07% at March 31, 2012, and 54.91% at December 31, 2012. The loan to deposit ratio was 70.19% at March 31, 2013 and 67.27% at December 31, 2012, excluding the $24.3 million and $271.9 million, respectively, of short-term demand deposits from one customer.

Lending

        Our lending business originates principally through our branch offices located in our primary markets. The Company also has an additional SBA loan production office in Santa Rosa, California. Total loans, excluding loans held-for-sale, increased 6% to $801.9 million at March 31, 2013, from $756.9 million at March 31, 2012, and decreased 1% from $812.3 million at December 31, 2012. The loan portfolio remains well diversified with commercial and industrial ("C&I") loans accounting for 44% of the total loan portfolio at March 31, 2013. Commercial and residential real estate loans accounted for 45% of the total loan portfolio at March 31, 2013, of which 51% were owner-occupied by businesses. Consumer and home equity loans accounted for 8% of the total loan portfolio, and land and construction loans accounted for the remaining 3% of the total loan portfolio at March 31, 2013. The yield on the loan portfolio was 5.13% for the first quarter of 2013, compared to 5.41% for the first quarter of 2012.

Net Interest Income

        The management of interest income and expense is fundamental to the performance of the Company. Net interest income, the difference between interest income and interest expense, is the largest component of the Company's total revenue. Management closely monitors both total net interest income and the net interest margin (net interest income divided by average earning assets).

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        The Company through its asset and liability policies and practices seeks to maximize net interest income without exposing the Company to an excessive level of interest rate risk. Interest rate risk is managed by monitoring the pricing, maturity and repricing options of all classes of interest bearing assets and liabilities. This is discussed in more detail under "Liquidity and Asset/Liability Management." In addition, we believe there are measures and initiatives we can take to improve the net interest margin, including increasing loan rates, adding floors on floating rate loans, reducing nonperforming assets, managing deposit interest rates, and reducing higher cost deposits.

        The net interest margin is also adversely impacted by the reversal of interest on nonaccrual loans and the reinvestment of loan payoffs into lower yielding investment securities and other short-term investments.

Management of Credit Risk

        We continue to proactively identify, quantify, and manage our problem loans. Early identification of problem loans and potential future losses helps enable us to resolve credit issues with potentially less risk and ultimate losses. We maintain an allowance for loan losses in an amount that we believe is adequate to absorb probable incurred losses in the portfolio. While we strive to carefully manage and monitor credit quality and to identify loans that may be deteriorating, circumstances can change at any time for loans included in the portfolio that may result in future losses, that as of the date of the financial statements have not yet been identified as potential problem loans. Through established credit practices, we adjust the allowance for loan losses accordingly. However, because future events are uncertain, there may be loans that deteriorate some of which could occur in an accelerated time frame. As a result, future additions to the allowance for loan losses may be necessary. Because the loan portfolio contains a number of commercial loans, commercial real estate, construction and land development loans with relatively large balances, deterioration in the credit quality of one or more of these loans may require a significant increase to the allowance for loan losses. Future additions to the allowance may also be required based on changes in the financial condition of borrowers. Additionally, Federal and state banking regulators, as an integral part of their supervisory function, periodically review our allowance for loan losses. These regulatory agencies may require us to recognize further loan loss provisions or charge-offs based upon their judgments, which may be different from ours. Any increase in the allowance for loan losses would have an adverse effect, which may be material, on our financial condition and results of operation.

        Further discussion of the management of credit risk appears under "Provision for Loan Losses" and "Allowance for Loan Losses."

Noninterest Income

        While net interest income remains the largest single component of total revenues, noninterest income is an important component. A portion of the Company's noninterest income is associated with its SBA lending activity, consisting of gains on the sale of loans sold in the secondary market and servicing income from loans sold with servicing retained. Other sources of noninterest income include loan servicing fees, service charges and fees, cash surrender value from company owned life insurance policies, and gains on the sale of securities.

Noninterest Expense

        Management considers the control of operating expenses to be a critical element of the Company's performance. The Company has undertaken several initiatives to reduce its noninterest expense and improve its efficiency. Noninterest expense for the first quarter of 2013 decreased to $10.8 million, compared to $10.9 million for the same period in 2012.

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Capital Management

        As part of its asset and liability management process, the Company continually assesses its capital position to take into consideration growth, expected earnings, risk profile and potential corporate activities that it may choose to pursue.

        On November 21, 2008, the Company issued to the U.S. Treasury under its Capital Purchase Program 40,000 shares of Series A Preferred Stock for $40.0 million and issued a warrant to purchase 462,963 shares of common stock at an exercise price of $12.96.

        On June 21, 2010, the Company issued Series C Convertible Perpetual Preferred Stock ("Series C Preferred Stock") to a limited number of institutional investors. The Series C Preferred Stock remains outstanding until its conversion to common stock upon the transfer of the Series C Preferred Stock in accordance with its terms. Holders of Series C Preferred Stock will receive dividends if and only to the extent dividends are paid to holders of common stock.

        On March 7, 2012, in accordance with approvals received from the U.S. Treasury and the Federal Reserve, the Company repurchased all shares of the Series A Preferred Stock and paid the related accrued and unpaid dividends. The repurchase of the Series A Preferred Stock will save $2.0 million in annual dividends. At the time the Company repurchased the Series A Preferred Stock, it did not repurchase the related warrant. The warrant was outstanding as of the date of this report.

        We have supported our growth through the issuance of trust preferred securities from special purpose trusts and accompanying sales of subordinated debt to these trusts. The subordinated debt that we issued to the trusts is senior to our shares of common stock and Series C Preferred Stock. As a result, we must make payments on the subordinated debt before any dividends can be paid on our common stock and Series C Preferred Stock. Under the terms of the subordinated debt, we may defer interest payments for up to five years. During the third quarter of 2012, the Company completed the redemption of $14 million fixed-rate subordinated debt, and had $9.3 million of variable-rate subordinated debt outstanding at March 31, 2013. The Company is current with respect to interest accrued on trust preferred subordinated debt securities as of March 31, 2013 and was current as of December 31, 2012.

RESULTS OF OPERATIONS

        The Company earns income from two primary sources. The first is net interest income, which is interest income generated by earning assets less interest expense on interest-bearing liabilities. The second is noninterest income, which primarily consists of gains on the sale of loans, loan servicing fees, customer service charges and fees, the increase in cash surrender value of life insurance, and gains on the sale of securities. The majority of the Company's noninterest expenses are operating costs that relate to providing a full range of banking services to our customers.

Net Interest Income and Net Interest Margin

        The level of net interest income depends on several factors in combination, including yields on earning assets, the cost of interest-bearing liabilities, the relative volumes of earning assets and interest-bearing liabilities, and the mix of products which comprise the Company's earning assets, deposits, and other interest-bearing liabilities. To maintain its net interest margin the Company must manage the relationship between interest earned and paid.

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        The following Distribution, Rate and Yield table presents the average amounts outstanding for the major categories of the Company's balance sheet, the average interest rates earned or paid thereon, and the resulting net interest margin on average interest earning assets for the periods indicated. Average balances are based on daily averages.

Distribution, Rate and Yield

	For the Three Months Ended March 31, 2013								For the Three Months Ended March 31, 2012
NET INTEREST INCOME AND NET INTEREST MARGIN	Average Balance		Interest Income/ Expense			Average Yield/ Rate			Average Balance		Interest Income/ Expense		Average Yield/ Rate
	(Dollars in thousands)
Assets:
Loans, gross(1)	$	798,131	$	10,089			5.13	%	$	767,288	$	10,316		5.41	%
Securities—taxable		385,707		2,462			2.59	%		389,919		3,097		3.19	%
Securities—tax exempt(2)		40,552		382			3.82	%		—		—		—
Federal funds sold and interest-bearing deposits in other financial institutions		116,947		68			0.24	%		55,991		36		0.26	%
Total interest earning assets		1,341,337		13,001			3.93	%		1,213,198		13,449		4.46	%
Cash and due from banks		23,555								20,987
Premises and equipment, net		7,521								7,978
Intangible assets		1,954								2,441
Other assets		68,561								67,381
Total assets	$	1,442,928							$	1,311,985
Liabilities and shareholders' equity:
Deposits:
Demand, noninterest-bearing	$	461,108							$	347,291
Demand, interest-bearing		164,402		59			0.15	%		142,650		52		0.15	%
Savings and money market		283,229		120			0.17	%		288,202		166		0.23	%
Time deposits—under $100		24,596		23			0.38	%		28,223		38		0.54	%
Time deposits—$100 and over		190,273		203			0.43	%		169,694		256		0.61	%
Time deposits—brokered		92,063		219			0.96	%		6,262		3		0.19	%
CDARS—money market and time deposits		11,475		1			0.04	%		84,730		201		0.95	%
Total interest-bearing deposits		766,038		625			0.33	%		719,761		716		0.40	%
Total deposits		1,227,146		625			0.21	%		1,067,052		716		0.27	%
Subordinated debt		9,279		88			3.85	%		23,702		474		8.04	%
Short-term borrowings		85		1			4.77	%		39		—		N/A
Total interest-bearing liabilities		775,402		714			0.37	%		743,502		1,190		0.64	%
Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds		1,236,510		714			0.23	%		1,090,793		1,190		0.44	%
Other liabilities		36,535								32,671
Total liabilities		1,273,045								1,123,464
Shareholders' equity		169,883								188,521
Total liabilities and shareholders' equity	$	1,442,928							$	1,311,985
Net interest income(2) / margin				12,287			3.71	%				12,259		4.06	%
Less tax equivalent adjustment(2)				(134	)							—
Net interest income			$	12,153							$	12,259

(1)

Includes loans held-for-sale. Yield amounts earned on loans include loan fees and costs. Nonaccrual loans are included in average balance.

(2)

Reflects tax equivalent adjustment for tax exempt income based on a 35% tax rate.

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Volume and Rate Variances

        The Volume and Rate Variances table below sets forth the dollar difference in interest earned and paid for each major category of interest-earning assets and interest-bearing liabilities for the noted periods, and the amount of such change attributable to changes in average balances (volume) or changes in average interest rates. Volume variances are equal to the increase or decrease in the average balance times the prior period rate, and rate variances are equal to the increase or decrease in the average rate times the prior period average balance. Variances attributable to both rate and volume changes are equal to the change in rate times the change in average balance and are included below in the average volume column.

	Three Months Ended March 31, 2013 vs. 2012 Increase (Decrease) Due to Change In:
	Average Volume			Average Rate			Net Change
	(Dollars in thousands)
Income from interest earning assets:
Loans, gross	$	383		$	(610	)	$	(227	)
Securities—taxable		(28	)		(607	)		(635	)
Securities—tax exempt		382			—			382
Federal funds sold and interest-bearing deposits in other financial institutions		35			(3	)		32
Total interest income from interest earnings assets		772			(1,220	)		(448	)
Expense on interest-bearing liabilities:
Demand, interest-bearing		6			1			7
Savings and money market		(1	)		(45	)		(46	)
Time deposits—under $100		(3	)		(12	)		(15	)
Time deposits—$100 and over		23			(76	)		(53	)
Time deposits—brokered		204			12			216
CDARS—money market and time deposits		(7	)		(193	)		(200	)
Subordinated debt		(137	)		(249	)		(386	)
Short-term borrowings		1			—			1
Total interest expense on interest-bearing liabilities		86			(562	)		(476	)
Net interest income	$	686		$	(658	)	$	28

        The Company's net interest margin expressed as a percentage of average earning assets was 3.71% for the first quarter of 2013, compared to 4.06% for the first quarter of 2012. The decline in the net interest margin for the first quarter of 2013 was primarily due to the increased short-term deposits at the Federal Reserve Bank as a result of the aforementioned short-term demand deposits of one customer. The net interest margin for the first quarter of 2013 was also impacted by a decline in loan and securities yields, partially offset by a lower cost of funds. Excluding the impact to the net interest margin as a result of the large short-term demand deposits from one customer, and favorable benefit on the repayment of interest income from paid-off nonaccrual loans, the net interest margin was 3.78% for the first quarter of 2013.

        A substantial portion of the Company's earning assets are variable-rate loans that re-price when the Company's prime lending rate is changed, compared to a large base of core deposits that are generally slower to re-price. This causes the Company's balance sheet to be asset-sensitive, which means that all else being equal, the Company's net interest margin will be lower during periods when short-term interest rates are falling and higher when rates are rising.

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Provision for Loan Losses

        Credit risk is inherent in the business of making loans. The Company establishes an allowance for loan losses through charges to earnings, which are presented in the statements of income as the provision for loan losses. Specifically identifiable and quantifiable known losses are promptly charged off against the allowance. The provision for loan losses is determined by conducting a quarterly evaluation of the adequacy of the Company's allowance for loan losses and charging the shortfall, if any, to the current quarter's expense. This has the effect of creating variability in the amount and frequency of charges to the Company's earnings. The provision for loan losses and level of allowance for each period are dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management's assessment of the quality of the loan portfolio, the valuation of problem loans and the general economic conditions in the Company's market area.

        The Company did not record a provision for loan losses in the first quarter of 2013 because of the net loan recoveries during the period and the reduced credit risk from the reduction in nonperforming assets and classified assets. The provision for loan losses for the first quarter of 2012 was $100,000.

        The allowance for loan losses totaled $19.3 million, or 2.41% of total loans at March 31, 2013, compared to $20.3 million, or 2.68% of total loans at March 31, 2012, and $19.0 million, or 2.34% of total loans at December 31, 2012. The decrease in the allowance for loan losses at March 31, 2013, compared to March 31, 2012, was primarily due to improved risk grading and credit metrics on non-impaired real estate loans, as well as a decline in historical charge-off levels. Net recoveries totaled $315,000 for the first quarter of 2013, compared to net charge-offs of $494,000 for the first quarter of 2012, and net charge-offs of $766,000 for the fourth quarter of 2012. Provisions for loan losses are charged to operations to bring the allowance for loan losses to a level deemed appropriate by the Company based on the factors discussed under "Allowance for Loan Losses".

Noninterest Income

        The following table sets forth the various components of the Company's noninterest income for the periods indicated:

	For the Three Months Ended March 31,				Increase (decrease) 2013 versus 2012
	2013		2012		Amount			Percent
	(Dollars in thousands)
Service charges and fees on deposit accounts	$	577	$	590	$	(13	)		-2	%
Increase in cash surrender value of life insurance		416		429		(13	)		-3	%
Servicing income		365		460		(95	)		-21	%
Gain on sales of SBA loans		136		36		100			278	%
Gain on sales of securities		31		27		4			15	%
Other		138		181		(43	)		-24	%
Total noninterest income	$	1,663	$	1,723	$	(60	)		-3	%

        Noninterest income for the first quarter of 2013 remained relatively flat at $1.7 million, compared to the same period in 2012.

        Historically, a significant percentage of the Company's noninterest income has been associated with its SBA lending activity, as gains on the sale of loans sold in the secondary market and servicing income from loans sold with servicing rights retained. For the quarter ended March 31, 2013, SBA loan sales resulted in a $136,000 gain, compared to a $36,000 gain on sales of SBA loans for the quarter ended March 31, 2012. The servicing assets that result from the sales of SBA loans with servicing

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retained, are amortized over the expected term of the loans using a method approximating the interest method. Servicing income generally declines as the respective loans are repaid.

Noninterest Expense

        The following table sets forth the various components of the Company's noninterest expense for the periods indicated:

	For the Three Months Ended March 31,					Increase (decrease) 2013 versus 2012
	2013			2012		Amount			Percent
	(Dollars in thousands)
Salaries and employee benefits	$	6,011		$	5,667	$	344			6	%
Occupancy and equipment		1,068			996		72			7	%
Professional fees		982			1,211		(229	)		-19	%
Low income housing investment losses		311			269		42			16	%
Software subscriptions		291			290		1			0	%
FDIC deposit insurance premiums		259			225		34			15	%
Insurance expense		254			224		30			13	%
Data processing		252			245		7			3	%
Correspondent bank charges		164			143		21			15	%
Foreclosed assets, net		(155	)		115		(270	)		-235	%
Other		1,344			1,471		(127	)		-9	%
Total noninterest expense	$	10,781		$	10,856	$	(75	)		-1	%

        The following table indicates the percentage of noninterest expense in each category for the periods indicated:

Noninterest Expense by Category

	For The Three Months Ended March 31,
	2013			Percent of Total			2012		Percent of Total
	(Dollars in thousands)
Salaries and employee benefits	$	6,011			56	%	$	5,667		52	%
Occupancy and equipment		1,068			10	%		996		9	%
Professional fees		982			9	%		1,211		11	%
Low income housing investment losses		311			3	%		269		3	%
Software subscriptions		291			3	%		290		3	%
FDIC deposit insurance premiums		259			2	%		225		2	%
Insurance expense		254			2	%		224		2	%
Data processing		252			2	%		245		2	%
Correspondent bank charges		164			2	%		143		1	%
Foreclosed assets, net		(155	)		-1	%		115		1	%
Other		1,344			12	%		1,471		14	%
Total noninterest expense	$	10,781			100	%	$	10,856		100	%

        Noninterest expense in the first quarter of 2013 was $10.8 million, a decrease from $10.9 million for the first quarter of 2012. The decrease in noninterest expense for the first quarter of 2013 was primarily due to a gain on the disposition of foreclosed assets and lower professional fees, partially

45

offset by higher health insurance premiums and other salaries and employee benefits costs. Full-time equivalent employees were 188 at March 31, 2013 and 189 at March 31, 2012.

Income Tax Expense

        The Company computes its provision for income taxes on a monthly basis. The effective tax rate is determined by applying the Company's statutory income tax rates to pre-tax book income as adjusted for permanent differences between pre-tax book income and actual taxable income. These permanent differences include, but are not limited to, increases in the cash surrender value of life insurance policies, California Enterprise Zone deductions, certain expenses that are not allowed as tax deductions, and tax credits.

        The Company's Federal and state income tax expense for the quarter ended March 31, 2013 was $855,000, compared to $951,000 for the quarter ended March 31, 2012. The following table shows the Company's effective income tax rates for the periods indicated:

	For the Three Months Ended March 31,
	2013			2012
Effective income tax rate		28.2	%		31.4	%

        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 tax exempt municipal securities. The Company has net investments of $2.2 million in low-income housing limited partnerships as of March 31, 2013.

        Some items of income and expense are recognized in different years for tax purposes than when applying generally accepted accounting principles leading to timing differences between the Company's actual tax liability, and the amount accrued for this liability based on book income. These temporary differences comprise the "deferred" portion of the Company's tax expense or benefit, which is accumulated on the Company's books as a deferred tax asset or deferred tax liability until such time as they reverse.

        Realization of the Company's deferred tax assets is primarily dependent upon the Company generating sufficient future taxable income to obtain benefit from the reversal of net deductible temporary differences and utilization of tax credit carryforwards and the net operating loss carryforwards for Federal and California state income tax purposes. The amount of deferred tax assets considered realizable is subject to adjustment in future periods based on estimates of future taxable income. Under generally accepted accounting principles a valuation allowance is required to be recognized if it is "more likely than not" that a deferred tax asset will not be realized. The determination of the realizability of the deferred tax assets is highly subjective and dependent upon judgment concerning management's evaluation of both positive and negative evidence, including forecasts of future income, cumulative losses, applicable tax planning strategies, and assessments of current and future economic and business conditions.

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        The Company had net deferred tax assets of $20.2 million and $19.3 million at March 31, 2013, and December 31, 2012, respectively. After consideration of the matters in the preceding paragraph, the Company determined that it is more likely than not that the net deferred tax asset at March 31, 2013 and December 31, 2012 will be fully realized in future years.

FINANCIAL CONDITION

        As of March 31, 2013, total assets increased to $1.38 billion, compared to $1.31 billion at March 31, 2012, and decreased from $1.69 billion at December 31, 2012. Excluding the short-term deposits at the Federal Reserve Bank offsetting the short-term demand deposits from one customer of $24.3 million at March 31, 2013 and $271.9 million at December 31, 2012, total assets were $1.36 billion and $1.42 billion, respectively. Securities available-for-sale (at fair value) were $346.8 million at March 31, 2013, a decrease of 10% from $385.8 million at March 31, 2012, and a decrease of 6% from $367.9 million at December 31, 2012. Securities held-to-maturity (at amortized cost) were $68.3 million at March 31, 2013, compared to no securities held-to-maturity at March 31, 2012, and $51.5 million at December 31, 2012. The total loan portfolio, excluding loans held-for-sale, was $801.9 million at March 31, 2013, an increase of 6% from $756.9 million at March 31, 2012, and a decrease of 1% from $812.3 million at December 31, 2012.

        Total deposits, excluding the short-term demand deposits from one customer of $24.3 million at March 31, 2013 and $271.9 million at December 31, 2012, increased 6% to $1.14 billion at March 31, 2013, from $1.08 billion at March 31, 2012 and decreased 5% from $1.21 billion at December 31, 2012. Subordinated debt decreased to $9.3 million at March 31, 2013 and December 31, 2012, compared to $23.7 million at March 31, 2012, as a result of the redemption of $14 million fixed-rate subordinated debt during the third quarter of 2012.

Securities Portfolio

        The following table reflects the balances for each category of securities at the dates indicated:

	March 31,
					December 31, 2012
	2013		2012
	(Dollars in thousands)
Securities available-for-sale (at fair value):
Agency mortgage-backed securities	$	271,077	$	340,181	$	291,244
Corporate bonds		54,892		10,636		55,588
Trust preferred securities		20,831		35,009		21,080
Total	$	346,800	$	385,826	$	367,912
Securities held-to-maturity (at amortized cost):
Agency mortgage-backed securities	$	15,185	$	—	$	16,659
Municipals—Tax Exempt		53,098		—		34,813
	$	68,283	$	—	$	51,472

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        The following table summarizes the weighted average life and weighted average yields of securities at March 31, 2013:

	March 31, 2013 Weighted Average Life
	After One and Within Five Years					After Five and Within Ten Years					After Ten Years					Total
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
	(Dollars in thousands)
Securities available-for-sale (at fair value):
Agency mortgage-backed securities	$	216,999		2.48	%	$	49,911		2.31	%	$	4,167		2.51	%	$	271,077		2.45	%
Corporate bonds		963		2.45	%		53,929		3.26	%		—		—			54,892		3.25	%
Trust preferred securities		—		—			—		—			20,831		4.92	%		20,831		4.92	%
	$	217,962		2.48	%	$	103,840		2.80	%	$	24,998		4.52	%	$	346,800		2.72	%

	March 31, 2013 Weighted Average Life
	After One and Within Five Years					After Five and Within Ten Years					After Ten Years					Total
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
	(Dollars in thousands)
Securities held-to-maturity (at amortized cost):
Agency mortgage-backed securities	$	12,307		2.51	%	$	—		—		$	2,878		2.81	%	$	15,185		2.56	%
Municipals—Tax Exempt		—		—			8,180		3.81	%		44,918		3.76	%		53,098		3.77	%
	$	12,307		2.51	%	$	8,180		3.81	%	$	47,796		3.71	%	$	68,283		3.50	%

        The securities portfolio is the second largest component of the Company's interest-earning assets, and the structure and composition of this portfolio is important to an analysis of the financial condition of the Company. The portfolio serves the following purposes: (i) it provides a source of pledged assets for securing certain deposits and borrowed funds, as may be required by law or by specific agreement with a depositor or lender; (ii) it provides liquidity to even out cash flows from the loan and deposit activities of customers; (iii) it can be used as an interest rate risk management tool, since it provides a large base of assets, the maturity and interest rate characteristics of which can be changed more readily than the loan portfolio to better match changes in the deposit base and other funding sources of the Company; and (iv) it is an alternative interest-earning use of funds when loan demand is weak or when deposits grow more rapidly than loans.

        The Company's portfolio may include: (i) U.S. Treasury securities and U.S. Government sponsored entities' debt securities for liquidity and pledging; (ii) mortgage-backed securities, which in many instances can also be used for pledging, and which generally enhance the yield of the portfolio; (iii) municipal obligations, which provide tax free income and limited pledging potential; (iv) collateralized mortgage obligations, which generally enhance the yield of the portfolio; and (v) single entity issue trust preferred securities, which generally enhance the yield on the portfolio.

        The Company classifies its securities as either available-for-sale or held-to-maturity at the time of purchase. Prior to the third quarter of 2012, the Company's securities were all classified under existing accounting rules as "available-for-sale" to allow flexibility for the management of the portfolio. Accounting guidance requires available-for-sale securities to be marked to fair value with an offset to accumulated other comprehensive income (loss), a component of shareholders' equity. Monthly adjustments are made to reflect changes in the fair value of the Company's available-for-sale securities. The investment securities available-for-sale portfolio totaled $346.8 million at March 31, 2013, a decrease of 10% from $385.8 million at March 31, 2012, and a decrease of 6% from $367.9 million at December 31, 2012. At March 31, 2013, the investment securities available-for-sale portfolio was

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comprised of $271.1 million of agency mortgage-backed securities (all issued by U.S. Government sponsored entities), $54.9 million of corporate bonds, and $20.8 million of single entity issue trust preferred securities.

        The investment securities held-to-maturity portfolio, at amortized cost, totaled $68.3 million at March 31, 2013, compared to no investment securities held-to-maturity at March 31, 2012, and $51.5 million at December 31, 2012. At March 31, 2013, the investment securities held-to-maturity portfolio was comprised of $53.1 million of tax-exempt municipal bonds, and $15.2 million of agency mortgage-backed securities. During the third quarter of 2012, the Company evaluated its available-for-sale portfolio and reclassified at fair value approximately $16.4 million of the mortgage-backed securities with higher price volatility and longer maturities to the held-to-maturity category. The Company transferred these securities to mitigate possible negative impacts on its regulatory capital under the proposed Basel III capital guidelines as the Company has the intent and ability to hold these securities to maturity. The related unrealized after-tax gains of $489,000 at March 31, 2013 remained in accumulated other comprehensive income and will be amortized over the remaining life of the securities as an adjustment of yield, offsetting the related amortization of the premium or accretion of the discount on the transferred securities. No gains or losses were recognized at the time of reclassification. Management considers the held-to-maturity classification of these investment securities to be appropriate based on the Company's positive intent and ability to hold these securities to maturity.

        The Company has not used interest rate swaps or other derivative instruments to hedge fixed rate loans or securities to otherwise mitigate interest rate risk.

Loans

        The Company's loans represent the largest portion of invested assets, substantially greater than the securities portfolio or any other asset category, and the quality and diversification of the loan portfolio is an important consideration when reviewing the Company's financial condition.

        Gross loans, excluding loans held-for-sale, represented 58% of total assets at March 31, 2013 and March 31, 2012, and 48% of total assets at December 31, 2012. Gross loans, excluding loans held-for-sale, represented 59% and 57% of total assets, excluding the short-term deposits at the Federal Reserve Bank offsetting the short-term demand deposits from one customer at March 31, 2013 and December 31, 2012, respectively. The ratio of loans to deposits decreased to 68.75% at March 31, 2013 from 70.07% at March 31, 2012 and 54.91% at December 31, 2012. The loan to deposit ratio was 70.19% and 67.27%, excluding the short-term demand deposits from one customer at March 31, 2013 and December 31, 2012, respectively.

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Loan Distribution

        The Loan Distribution table that follows sets forth the Company's gross loans, excluding loans held-for-sale, outstanding and the percentage distribution in each category at the dates indicated:

	March 31, 2013						March 31, 2012						December 31, 2012
	Balance			% of Total			Balance			% of Total			Balance			% of Total
	(Dollars in thousands)
Commercial	$	356,688			44	%	$	357,906			47	%	$	375,469			46	%
Real estate:
Commercial and residential		361,340			45	%		319,914			42	%		354,934			44	%
Land and construction		24,611			3	%		18,583			3	%		22,352			3	%
Home equity		45,347			6	%		48,444			6	%		43,865			5	%
Consumer		14,036			2	%		11,810			2	%		15,714			2	%
Total loans		802,022			100	%		756,657			100	%		812,334			100	%
Deferred loan (fees) costs, net		(97	)		—			237			—			(21	)		—
Loans, including deferred fees and costs		801,925			100	%		756,894			100	%		812,313			100	%
Allowance for loan losses		(19,342	)					(20,306	)					(19,027	)
Loans, net	$	782,583					$	736,588					$	793,286

        The decrease of $18.8 million in the commercial loan portfolio from December 31, 2012 to March 31, 2013, was primarily due to a reduction in the utilization of lines of credit.

        The Company's loan portfolio is concentrated in commercial loans, primarily manufacturing, wholesale, and services, and commercial real estate, with the balance in land development and construction and home equity and consumer loans. The Company does not have any concentrations by industry or group of industries in its loan portfolio, however, 54% of its gross loans were secured by real property at March 31, 2013, compared to 51% at March 31, 2012, and 52% at December 31, 2012. While no specific industry concentration is considered significant, the Company's lending operations are located in areas that are dependent on the technology and real estate industries and their supporting companies.

        The Company has established concentration limits in its loan portfolio for commercial real estate loans, commercial loans, construction loans and unsecured lending, among others. All loan types are within established limits. The Company underwrites to the historical cash flow of the borrowers to determine debt service and stress tests the debt service under higher interest rate scenarios. Financial and performance covenants are used in commercial lending to allow the Company to react to a borrower's deteriorating financial condition should that occur.

        The Company's commercial loans are made for working capital, financing the purchase of equipment or for other business purposes. Commercial loans include loans with maturities ranging from thirty days to one year and "term loans" with maturities normally ranging from one to five years. Short-term business loans are generally intended to finance current transactions and typically provide for periodic principal payments, with interest payable monthly. Term loans normally provide for floating interest rates, with monthly payments of both principal and interest.

        The Company is an active participant in the SBA and U.S. Department of Agriculture guaranteed lending programs, and has been approved by the SBA as a lender under the Preferred Lender Program. The Company regularly makes such guaranteed loans (collectively referred to as "SBA loans"). The guaranteed portion of these loans is typically sold in the secondary market depending on market conditions. When the guaranteed portion of an SBA loan is sold the Company retains the

50

servicing rights for the sold portion. During the first quarter of 2013, loans were sold resulting in a gain on sale of SBA loans of $136,000.

        As of March 31, 2013, commercial and residential real estate mortgage loans of $361.3 million consist primarily of adjustable and fixed rate loans secured by deeds of trust on commercial and residential property. The real estate mortgage loans at March 31, 2013 consist of $184.4 million, or 51%, of commercial owner occupied properties, $173.9 million, or 48%, of commercial investment properties, and $3.0 million, or 1% in residential properties. Properties securing the commercial real estate mortgage loans are generally located in the Company's primary market, which is the Greater San Francisco Bay Area.

        The Company's commercial real estate loans consist primarily of loans based on the borrower's cash flow and are secured by deeds of trust on commercial and residential property to provide a secondary source of repayment. The Company generally restricts real estate term loans to no more than 75% of the property's appraised value or the purchase price of the property during the initial underwriting of the credit, depending on the type of property and its utilization. The Company offers both fixed and floating rate loans. Maturities on real estate mortgage loans are generally between five and ten years (with amortization ranging from fifteen to twenty-five years and a balloon payment due at maturity); however, SBA and certain other real estate loans that can be sold in the secondary market may be granted for longer maturities.

        The Company's land and construction loans are primarily to finance the development/construction of commercial and single family residential properties. The Company utilizes underwriting guidelines to assess the likelihood of repayment from sources such as sale of the property or availability of permanent mortgage financing prior to making the construction loan. Land and construction loans increased $6.0 million to $24.6 million, at March 31, 2013, from $18.6 million, at March 31, 2012, and increased $2.2 million from $22.4 million, at December 31, 2012.

        The Company makes home equity lines of credit available to its existing customers. Home equity lines of credit are underwritten initially with a maximum 70% loan to value ratio. Home equity lines are reviewed at least semiannually, with specific emphasis on loans with a loan to value ratio greater than 70% and loans that were underwritten from mid-2005 through 2008, when real estate values were at the peak in the cycle. The Company takes measures to work with customers to reduce line commitments and minimize potential losses. There have been no adverse classifications to date as a result of the review.

        Additionally, the Company makes consumer loans for the purpose of financing automobiles, various types of consumer goods, and other personal purposes. Consumer loans generally provide for the monthly payment of principal and interest. Most of the Company's consumer loans are secured by the personal property being purchased or, in the instances of home equity loans or lines, real property.

        With certain exceptions, state chartered banks are permitted to make extensions of credit to any one borrowing entity up to 15% of the bank's capital and reserves for unsecured loans and up to 25% of the bank's capital and reserves for secured loans. For HBC, these lending limits were $27.9 million and $46.4 million at March 31, 2013, respectively.

Loan Maturities

        The following table presents the maturity distribution of the Company's loans (excluding loans held-for-sale) as of March 31, 2013. The table shows the distribution of such loans between those loans with predetermined (fixed) interest rates and those with variable (floating) interest rates. Floating rates generally fluctuate with changes in the prime rate as reflected in the Western Edition of The Wall

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Street Journal. As of March 31, 2013, approximately 63% of the Company's loan portfolio consisted of floating interest rate loans.

	Due in One Year or Less		Over One Year But Less than Five Years		Over Five Years		Total
	(Dollars in thousands)
Commercial	$	244,513	$	43,861	$	68,314	$	356,688
Real estate:
Commercial and residential		100,986		164,816		95,538		361,340
Land and construction		24,111		500		—		24,611
Home equity		42,340		1,640		1,367		45,347
Consumer		13,259		689		88		14,036
Loans	$	425,209	$	211,506	$	165,307	$	802,022
Loans with variable interest rates	$	375,860	$	56,360	$	70,093	$	502,313
Loans with fixed interest rates		49,349		155,146		95,214		299,709
Loans	$	425,209	$	211,506	$	165,307	$	802,022

Loan Servicing

        As of March 31, 2013 and 2012, $146.7 million and $162.7 million, respectively, in SBA loans were serviced by the Company for others. Activity for loan servicing rights was as follows:

	For the Three Months Ended March 31,
	2013			2012
	(Dollars in thousands)
Beginning of period balance	$	709		$	792
Additions		29			10
Amortization		(68	)		(72	)
End of period balance	$	670		$	730

        Loan servicing rights are included in accrued interest receivable and other assets on the unaudited consolidated balance sheets and reported net of amortization. There was no valuation allowance as of March 31, 2013 and 2012, as the fair value of the assets was greater than the carrying value.

        Activity for the I/O strip receivable was as follows:

	For the Three Months Ended March 31,
	2013			2012
	(Dollars in thousands)
Beginning of period balance	$	1,786		$	2,094
Unrealized holding gain (loss)		(9	)		19
End of period balance	$	1,777		$	2,113

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Credit Quality

        Financial institutions generally have a certain level of exposure to credit quality risk, and could potentially receive less than a full return of principal and interest if a debtor becomes unable or unwilling to repay. Since loans are the most significant assets of the Company and generate the largest portion of its revenues, the Company's management of credit quality risk is focused primarily on loan quality. Banks have generally suffered their most severe earnings declines as a result of customers' inability to generate sufficient cash flow to service their debts and/or downturns in national and regional economies and declines in overall asset values including real estate. In addition, certain debt securities that the Company may purchase have the potential of declining in value if the obligor's financial capacity to repay deteriorates.

        The Company's policies and procedures identify market segments, set goals for portfolio growth or contraction, and establish limits on industry and geographic credit concentrations. In addition, these policies establish the Company's underwriting standards and the methods of monitoring ongoing credit quality. The Company's internal credit risk controls are centered in underwriting practices, credit granting procedures, training, risk management techniques, and familiarity with loan customers as well as the relative diversity and geographic concentration of our loan portfolio.

        The Company's credit risk may also be affected by external factors such as the level of interest rates, employment, general economic conditions, real estate values, and trends in particular industries or geographic markets. As an independent community bank serving a specific geographic area, the Company must contend with the unpredictable changes in the general California market and, particularly, primary local markets. The Company's asset quality has suffered in the past from the impact of national and regional economic recessions, consumer bankruptcies, and depressed real estate values.

        Nonperforming assets are comprised of the following: loans and loans held-for-sale for which the Company is no longer accruing interest; restructured loans which have been current under six months; loans 90 days or more past due and still accruing interest (although they are generally placed on nonaccrual when they become 90 days past due, unless they are both well-secured and in the process of collection); and foreclosed assets. Management's classification of a loan as "nonaccrual" is an indication that there is reasonable doubt as to the full recovery of principal or interest on the loan. At that point, the Company stops accruing interest income, and reverses any uncollected interest that had been accrued as income. The Company begins recognizing interest income only as cash interest payments are received and it has been determined the collection of all outstanding principal is not in doubt. The loans may or may not be collateralized, and collection efforts are pursued. Loans may be restructured by management when a borrower has experienced some change in financial status causing an inability to meet the original repayment terms and where the Company believes the borrower will eventually overcome those circumstances and make full restitution. Foreclosed assets consist of properties acquired by foreclosure or similar means that management is offering or will offer for sale.

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        The following table summarizes the Company's nonperforming assets at the dates indicated:

	March 31,						December 31,
	2013			2012			2012
	(Dollars in thousands)
Nonaccrual loans—held-for-sale	$	—		$	184		$	—
Nonaccrual loans—held-for-investment		16,115			14,005			17,335
Restructured and loans over 90 days past due and still accruing		549			2,155			859
Total nonperforming loans		16,664			16,344			18,194
Foreclosed assets		738			3,167			1,270
Total nonperforming assets	$	17,402		$	19,511		$	19,464
Nonperforming assets as a percentage of loans plus other real estate owned plus nonaccrual loans held-for-sale plus foreclosed assets		2.17	%		2.57	%		2.39	%
Nonperforming assets as a percentage of total assets		1.26	%		1.49	%		1.15	%

        Nonperforming assets were $17.4 million, or 1.26% of total assets, at March 31, 2013, compared to $19.5 million, or 1.49% of total assets at March 31, 2012, and $19.5 million, or 1.15% of total assets at December 31, 2012. Nonperforming assets to total assets were 1.28% at March 31, 2013 and 1.37% at December 31, 2012, excluding the short-term deposits at the Federal Reserve Bank offsetting the short-term demand deposits from one customer. Included in total nonperforming assets were foreclosed assets of $738,000 at March 31, 2013, compared to $3.2 million at March 31, 2012, and $1.3 million at December 31, 2012.

Allowance for Loan Losses

        The allowance for loan losses is an estimate of probable incurred losses in the loan portfolio. Loans are charged-off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance for loan losses. Management's methodology for estimating the allowance balance consists of several key elements, which include specific allowances on individual impaired loans and the formula driven allowances on pools of loans with similar risk characteristics. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged-off.

        Specific allowances are established for impaired loans. Management considers a loan to be impaired when it is probable that the Company will be unable to collect all amounts due according to the original contractual terms of the loan agreement, including scheduled interest payments. Loans for which the terms have been modified with a concession granted, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. When a loan is considered to be impaired, the amount of impairment is measured based on the fair value of the collateral less costs to sell if the loan is collateral dependent, or on the present value of expected future cash flows or values that are observable in the secondary market. If the measure of the impaired loans is less than the investment in the loan, the deficiency will be charged off against the allowance for loan losses if the amount is a confirmed loss, or, alternatively, a specific allocation within the allowance will be established. Loans that are considered impaired are specifically excluded from the formula portion of the allowance for loan losses analysis.

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        The estimated loss factors for pools of loans that are not impaired are based on determining the probability of default and loss given default for loans within each segment of the portfolio, adjusted for significant factors that, in management's judgment, affect collectibility as of the evaluation date. The Company's historical delinquency experience and loss experience are utilized to determine the probability of default and loss given default for segments of the portfolio where the Company has experienced losses in the past. For segments of the portfolio where the Company has no significant prior loss experience, the Company uses quantifiable observable industry data to determine the probability of default and loss given default.

        Loans that demonstrate a weakness for which there is a possibility of loss if the weakness is not corrected, are categorized as "classified." Classified assets include all loans considered as substandard, substandard-nonaccrual, and doubtful and may result from problems specific to a borrower's business or from economic downturns that affect the borrower's ability to repay or that cause a decline in the value of the underlying collateral (particularly real estate), and foreclosed assets. The principal balance of classified assets, net of SBA guarantees was $31.2 million at March 31, 2013, $54.2 million at March 31, 2012, and $36.8 million at December 31, 2012. Included in classified assets at March 31, 2012 were $184,000 of loans held-for-sale. There were no loans held-for-sale included in classified assets at March 31, 2013 and December 31, 2012. Loans held-for-sale are carried at the lower of cost or estimated fair value, and are not allocated an allowance for loan losses. Reducing classified assets will continue to be a focus for executive management, the lending staff and the Company's Special Assets Department.

        It is the policy of management to maintain the allowance for loan losses at a level adequate for risks inherent in the loan portfolio. On an ongoing basis, we have engaged an outside firm to perform independent credit reviews of our loan portfolio. The Federal Reserve Bank of San Francisco and the California Department of Financial Institutions also review the allowance for loan losses as an integral part of the examination process. Based on information currently available, management believes that the allowance for loan losses is adequate. However, the loan portfolio can be adversely affected if California economic conditions and the real estate market in the Company's market area were to further weaken. Also, any weakness of a prolonged nature in the technology industry would have a negative impact on the local market. The effect of such events, although uncertain at this time, could result in an increase in the level of nonperforming loans and increased loan losses, which could adversely affect the Company's future growth and profitability. No assurance of the ultimate level of credit losses can be given with any certainty.

        The following tables summarize the Company's loan loss experience, as well as provisions and charges to the allowance for loan losses and certain pertinent ratios for the periods indicated:

	Three Months Ended March 31, 2013
	Commercial			Real Estate			Consumer			Total
	(Dollars in thousands)
Balance, beginning of period	$	12,866		$	6,034		$	127		$	19,027
Charge-offs		(840	)		—			—			(840	)
Recoveries		1,150			5			—			1,155
Net recoveries		310			5			—			315
Provision (credit) for loan losses		(721	)		731			(10	)		—
Balance, end of period	$	12,455		$	6,770		$	117		$	19,342
RATIOS:
Net recoveries to average loans(1)		0.16	%		0.00	%		0.00	%		0.16	%
Allowance for loan losses to total loans(1)		1.55	%		0.84	%		0.02	%		2.41	%
Allowance for loan losses to nonperforming loans		74.74	%		40.63	%		0.70	%		116.07	%

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	Three Months Ended March 31, 2012
	Commercial			Real Estate			Consumer			Total
	(Dollars in thousands)
Balance, beginning of period	$	13,215		$	7,338		$	147		$	20,700
Charge-offs		(910	)		(45	)		—			(955	)
Recoveries		461			—			—			461
Net charge-offs		(449	)		(45	)		—			(494	)
Provision (credit) for loan losses		968			(884	)		16			100
Balance, end of period	$	13,734		$	6,409		$	163		$	20,306
RATIOS:
Net charge-offs to average loans(1)		0.24	%		0.02	%		0.00	%		0.26	%
Allowance for loan losses to total loans(1)		1.81	%		0.85	%		0.02	%		2.68	%
Allowance for loan losses to nonperforming loans		84.03	%		39.21	%		1.00	%		124.24	%

(1)

Average loans and total loans exclude loans held-for-sale.

        The following table provides a summary of the allocation of the allowance for loan losses for specific class at the dates indicated. The allocation presented should not be interpreted as an indication that charges to the allowance for loan losses will be incurred in these amounts or proportions, or that the portion of the allowance allocated to each category represents the total amount available for charge-offs that may occur within these classes.

Allocation of Allowance for Loan Losses

	March 31,
	2013					2012					December 31, 2012
	Allowance		Percent of Loans in each category to total loans			Allowance		Percent of Loans in each category to total loans			Allowance		Percent of Loans in each category to total loans
	(Dollars in thousands)
Commercial	$	12,455		44	%	$	13,734		47	%	$	12,866		46	%
Real estate:
Commercial and residential		5,394		45	%		5,449		42	%		4,609		44	%
Land and construction		273		3	%		431		3	%		399		3	%
Home equity		1,103		6	%		529		6	%		1,026		5	%
Consumer		117		2	%		163		2	%		127		2	%
Total	$	19,342		100	%	$	20,306		100	%	$	19,027		100	%

        The allowance for loan losses totaled $19.3 million, or 2.41% of total loans at March 31, 2013, compared to $20.3 million, or 2.68% of total loans at March 31, 2012, $19.0 million, or 2.34% of total loans at December 31, 2012. Loan charge-offs reflect the realization of losses in the portfolio that were partially recognized previously through the provision for loan losses. The Company had net recoveries of $315,000, or 0.16% of average loans, for the first quarter of 2013, compared to net charge-offs of $494,000, or 0.26% of average loans, for the first quarter of 2012, and net charge-offs of $766,000, or 0.38% of average loans, for the fourth quarter of 2012. The allowance for loan losses related to the commercial portfolio decreased $411,000 during the three months ended March 31, 2013 from December 31, 2012, as a result of a credit to the provision for loan losses of $721,000 and net recoveries of $310,000. The decrease in the allowance for loan losses was primarily due to improved risk grading and credit metrics on commercial loans, as well as a decline in historical charge-off levels.

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The allowance for loan losses related to the real estate portfolio increased $736,000 during the three months ended March 31, 2013 from December 31, 2012, as a result of a provision for loan losses of $731,000 and net recoveries of $5,000. The increase in the allowance for loan losses was primarily due to an increase in the allowance for loan losses on impaired real estate loans, partially offset by improved risk grading and credit metrics on non-impaired real estate loans, as well as a decline in historical charge-off levels.

Deposits

        The composition and cost of the Company's deposit base are important components in analyzing the Company's net interest margin and balance sheet liquidity characteristics, both of which are discussed in greater detail in other sections herein. The Company's liquidity is impacted by the volatility of deposits or other funding instruments or, in other words, by the propensity of that money to leave the institution for rate-related or other reasons. Deposits can be adversely affected if economic conditions in California, and the Company's market area in particular, continue to weaken. Potentially, the most volatile deposits in a financial institution are jumbo certificates of deposit, meaning time deposits with balances that equal or exceed $100,000, as customers with balances of that magnitude are typically more rate-sensitive than customers with smaller balances.

        The following table summarizes the distribution of deposits and the percentage of distribution in each category of deposits for the periods indicated:

	March 31, 2013					March 31, 2012					December 31, 2012
	Balance		% to Total			Balance		% to Total			Balance		% to Total
	(Dollars in thousands)
Demand, noninterest-bearing	$	397,198		34	%	$	356,618		33	%	$	727,684		49	%
Demand, interest-bearing		169,681		15	%		144,022		13	%		155,951		10	%
Savings and money market		286,784		25	%		292,009		27	%		272,047		18	%
Time deposits—under $100		23,835		2	%		27,949		2	%		25,157		2	%
Time deposits—$100 and over		189,779		16	%		168,726		16	%		190,502		13	%
Time deposits—brokered		83,763		7	%		84,728		8	%		97,807		7	%
CDARS—money market and time deposits		15,850		1	%		6,198		1	%		10,220		1	%
Total deposits	$	1,166,890		100	%	$	1,080,250		100	%	$	1,479,368		100	%

        The Company obtains deposits from a cross-section of the communities it serves. The Company's business is not generally seasonal in nature. The Company is not dependent upon funds from sources outside the United States. Less than 8% of deposits at March 31, 2013, 5% at March 31, 2012, and 6% at December 31, 2012 were from public sources.

        Deposits totaled $1.17 billion at March 31, 2013, compared to $1.08 billion at March 31, 2012, and $1.48 billion at December 31, 2012. Late in the fourth quarter of 2012, the Company received short-term demand deposits in the amount of $467.5 million from one customer for specific transactions. Of this amount, $195.6 million was subsequently withdrawn, for a net outstanding balance of $271.9 million at December 31, 2012. The outstanding balance of the short-term demand deposits was $24.3 million at March 31, 2013. Total deposits, excluding brokered deposits and short-term demand deposits from one customer of $24.3 million at March 31, 2013 and $271. 9 million at December 31, 2012, were $1.06 billion at March 31, 2013, compared to $995.5 million at March 31, 2012, and $1.11 billion at December 31, 2012.

        Noninterest-bearing demand deposits (excluding the short-term demand deposits from one customer) increased $16.3 million, or 5%, to $372.9 million at March 31, 2013, from $356.6 million at March 31, 2012, and decreased $82.9 million, or 18%, from $455.8 million at December 31, 2012. At

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March 31, 2013, the Company had $99.0 million (at fair value) of securities pledged for $85.0 million in certificates of deposits from the State of California. At March 31, 2012, the Company had $56.5 million (at fair value) of securities pledged for $50.0 million in certificates of deposits with the State of California. At December 31, 2012, the Company had $95.3 million (at fair value) of securities pledged for $85.0 million in certificates of deposits from the State of California. At March 31, 2013, brokered deposits decreased $965,000, or 1%, to $83.8 million, compared to $84.7 million at March 31, 2012, and decreased $14.0 million, or 14%, from $97.8 million at December 31, 2012.

        CDARS deposits were comprised of $10.8 million of money market accounts and $5.1 million of time deposits at March 31, 2013. All of the $6.2 million of CDARS deposits at March 31, 2012 were time deposits. CDARS deposits were comprised of $5.0 million of money market accounts and $5.2 million of time deposits at December 31, 2012.

        The following table indicates the contractual maturity schedule of the Company's time deposits of $100,000 and over, and all CDARS time deposits and brokered deposits as of March 31, 2013:

	Balance		% of Total
	(Dollars in thousands)
Three months or less	$	79,933		29	%
Over three months through six months		98,121		35	%
Over six months through twelve months		49,443		18	%
Over twelve months		51,144		18	%
Total	$	278,641		100	%

        The Company focuses primarily on providing and servicing business deposit accounts that are frequently over $100,000 in average balance per account. As a result, certain types of business clients that the Company serves typically carry average deposits in excess of $100,000. The account activity for some account types and client types necessitates appropriate liquidity management practices by the Company to help ensure its ability to fund deposit withdrawals.

Return on Equity and Assets

        The following table indicates the ratios for return on average assets and average equity, and average equity to average assets for the periods indicated:

	Three Months Ended March 31,
	2013			2012
Annualized return on average assets		0.61	%		0.64	%
Annualized return on average tangible assets		0.61	%		0.64	%
Annualized return on average equity		5.20	%		4.43	%
Annualized return on average tangible equity		5.26	%		4.48	%
Average equity to average assets ratio		11.77	%		14.37	%

Off-Balance Sheet Arrangements

        In the normal course of business, the Company makes commitments to extend credit to its customers as long as there are no violations of any conditions established in the contractual arrangements. These commitments are obligations that represent a potential credit risk to the Company, but are not reflected on the Company's consolidated balance sheets. Total unused commitments to extend credit were $333.7 million at March 31, 2013, as compared to $294.2 million at March 31, 2012 and $308.9 million at December 31, 2012. Unused commitments represented 42%,

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39%, and 38% of outstanding gross loans at March 31, 2013 and 2012, and December 31, 2012, respectively.

        The effect on the Company's revenues, expenses, cash flows and liquidity from the unused portion of the commitments to provide credit cannot be reasonably predicted because there is no certainty that lines of credit and letters of credit will ever be fully utilized. The following table presents the Company's commitments to extend credit for the periods indicated:

	March 31,
	2013				2012				December 31, 2012
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
	(Dollars in thousands)
Unused lines of credit and commitments to make loans	$	7,635	$	315,869	$	14,267	$	269,839	$	8,410	$	291,191
Standby letters of credit		2,775		7,424		2,291		7,852		2,200		7,051
	$	10,410	$	323,293	$	16,558	$	277,691	$	10,610	$	298,242

Liquidity and Asset/Liability Management

        Liquidity refers to the Company's ability to maintain cash flows sufficient to fund operations and to meet obligations and other commitments in a timely and cost effective fashion. At various times the Company requires funds to meet short-term cash requirements brought about by loan growth or deposit outflows, the purchase of assets, or liability repayments. An integral part of the Company's ability to manage its liquidity position appropriately is the Company's large base of core deposits, which are generated by offering traditional banking services in its service area and which have historically been a stable source of funds. To manage liquidity needs properly, cash inflows must be timed to coincide with anticipated outflows or sufficient liquidity resources must be available to meet varying demands. The Company manages liquidity to be able to meet unexpected sudden changes in levels of its assets or deposit liabilities without maintaining excessive amounts of balance sheet liquidity. Excess balance sheet liquidity can negatively impact the Company's interest margin. In order to meet short-term liquidity needs the Company utilizes overnight Federal funds purchase arrangements and other borrowing arrangements with correspondent banks, solicits brokered deposits if cost effective deposits are not available from local sources and maintains collateralized lines of credit with the FHLB and FRB. In addition, the Company can raise cash for temporary needs by selling securities under agreements to repurchase and selling securities available-for-sale.

        One of the measures we analyze for liquidity is our loan to deposit ratio. Our loan to deposit ratio was 68.72% at March 31, 2013, compared to 70.07% at March 31, 2012, and 54.91% at December 31, 2012. The loan to deposit ratio was 70.19% at March 31, 2013 and 67.27% at December 31, 2012, excluding the $24.3 million and $271.9 million, respectively, of short-term demand deposits from one customer.

FHLB and FRB Borrowings and Available Lines of Credit

        The Company has off-balance sheet liquidity in the form of Federal funds purchase arrangements with correspondent banks, including the FHLB and FRB. The Company can borrow from the FHLB on a short-term (typically overnight) or long-term (over one year) basis. The Company had no overnight borrowings from the FHLB at March 31, 2013, March 31, 2012 and December 31, 2012. The Company had $225.7 million of loans pledged to the FHLB as collateral on an available line of credit of $112.6 million at March 31, 2013.

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        The Company can also borrow from FRB's discount window. The Company had $221.1 million of loans pledged to the FRB as collateral on an available line of credit of $161.3 million at March 31, 2013, none of which was outstanding.

        At March 31, 2013, the Company had Federal funds purchase arrangements available of $55.0 million. There were no Federal funds purchased outstanding at March 31, 2013, March 31, 2012, and December 31, 2012.

        The Company may also utilize securities sold under repurchase agreements to manage our liquidity position. There were no securities sold under agreements to repurchase at March 31, 2013, March 31, 2012, and December 31, 2012.

        The following table summarizes the Company's borrowings under its Federal funds purchased, security repurchase arrangements and lines of credit for the periods indicated:

	March 31,
					December 31, 2012
	2013		2012
	(Dollars in thousands)
Average balance year-to-date	$	—	$	—	$	—
Average interest rate year-to-date		N/A		N/A		N/A
Maximum month-end balance during the quarter	$	—	$	—	$	—
Average rate at period-end		N/A		N/A		N/A

Capital Resources

        The Company uses a variety of measures to evaluate capital adequacy. Management reviews various capital measurements on a regular basis and takes appropriate action to ensure that such measurements are within established internal and external guidelines. The external guidelines, which are issued by the Federal Reserve Board and the FDIC, establish a risk-adjusted ratio relating capital to different categories of assets and off-balance sheet exposures. There are two categories of capital under the Federal Reserve Board and FDIC guidelines: Tier 1 and Tier 2 Capital. Our Tier 1 Capital currently consists of total shareholders' equity (excluding accumulated other comprehensive income or loss) and the proceeds from the issuance of trust preferred securities (trust preferred securities are counted only up to a maximum of 25% of Tier 1 capital), less goodwill and other intangible assets and disallowed deferred tax assets. Our Tier 2 Capital includes the allowances for loan losses and off-balance sheet credit losses.

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        The following table summarizes risk-based capital, risk-weighted assets, and risk-based capital ratios of the consolidated Company:

	March 31,
							December 31, 2012
	2013			2012
	(Dollars in thousands)
Capital components:
Tier 1 Capital	$	163,200		$	162,701		$	157,947
Tier 2 Capital		13,248			12,334			13,254
Total risk-based capital	$	176,448		$	175,035		$	171,201
Risk-weighted assets	$	1,053,602		$	978,513		$	1,054,394
Average assets for capital purposes	$	1,418,020		$	1,283,316		$	1,378,011
										Well-Capitalized Regulatory Requirements			Minimum Regulatory Requirements
Capital ratios:
Total risk-based capital		16.7	%		17.9	%		16.2	%		10.00	%		8.00	%
Tier 1 risk-based capital		15.5	%		16.6	%		15.0	%		6.00	%		4.00	%
Leverage(1)		11.5	%		12.7	%		11.5	%		N/A			4.00	%

(1)

Tier 1 capital divided by quarterly average assets (excluding goodwill, other intangible assets and disallowed deferred tax assets).

        The table above presents the capital ratios of the consolidated Company computed in accordance with applicable regulatory guidelines and compared to the standards for minimum capital adequacy requirements for bank holding companies.

        The following table summarizes risk-based capital, risk-weighted assets, and risk-based capital ratios of HBC:

	March 31,
							December 31, 2012
	2013			2012
	(Dollars in thousands)
Capital components:
Tier 1 Capital	$	154,302		$	153,285		$	147,742
Tier 2 Capital		13,275			12,361			13,262
Total risk-based capital	$	167,577		$	165,646		$	161,004
Risk-weighted assets	$	1,055,799		$	980,708		$	1,055,061
Average assets for capital purposes	$	1,419,570		$	1,285,488		$	1,378,238
										Well-Capitalized Regulatory Requirements			Minimum Regulatory Requirements
Capital ratios:
Total risk-based capital		15.9	%		16.9	%		15.3	%		10.00	%		8.00	%
Tier 1 risk-based capital		14.6	%		15.6	%		14.0	%		6.00	%		4.00	%
Leverage(1)		10.9	%		11.9	%		10.7	%		5.00	%		4.00	%

(1)

Tier 1 capital divided by quarterly average assets (excluding goodwill, other intangible assets and disallowed deferred tax assets).

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        The table above presents the capital ratios of HBC computed in accordance with applicable regulatory guidelines and compared to the standards for minimum capital adequacy requirements under the FDIC's prompt corrective action authority.

        Due primarily to the redemption of the $14 million fixed-rate subordinated debt in the third quarter of 2012, the Company's total risk-based capital ratio, Tier 1 risk-based capital ratio, and leverage ratio at March 31, 2013 decreased to 16.7%, 15.5%, and 11.5%, compared to 17.9%, 16.6%, and 12.7% at March 31, 2012, respectively. The Company's total risk-based capital ratio, Tier 1 risk-based capital ratio, and leverage ratio were 16.2%, 15.0%, and 11.5% at December 31, 2012, respectively. Due primarily to a distribution from HBC to HCC to provide cash of $15 million for the redemption of the fixed-rate subordinated debt in the third quarter of 2012, HBC's total risk-based capital ratio, Tier 1 risk-based capital ratio, and leverage ratio at March 31, 2013 decreased to 15.9%, 14.6%, and 10.9%, compared to 16.9%, 15.6%, and 11.9% at March 31, 2012, respectively. HBC's total risk-based capital ratio, Tier 1 risk-based capital ratio, and leverage ratio were 15.3%, 14.0%, and 10.7% at December 31, 2012, respectively. At March 31, 2013, the Company's and HBC's capital ratios exceed the highest regulatory capital requirement of "well-capitalized" under prompt corrective action provisions.

        At March 31, 2013, the Company had total shareholders' equity of $170.8 million, including $19.5 million in preferred stock, $132.0 million in common stock, $17.9 million in retained earnings, and $1.4 million of accumulated other comprehensive income. The components of other comprehensive income, net of taxes, at March 31, 2013 include the following: an unrealized gain on available-for-sale securities of $6.1 million; a liability adjustment on the supplemental executive retirement plan of ($2.3) million; a liability adjustment on the split dollar insurance contracts of ($3.4) million; and an unrealized gain on interest-only strip from SBA loans of $1.0 million.

Mandatory Redeemable Cumulative Trust Preferred Securities

        To enhance regulatory capital and to provide liquidity, the Company, through unconsolidated subsidiary grantor trusts, issued the following mandatory redeemable cumulative trust preferred securities of subsidiary grantor trusts: In the first quarter of 2000, the Company issued $7.0 million principal amount of 10.875% fixed-rate subordinated debt due on March 8, 2030, and common securities of $217,000 to a subsidiary trust, which in turn issued a similar amount of trust preferred securities. In the third quarter of 2000, the Company issued $7.0 million principal amount of 10.60% fixed-rate subordinated debt due on September 7, 2030, and common securities of $206,000 to a subsidiary trust, which in turn issued a similar amount of trust preferred securities. In the third quarter of 2001, the Company issued $5.2 million aggregate principal amount of Floating Rate Junior Subordinated Deferrable Interest Debentures due on July 31, 2031 to a subsidiary trust, which in turn issued a similar amount of trust preferred securities. In the third quarter of 2002, the Company issued $4.1 million of aggregate principal amount of Floating Rate Junior Subordinated Deferrable Interest Debentures due on September 26, 2032 to a subsidiary trust, which in turn issued a similar amount of trust preferred securities. The subordinated debt is recorded as a component of long-term debt and includes the value of the common stock issued by the trusts to the Company. The common stock is recorded as other assets for the amount issued. Under applicable regulatory guidelines, the trust preferred securities currently qualify as Tier I capital. The subsidiary trusts are not consolidated in the Company's consolidated financial statements. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, certain trust preferred securities will no longer be eligible to be included as Tier 1 capital for regulatory purposes. The trust preferred securities continued to be eligible for Tier 1 capital under Dodd-Frank for bank holding companies with less than $15 billion of assets; however, under proposed rules implementing Basel III trust preferred securities would lose eligibility for Tier 1 capital over a ten year period.

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        During the third quarter of 2012, the Company redeemed its 10.875% fixed-rate subordinated debentures in the amount of $7 million issued to Heritage Capital Trust I and the Company's 10.600% fixed-rate subordinated debentures in the amount of $7 million issued to Heritage Statutory Trust I. The related trust securities issued by Capital Trust I and Statutory Trust I were also redeemed in connection with the subordinated debt redemption and the trusts were dissolved.

U.S. Treasury Capital Purchase Program

        The Company received $40 million in November 2008 through the issuance of its Series A Preferred Stock and a warrant to purchase 462,963 shares of its common stock to the Treasury through the U.S. Treasury Capital Purchase Program. The Series A Preferred Stock qualifies as a component of Tier 1 capital.

        On March 7, 2012, in accordance with approvals received from the U.S. Treasury and the Federal Reserve, the Company repurchased all of the Series A Preferred Stock and paid the related accrued and unpaid dividends. The repurchase of the Series A Preferred Stock will save $2.0 million in annual dividends. At the time the Company repurchased the Series A Preferred Stock, it did not repurchase the related warrant. The warrant was outstanding as of the date of this report.

Series C Preferred Stock

        On June 21, 2010, the Company issued to various institutional investors 21,004 shares of newly issued Series C Convertible Perpetual Preferred Stock ("Series C Preferred Stock"). The Series C Preferred Stock is mandatorily convertible into common stock at a conversion price of $3.75 per share upon a subsequent transfer of the Series C Preferred stock to third parties not affiliates with the holder in a widely dispersed offering. The Series C Preferred Stock is non-voting except in the case of certain transactions that would affect the rights of the holders of the Series C Preferred Stock or applicable law. Holders of Series C Preferred Stock will receive dividends if and only to the extent dividends are paid to holders of common stock. The Series C Preferred Stock is not redeemable by the Company or by the holders and has a liquidation preference of $1,000 per share. The Series C Preferred Stock ranks senior to the Company's common stock.

Market Risk

        Market risk is the risk of loss of future earnings, fair values, or future cash flows that may result from changes in the price of a financial instrument. The value of a financial instrument may change as a result of changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market risk sensitive instruments. Market risk is attributed to all market risk sensitive financial instruments, including securities, loans, deposits and borrowings, as well as the Company's role as a financial intermediary in customer-related transactions. The objective of market risk management is to avoid excessive exposure of the Company's earnings and equity to loss and to reduce the volatility inherent in certain financial instruments.

Interest Rate Management

        Market risk arises from changes in interest rates, exchange rates, commodity prices and equity prices. The Company's market risk exposure is primarily that of interest rate risk, and it has established policies and procedures to monitor and limit earnings and balance sheet exposure to changes in interest rates. The Company does not engage in the trading of financial instruments, nor does the Company have exposure to currency exchange rates.

        The principal objective of interest rate risk management (often referred to as "asset/liability management") is to manage the financial components of the Company in a manner that will optimize the risk/reward equation for earnings and capital in relation to changing interest rates. The Company's

63

exposure to market risk is reviewed on a regular basis by the Asset/Liability Committee. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income. Management realizes certain risks are inherent, and that the goal is to identify and manage the risks. Management uses two methodologies to manage interest rate risk: (i) a standard GAP analysis; and (ii) an interest rate shock simulation model.

        The planning of asset and liability maturities is an integral part of the management of an institution's net interest margin. To the extent maturities of assets and liabilities do not match in a changing interest rate environment, the net interest margin may change over time. Even with perfectly matched repricing of assets and liabilities, risks remain in the form of prepayment of loans or securities or in the form of delays in the adjustment of rates of interest applying to either earning assets with floating rates or to interest bearing liabilities. The Company has generally been able to control its exposure to changing interest rates by maintaining primarily floating interest rate loans and a majority of its time certificates with relatively short maturities.

        Interest rate changes do not affect all categories of assets and liabilities equally or at the same time. Varying interest rate environments can create unexpected changes in prepayment levels of assets and liabilities, which may have a significant effect on the net interest margin and are not reflected in the interest sensitivity analysis table. Because of these factors, an interest sensitivity GAP report may not provide a complete assessment of the exposure to changes in interest rates.

        The Company uses modeling software for asset/liability management in order to simulate the effects of potential interest rate changes on the Company's net interest margin, and to calculate the estimated fair values of the Company's financial instruments under different interest rate scenarios. The program imports current balances, interest rates, maturity dates and repricing information for individual financial instruments, and incorporates assumptions on the characteristics of embedded options along with pricing and duration for new volumes to project the effects of a given interest rate change on the Company's interest income and interest expense. Rate scenarios consisting of key rate and yield curve projections are run against the Company's investment, loan, deposit and borrowed funds portfolios. These rate projections can be shocked (an immediate and parallel change in all base rates, up or down) and ramped (an incremental increase or decrease in rates over a specified time period), based on current trends and econometric models or stable economic conditions (unchanged from current actual levels).

        The following table sets forth the estimated changes in the Company's annual net interest income that would result from the designated instantaneous parallel shift in interest rates noted, as of March 31, 2013. Computations of prospective effects of hypothetical interest rate changes are based on

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numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.

	Increase/(Decrease) in Estimated Net Interest Income
	Amount			Percent
	(Dollars in thousands)
Change in Interest Rates (basis points)
+400	$	12,104			25.9	%
+300	$	9,308			19.9	%
+200	$	6,201			13.3	%
+100	$	2,880			6.2	%
0	$	—			0.0	%
-100	$	(4,275	)		-9.2	%
-200	$	(7,495	)		-16.0	%

        This data does not reflect any actions that we may undertake in response to changes in interest rates such as changes in rates paid on certain deposit accounts based on local competitive factors, which could reduce the actual impact on net interest income.

        As with any method of gauging interest rate risk, there are certain shortcomings inherent to the methodology noted above. The model assumes interest rate changes are instantaneous parallel shifts in the yield curve. In reality, rate changes are rarely instantaneous. The use of the simplifying assumption that short-term and long-term rates change by the same degree may also misstate historic rate patterns, which rarely show parallel yield curve shifts. Further, the model assumes that certain assets and liabilities of similar maturity or period to repricing will react in the same way to changes in rates. In reality, certain types of financial instruments may react in advance of changes in market rates, while the reaction of other types of financial instruments may lag behind the change in general market rates. Additionally, the methodology noted above does not reflect the full impact of annual and lifetime restrictions on changes in rates for certain assets, such as adjustable rate loans. When interest rates change, actual loan prepayments and actual early withdrawals from certificates may deviate significantly from the assumptions used in the model. Finally, this methodology does not measure or reflect the impact that higher rates may have on adjustable-rate loan clients' ability to service their debt. All of these factors are considered in monitoring the Company's exposure to interest rate risk.

ITEM 3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        The information concerning quantitative and qualitative disclosure or market risk called for by Item 305 of Regulation S-K is included as part of Item 2 above.

ITEM 4—CONTROLS AND PROCEDURES

Disclosure Control and Procedures

        The Company has carried out an evaluation, under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of March 31, 2013. As defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), disclosure controls and procedures are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported on a timely basis. Disclosure controls are also designed to reasonably assure that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to

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allow timely decisions regarding required disclosure. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded the Company's disclosure controls were effective as of March 31, 2013, the period covered by this report on Form 10-Q.

        During the three months ended March 31, 2013, there were no changes in our internal controls over financial reporting that materially affected, or are reasonably likely to affect, our internal controls over financial reporting.

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Part II—OTHER INFORMATION

ITEM 1—LEGAL PROCEEDINGS

        The Company is involved in certain legal actions arising from normal business activities. Management, based upon the advice of legal counsel, believes the ultimate resolution of all pending legal actions will not have a material effect on the financial statements of the Company.

ITEM 1A—RISK FACTORS

        In addition to the other information set forth in this Report, you should carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2012, which could materially affect our business, financial condition and/or operating results. There were no material changes from risk factors previously disclosed in our 2012 Annual Report on Form 10-K. The risk factors identified are in addition to those contained in any other cautionary statements, written or oral, which may be made or otherwise addressed in connection with a forward-looking statement or contained in any of our subsequent filings with the Securities and Exchange Commission.

ITEM 2—UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

        None

ITEM 3—DEFAULTS UPON SENIOR SECURITIES

        None

ITEM 4—MINE SAFETY DISCLOSURES

        None

ITEM 5—OTHER INFORMATION

        None

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ITEM 6—EXHIBITS

Exhibit	Description
3.1	Heritage Commerce Corp Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K filed on March 4, 2010)
3.2	Certificate of Amendment of Articles of Incorporation of Heritage Commerce Corp as filed with the California Secretary of State on June 1, 2010 (incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 filed July 23, 2010).
3.3	Heritage Commerce Corp Bylaws, as amended (incorporated by reference to the Registrant's Registration Statement Form S-1 filed on July 23, 2010)
4.1	Warrant to Purchase Common Stock dated November 21, 2008 (incorporated by reference to Exhibit 4.2 to the Registrant's Form 8-K filed on November 26, 2008)
4.2	Certificate of Determination for Series C Convertible Perpetual Preferred Stock (incorporated by reference to the Registrant's Form 8-K filed on June 22, 2010)
12.1	Calculation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges and Preferred Stock Dividends
31.1	Certification of Registrant's Chief Executive Officer Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Registrant's Chief Financial Officer Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Registrant's Chief Executive Officer Pursuant To 18 U.S.C. Section 1350
32.2	Certification of Registrant's Chief Financial Officer Pursuant To 18 U.S.C. Section 1350
101.INS	XBRL Instance Document, furnished herewith
101.SCH	XBRL Taxonomy Extension Schema Document, furnished herewith
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document, furnished herewith
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document, furnished herewith
101.LAB	XBRL Taxonomy Extension Label Linkbase Document, furnished herewith
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document, furnished herewith

68

SIGNATURES

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

	Heritage Commerce Corp (Registrant)
Date: May 8, 2013	/s/ WALTER T. KACZMAREK Walter T. Kaczmarek Chief Executive Officer
Date: May 8, 2013	/s/ LAWRENCE D. MCGOVERN Lawrence D. McGovern Chief Financial Officer

69

EXHIBIT INDEX

Exhibit	Description
3.1	Heritage Commerce Corp Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K filed on March 4, 2010)
3.2	Certificate of Amendment of Articles of Incorporation of Heritage Commerce Corp as filed with the California Secretary of State on June 1, 2010 (incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 filed July 23, 2010).
3.3	Heritage Commerce Corp Bylaws, as amended (incorporated by reference to the Registrant's Registration Statement Form S-1 filed on July 23, 2010)
4.1	Warrant to Purchase Common Stock dated November 21, 2008 (incorporated by reference to Exhibit 4.2 to the Registrant's Form 8-K filed on November 26, 2008)
4.2	Certificate of Determination for Series C Convertible Perpetual Preferred Stock (incorporated by reference to the Registrant's Form 8-K filed on June 22, 2010)
12.1	Calculation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges and Preferred Stock Dividends
31.1	Certification of Registrant's Chief Executive Officer Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Registrant's Chief Financial Officer Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Registrant's Chief Executive Officer Pursuant To 18 U.S.C. Section 1350
32.2	Certification of Registrant's Chief Financial Officer Pursuant To 18 U.S.C. Section 1350
101.INS	XBRL Instance Document, furnished herewith
101.SCH	XBRL Taxonomy Extension Schema Document, furnished herewith
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document, furnished herewith
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document, furnished herewith
101.LAB	XBRL Taxonomy Extension Label Linkbase Document, furnished herewith
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document, furnished herewith

70

EX-12.1

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Exhibit 12.1

CALCULATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES

	Three Months Ended March 31,				Year Ended December 31,
(Dollars in thousands)	2013		2012		2012		2011		2010			2009
Earnings:
Income (loss) before income taxes	$	3,035	$	3,026	$	14,203	$	10,537	$	(61,623	)	$	(24,694	)
Fixed Charges:
Interest on deposits	$	625	$	716	$	2,800	$	3,942	$	8,086		$	13,462
Interest on notes payable to subsidiary grantor trusts, repurchase agreements, and other borrowings		89		474		1,387		1,933		2,426			2,864
Rent expense interest factor(1)		249		230		912		922		909			853
Total fixed charges:
Including interest on deposits	$	963	$	1,420	$	5,099	$	6,797	$	11,421		$	17,179
Excluding interest on deposits	$	338	$	704	$	2,299	$	2,855	$	3,335		$	3,717
Ratio of earnings (loss) to fixed charges:
Excluding interest on deposits		9.98		5.30		7.18		4.69		(17.48	)		(5.64	)
Including interest on deposits		4.15		3.13		3.79		2.55		(4.40	)		(0.44	)

(1)

This amount is the portion of rent expense (generally one-third) deemed representative of the interest factor.

        For purposes of calculating the ratios of earnings to fixed charges and preferred stock dividends, earnings consist of income (loss) before income taxes and fixed charges. Fixed charges consist of interest on subordinated debt, repurchase agreements and other borrowings, the proportion deemed representative of the interest factor within rent expense. These ratios are presented both including and excluding interest on deposits.

        The earnings coverage for the three months ended March 31, 2013 was $3,035,000, both excluding and including interest on deposits.

CALCULATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS

	Three Months Ended March 31,				Year Ended December 31,
(Dollars in thousands)	2013		2012		2012		2011		2010			2009
Earnings:
Income (loss) before income taxes	$	3,035	$	3,026	$	14,203	$	10,537	$	(61,623	)	$	(24,694	)
Fixed Charges:
Interest on deposits	$	625		716	$	2,800	$	3,942	$	8,086		$	13,462
Interest on notes payable to subsidiary grantor trusts, repurchase agreements, and other borrowings		89		474		1,387		1,933		2,426			2,864
Preferred stock dividends		—		373		373		1,939		2,027			2,028
Rent expense interest factor(1)		249		230		912		922		909			853
Total fixed charges:
Including interest on deposits	$	963	$	1,793	$	5,472	$	8,736	$	13,448		$	19,207
Excluding interest on deposits	$	338	$	1,077	$	2,672	$	4,794	$	5,362		$	5,745
Ratio of earnings (loss) to fixed charges and preferred stock dividends:
Excluding interest on deposits		9.98		3.81		6.32		3.20		(10.49	)		(3.30	)
Including interest on deposits		4.15		2.69		3.60		2.21		(3.58	)		(0.29	)

(1)

This amount is the portion of rent expense (generally one-third) deemed representative of the interest factor.

        For purposes of calculating the ratios of earnings to fixed charges and preferred stock dividends, earnings consist of income (loss) before income taxes and fixed charges. Fixed charges consist of interest on subordinated debt, repurchase agreements and other borrowings, the proportion deemed representative of the interest factor within rent expense, and preferred stock dividends. These ratios are presented both including and excluding interest on deposits.

        The earnings coverage for the three months ended March 31, 2013 was $3,035,000, both excluding and including interest on deposits.

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Exhibit 12.1

CALCULATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
CALCULATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS

EX-31.1

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Exhibit 31.1

CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
REGARDING THE QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2013

I, Walter T. Kaczmarek, certify that:

1.

I have reviewed this Quarterly Report on Form 10-Q for the Quarter Ended March 31, 2013 of Heritage Commerce Corp;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: May 8, 2013

/s/ WALTER T. KACZMAREK
Walter T. Kaczmarek
Chief Executive Officer

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Exhibit 31.1

CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 REGARDING THE QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2013

EX-31.2

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Exhibit 31.2

CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
REGARDING THE QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2013

I, Lawrence D. McGovern, certify that:

1.

I have reviewed this Quarterly Report on Form 10-Q for the Quarter Ended March 31, 2013 of Heritage Commerce Corp;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: May 8, 2013

/s/ LAWRENCE D. MCGOVERN
Lawrence D. McGovern
Chief Financial Officer

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Exhibit 31.2

CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 REGARDING THE QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2013

EX-32.1

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Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
REGARDING THE QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2013

        In connection with the Quarterly Report of Heritage Commerce Corp (the "Company") on Form 10-Q for the period ended March 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Walter T. Kaczmarek, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and



(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 8, 2013

/s/ WALTER T. KACZMAREK
Walter T. Kaczmarek
Chief Executive Officer

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Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 REGARDING THE QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2013

EX-32.2

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Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
REGARDING THE QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2013

        In connection with the Quarterly Report of Heritage Commerce Corp (the "Company") on Form 10-Q for the period ended March 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Lawrence D. McGovern, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and



(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 8, 2013

/s/ LAWRENCE D. MCGOVERN
Lawrence D. McGovern
Chief Financial Officer

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Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 REGARDING THE QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2013

XML

Loans (Details 5) (USD $)	3 Months Ended	12 Months Ended
	Mar. 31, 2013	Dec. 31, 2012
Loan portfolio by loan type and credit quality classification
Balance to report	$ 782,583,000	$ 793,286,000
Total loan balance	802,022,000	812,334,000
Nonclassified
Loan portfolio by loan type and credit quality classification
Total loan balance	770,963,000	775,851,000
Classified
Loan portfolio by loan type and credit quality classification
Total loan balance	31,059,000	36,483,000
Loan classified as loss
Loan portfolio by loan type and credit quality classification
Recovery value	0	0
Balance to report	0	0
Commercial
Loan portfolio by loan type and credit quality classification
Total loan balance	356,688,000	375,469,000
Commercial | Nonclassified
Loan portfolio by loan type and credit quality classification
Total loan balance	340,372,000	355,440,000
Commercial | Classified
Loan portfolio by loan type and credit quality classification
Total loan balance	16,316,000	20,029,000
Real estate
Loan portfolio by loan type and credit quality classification
Total loan balance	431,298,000	421,151,000
Real estate | Commercial and residential
Loan portfolio by loan type and credit quality classification
Total loan balance	361,340,000	354,934,000
Real estate | Commercial and residential | Nonclassified
Loan portfolio by loan type and credit quality classification
Total loan balance	351,911,000	345,045,000
Real estate | Commercial and residential | Classified
Loan portfolio by loan type and credit quality classification
Total loan balance	9,429,000	9,889,000
Real estate | Land and construction
Loan portfolio by loan type and credit quality classification
Total loan balance	24,611,000	22,352,000
Real estate | Land and construction | Nonclassified
Loan portfolio by loan type and credit quality classification
Total loan balance	22,433,000	18,858,000
Real estate | Land and construction | Classified
Loan portfolio by loan type and credit quality classification
Total loan balance	2,178,000	3,494,000
Real estate | Home equity
Loan portfolio by loan type and credit quality classification
Total loan balance	45,347,000	43,865,000
Real estate | Home equity | Nonclassified
Loan portfolio by loan type and credit quality classification
Total loan balance	42,591,000	41,187,000
Real estate | Home equity | Classified
Loan portfolio by loan type and credit quality classification
Total loan balance	2,756,000	2,678,000
Consumer
Loan portfolio by loan type and credit quality classification
Total loan balance	14,036,000	15,714,000
Consumer | Nonclassified
Loan portfolio by loan type and credit quality classification
Total loan balance	13,656,000	15,321,000
Consumer | Classified
Loan portfolio by loan type and credit quality classification
Total loan balance	$ 380,000	$ 393,000

XML

Equity Plan (Details)	3 Months Ended
	Mar. 31, 2013
Equity plan
Number of shares available for future grants	349,071
Options
Equity plan
Vesting period	4 years
Options | Maximum
Equity plan
Expiration term	10 years

XML

Fair Value (Details 3) (USD $)	3 Months Ended	12 Months Ended
	Mar. 31, 2013	Dec. 31, 2012
Quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis
Foreclosed assets, Fair Value	738,000	1,270,000
Non-recurring basis | Level 3
Quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis
Impaired loans- held-for-investment, Fair Value	8,006,000	9,172,000
Foreclosed assets, Fair Value	738,000	1,270,000
Non-recurring basis | Level 3 | Land and construction
Quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis
Foreclosed assets, Fair Value	657,000	1,187,000
Non-recurring basis | Level 3 | Land and construction | Market Approach | Minimum
Quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis
Discount adjustment for differences between comparable sales (as a percent)	1.00%	0.00%
Non-recurring basis | Level 3 | Land and construction | Market Approach | Maximum
Quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis
Discount adjustment for differences between comparable sales (as a percent)	16.00%	23.00%
Non-recurring basis | Level 3 | Land and construction | Market Approach | Weighted average
Quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis
Discount adjustment for differences between comparable sales (as a percent)	7.00%	6.00%
Non-recurring basis | Level 3 | Commercial
Quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis
Impaired loans- held-for-investment, Fair Value	2,982,000	3,645,000
Foreclosed assets, Fair Value	81,000	83,000
Non-recurring basis | Level 3 | Commercial | Market Approach | Minimum
Quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis
Discount adjustment for differences between comparable sales (as a percent)	0.00%	0.00%
Non-recurring basis | Level 3 | Commercial | Market Approach | Maximum
Quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis
Discount adjustment for differences between comparable sales (as a percent)	3.00%	4.00%
Non-recurring basis | Level 3 | Commercial | Market Approach | Weighted average
Quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis
Discount adjustment for differences between comparable sales (as a percent)	2.00%	1.00%
Non-recurring basis | Level 3 | Real estate | Commercial and residential
Quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis
Impaired loans- held-for-investment, Fair Value	3,217,000	3,674,000
Non-recurring basis | Level 3 | Real estate | Commercial and residential | Market Approach | Minimum
Quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis
Discount adjustment for differences between comparable sales (as a percent)	0.00%	0.00%
Non-recurring basis | Level 3 | Real estate | Commercial and residential | Market Approach | Maximum
Quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis
Discount adjustment for differences between comparable sales (as a percent)	13.00%	13.00%
Non-recurring basis | Level 3 | Real estate | Commercial and residential | Market Approach | Weighted average
Quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis
Discount adjustment for differences between comparable sales (as a percent)	1.00%	1.00%
Non-recurring basis | Level 3 | Real estate | Land and construction
Quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis
Impaired loans- held-for-investment, Fair Value	1,685,000	1,723,000
Non-recurring basis | Level 3 | Real estate | Land and construction | Market Approach | Minimum
Quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis
Discount adjustment for differences between comparable sales (as a percent)	1.00%	1.00%
Non-recurring basis | Level 3 | Real estate | Land and construction | Market Approach | Maximum
Quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis
Discount adjustment for differences between comparable sales (as a percent)	4.00%	4.00%
Non-recurring basis | Level 3 | Real estate | Land and construction | Market Approach | Weighted average
Quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis
Discount adjustment for differences between comparable sales (as a percent)	2.00%	2.00%

XML

Securities (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2013 item	Dec. 31, 2012
Securities available-for-sale:
Amortized Cost - Securities available-for-sale	$ 337,180	$ 356,106
Gross Unrealized Gains	9,863	11,892
Gross Unrealized Losses	(243)	(86)
Estimated Fair Value	346,800	367,912
Securities held-to-maturity:
Amortized Cost - Securities held-to-maturity	68,283	51,472
Gross Unrealized Gains	7	82
Gross Unrealized Losses	(2,631)	(590)
Estimated Fair Value	65,659	50,964
Additional information
Number of securities held	320	269
Number of available-for-sale securities held	169	168
Number of held to maturity securities held	151	101
Number of securities with fair values below amortized cost	143	70
Number of securities carried with an unrealized loss for over twelve months	0	0
Agency mortgage-backed securities
Securities available-for-sale:
Amortized Cost - Securities available-for-sale	262,710	281,598
Gross Unrealized Gains	8,444	9,668
Gross Unrealized Losses	(77)	(22)
Estimated Fair Value	271,077	291,244
Securities held-to-maturity:
Amortized Cost - Securities held-to-maturity	15,185	16,659
Gross Unrealized Gains	6	2
Gross Unrealized Losses	(298)	(177)
Estimated Fair Value	14,893	16,484
Additional information
Holdings of securities as percentage of shareholders' equity, considered as threshold for disclosure purpose	10.00%
Number of securities held	0
Corporate bonds
Securities available-for-sale:
Amortized Cost - Securities available-for-sale	53,681	53,739
Gross Unrealized Gains	1,269	1,849
Gross Unrealized Losses	(58)
Estimated Fair Value	54,892	55,588
Trust preferred securities
Securities available-for-sale:
Amortized Cost - Securities available-for-sale	20,789	20,769
Gross Unrealized Gains	150	375
Gross Unrealized Losses	(108)	(64)
Estimated Fair Value	20,831	21,080
Municipals - Tax exempt
Securities held-to-maturity:
Amortized Cost - Securities held-to-maturity	53,098	34,813
Gross Unrealized Gains	1	80
Gross Unrealized Losses	(2,333)	(413)
Estimated Fair Value	$ 50,766	$ 34,480

XML

Benefit Plans (Tables)

3 Months Ended

Mar. 31, 2013

Benefit plans

Schedule of components of net periodic benefit cost

	Three Months Ended March 31,
	2013		2012
	(Dollars in thousands)
Components of net periodic benefit cost:
Service cost	$	304	$	294
Interest cost		196		193
Amortization of prior service cost		—		7
Amortization of net actuarial loss		71		63
Net periodic benefit cost	$	571	$	557

Schedule of funded status of split-dollar life insurance benefits

	March 31, 2013		December 31, 2012
	(Dollars in thousands)
Change in projected benefit obligation
Projected benefit obligation at beginning of year	$	4,717	$	4,525
Interest cost		44		185
Actuarial gain		3		7
Projected benefit obligation at end of period	$	4,764	$	4,717

Schedule of amounts recognized in accumulated other comprehensive income

	March 31, 2013		December 31, 2012
	(Dollars in thousands)
Net actuarial loss	$	669	$	624
Prior transition obligation		1,665		1,685
Accumulated other comprehensive loss	$	2,334	$	2,309

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Subordinated Debt (Details) (USD $)			3 Months Ended	12 Months Ended				3 Months Ended	12 Months Ended	3 Months Ended	12 Months Ended
	Mar. 31, 2013	Dec. 31, 2012	Sep. 30, 2012 Subordinated debentures	Dec. 31, 2012 Subordinated debentures	Mar. 31, 2013 Subordinated debentures	Sep. 30, 2012 Subordinated debentures Heritage Capital Trust I	Sep. 30, 2012 Subordinated debentures Heritage Statutory Trust I	Mar. 31, 2013 Subordinated debentures Heritage Statutory Trust II	Dec. 31, 2012 Subordinated debentures Heritage Statutory Trust II	Mar. 31, 2013 Subordinated debentures Heritage Statutory Trust III	Dec. 31, 2012 Subordinated debentures Heritage Statutory Trust III
Subordinated Debt
Interest rate (as a percent)						10.875%	10.60%
Subordinated debt, redemption amount						$ 7,000,000	$ 7,000,000
Premium cost						304,500	296,800
Dividends received from HBC as approved by DFI			15,000,000
Early payoff premium on redemption of debt				601,300
Interest rate at March 31, 2013 (as a percent)								3.86%		3.68%
Total subordinated debt	$ 9,279,000	$ 9,279,000		$ 9,279,000	$ 9,279,000			$ 5,155,000	$ 5,155,000	$ 4,124,000	$ 4,124,000
Variable rate basis								3-month Libor	3-month Libor	3-month Libor	3-month Libor
Interest rate margin (as a percent)								3.58%	3.58%	3.40%	3.40%

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Benefit Plans (Details) (USD $)			3 Months Ended			12 Months Ended
	Mar. 31, 2013	Dec. 31, 2012	Mar. 31, 2013 SERP	Mar. 31, 2012 SERP	Mar. 31, 2013 Split-Dollar Life Insurance Benefit Plan	Dec. 31, 2012 Split-Dollar Life Insurance Benefit Plan
Benefit plans
Plan assets associated with the plan			$ 0
Components of net periodic benefit cost:
Service cost			304,000	294,000
Interest cost			196,000	193,000	44,000	185,000
Amortization of prior service cost				7,000
Amortization of net actuarial loss			71,000	63,000
Net periodic benefit cost			571,000	557,000
Change in projected benefit obligation:
Projected benefit obligation at beginning of year					4,717,000	4,525,000
Actuarial gain					3,000	7,000
Projected benefit obligation at end of period					4,764,000	4,717,000
Schedule of amounts recognized in accumulated other comprehensive income
Net actuarial loss	669,000	624,000
Prior transition obligation	1,665,000	1,685,000
Accumulated other comprehensive loss	$ 2,334,000	$ 2,309,000

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Loans (Details 3) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012	Dec. 31, 2012
Unpaid Principal Balance
Total with no related allowance recorded	$ 11,875		$ 15,035
Total with an allowance recorded	6,589		7,303
Total	18,464		22,338
Recorded Investment
Total with no related allowance recorded	11,875		14,083
Total with an allowance recorded	6,506		5,561
Total	18,381	16,591	19,644
Total with an allowance recorded, Allowance for Loan Losses Allocated	3,026		2,740
Average impaired loans with interest recognized and cash-basis interest earned on impaired loans
Average of impaired loans during the period	19,013	17,252
Interest income during impairment		15
Cash-basis interest earned		15
Commercial
Unpaid Principal Balance
Total with no related allowance recorded	3,939		7,829
Total with an allowance recorded	4,272		3,678
Recorded Investment
Total with no related allowance recorded	3,939		6,978
Total with an allowance recorded	4,189		3,182
Total with an allowance recorded, Allowance for Loan Losses Allocated	2,031		1,963
Average impaired loans with interest recognized and cash-basis interest earned on impaired loans
Average of impaired loans during the period	9,145	11,450
Real estate | Commercial and residential
Unpaid Principal Balance
Total with no related allowance recorded	3,622		2,755
Total with an allowance recorded	1,882		3,183
Recorded Investment
Total with no related allowance recorded	3,622		2,741
Total with an allowance recorded	1,882		1,937
Total with an allowance recorded, Allowance for Loan Losses Allocated	683		465
Average impaired loans with interest recognized and cash-basis interest earned on impaired loans
Average of impaired loans during the period	5,090	2,773
Interest income during impairment		1
Cash-basis interest earned		1
Real estate | Home equity
Unpaid Principal Balance
Total with no related allowance recorded	2,137		2,141
Total with an allowance recorded	294		295
Recorded Investment
Total with no related allowance recorded	2,137		2,141
Total with an allowance recorded	294		295
Total with an allowance recorded, Allowance for Loan Losses Allocated	294		295
Average impaired loans with interest recognized and cash-basis interest earned on impaired loans
Average of impaired loans during the period	2,434	16
Real estate | Land and construction
Unpaid Principal Balance
Total with no related allowance recorded	2,177		2,310
Recorded Investment
Total with no related allowance recorded	2,177		2,223
Average impaired loans with interest recognized and cash-basis interest earned on impaired loans
Average of impaired loans during the period	2,200	3,002
Interest income during impairment		14
Cash-basis interest earned		14
Consumer
Unpaid Principal Balance
Total with an allowance recorded	141		147
Recorded Investment
Total with an allowance recorded	141		147
Total with an allowance recorded, Allowance for Loan Losses Allocated	18		17
Average impaired loans with interest recognized and cash-basis interest earned on impaired loans
Average of impaired loans during the period	$ 144	$ 11

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Fair Value (Details 4) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012
Carrying Amounts
Assets
Cash and cash equivalents	$ 76,869	$ 373,565
Securities available-for-sale	346,800	367,912
Securities held-to-maturity	68,283	51,472
Loans (including loans held-for-sale), net	786,977	796,695
FHLB and FRB stock	10,764	10,728
Accrued interest receivable	4,309	3,773
Loan servicing rights and I/O strips receivables	2,447	2,495
Liabilities
Time deposits	302,476	318,664
Other deposits	864,414	1,160,704
Subordinated debt	9,279	9,279
Accrued interest payable	281	277
Estimated Fair Value
Assets
Cash and cash equivalents	76,869	373,565
Securities available-for-sale	346,800	367,912
Securities held-to-maturity	65,659	50,964
Loans (including loans held-for-sale), net	787,520	797,320
Accrued interest receivable	4,309	3,773
Loan servicing rights and I/O strips receivables	4,680	4,715
Liabilities
Time deposits	303,282	319,476
Other deposits	864,414	1,160,704
Subordinated debt	5,400	5,400
Accrued interest payable	281	277
Estimated Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1)
Assets
Cash and cash equivalents	76,869	373,565
Estimated Fair Value | Significant Other Observable Inputs (Level 2)
Assets
Securities available-for-sale	346,800	367,912
Securities held-to-maturity	65,659	50,964
Loans (including loans held-for-sale), net	4,394	3,409
Accrued interest receivable	1,919	1,514
Loan servicing rights and I/O strips receivables	4,680	4,715
Liabilities
Time deposits	303,282	319,476
Other deposits	864,414	1,160,704
Accrued interest payable	281	277
Estimated Fair Value | Significant Unobservable Inputs (Level 3)
Assets
Loans (including loans held-for-sale), net	783,126	793,911
Accrued interest receivable	2,390	2,259
Liabilities
Subordinated debt	$ 5,400	$ 5,400

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Earnings Per Share

3 Months Ended

Mar. 31, 2013

Earnings Per Share

Earnings Per Share

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. On June 21, 2010, the Company issued to various institutional investors 21,004 shares of Series C Convertible Perpetual Preferred Stock ("Series C Preferred Stock"). The Series C Preferred Stock is convertible into 5,601,000 shares of common stock when transferred in accordance with its terms. The Series C Preferred Stock participate 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 and common stock warrants, using the treasury stock method. The common stock warrant was antidilutive at March 31, 2013 and 2012. A reconciliation of these factors used in computing basic and diluted earnings per common share is as follows:

	For the Three Months Ended March 31,
	2013		2012
	(Dollars in thousands)
Net income available to common shareholders	$	2,180	$	869
Less: net income allocated to Series C Preferred Stock		382		153
Net income allocated to common shareholders	$	1,798	$	716
Weighted average common shares outstanding for basic earnings per common share		26,329,343		26,289,334
Dilutive effect of stock options oustanding, using the the treasury stock method		49,114		27,220
Shares used in computing diluted earnings per common share		26,378,457		26,316,554
Basic earnings per share	$	0.07	$	0.03
Diluted earnings per share	$	0.07	$	0.03

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Preferred Stock (Details) (USD $)	3 Months Ended	1 Months Ended	3 Months Ended			1 Months Ended
	Mar. 31, 2012	Nov. 30, 2008 Series A Preferred Stock	Mar. 31, 2012 Series A Preferred Stock	Mar. 07, 2012 Series A Preferred Stock	Nov. 21, 2008 Series A Preferred Stock	Jun. 30, 2010 Series C Preferred Stock	Jun. 21, 2010 Series C Preferred Stock
Shareholders' equity
Preferred stock, shares issued		40,000				21,004
Value of stock issued		$ 40,000,000
Liquidation preference (in dollars per share)					$ 1,000		$ 1,000
Dividends received from HBC as approved by DFI			30,000,000
Accelerated accretion of remaining issuance discount				765,000
Reduction in amount of net income available to common shareholders due to dividend and discount accretion on preferred stock	$ 1,206,000		$ 1,206,000
Conversion price (in dollars per share)						$ 3.75

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Basis of Presentation (Details)	3 Months Ended
	Mar. 31, 2013 item
Basis of Presentation
Number of operating segments	1
Number of customers accounting for more than 10 percent of revenue for HBC or the Company	0

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Subordinated Debt (Tables)

3 Months Ended

Mar. 31, 2013

Subordinated Debt

Summary of the entity's subordinated debt

	March 31, 2013		December 31, 2012
	(Dollars in thousands)
Subordinated debentures due to Heritage Statutory Trust II with interest payable quarterly based on 3-month Libor plus 3.58% (3.86% at March 31, 2013), redeemable with a premium beginning July 31, 2006 and with no premium beginning July 31, 2011, due July 31, 2031	$	5,155	$	5,155
Subordinated debentures due to Heritage Statutory Trust III with interest payable quarterly based on 3-month Libor plus 3.40% (3.68% at March 31, 2013), redeemable with a premium beginning September 26, 2007 and due September 26, 2032		4,124		4,124
Total	$	9,279	$	9,279

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Fair Value (Details) (USD $)	Mar. 31, 2013	Dec. 31, 2012
Financial assets and liabilities measured on a recurring and non-recurring basis
Foreclosed assets:	$ 738,000	$ 1,270,000
Recurring basis
Financial assets and liabilities measured on a recurring and non-recurring basis
Transfers between Level 1 and Level 2	0	0
Recurring basis | Balance
Financial assets and liabilities measured on a recurring and non-recurring basis
I/O strip receivables	1,777,000	1,786,000
Recurring basis | Balance | Agency mortgage-backed securities
Financial assets and liabilities measured on a recurring and non-recurring basis
Available-for-sale securities	271,077,000	291,244,000
Recurring basis | Balance | Corporate bonds
Financial assets and liabilities measured on a recurring and non-recurring basis
Available-for-sale securities	54,892,000	55,588,000
Recurring basis | Balance | Trust preferred securities
Financial assets and liabilities measured on a recurring and non-recurring basis
Available-for-sale securities	20,831,000	21,080,000
Recurring basis | Significant Other Observable Inputs (Level 2)
Financial assets and liabilities measured on a recurring and non-recurring basis
I/O strip receivables	1,777,000	1,786,000
Recurring basis | Significant Other Observable Inputs (Level 2) | Agency mortgage-backed securities
Financial assets and liabilities measured on a recurring and non-recurring basis
Available-for-sale securities	271,077,000	291,244,000
Recurring basis | Significant Other Observable Inputs (Level 2) | Corporate bonds
Financial assets and liabilities measured on a recurring and non-recurring basis
Available-for-sale securities	54,892,000	55,588,000
Recurring basis | Significant Other Observable Inputs (Level 2) | Trust preferred securities
Financial assets and liabilities measured on a recurring and non-recurring basis
Available-for-sale securities	20,831,000	21,080,000
Non-recurring basis | Balance
Financial assets and liabilities measured on a recurring and non-recurring basis
Impaired loans - held-for-investment:	8,006,000	9,172,000
Foreclosed assets:	738,000	1,270,000
Non-recurring basis | Balance | Land and construction
Financial assets and liabilities measured on a recurring and non-recurring basis
Foreclosed assets:	657,000	1,187,000
Non-recurring basis | Balance | Commercial
Financial assets and liabilities measured on a recurring and non-recurring basis
Impaired loans - held-for-investment:	2,982,000	3,645,000
Foreclosed assets:	81,000	83,000
Non-recurring basis | Balance | Real estate | Commercial and residential
Financial assets and liabilities measured on a recurring and non-recurring basis
Impaired loans - held-for-investment:	3,217,000	3,674,000
Non-recurring basis | Balance | Real estate | Land and construction
Financial assets and liabilities measured on a recurring and non-recurring basis
Impaired loans - held-for-investment:	1,685,000	1,723,000
Non-recurring basis | Balance | Consumer
Financial assets and liabilities measured on a recurring and non-recurring basis
Impaired loans - held-for-investment:	122,000	130,000
Non-recurring basis | Significant Unobservable Inputs (Level 3)
Financial assets and liabilities measured on a recurring and non-recurring basis
Impaired loans - held-for-investment:	8,006,000	9,172,000
Foreclosed assets:	738,000	1,270,000
Non-recurring basis | Significant Unobservable Inputs (Level 3) | Land and construction
Financial assets and liabilities measured on a recurring and non-recurring basis
Foreclosed assets:	657,000	1,187,000
Non-recurring basis | Significant Unobservable Inputs (Level 3) | Commercial
Financial assets and liabilities measured on a recurring and non-recurring basis
Impaired loans - held-for-investment:	2,982,000	3,645,000
Foreclosed assets:	81,000	83,000
Non-recurring basis | Significant Unobservable Inputs (Level 3) | Real estate | Commercial and residential
Financial assets and liabilities measured on a recurring and non-recurring basis
Impaired loans - held-for-investment:	3,217,000	3,674,000
Non-recurring basis | Significant Unobservable Inputs (Level 3) | Real estate | Land and construction
Financial assets and liabilities measured on a recurring and non-recurring basis
Impaired loans - held-for-investment:	1,685,000	1,723,000
Non-recurring basis | Significant Unobservable Inputs (Level 3) | Consumer
Financial assets and liabilities measured on a recurring and non-recurring basis
Impaired loans - held-for-investment:	$ 122,000	$ 130,000

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Earnings Per Share (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		1 Months Ended	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012	Jun. 30, 2010 Series C Preferred Stock	Mar. 31, 2013 Series C Preferred Stock
Earnings Per Share
Number of shares issued to various institutional investors			21,004
Number of common stock into which preferred stock are convertible (in shares)				5,601,000
Reconciliation of factors used in computing basic and diluted earnings (loss) per common share
Net income available to common shareholders	$ 2,180	$ 869
Less: net income allocated to Series C Preferred Stock	382	153
Net income allocated to common shareholders	$ 1,798	$ 716
Weighted average common shares outstanding for basic earnings per common share	26,329,343	26,289,334
Dilutive effect of stock options outstanding, using the treasury stock method (in shares)	49,114	27,220
Shares used in computing diluted earnings per common share	26,378,457	26,316,554
Basic earnings per share (in dollars per share)	$ 0.07	$ 0.03
Diluted earnings per share (in dollars per share)	$ 0.07	$ 0.03

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Accumulated Other Comprehensive Income (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
Changes in AOCI
Balance at the beginning of the period, net of taxes	$ 2,681	$ 955
Other comprehensive (loss) before reclassification, net of taxes	(1,279)	208
Amounts reclassified from other comprehensive income (loss), net of taxes	15	25
Other comprehensive income (loss)	(1,264)	233
Balance at the end of the period, net of taxes	1,417	1,188
Unrealized Gains on Available-for-Sale Securities and I/O Strips
Changes in AOCI
Balance at the beginning of the period, net of taxes	7,887	6,210
Other comprehensive (loss) before reclassification, net of taxes	(1,255)	216
Amounts reclassified from other comprehensive income (loss), net of taxes	(18)	(16)
Other comprehensive income (loss)	(1,273)	200
Balance at the end of the period, net of taxes	6,614	6,410
Unamortized Unrealized Gain on Available-for-Sale Securities Reclassified to Held-to-Maturity
Changes in AOCI
Balance at the beginning of the period, net of taxes	497
Amounts reclassified from other comprehensive income (loss), net of taxes	(8)
Other comprehensive income (loss)	(8)
Balance at the end of the period, net of taxes	489
Defined Benefit Pension Plan Items
Changes in AOCI
Balance at the beginning of the period, net of taxes	(5,703)	(5,255)
Other comprehensive (loss) before reclassification, net of taxes	(24)	(8)
Amounts reclassified from other comprehensive income (loss), net of taxes	41	41
Other comprehensive income (loss)	17	33
Balance at the end of the period, net of taxes	$ (5,686)	$ (5,222)

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Basis of Presentation

3 Months Ended

Mar. 31, 2013

Basis of Presentation

Basis of Presentation

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, 2012. The Company has also established the following unconsolidated subsidiary grantor trusts: Heritage Capital Trust I; Heritage Statutory Trust I; Heritage Statutory Trust II; and Heritage Commerce Corp Statutory Trust III, which are Delaware Statutory business trusts formed for the exclusive purpose of issuing and selling trust preferred securities. During the third quarter of 2012 the Company dissolved the Heritage Statutory Trust I and the Heritage Capital Trust I.

        HBC is a commercial bank serving customers located in Santa Clara, Alameda, and Contra Costa counties of California. No customer accounts for more than 10 percent of revenue for HBC or the Company. Management evaluates the Company's performance as a whole and does not allocate resources based on the performance of different lending or transaction activities. Accordingly, the Company and its subsidiary operate as one business segment.

        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 months ended March 31, 2013 are not necessarily indicative of the results expected for any subsequent period or for the entire year ending December 31, 2013.

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 February 2013, the FASB issued an accounting standards update with the primary objective of improving the reporting of reclassifications out of accumulated other comprehensive income ("AOCI"). For significant reclassifications that are required to be presented in their entirety in net income in the same reporting period by U.S. GAAP, the update requires an entity to report the effect of these reclassifications out of AOCI on the respective line items of net income either on the face of the statement that reports net income or in the financial statement notes. For AOCI items that that are not reclassified to net income in their entirety, presentation in the financial statement notes is required. This update is effective for public companies for fiscal years and interim periods within those years beginning after December 15, 2012, or the first quarter of 2013 for calendar year-end companies, and is required to be applied prospectively. The effect of adopting this standard did not have a material effect on the Company's operating results or financial condition, but the additional disclosures are included in Note 3.

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Accumulated Other Comprehensive Income (Details 2) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
Amount Reclassified from AOCI
Realized gains on sale of securities	$ 31	$ 27
Interest income on taxable securities	2,462	3,097
Income before income taxes	3,035	3,026
Income tax expense	(855)	(951)
Net income	2,180	2,075
Amount Reclassified from AOCI
Amount Reclassified from AOCI
Net income	(15)	(25)
Unrealized gains on available-for-sale securities and I/O strips | Amount Reclassified from AOCI
Amount Reclassified from AOCI
Realized gains on sale of securities	31	27
Income tax expense	(13)	(11)
Net income	18	16
Unamortized Unrealized Gain on Available-for-Sale Securities Reclassified to Held-to-Maturity | Amount Reclassified from AOCI
Amount Reclassified from AOCI
Interest income on taxable securities	14
Income tax expense	(6)
Net income	8
Amortization of defined benefit pension plan items | Amount Reclassified from AOCI
Amount Reclassified from AOCI
Prior service cost		(7)
Actuarial losses	(71)	(63)
Income before income taxes	(71)	(70)
Income tax expense	30	29
Net income	$ (41)	$ (41)

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Loans (Details 6) (USD $)	3 Months Ended
	Mar. 31, 2013 item	Mar. 31, 2012 item	Dec. 31, 2012
Loans
Recorded investment of troubled debt restructurings	$ 3,662,000		$ 4,107,000
Troubled debt restructurings, nonaccrual loans	1,396,000		1,798,000
Troubled debt restructurings, accruing loans	2,266,000		2,309,000
Specific reserves	920,000		1,152,000
Additional amount of loan classified as a troubled debt restructurings	0		0
Loans by class modified as troubled debt restructurings
Number of Contracts		2
Pre-modification Outstanding Recorded Investment		412,000
Post-modification Outstanding Recorded Investment		412,000
Net charge-offs under troubled debt restructurings		0
Increased allowance for loan losses due to troubled debt restructurings		27,000
Default period contractually past due under modified terms	30 days
Number of defaults on troubled debt restructurings	0
Commercial
Loans by class modified as troubled debt restructurings
Number of Contracts		2
Pre-modification Outstanding Recorded Investment		412,000
Post-modification Outstanding Recorded Investment		$ 412,000

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CONSOLIDATED BALANCE SHEETS (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012
Assets
Cash and due from banks	$ 19,779	$ 16,520
Interest-bearing deposits in other financial institutions	57,090	357,045
Total cash and cash equivalents	76,869	373,565
Securities available-for-sale, at fair value	346,800	367,912
Securities held-to-maturity, at amortized cost (fair value of $65,659 at March 31, 2013 and $50,964 at December 31, 2012)	68,283	51,472
Loans held-for-sale - SBA, at lower of cost or fair value, including deferred costs	4,394	3,409
Loans, including deferred fees and costs	801,925	812,313
Allowance for loan losses	(19,342)	(19,027)
Loans, net	782,583	793,286
Federal Home Loan Bank and Federal Reserve Bank stock, at cost	10,764	10,728
Company owned life insurance	48,774	48,358
Premises and equipment, net	7,632	7,469
Intangible assets	1,882	2,000
Accrued interest receivable and other assets	35,583	35,113
Total assets	1,383,564	1,693,312
Deposits:
Demand, noninterest-bearing	397,198	727,684
Demand, interest-bearing	169,681	155,951
Savings and money market	286,784	272,047
Time deposits-under $100	23,835	25,157
Time deposits-$100 and over	189,779	190,502
Time deposits-brokered	83,763	97,807
CDARS - money market and time deposits	15,850	10,220
Total deposits	1,166,890	1,479,368
Subordinated debt	9,279	9,279
Accrued interest payable and other liabilities	36,560	34,924
Total liabilities	1,212,729	1,523,571
Shareholders' equity:
Common stock, no par value; 60,000,000 shares authorized; 26,333,368 shares issued and outstanding at March 31, 2013 and 26,322,147 shares issued and outstanding at December 31, 2012	131,998	131,820
Retained earnings	17,901	15,721
Accumulated other comprehensive income	1,417	2,681
Total shareholders' equity	170,835	169,741
Total liabilities and shareholders' equity	1,383,564	1,693,312
Series C convertible perpetual preferred stock
Shareholders' equity:
Preferred stock	$ 19,519	$ 19,519

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Fair Value (Details 2) (USD $)	3 Months Ended	12 Months Ended
	Mar. 31, 2013	Dec. 31, 2012
Impaired loans held-for-investment
Impaired loans held-for-investment	$ 18,381,000	$ 19,644,000
Specific valuation allowance	(3,026,000)	(2,740,000)
Impaired loans held-for-investment carried at fair value
Partial charge-offs	83,000	2,694,000
Additional provision for loan losses	757,000	3,856,000
Net carrying amount of foreclosed assets	738,000	1,270,000
Valuation allowance on foreclosed assets	0	0
Carried at fair value
Impaired loans held-for-investment
Impaired loans held-for-investment	11,032,000	11,912,000
Carried at cost
Impaired loans held-for-investment
Impaired loans held-for-investment	7,349,000	7,732,000
Carried at fair value, net
Impaired loans held-for-investment
Impaired loans held-for-investment carried at fair value, net	$ 8,006,000	$ 9,172,000

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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (USD $) In Thousands, except Share data, unless otherwise specified	Total	Preferred Stock	Common Stock	Retained Earnings	Accumulated Other Comprehensive Income
Balance at Dec. 31, 2011	$ 197,831	$ 59,365	$ 131,172	$ 7,172	$ 955
Balance (in shares) at Dec. 31, 2011		61,004	26,295,001
Increase (Decrease) in Shareholders' Equity
Net income	2,075			2,075
Other comprehensive income (loss)	233				233
Repurchase of Series A preferred stock	(40,000)	(40,000)
Repurchase of Series A preferred stock (in shares)		(40,000)
Series A preferred stock capitalized offering costs		154		(154)
Issuance (forfeitures) of restricted stock awards (in shares)			(8,500)
Amortization of restricted stock awards, net of forfeitures and taxes	28		28
Cash dividends accrued on Series A preferred stock	(373)			(373)
Accretion of discount on Series A preferred stock		833		(833)
Stock option expense, net of forfeitures and taxes	102		102
Balance at Mar. 31, 2012	159,896	19,519	131,302	7,887	1,188
Balance (in shares) at Mar. 31, 2012		21,004	26,286,501
Balance at Dec. 31, 2012	169,741	19,519	131,820	15,721	2,681
Balance (in shares) at Dec. 31, 2012		21,004	26,322,147
Increase (Decrease) in Shareholders' Equity
Net income	2,180			2,180
Other comprehensive income (loss)	(1,264)				(1,264)
Issuance (forfeitures) of restricted stock awards (in shares)			10,000
Amortization of restricted stock awards, net of forfeitures and taxes	45		45
Stock option expense, net of forfeitures and taxes	129		129
Stock options exercised	4		4
Stock options exercised (in shares)			1,221
Balance at Mar. 31, 2013	$ 170,835	$ 19,519	$ 131,998	$ 17,901	$ 1,417
Balance (in shares) at Mar. 31, 2013		21,004	26,333,368

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Loans (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012	Mar. 31, 2012	Dec. 31, 2011
Loans held-for-investment:
Loans	$ 802,022	$ 812,334
Deferred loan origination (fees) costs, net	(97)	(21)
Loans, including deferred fees and costs	801,925	812,313
Allowance for loan losses	(19,342)	(19,027)	(20,306)	(20,700)
Loans, net	782,583	793,286
Commercial
Loans held-for-investment:
Loans	356,688	375,469
Allowance for loan losses	(12,455)	(12,866)	(13,734)	(13,215)
Real estate
Loans held-for-investment:
Loans	431,298	421,151
Allowance for loan losses	(6,770)	(6,034)	(6,409)	(7,338)
Real estate | Commercial and residential
Loans held-for-investment:
Loans	361,340	354,934
Real estate | Land and construction
Loans held-for-investment:
Loans	24,611	22,352
Real estate | Home equity
Loans held-for-investment:
Loans	45,347	43,865
Consumer
Loans held-for-investment:
Loans	14,036	15,714
Allowance for loan losses	$ (117)	$ (127)	$ (163)	$ (147)

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Accumulated Other Comprehensive Income (Tables)

3 Months Ended

Mar. 31, 2013

Accumulated Other Comprehensive Income

Schedule of changes in AOCI by component

	For the Three Months Ended March 31, 2013 and 2012
	Unrealized Gains 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, 2013, net of taxes	$	7,887		$	497		$	(5,703	)	$	2,681
Other comprehensive (loss) before reclassification, net of taxes		(1,255	)		—			(24	)		(1,279	)
Amounts reclassified from other comprehensive income (loss), net of taxes		(18	)		(8	)		41			15
Net current period other comprensive income (loss), net of taxes		(1,273	)		(8	)		17			(1,264	)
Ending balance March 31, 2013, net of taxes	$	6,614		$	489		$	(5,686	)	$	1,417
Beginning balance January 1, 2012, net of taxes	$	6,210		$	—		$	(5,255	)	$	955
Other comprehensive income (loss) before reclassification, net of taxes		216			—			(8	)		208
Amounts reclassified from other comprehensive income (loss), net of taxes		(16	)		—			41			25
Net current period other comprensive income, net of taxes		200			—			33			233
Ending balance March 31, 2012, net of taxes	$	6,410		$	—		$	(5,222	)	$	1,188

(1)

Amounts in parenthesis indicate debits.

Schedule of reclassifications out of AOCI into net income

	Amounts Reclassified from AOCI(1) For the Three Months Ended March 31,
							Affected Line Item Where Net Income is Presented
Details About AOCI Components	2013			2012
	(Dollars in thousands)
Unrealized gains on available-for-sale securities and I/O strips	$	31		$	27		Realized gains on sale of securities
		(13	)		(11	)	Income tax expense
		18			16		Net of tax
Amortization of unrealized gain on securities available-for-sale that were reclassified to securities held-to-maturity		14			—		Interest income on taxable securities
		(6	)		—		Income tax expense
		8			—		Net of tax
Amortization of defined benefit pension plan items(2)
Prior service cost		—			(7	)
Actuarial losses		(71	)		(63	)
		(71	)		(70	)	Income before income tax
		30			29		Income tax expense
		(41	)		(41	)	Net of tax
Total reclassification for the period	$	(15	)	$	(25	)

(1)

Amounts in parenthesis indicate debits.

(2)

This AOCI component is included in the computation of net periodic benefit cost (see Note 7—Benefit Plans).

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Loans (Details 2) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012	Dec. 31, 2012
Changes in allowance for loan losses
Balance, beginning of year	$ 19,027	$ 20,700
Charge-offs	(840)	(955)
Recoveries	1,155	461
Net charge-offs	315	(494)
Provision (credit) for loan losses		100
Balance, end of year	19,342	20,306
Balance in allowance for loan losses and recorded investment in loans by portfolio segment, based on impairment method
Allowance for loan losses, Individually evaluated for impairment	3,026		2,740
Allowance for loan losses, Collectively evaluated for impairment	16,316		16,287
Total allowance balance	19,342	20,306
Loans, Individually evaluated for impairment	18,381		19,644
Loans, Collectively evaluated for impairment	783,641		792,690
Total loan balance	802,022		812,334
Commercial
Changes in allowance for loan losses
Balance, beginning of year	12,866	13,215
Charge-offs	(840)	(910)
Recoveries	1,150	461
Net charge-offs	310	(449)
Provision (credit) for loan losses	(721)	968
Balance, end of year	12,455	13,734
Balance in allowance for loan losses and recorded investment in loans by portfolio segment, based on impairment method
Allowance for loan losses, Individually evaluated for impairment	2,031		1,963
Allowance for loan losses, Collectively evaluated for impairment	10,424		10,903
Total allowance balance	12,455	13,734
Loans, Individually evaluated for impairment	8,128		10,161
Loans, Collectively evaluated for impairment	348,560		365,308
Total loan balance	356,688		375,469
Real estate
Changes in allowance for loan losses
Balance, beginning of year	6,034	7,338
Charge-offs		(45)
Recoveries	5
Net charge-offs	5	(45)
Provision (credit) for loan losses	731	(884)
Balance, end of year	6,770	6,409
Balance in allowance for loan losses and recorded investment in loans by portfolio segment, based on impairment method
Allowance for loan losses, Individually evaluated for impairment	977		760
Allowance for loan losses, Collectively evaluated for impairment	5,793		5,274
Total allowance balance	6,770	6,409
Loans, Individually evaluated for impairment	10,112		9,336
Loans, Collectively evaluated for impairment	421,186		411,815
Total loan balance	431,298		421,151
Consumer
Changes in allowance for loan losses
Balance, beginning of year	127	147
Provision (credit) for loan losses	(10)	16
Balance, end of year	117	163
Balance in allowance for loan losses and recorded investment in loans by portfolio segment, based on impairment method
Allowance for loan losses, Individually evaluated for impairment	18		17
Allowance for loan losses, Collectively evaluated for impairment	99		110
Total allowance balance	117	163
Loans, Individually evaluated for impairment	141		147
Loans, Collectively evaluated for impairment	13,895		15,567
Total loan balance	$ 14,036		$ 15,714

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Loans (Tables)

3 Months Ended

Mar. 31, 2013

Loans

Schedule of loans

	March 31, 2013			December 31, 2012
	(Dollars in thousands)
Loans held-for-investment:
Commercial	$	356,688		$	375,469
Real estate:
Commercial and residential		361,340			354,934
Land and construction		24,611			22,352
Home equity		45,347			43,865
Consumer		14,036			15,714
Loans		802,022			812,334
Deferred loan origination (fees) costs, net		(97	)		(21	)
Loans, including deferred fees and costs		801,925			812,313
Allowance for loan losses		(19,342	)		(19,027	)
Loans, net	$	782,583		$	793,286

Schedule of changes in allowance for loan losses

	Three Months Ended March 31, 2013
	Commercial			Real Estate		Consumer			Total
	(Dollars in thousands)
Balance, beginning of period	$	12,866		$	6,034	$	127		$	19,027
Charge-offs		(840	)		—		—			(840	)
Recoveries		1,150			5		—			1,155
Net recoveries		310			5		—			315
Provision (credit) for loan losses		(721	)		731		(10	)		—
Balance, end of period	$	12,455		$	6,770	$	117		$	19,342

	Three Months Ended March 31, 2012
	Commercial			Real Estate			Consumer		Total
	(Dollars in thousands)
Balance, beginning of period	$	13,215		$	7,338		$	147	$	20,700
Charge-offs		(910	)		(45	)		—		(955	)
Recoveries		461			—			—		461
Net charge-offs		(449	)		(45	)		—		(494	)
Provision (credit) for loan losses		968			(884	)		16		100
Balance, end of period	$	13,734		$	6,409		$	163	$	20,306

Schedule of balance in allowance for loan losses and recorded investment in loans by portfolio segment, based on impairment method

	March 31, 2013
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	2,031	$	977	$	18	$	3,026
Collectively evaluated for impairment		10,424		5,793		99		16,316
Total allowance balance	$	12,455	$	6,770	$	117	$	19,342
Loans:
Individually evaluated for impairment	$	8,128	$	10,112	$	141	$	18,381
Collectively evaluated for impairment		348,560		421,186		13,895		783,641
Total loan balance	$	356,688	$	431,298	$	14,036	$	802,022

	December 31, 2012
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	1,963	$	760	$	17	$	2,740
Collectively evaluated for impairment		10,903		5,274		110		16,287
Total allowance balance	$	12,866	$	6,034	$	127	$	19,027
Loans:
Individually evaluated for impairment	$	10,161	$	9,336	$	147	$	19,644
Collectively evaluated for impairment		365,308		411,815		15,567		792,690
Total loan balance	$	375,469	$	421,151	$	15,714	$	812,334

Schedule of loans held-for-investment individually evaluated for impairment by class of loans

	March 31, 2013						December 31, 2012
	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	$	3,939	$	3,939	$	—	$	7,829	$	6,978	$	—
Real estate:
Commercial and residential		3,622		3,622		—		2,755		2,741		—
Land and construction		2,177		2,177		—		2,310		2,223		—
Home Equity		2,137		2,137		—		2,141		2,141		—
Total with no related allowance recorded		11,875		11,875		—		15,035		14,083		—
With an allowance recorded:
Commercial		4,272		4,189		2,031		3,678		3,182		1,963
Real estate:
Commercial and residential		1,882		1,882		683		3,183		1,937		465
Home Equity		294		294		294		295		295		295
Consumer		141		141		18		147		147		17
Total with an allowance recorded		6,589		6,506		3,026		7,303		5,561		2,740
Total	$	18,464	$	18,381	$	3,026	$	22,338	$	19,644	$	2,740

Schedule of average impaired loans with interest recognized and cash-basis interest earned on impaired loans

	Three Months Ended March 31, 2013
			Real Estate
	Commercial		Commercial and Residential		Land and Construction		Home Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	9,145	$	5,090	$	2,200	$	2,434	$	144	$	19,013
Interest income during impairment	$	—	$	—	$	—	$	—	$	—	$	—
Cash-basis interest earned	$	—	$	—	$	—	$	—	$	—	$	—

	Three Months Ended March 31, 2012
			Real Estate
	Commercial		Commercial and Residential		Land and Construction		Home Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	11,450	$	2,773	$	3,002	$	16	$	11	$	17,252
Interest income during impairment	$	—	$	1	$	14	$	—	$	—	$	15
Cash-basis interest earned	$	—	$	1	$	14	$	—	$	—	$	15

Schedule of nonperforming loans

	March 31,
					December 31, 2012
	2013		2012
	(Dollars in thousands)
Nonaccrual loans—held-for-sale	$	—	$	184	$	—
Nonaccrual loans—held-for-investment		16,115		14,005		17,335
Restructured and loans over 90 days past due and still accruing		549		2,155		859
Total nonperforming loans	$	16,664	$	16,344	$	18,194
Other restructured loans	$	1,717	$	431	$	1,450
Impaired loans, excluding loans held-for-sale	$	18,381	$	16,591	$	19,644

Schedule of nonperforming loans by class

	March 31, 2013						December 31, 2012
	Nonaccrual		Restructured and Loans Over 90 Days Past Due and Still Accruing		Total		Nonaccrual		Restructured and Loans Over 90 Days Past Due and Still Accruing		Total
	(Dollars in thousands)
Commercial	$	5,863	$	549	$	6,412	$	7,852	$	859	$	8,711
Real estate:
Commercial and residential		5,503		—		5,503		4,676		—		4,676
Land and construction		2,177		—		2,177		2,223		—		2,223
Home equity		2,431		—		2,431		2,437		—		2,437
Consumer		141		—		141		147		—		147
Total	$	16,115	$	549	$	16,664	$	17,335	$	859	$	18,194

Schedule of aging of past due loans by class of loans

	March 31, 2013
	30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Loans Not Past Due		Total
	(Dollars in thousands)
Commercial	$	1,445	$	646	$	4,368	$	6,459	$	350,229	$	356,688
Real estate:
Commercial and residential		—		—		3,485		3,485		357,855		361,340
Land and construction		—		—		69		69		24,542		24,611
Home equity		87		—		2,043		2,130		43,217		45,347
Consumer		103				—		103		13,933		14,036
Total	$	1,635	$	646	$	9,965	$	12,246	$	789,776	$	802,022

	December 31, 2012
	30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Loans Not Past Due		Total
	(Dollars in thousands)
Commercial	$	1,699	$	355	$	5,120	$	7,174	$	368,295	$	375,469
Real estate:
Commercial and residential		1,603		—		3,290		4,893		350,041		354,934
Land and construction		—		—		78		78		22,274		22,352
Home equity		742		—		2,045		2,787		41,078		43,865
Consumer		—		—		—		—		15,714		15,714
Total	$	4,044	$	355	$	10,533	$	14,932	$	797,402	$	812,334

Summary of loan portfolio by loan type and credit quality classification

	March 31, 2013						December 31, 2012
	Nonclassified		Classified		Total		Nonclassified		Classified		Total
	(Dollars in thousands)
Commercial	$	340,372	$	16,316	$	356,688	$	355,440	$	20,029	$	375,469
Real estate:
Commercial and residential		351,911		9,429		361,340		345,045		9,889		354,934
Land and construction		22,433		2,178		24,611		18,858		3,494		22,352
Home equity		42,591		2,756		45,347		41,187		2,678		43,865
Consumer		13,656		380		14,036		15,321		393		15,714
Total	$	770,963	$	31,059	$	802,022	$	775,851	$	36,483	$	812,334

Schedule of loans by class modified as troubled debt restructurings

	During the Three Months Ended March 31, 2012
Troubled Debt Restructurings:	Number of Contracts		Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment
	(Dollars in thousands)
Commercial		2	$	412	$	412
Total		2	$	412	$	412

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CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$ 2,180	$ 2,075
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of discounts and premiums on securities	756	533
Gain on sales of securities available-for-sale	(31)	(27)
Gain on sales of SBA loans	(136)	(36)
Proceeds from sale of SBA loans originated for sale	1,774	632
Net change in SBA loans originated for sale	(2,643)	(4,621)
Provision for loan losses		100
Increase in cash surrender value of life insurance	(416)	(429)
Depreciation and amortization	177	195
Amortization of intangible assets	118	123
Gains on sale of foreclosed assets, net	(198)	(31)
Stock option expense, net	129	102
Amortization of restricted stock awards, net	45	28
Effect of changes in:
Accrued interest receivable and other assets	(88)	818
Accrued interest payable and other liabilities	1,806	(609)
Net cash provided by (used in) operating activities	3,473	(1,147)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities available-for-sale	(8,334)	(19,943)
Purchase of securities held-to-maturity	(18,433)
Maturities/paydowns/calls of securities available-for-sale	23,056	18,858
Maturities/paydowns/calls of securities held-to-maturity	1,429
Proceeds from sale of securities available-for-sale	3,530	2,280
Net change in loans	10,690	5,239
Change in Federal Home Loan Bank and Federal Reserve Bank stock	(36)	(3)
Purchase of premises and equipment	(340)	(98)
Proceeds from sale of foreclosed assets	743	188
Proceeds from sale of other loans transferred to held-for-sale		220
Purchases of company owned life insurance		(250)
Net cash provided by investing activities	12,305	6,491
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits	(312,478)	30,822
Repayment of preferred stock		(40,000)
Payment of cash dividends - preferred stock		(373)
Exercise of stock options	4
Net cash used in financing activities	(312,474)	(9,551)
Net decrease in cash and cash equivalents	(296,696)	(4,207)
Cash and cash equivalents, beginning of period	373,565	72,872
Cash and cash equivalents, end of period	76,869	68,665
Supplemental disclosures of cash flow information:
Interest paid	709	1,557
Income taxes paid	1,025	800
Supplemental schedule of non-cash investing activity:
Due to broker for securities purchased	3,351	11,921
Loans transferred to foreclosed assets	33	1,973
Transfer of loans held-for-sale to loan portfolio	$ 20

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CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012
Securities held-to-maturity, fair value (in dollars)	$ 65,659	$ 50,964
Preferred stock, par value (in dollars per share)	$ 0	$ 0
Preferred stock, shares authorized	10,000,000	10,000,000
Common stock, par value per share	$ 0	$ 0
Common stock, shares authorized	60,000,000	60,000,000
Common stock, shares issued	26,333,368	26,322,147
Common stock, shares outstanding	26,333,368	26,322,147
Series C convertible perpetual preferred stock
Preferred stock, shares issued	21,004	21,004
Preferred stock, shares outstanding	21,004	21,004
Preferred stock, liquidation preference (in dollars)	$ 21,004	$ 21,004

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Equity Plan

3 Months Ended

Mar. 31, 2013

Equity Plan

Equity Plan

10) Equity Plan

        The Company has an Amended and Restated 2004 Equity Plan (the "Equity Plan") for directors, officers, and key employees. The Equity Plan provides for the grant of incentive and non-qualified stock options and restricted stock. The Equity Plan provides that the option price for both incentive and non-qualified stock options will be determined by the Board of Directors at no less than the fair value at the date of grant. Options granted vest on a schedule determined by the Board of Directors at the time of grant. Generally, options vest over four years. All options expire no later than ten years from the date of grant. As of March 31, 2013, there are 349,071 shares available for future grants under the Equity Plan.

        Stock option activity under the Equity Plan is as follows:

Total Stock Options	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value
Outstanding at January 1, 2013		1,314,347		$	12.90
Granted		15,000		$	6.51
Exercised		(1,221	)	$	3.57
Forfeited or expired		(4,159	)	$	4.96
Outstanding at March 31, 2013		1,323,967		$	12.80		5.6	$	794,000
Vested or expected to vest		1,257,769					5.6	$	755,000
Exercisable at March 31, 2013		1,011,067					4.6	$	484,000

        As of March 31, 2013, there was $1,066,000 of total unrecognized compensation cost related to nonvested stock options granted under the Equity Plan. That cost is expected to be recognized over a weighted-average period of approximately 2.79 years.

        Restricted stock activity under the Equity Plan is as follows:

Total Restricted Stock Award	Number of Shares		Weighted Average Grant Date Fair Value
Nonvested shares at January 1, 2013		88,000	$	5.74
Granted		10,000	$	6.51
Vested		—	$	—
Forfeited		—	$	—
Nonvested shares at March 31, 2013		98,000	$	5.82

        As of March 31, 2013, there was $266,000 of total unrecognized compensation cost related to nonvested restricted stock awards granted under the Equity Plan. The cost is expected to be recognized over a weighted-average period of approximately 11 months.

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Document and Entity Information	3 Months Ended
	Mar. 31, 2013	Apr. 18, 2013
Document and Entity Information
Entity Registrant Name	HERITAGE COMMERCE CORP
Entity Central Index Key	0001053352
Document Type	10-Q
Document Period End Date	Mar. 31, 2013
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		26,333,368
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	Q1

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Subordinated Debt

3 Months Ended

Mar. 31, 2013

Subordinated Debt

Subordinated Debt

11) Subordinated Debt

        The Company has supported its growth through the issuance of trust preferred securities from special purpose trusts and accompanying sales of subordinated debt to these trusts. The subordinated debt that we issued to the trusts is senior to our shares of common stock and Series C Preferred Stock. As a result, we must make payments on the subordinated debt before any dividends can be paid on our common stock and Series C Preferred Stock. Under the terms of the subordinated debt, we may defer interest payments for up to five years. Interest payments on the subordinated notes payable to the Company's subsidiary grantor Trusts are deductible for tax purposes. The subordinated debt is not registered with the Securities and Exchange Commission. For regulatory reporting purposes, the subordinated debt qualifies for Tier 1 capital treatment. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, certain trust preferred securities will no longer be eligible to be included as Tier 1 capital for regulatory purposes. The trust preferred securities continued to be eligible for Tier 1 capital under Dodd-Frank for bank holding companies with less than $15,000,000,000 of assets; however, under proposed rules implementing Basel III trust preferred securities would lose eligibility for Tier 1 capital over a ten year period. Therefore, our trust preferred securities will continue to be eligible to be treated as Tier 1 capital, subject to other rules and limitations.

        During the third quarter of 2012, the Company redeemed its 10.875% fixed-rate subordinated debentures in the amount of $7,000,000 issued to Heritage Capital Trust I (and the related premium cost of $304,500) and the Company's 10.600% fixed-rate subordinated debentures in the amount of $7,000,000 issued to Heritage Statutory Trust I (and the related premium cost of $296,800). The related trust securities issued by Capital Trust I and Statutory Trust I were also redeemed in connection with the subordinated debt redemption and the trusts were dissolved. A $15,000,000 distribution from the Bank to the HCC provided the cash for the redemption. The Company incurred a charge of $601,300 in 2012 for the early payoff premium on the redemption of the subordinated debt.

        The table below summarizes the Company's subordinated debt as of the periods indicated:

	March 31, 2013		December 31, 2012
	(Dollars in thousands)
Subordinated debentures due to Heritage Statutory Trust II with interest payable quarterly based on 3-month Libor plus 3.58% (3.86% at March 31, 2013), redeemable with a premium beginning July 31, 2006 and with no premium beginning July 31, 2011, due July 31, 2031	$	5,155	$	5,155
Subordinated debentures due to Heritage Statutory Trust III with interest payable quarterly based on 3-month Libor plus 3.40% (3.68% at March 31, 2013), redeemable with a premium beginning September 26, 2007 and due September 26, 2032		4,124		4,124
Total	$	9,279	$	9,279

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CONSOLIDATED STATEMENTS OF INCOME (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
Interest income:
Loans, including fees	$ 10,089	$ 10,316
Securities, taxable	2,462	3,097
Securities, non-taxable	248
Interest-bearing deposits in other financial institutions	68	36
Total interest income	12,867	13,449
Interest expense:
Deposits	625	716
Subordinated debt	88	474
Short-term borrowings	1
Total interest expense	714	1,190
Net interest income before provision for loan losses	12,153	12,259
Provision for loan losses		100
Net interest income after provision for loan losses	12,153	12,159
Noninterest income:
Service charges and fees on deposit accounts	577	590
Increase in cash surrender value of life insurance	416	429
Servicing income	365	460
Gain on sales of SBA loans	136	36
Gain on sales of securities	31	27
Other	138	181
Total noninterest income	1,663	1,723
Noninterest expense:
Salaries and employee benefits	6,011	5,667
Occupancy and equipment	1,068	996
Professional fees	982	1,211
Low income housing investment losses	311	269
Software subscriptions	291	290
FDIC deposit insurance premiums	259	225
Insurance expense	254	224
Data processing	252	245
Correspondent bank charges	164	143
Foreclosed assets, net	(155)	115
Other	1,344	1,471
Total noninterest expense	10,781	10,856
Income before income taxes	3,035	3,026
Income tax expense	855	951
Net income	2,180	2,075
Dividends and discount accretion on preferred stock		(1,206)
Net income available to common shareholders	$ 2,180	$ 869
Earnings per common share:
Basic (in dollars per share)	$ 0.07	$ 0.03
Diluted (in dollars per share)	$ 0.07	$ 0.03

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Loans

3 Months Ended

Mar. 31, 2013

Loans

Loans

5) Loans

        Loans were as follows:

	March 31, 2013			December 31, 2012
	(Dollars in thousands)
Loans held-for-investment:
Commercial	$	356,688		$	375,469
Real estate:
Commercial and residential		361,340			354,934
Land and construction		24,611			22,352
Home equity		45,347			43,865
Consumer		14,036			15,714
Loans		802,022			812,334
Deferred loan origination (fees) costs, net		(97	)		(21	)
Loans, including deferred fees and costs		801,925			812,313
Allowance for loan losses		(19,342	)		(19,027	)
Loans, net	$	782,583		$	793,286

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

	Three Months Ended March 31, 2013
	Commercial			Real Estate		Consumer			Total
	(Dollars in thousands)
Balance, beginning of period	$	12,866		$	6,034	$	127		$	19,027
Charge-offs		(840	)		—		—			(840	)
Recoveries		1,150			5		—			1,155
Net recoveries		310			5		—			315
Provision (credit) for loan losses		(721	)		731		(10	)		—
Balance, end of period	$	12,455		$	6,770	$	117		$	19,342

	Three Months Ended March 31, 2012
	Commercial			Real Estate			Consumer		Total
	(Dollars in thousands)
Balance, beginning of period	$	13,215		$	7,338		$	147	$	20,700
Charge-offs		(910	)		(45	)		—		(955	)
Recoveries		461			—			—		461
Net charge-offs		(449	)		(45	)		—		(494	)
Provision (credit) for loan losses		968			(884	)		16		100
Balance, end of period	$	13,734		$	6,409		$	163	$	20,306

        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:

	March 31, 2013
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	2,031	$	977	$	18	$	3,026
Collectively evaluated for impairment		10,424		5,793		99		16,316
Total allowance balance	$	12,455	$	6,770	$	117	$	19,342
Loans:
Individually evaluated for impairment	$	8,128	$	10,112	$	141	$	18,381
Collectively evaluated for impairment		348,560		421,186		13,895		783,641
Total loan balance	$	356,688	$	431,298	$	14,036	$	802,022

	December 31, 2012
	Commercial		Real Estate		Consumer		Total
	(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	1,963	$	760	$	17	$	2,740
Collectively evaluated for impairment		10,903		5,274		110		16,287
Total allowance balance	$	12,866	$	6,034	$	127	$	19,027
Loans:
Individually evaluated for impairment	$	10,161	$	9,336	$	147	$	19,644
Collectively evaluated for impairment		365,308		411,815		15,567		792,690
Total loan balance	$	375,469	$	421,151	$	15,714	$	812,334

        The following table presents loans held-for-investment individually evaluated for impairment by class of loans as of March 31, 2013 and December 31, 2012. 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.

	March 31, 2013						December 31, 2012
	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	$	3,939	$	3,939	$	—	$	7,829	$	6,978	$	—
Real estate:
Commercial and residential		3,622		3,622		—		2,755		2,741		—
Land and construction		2,177		2,177		—		2,310		2,223		—
Home Equity		2,137		2,137		—		2,141		2,141		—
Total with no related allowance recorded		11,875		11,875		—		15,035		14,083		—
With an allowance recorded:
Commercial		4,272		4,189		2,031		3,678		3,182		1,963
Real estate:
Commercial and residential		1,882		1,882		683		3,183		1,937		465
Home Equity		294		294		294		295		295		295
Consumer		141		141		18		147		147		17
Total with an allowance recorded		6,589		6,506		3,026		7,303		5,561		2,740
Total	$	18,464	$	18,381	$	3,026	$	22,338	$	19,644	$	2,740

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

	Three Months Ended March 31, 2013
			Real Estate
	Commercial		Commercial and Residential		Land and Construction		Home Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	9,145	$	5,090	$	2,200	$	2,434	$	144	$	19,013
Interest income during impairment	$	—	$	—	$	—	$	—	$	—	$	—
Cash-basis interest earned	$	—	$	—	$	—	$	—	$	—	$	—

	Three Months Ended March 31, 2012
			Real Estate
	Commercial		Commercial and Residential		Land and Construction		Home Equity		Consumer		Total
	(Dollars in thousands)
Average of impaired loans during the period	$	11,450	$	2,773	$	3,002	$	16	$	11	$	17,252
Interest income during impairment	$	—	$	1	$	14	$	—	$	—	$	15
Cash-basis interest earned	$	—	$	1	$	14	$	—	$	—	$	15

        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:

	March 31,
					December 31, 2012
	2013		2012
	(Dollars in thousands)
Nonaccrual loans—held-for-sale	$	—	$	184	$	—
Nonaccrual loans—held-for-investment		16,115		14,005		17,335
Restructured and loans over 90 days past due and still accruing		549		2,155		859
Total nonperforming loans	$	16,664	$	16,344	$	18,194
Other restructured loans	$	1,717	$	431	$	1,450
Impaired loans, excluding loans held-for-sale	$	18,381	$	16,591	$	19,644

        The following table presents the nonperforming loans by class as of March 31, 2013 and December 31, 2012:

	March 31, 2013						December 31, 2012
	Nonaccrual		Restructured and Loans Over 90 Days Past Due and Still Accruing		Total		Nonaccrual		Restructured and Loans Over 90 Days Past Due and Still Accruing		Total
	(Dollars in thousands)
Commercial	$	5,863	$	549	$	6,412	$	7,852	$	859	$	8,711
Real estate:
Commercial and residential		5,503		—		5,503		4,676		—		4,676
Land and construction		2,177		—		2,177		2,223		—		2,223
Home equity		2,431		—		2,431		2,437		—		2,437
Consumer		141		—		141		147		—		147
Total	$	16,115	$	549	$	16,664	$	17,335	$	859	$	18,194

        The following table presents the aging of past due loans as of March 31, 2013 by class of loans:

	March 31, 2013
	30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Loans Not Past Due		Total
	(Dollars in thousands)
Commercial	$	1,445	$	646	$	4,368	$	6,459	$	350,229	$	356,688
Real estate:
Commercial and residential		—		—		3,485		3,485		357,855		361,340
Land and construction		—		—		69		69		24,542		24,611
Home equity		87		—		2,043		2,130		43,217		45,347
Consumer		103				—		103		13,933		14,036
Total	$	1,635	$	646	$	9,965	$	12,246	$	789,776	$	802,022

        The following table presents the aging of past due loans as of December 31, 2012 by class of loans:

	December 31, 2012
	30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Loans Not Past Due		Total
	(Dollars in thousands)
Commercial	$	1,699	$	355	$	5,120	$	7,174	$	368,295	$	375,469
Real estate:
Commercial and residential		1,603		—		3,290		4,893		350,041		354,934
Land and construction		—		—		78		78		22,274		22,352
Home equity		742		—		2,045		2,787		41,078		43,865
Consumer		—		—		—		—		15,714		15,714
Total	$	4,044	$	355	$	10,533	$	14,932	$	797,402	$	812,334

        Past due loans 30 days or greater totaled $12,246,000 and $14,932,000 at March 31, 2013 and December 31, 2012, respectively, of which $11,267,000 and $12,020,000 were on nonaccrual. At March 31, 2013, there were also $4,848,000 loans less than 30 days past due included in nonaccrual loans held-for-investment. At December 31, 2012, there were also $5,315,000 loans less than 30 days past due included in nonaccrual loans held-for-investment. Management's classification of a loan as "nonaccrual" is an indication that there is reasonable doubt as to the full recovery of principal or interest on the loan. At that point, the Company stops accruing interest income, and reverses any uncollected interest that had been accrued as income. The Company begins recognizing interest income only as cash interest payments are received and it has been determined the collection of all outstanding principal is not in doubt. The loans may or may not be collateralized, and collection efforts are pursued.

Credit Quality Indicators

        Concentrations of credit risk arise when a number of clients are engaged in similar business activities, or activities in the same geographic region, or have similar features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. The Company's loan portfolio is concentrated in commercial (primarily manufacturing, wholesale, and service) and real estate lending, with the balance in consumer loans. While no specific industry concentration is considered significant, the Company's lending operations are located in the Company's market areas that are dependent on the technology and real estate industries and their supporting companies. Thus, the Company's borrowers could be adversely impacted by a continued downturn in these sectors of the economy which could reduce the demand for loans and adversely impact the borrowers' ability to repay their loans.

        The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a quarterly basis. Nonclassified loans generally include those loans that are expected to be repaid in accordance with contractual loans terms. Classified loans are those loans that are assigned a substandard, substandard-nonaccrual, or doubtful risk rating using the following definitions:

        Substandard.    Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

        Substandard-Nonaccrual.    Loans classified as substandard-nonaccrual are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. In addition, the Company no longer accrues interest on the loan because of the underlying weaknesses.

        Doubtful.    Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

        Loss.    Loans classified as loss are considered uncollectable or of so little value that their continuance as assets is not warranted. This classification does not necessarily mean that a loan has no recovery or salvage value; but rather, there is much doubt about whether, how much, or when the recovery would occur. Loans classified as loss are immediately charged off against the allowance for loan losses. Therefore, there is no balance to report at March 31, 2013 or December 31, 2012.

        The following table provides a summary of the loan portfolio by loan type and credit quality classification at March 31, 2013 and December 31, 2012:

	March 31, 2013						December 31, 2012
	Nonclassified		Classified		Total		Nonclassified		Classified		Total
	(Dollars in thousands)
Commercial	$	340,372	$	16,316	$	356,688	$	355,440	$	20,029	$	375,469
Real estate:
Commercial and residential		351,911		9,429		361,340		345,045		9,889		354,934
Land and construction		22,433		2,178		24,611		18,858		3,494		22,352
Home equity		42,591		2,756		45,347		41,187		2,678		43,865
Consumer		13,656		380		14,036		15,321		393		15,714
Total	$	770,963	$	31,059	$	802,022	$	775,851	$	36,483	$	812,334

        In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company's underwriting policy.

        The recorded investment of troubled debt restructurings at March 31, 2013 was $3,662,000, which included $1,396,000 of nonaccrual loans and $2,266,000 of accruing loans. The book balance of troubled debt restructurings at December 31, 2012 was $4,107,000, which included $1,798,000 of nonaccrual loans and $2,309,000 of accruing loans. Approximately $920,000 and $1,152,000 in specific reserves were established with respect to these loans as of March 31, 2013 and December 31, 2012, respectively. As of March 31, 2013 and December 31, 2012, the Company had no additional amounts committed on any loan classified as a troubled debt restructuring.

        There were no loans modified as troubled debt restructuring during the three months ended March 31, 2013. The following table presents loans by class modified as troubled debt restructurings during the three month period ended March 31, 2012:

	During the Three Months Ended March 31, 2012
Troubled Debt Restructurings:	Number of Contracts		Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment
	(Dollars in thousands)
Commercial		2	$	412	$	412
Total		2	$	412	$	412

        The troubled debt restructurings described above increased the allowance for loan losses by $27,000 through the allocation of specific reserves, and resulted in no net charge-offs during the three month period ended March 31, 2012.

        A loan is considered to be in payment default when it is 30 days contractually past due under the modified terms. There were no defaults on troubled debt restructurings, within twelve months following the modification, during the three month ended March 31, 2013 or 2012.

        A loan that is a troubled debt restructuring on nonaccrual status may return to accruing status after a period of at least six months of consecutive payments in accordance with the modified terms.

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Securities

3 Months Ended

Mar. 31, 2013

Securities

Securities

4) Securities

        The amortized cost and estimated fair value of securities at March 31, 2013 and December 31, 2012 were as follows:

March 31, 2013	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(Dollars in thousands)
Securities available-for-sale:
Agency mortgage-backed securities	$	262,710	$	8,444	$	(77	)	$	271,077
Corporate bonds		53,681		1,269		(58	)		54,892
Trust preferred securities		20,789		150		(108	)		20,831
Total	$	337,180	$	9,863	$	(243	)	$	346,800
Securities held-to-maturity:
Agency mortgage-backed securities	$	15,185	$	6	$	(298	)	$	14,893
Municipals—tax exempt		53,098		1		(2,333	)		50,766
Total	$	68,283	$	7	$	(2,631	)	$	65,659

December 31, 2012	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(Dollars in thousands)
Securities available-for-sale:
Agency mortgage-backed securities	$	281,598	$	9,668	$	(22	)	$	291,244
Corporate bonds		53,739		1,849		—			55,588
Trust preferred securities		20,769		375		(64	)		21,080
Total	$	356,106	$	11,892	$	(86	)	$	367,912
Securities held-to-maturity:
Agency mortgage-backed securities	$	16,659	$	2	$	(177	)	$	16,484
Municipals—tax exempt		34,813		80		(413	)		34,480
Total	$	51,472	$	82	$	(590	)	$	50,964

        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 March 31, 2013, the Company held 320 securities (169 available-for-sale and 151 held-to-maturity), of which 143 had fair values below amortized cost. No securities had been carried with an unrealized loss for over 12 months. 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 intend to sell any securities with an unrealized loss and 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 March 31, 2013.

        At December 31, 2012, the Company held 269 securities (168 available-for-sale and 101 held-to-maturity), of which 70 had fair values below amortized cost. No securities had been carried with an unrealized loss for over 12 months. The Company does not consider these securities to be other-than-temporarily impaired at December 31, 2012.

        The amortized cost and estimated fair values of securities as March 31, 2013, by contractual maturity, are shown 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	$	924	$	963
Due after five through ten years		52,757		53,929
Due after ten years		20,789		20,831
Agency mortgage-backed securities	$	262,710		271,077
Total	$	337,180	$	346,800

	Held-to-maturity
	Amortized Cost		Estimated Fair Value
	(Dollars in thousands)
Due after five through ten years	$	1,085	$	1,060
Due after ten years		52,013		49,706
Agency mortgage-backed securities		15,185		14,893
Total	$	68,283	$	65,659

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Securities (Tables)

3 Months Ended

Mar. 31, 2013

Securities

Schedule of amortized cost and estimated fair value of securities

March 31, 2013	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(Dollars in thousands)
Securities available-for-sale:
Agency mortgage-backed securities	$	262,710	$	8,444	$	(77	)	$	271,077
Corporate bonds		53,681		1,269		(58	)		54,892
Trust preferred securities		20,789		150		(108	)		20,831
Total	$	337,180	$	9,863	$	(243	)	$	346,800
Securities held-to-maturity:
Agency mortgage-backed securities	$	15,185	$	6	$	(298	)	$	14,893
Municipals—tax exempt		53,098		1		(2,333	)		50,766
Total	$	68,283	$	7	$	(2,631	)	$	65,659

December 31, 2012	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(Dollars in thousands)
Securities available-for-sale:
Agency mortgage-backed securities	$	281,598	$	9,668	$	(22	)	$	291,244
Corporate bonds		53,739		1,849		—			55,588
Trust preferred securities		20,769		375		(64	)		21,080
Total	$	356,106	$	11,892	$	(86	)	$	367,912
Securities held-to-maturity:
Agency mortgage-backed securities	$	16,659	$	2	$	(177	)	$	16,484
Municipals—tax exempt		34,813		80		(413	)		34,480
Total	$	51,472	$	82	$	(590	)	$	50,964

Schedule of amortized cost and estimated fair values of securities, by contractual maturity

	Available-for-sale
	Amortized Cost		Estimated Fair Value
	(Dollars in thousands)
Due after one through five years	$	924	$	963
Due after five through ten years		52,757		53,929
Due after ten years		20,789		20,831
Agency mortgage-backed securities	$	262,710		271,077
Total	$	337,180	$	346,800

	Held-to-maturity
	Amortized Cost		Estimated Fair Value
	(Dollars in thousands)
Due after five through ten years	$	1,085	$	1,060
Due after ten years		52,013		49,706
Agency mortgage-backed securities		15,185		14,893
Total	$	68,283	$	65,659

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Loss Contingencies

3 Months Ended

Mar. 31, 2013

Loss Contingencies

Loss Contingencies

12) Loss Contingencies

        The Company's policy is to accrue for legal costs associated with both asserted and unasserted claims when it probable that such costs will be incurred and such costs can be reasonably estimated. The Company had previously accrued for such costs associated with an unasserted claim arising from an apparent transfer of funds for personal use by an authorized signatory of a customer. During the first quarter of 2013, a legal claim was asserted on this matter and the Company accrued an additional $266,000 for additional legal costs that are expected to be incurred to defend this matter. The litigation is in the very early stages and the Company intends to vigorously defend the litigation. At this time it is not possible to determine the amount of the loss, if any, arising from the claim in excess of the legal expenses expected to be incurred in defense of the litigation.

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Preferred Stock

3 Months Ended

Mar. 31, 2013

Preferred Stock

Preferred Stock

8) Preferred Stock

Series A Preferred Stock

        On November 21, 2008, the Company issued 40,000 shares of Series A Fixed Rate Cumulative Perpetual Preferred Stock ("Series A Preferred Stock") to the U.S. Treasury under the terms of the U.S. Treasury Capital Purchase Program for $40,000,000 with a liquidation preference of $1,000 per share. On March 7, 2012, in accordance with approvals received from the U.S. Treasury and the Federal Reserve Board, the Company repurchased all of the Series A Preferred Stock and paid all of the related accrued and unpaid dividends. HCC used available cash and proceeds from a $30,000,000 distribution approved by the California Department of Financial Institutions from HBC to HCC. The repurchase of the Series A Preferred Stock accelerated the accretion of the remaining issuance discount on the Series A Preferred Stock. Total dividends and discount accretion on Preferred Stock, including accelerated accretion of approximately $765,000, reduced net income available to common shareholders by $1,206,000 in the first quarter of 2012. The Company did not repurchase the related warrant that was issued to the U.S. Treasury, and the warrant remains outstanding as of the date of this report.

Series C Preferred Stock

        On June 21, 2010, the Company issued to various institutional investors 21,004 shares of Series C Convertible Perpetual Preferred Stock ("Series C Preferred Stock"). The Series C Preferred Stock is mandatorily convertible into common stock at a conversion price of $3.75 per share upon a subsequent transfer of the Series C Preferred Stock to third parties not affiliated with the holder in a widely dispersed offering. The Series C Preferred Stock is non-voting except in the case of certain transactions that would affect the rights of the holders of the Series C Preferred Stock or applicable law. Holders of Series C Preferred Stock will receive dividends if and only to the extent dividends are paid to holders of common stock. The Series C Preferred Stock is not redeemable by the Company or by the holders and has a liquidation preference of $1,000 per share. The Series C Preferred Stock ranks senior to the Company's common stock.

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Income Taxes

3 Months Ended

Mar. 31, 2013

Income Taxes

Income Taxes

6) Income Taxes

        Some items of income and expense are recognized in different years for tax purposes than when applying generally accepted accounting principles, leading to timing differences between the Company's actual tax liability and the amount accrued for this liability based on book income. These temporary differences comprise the "deferred" portion of the Company's tax expense or benefit, which is accumulated on the Company's books as a deferred tax asset or deferred tax liability until such time as they reverse.

        Realization of the Company's deferred tax assets is primarily dependent upon the Company generating sufficient taxable income to obtain benefit from the reversal of net deductible temporary differences and utilization of tax credit carryforwards and the net operating loss carryforwards for Federal and California state income tax purposes. The amount of deferred tax assets considered realizable is subject to adjustment in future periods based on estimates of future taxable income. Under generally accepted accounting principles, a valuation allowance is required to be recognized if it is "more likely than not" that a deferred tax asset will not be realized. The determination of the realizability of the deferred tax assets is highly subjective and dependent upon judgment concerning management's evaluation of both positive and negative evidence, including forecasts of future income, cumulative losses, applicable tax planning strategies, and assessments of current and future economic and business conditions.

        The Company had net deferred tax assets of $20,237,000, and $19,264,000, at March 31, 2013, and December 31, 2012, respectively. After consideration of the matters in the preceding paragraph, the Company determined that it is more likely than not that the net deferred tax asset at March 31, 2013 and December 31, 2012 will be fully realized in future years.

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Benefit Plans

3 Months Ended

Mar. 31, 2013

Benefit Plans

Benefit Plans

7) Benefit Plans

Supplemental Retirement Plan

        The Company has a supplemental retirement plan (the "Plan") covering current and former key executives and directors. The Plan is a nonqualified defined benefit plan. Benefits are unsecured as there are no Plan assets. The following table presents the amount of periodic cost recognized for the periods indicated:

	Three Months Ended March 31,
	2013		2012
	(Dollars in thousands)
Components of net periodic benefit cost:
Service cost	$	304	$	294
Interest cost		196		193
Amortization of prior service cost		—		7
Amortization of net actuarial loss		71		63
Net periodic benefit cost	$	571	$	557

Split-Dollar Life Insurance Benefit Plan

        The Company maintains life insurance policies for current and former directors and officers that are subject to split-dollar life insurance agreements. The following table sets forth the funded status of the split-dollar life insurance benefits for the periods indicated:

	March 31, 2013		December 31, 2012
	(Dollars in thousands)
Change in projected benefit obligation
Projected benefit obligation at beginning of year	$	4,717	$	4,525
Interest cost		44		185
Actuarial gain		3		7
Projected benefit obligation at end of period	$	4,764	$	4,717

        Amounts recognized in accumulated other comprehensive income at March 31, 2013 and December 31, 2012 consist of the following:

	March 31, 2013		December 31, 2012
	(Dollars in thousands)
Net actuarial loss	$	669	$	624
Prior transition obligation		1,665		1,685
Accumulated other comprehensive loss	$	2,334	$	2,309

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Fair Value

3 Months Ended

Mar. 31, 2013

Fair Value

Fair Value

9) Fair Value

        Accounting guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

        Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

        Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data (for example, interest rates and yield curves observable at commonly quoted intervals, prepayment speeds, credit risks, and default rates).

        Level 3: Significant unobservable inputs that reflect a reporting entity's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Financial Assets and Liabilities Measured on a Recurring Basis

        The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2 inputs).

        The fair value of interest-only ("I/O") strip receivable assets is based on a valuation model used by a third party. The Company is able to compare the valuation model inputs and results to widely available published industry data for reasonableness (Level 2 inputs).

			Fair Value Measurements Using
	Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Assets at March 31, 2013:
Available-for-sale securities:
Agency mortgage-backed securities	$	271,077		—	$	271,077		—
Corporate bonds		54,892		—		54,892		—
Trust preferred securities		20,831		—		20,831		—
I/O strip receivables		1,777		—		1,777		—
Assets at December 31, 2012:
Available-for-sale securities:
Agency mortgage-backed securities	$	291,244		—	$	291,244		—
Corporate bonds		55,588		—		55,588		—
Trust preferred securities		21,080		—		21,080		—
I/O strip receivables		1,786				1,786		—

        There were no transfers between Level 1 and Level 2 during the period for assets measured at fair value on a recurring basis.

Assets and Liabilities Measured on a Non-Recurring Basis

        The fair value of loans held-for-sale is generally based on obtaining bids and broker indications on the estimated value of these loans held-for-sale, resulting in a Level 2 classification.

        The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. The appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

        Foreclosed assets are valued at the time the loan is foreclosed upon and the asset is transferred to foreclosed assets. The fair value is based primarily on third party appraisals, less costs to sell. The appraisals may utilize a single valuation approach or a combination of approaches including the comparable sales and income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.

			Fair Value Measurements Using
	Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Assets at March 31, 2013:
Impaired loans—held-for-investment:
Commercial	$	2,982		—		—	$	2,982
Real estate:
Commercial and residential		3,217		—		—		3,217
Land and construction		1,685		—		—		1,685
Consumer		122		—		—		122
	$	8,006		—		—	$	8,006
Foreclosed assets:
Commercial	$	81		—		—	$	81
Land and construction		657		—		—		657
	$	738		—		—	$	738
Assets at December 31, 2012:
Impaired loans—held-for-investment:
Commercial	$	3,645		—		—	$	3,645
Real estate:
Commercial and residential		3,674		—		—		3,674
Land and construction		1,723		—		—		1,723
Consumer		130		—		—		130
	$	9,172		—		—	$	9,172
Foreclosed assets:
Commercial	$	83		—		—	$	83
Land and construction		1,187		—		—		1,187
	$	1,270		—		—	$	1,270

        The following table shows the detail of the impaired loans held-for-investment and the impaired loans held-for-investment carried at fair value for the periods indicated:

	March 31, 2013			December 31, 2012
	(Dollars in thousands)
Impaired loans held-for-investment:
Book value of impaired loans held-for-investment carried at fair value	$	11,032		$	11,912
Book value of impaired loans held-for-investment carried at cost		7,349			7,732
Total impaired loans held-for-investment	$	18,381		$	19,644
Impaired loans held-for-investment carried at fair value:
Book value of impaired loans held-for-investment carried at fair value	$	11,032		$	11,912
Specific valuation allowance		(3,026	)		(2,740	)
Impaired loans held-for-investment carried at fair value, net	$	8,006		$	9,172

        Impaired loans held-for-investment which are measured primarily for impairment using the fair value of the collateral were $18,381,000 at March 31, 2013, after partial charge-offs of $83,000 in the first three months of 2013. In addition, these loans had a specific valuation allowance of $3,026,000 at March 31, 2013. Impaired loans held-for-investment totaling $11,032,000 at March 31, 2013 were carried at fair value as a result of the aforementioned partial charge-offs and specific valuation allowances at period-end. The remaining $7,349,000 of impaired loans were carried at cost at March 31, 2013, as the fair value of the collateral exceeded the cost basis of each respective loan. Partial charge-offs and changes in specific valuation allowances during the first three months of 2013 on impaired loans held-for-investment carried at fair value at March 31, 2013 resulted in an additional provision for loan losses of $757,000.

        Foreclosed assets measured at fair value less costs to sell, had a carrying amount of $738,000, with no valuation allowance at March 31, 2013.

        Impaired loans held-for-investment of $19,644,000 at December 31, 2012, after partial charge-offs of $2,694,000 in 2012, were analyzed for additional impairment primarily using the fair value of collateral. In addition, these loans had a specific valuation allowance of $2,740,000 at December 31, 2012. Impaired loans held-for-investment totaling $11,912,000 at December 31, 2012 were carried at fair value as a result of the aforementioned partial charge-offs and specific valuation allowances at year-end. The remaining $7,732,000 of impaired loans were carried at cost at December 31, 2012, as the fair value of the collateral exceeded the cost basis of each respective loan. Partial charge-offs and changes in specific valuation allowances during 2012 on impaired loans held-for-investment carried at fair value at December 31, 2012 resulted in an additional provision for loan losses of $3,856,000.

        At December 31, 2012, foreclosed assets had a carrying amount of $1,270,000, with no valuation allowance at December 31, 2012.

        The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at the periods indicated:

	March 31, 2013
	Fair Value		Valuation Techniques	Unobservable Inputs	Range (Weighted Average)
	(Dollars in thousands)
Impaired loans—held-for-investment:
Commercial	$	2,982	Market Approach	Discount adjustment for differences between comparable sales	0% to 3% (2%)
Real estate:
Commercial and residential		3,217	Market Approach	Discount adjustment for differences between comparable sales	0% to 13% (1%)
Land and construction		1,685	Market Approach	Discount adjustment for differences between comparable sales	1% to 4% (2%)
Foreclosed assets:
Land and construction		657	Market Approach	Discount adjustment for differences between comparable sales	1% to 16% (7%)

	December 31, 2012
	Fair Value		Valuation Techniques	Unobservable Inputs	Range (Weighted Average)
	(Dollars in thousands)
Impaired loans—held-for-investment:
Commercial	$	3,645	Market Approach	Discount adjustment for differences between comparable sales	0% to 4% (1%)
Real estate:
Commercial and residential		3,674	Market Approach	Discount adjustment for differences between comparable sales	0% to 13% (1%)
Land and construction		1,723	Market Approach	Discount adjustment for differences between comparable sales	1% to 4% (2%)
Foreclosed assets:
Land and construction		1,187	Market Approach	Discount adjustment for differences between comparable sales	0% to 23% (6%)

        The Company obtains third party appraisals on its impaired loans held-for-investment and foreclosed assets to determine fair value. Generally, the third party appraisals apply the "market approach," which is a valuation technique that uses prices and other relevant information generated by market transactions involving identical or comparable (that is, similar) assets, liabilities, or a group of assets and liabilities, such as a business. Adjustments are then made based on the type of property, age of appraisal, current status of property and other related factors to estimate the current value of collateral.

        The carrying amounts and estimated fair values of financial instruments at March 31, 2013 are as follows:

			Estimated Fair Value
	Carrying Amounts		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	76,869	$	76,869	$	—	$	—	$	76,869
Securities available-for-sale		346,800		—		346,800		—		346,800
Securities held-to-maturity		68,283		—		65,659		—		65,659
Loans (including loans held-for-sale), net		786,977		—		4,394		783,126		787,520
FHLB and FRB stock		10,764		—		—		—		N/A
Accrued interest receivable		4,309		—		1,919		2,390		4,309
Loan servicing rights and I/O strips receivables		2,447		—		4,680		—		4,680
Liabilities:
Time deposits	$	302,476	$	—	$	303,282	$	—	$	303,282
Other deposits		864,414		—		864,414		—		864,414
Subordinated debt		9,279		—		—		5,400		5,400
Accrued interest payable		281		—		281		—		281

        The carrying amounts and estimated fair values of the Company's financial instruments at December 31, 2012:

			Estimated Fair Value
	Carrying Amounts		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	373,565	$	373,565	$	—	$	—	$	373,565
Securities available-for-sale		367,912		—		367,912		—		367,912
Securities held-to-maturity		51,472		—		50,964		—		50,964
Loans (including loans held-for-sale), net		796,695		—		3,409		793,911		797,320
FHLB and FRB stock		10,728		—		—		—		N/A
Accrued interest receivable		3,773		—		1,514		2,259		3,773
Loan servicing rights and I/O strips receivables		2,495		—		4,715		—		4,715
Liabilities:
Time deposits	$	318,664	$	—	$	319,476	$	—	$	319,476
Other deposits		1,160,704		—		1,160,704		—		1,160,704
Subordinated debt		9,279		—		—		5,400		5,400
Accrued interest payable		277		—		277		—		277

        The methods and assumptions, not previously discussed, used to estimate the fair value are described as follows:

Cash and Cash Equivalents

        The carrying amounts of cash on hand, noninterest and interest bearing due from bank accounts, and Fed funds sold approximate fair values and are classified as Level 1.

Loans

        The fair value of loans held-for-sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.

        Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

FHLB and FRB Stock

        It was not practical to determine the fair value of FHLB and FRB stock due to restrictions placed on their transferability.

Accrued Interest Receivable/Payable

        The carrying amounts of accrued interest approximate fair value resulting in a Level 2 or Level 3 classification.

Deposits

        The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 2 classification. The carrying amounts of variable rate, fixed-term money market accounts approximate their fair values at the reporting date resulting in a Level 2 classification. The carrying amounts of variable rate, certificates of deposit approximate their fair values at the reporting date resulting in a Level 2 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

Subordinated Debt

        The fair values of the subordinated debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

Off-balance Sheet Instruments

        Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The fair value of commitments is not material.

Limitations

        Fair value estimates are made at a specific point in time, based on relevant market information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

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Securities (Details 2) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2013	Dec. 31, 2012
Available-for-sale, Amortized Cost
Due after one through five years	$ 924
Due after five through ten years	52,757
Due after ten years	20,789
Agency mortgage-backed securities	262,710
Total	337,180
Available-for-sale, Estimated Fair Value
Due after one through five years	963
Due after five through ten years	53,929
Due after ten years	20,831
Agency mortgage-backed securities	271,077
Estimated Fair Value	346,800	367,912
Held-to-maturity, Amortized Cost
Due after five through ten years	1,085
Due after ten years	52,013
Agency mortgage-backed securities	15,185
Total	68,283
Held-to-maturity, Estimated Fair Value
Due after five through ten years	1,060
Due after ten years	49,706
Agency mortgage-backed securities	14,893
Total	$ 65,659

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Loss Contingencies (Details) (USD $)	3 Months Ended
	Mar. 31, 2013
Loss Contingencies
Amount accrued for additional legal costs that are expected to be incurred to defend legal claim	$ 266,000

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Earnings Per Share (Tables)

3 Months Ended

Mar. 31, 2013

Earnings Per Share

Schedule of reconciliation of factors used in computing basic and diluted earnings per common share

	For the Three Months Ended March 31,
	2013		2012
	(Dollars in thousands)
Net income available to common shareholders	$	2,180	$	869
Less: net income allocated to Series C Preferred Stock		382		153
Net income allocated to common shareholders	$	1,798	$	716
Weighted average common shares outstanding for basic earnings per common share		26,329,343		26,289,334
Dilutive effect of stock options oustanding, using the the treasury stock method		49,114		27,220
Shares used in computing diluted earnings per common share		26,378,457		26,316,554
Basic earnings per share	$	0.07	$	0.03
Diluted earnings per share	$	0.07	$	0.03

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Fair Value (Tables)

3 Months Ended

Mar. 31, 2013

Fair Value

Schedule of financial assets and liabilities measured on a recurring basis

			Fair Value Measurements Using
	Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Assets at March 31, 2013:
Available-for-sale securities:
Agency mortgage-backed securities	$	271,077		—	$	271,077		—
Corporate bonds		54,892		—		54,892		—
Trust preferred securities		20,831		—		20,831		—
I/O strip receivables		1,777		—		1,777		—
Assets at December 31, 2012:
Available-for-sale securities:
Agency mortgage-backed securities	$	291,244		—	$	291,244		—
Corporate bonds		55,588		—		55,588		—
Trust preferred securities		21,080		—		21,080		—
I/O strip receivables		1,786				1,786		—

Schedule of assets and liabilities measured on a non-recurring basis

			Fair Value Measurements Using
	Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Assets at March 31, 2013:
Impaired loans—held-for-investment:
Commercial	$	2,982		—		—	$	2,982
Real estate:
Commercial and residential		3,217		—		—		3,217
Land and construction		1,685		—		—		1,685
Consumer		122		—		—		122
	$	8,006		—		—	$	8,006
Foreclosed assets:
Commercial	$	81		—		—	$	81
Land and construction		657		—		—		657
	$	738		—		—	$	738
Assets at December 31, 2012:
Impaired loans—held-for-investment:
Commercial	$	3,645		—		—	$	3,645
Real estate:
Commercial and residential		3,674		—		—		3,674
Land and construction		1,723		—		—		1,723
Consumer		130		—		—		130
	$	9,172		—		—	$	9,172
Foreclosed assets:
Commercial	$	83		—		—	$	83
Land and construction		1,187		—		—		1,187
	$	1,270		—		—	$	1,270

Schedule of impaired loans held-for-investment and impaired loans held-for-investment carried at fair value

	March 31, 2013			December 31, 2012
	(Dollars in thousands)
Impaired loans held-for-investment:
Book value of impaired loans held-for-investment carried at fair value	$	11,032		$	11,912
Book value of impaired loans held-for-investment carried at cost		7,349			7,732
Total impaired loans held-for-investment	$	18,381		$	19,644
Impaired loans held-for-investment carried at fair value:
Book value of impaired loans held-for-investment carried at fair value	$	11,032		$	11,912
Specific valuation allowance		(3,026	)		(2,740	)
Impaired loans held-for-investment carried at fair value, net	$	8,006		$	9,172

Schedule of quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis

	March 31, 2013
	Fair Value		Valuation Techniques	Unobservable Inputs	Range (Weighted Average)
	(Dollars in thousands)
Impaired loans—held-for-investment:
Commercial	$	2,982	Market Approach	Discount adjustment for differences between comparable sales	0% to 3% (2%)
Real estate:
Commercial and residential		3,217	Market Approach	Discount adjustment for differences between comparable sales	0% to 13% (1%)
Land and construction		1,685	Market Approach	Discount adjustment for differences between comparable sales	1% to 4% (2%)
Foreclosed assets:
Land and construction		657	Market Approach	Discount adjustment for differences between comparable sales	1% to 16% (7%)

	December 31, 2012
	Fair Value		Valuation Techniques	Unobservable Inputs	Range (Weighted Average)
	(Dollars in thousands)
Impaired loans—held-for-investment:
Commercial	$	3,645	Market Approach	Discount adjustment for differences between comparable sales	0% to 4% (1%)
Real estate:
Commercial and residential		3,674	Market Approach	Discount adjustment for differences between comparable sales	0% to 13% (1%)
Land and construction		1,723	Market Approach	Discount adjustment for differences between comparable sales	1% to 4% (2%)
Foreclosed assets:
Land and construction		1,187	Market Approach	Discount adjustment for differences between comparable sales	0% to 23% (6%)

Schedule of carrying amounts and estimated fair values of financial instruments

 The carrying amounts and estimated fair values of financial instruments at March 31, 2013 are as follows:

			Estimated Fair Value
	Carrying Amounts		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	76,869	$	76,869	$	—	$	—	$	76,869
Securities available-for-sale		346,800		—		346,800		—		346,800
Securities held-to-maturity		68,283		—		65,659		—		65,659
Loans (including loans held-for-sale), net		786,977		—		4,394		783,126		787,520
FHLB and FRB stock		10,764		—		—		—		N/A
Accrued interest receivable		4,309		—		1,919		2,390		4,309
Loan servicing rights and I/O strips receivables		2,447		—		4,680		—		4,680
Liabilities:
Time deposits	$	302,476	$	—	$	303,282	$	—	$	303,282
Other deposits		864,414		—		864,414		—		864,414
Subordinated debt		9,279		—		—		5,400		5,400
Accrued interest payable		281		—		281		—		281

        The carrying amounts and estimated fair values of the Company's financial instruments at December 31, 2012:

			Estimated Fair Value
	Carrying Amounts		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	373,565	$	373,565	$	—	$	—	$	373,565
Securities available-for-sale		367,912		—		367,912		—		367,912
Securities held-to-maturity		51,472		—		50,964		—		50,964
Loans (including loans held-for-sale), net		796,695		—		3,409		793,911		797,320
FHLB and FRB stock		10,728		—		—		—		N/A
Accrued interest receivable		3,773		—		1,514		2,259		3,773
Loan servicing rights and I/O strips receivables		2,495		—		4,715		—		4,715
Liabilities:
Time deposits	$	318,664	$	—	$	319,476	$	—	$	319,476
Other deposits		1,160,704		—		1,160,704		—		1,160,704
Subordinated debt		9,279		—		—		5,400		5,400
Accrued interest payable		277		—		277		—		277

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Equity Plan (Details 2) (USD $)	3 Months Ended
	Mar. 31, 2013
Options
Number of Shares
Outstanding at the beginning of the period (in shares)	1,314,347
Granted (in shares)	15,000
Exercised (in shares)	(1,221)
Forfeited or expired (in shares)	(4,159)
Outstanding at the end of the period (in shares)	1,323,967
Vested or expected to vest (in shares)	1,257,769
Exercisable at the end of the period (in shares)	1,011,067
Weighted Average Exercise Price
Outstanding at the beginning of the period (in dollars per share)	$ 12.90
Granted (in dollars per share)	$ 6.51
Exercised (in dollars per share)	$ 3.57
Forfeited or expired (in dollars per share)	$ 4.96
Outstanding at the end of the period (in dollars per share)	$ 12.80
Weighted Average Remaining Contractual Life (Years)
Outstanding at the end of the period	5 years 7 months 6 days
Vested or expected to vest	5 years 7 months 6 days
Exercisable at the end of the period	4 years 7 months 6 days
Aggregate Intrinsic Value
Outstanding at the end of the period (in dollars)	$ 794,000
Vested or expected to vest (in dollars)	755,000
Exercisable at the end of the period (in dollars)	484,000
Unrecognized compensation cost information
Total unrecognized compensation cost related to nonvested stock options granted (in dollars)	1,066,000
Expected weighted-average period for recognition of compensation costs related to nonvested stock options	2 years 9 months 14 days
Restricted stock
Unrecognized compensation cost information
Total unrecognized compensation cost related to nonvested stock options granted (in dollars)	$ 266,000
Expected weighted-average period for recognition of compensation costs related to nonvested stock options	11 months
Number of Shares
Nonvested shares at the beginning of the period (in shares)	88,000
Granted (in shares)	10,000
Nonvested shares at the end of the period (in shares)	98,000
Weighted Average Grant Date Fair Value
Nonvested shares at the beginning of the period (in dollars per share)	$ 5.74
Granted (in dollars per share)	$ 6.51
Nonvested shares at the end of the period (in dollars per share)	$ 5.82

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Income Taxes (Details) (USD $)	Mar. 31, 2013	Dec. 31, 2012
Net deferred tax assets
Net deferred tax assets	$ 20,237,000	$ 19,264,000

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2013	Mar. 31, 2012
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income	$ 2,180	$ 2,075
Other comprehensive income (loss):
Change in net unrealized holding gains on available-for-sale securities and I/O strips	(2,164)	372
Deferred income taxes	909	(156)
Change in net unamortized unrealized gain on securities available-for-sale that were reclassified to securities held-to-maturity	(14)
Deferred income taxes	6
Reclassification adjustment for (gains) realized in income	(31)	(27)
Deferred income taxes	13	11
Change in unrealized gains (loss) on securities and I/O strips, net of deferred income taxes	(1,281)	200
Change in net pension and other benefit plan liability adjustment	29	57
Deferred income taxes	(12)	(24)
Change in pension and other benefit plan liability, net of deferred income taxes	17	33
Other comprehensive income (loss)	(1,264)	233
Total comprehensive income	$ 916	$ 2,308

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Accumulated Other Comprehensive Income

3 Months Ended

Mar. 31, 2013

Accumulated Other Comprehensive Income

Accumulated Other Comprehensive Income

3) Accumulated Other Comprehensive Income ("AOCI")

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

	For the Three Months Ended March 31, 2013 and 2012
	Unrealized Gains 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, 2013, net of taxes	$	7,887		$	497		$	(5,703	)	$	2,681
Other comprehensive (loss) before reclassification, net of taxes		(1,255	)		—			(24	)		(1,279	)
Amounts reclassified from other comprehensive income (loss), net of taxes		(18	)		(8	)		41			15
Net current period other comprensive income (loss), net of taxes		(1,273	)		(8	)		17			(1,264	)
Ending balance March 31, 2013, net of taxes	$	6,614		$	489		$	(5,686	)	$	1,417
Beginning balance January 1, 2012, net of taxes	$	6,210		$	—		$	(5,255	)	$	955
Other comprehensive income (loss) before reclassification, net of taxes		216			—			(8	)		208
Amounts reclassified from other comprehensive income (loss), net of taxes		(16	)		—			41			25
Net current period other comprensive income, net of taxes		200			—			33			233
Ending balance March 31, 2012, net of taxes	$	6,410		$	—		$	(5,222	)	$	1,188

(1)

Amounts in parenthesis indicate debits.

	Amounts Reclassified from AOCI(1) For the Three Months Ended March 31,
							Affected Line Item Where Net Income is Presented
Details About AOCI Components	2013			2012
	(Dollars in thousands)
Unrealized gains on available-for-sale securities and I/O strips	$	31		$	27		Realized gains on sale of securities
		(13	)		(11	)	Income tax expense
		18			16		Net of tax
Amortization of unrealized gain on securities available-for-sale that were reclassified to securities held-to-maturity		14			—		Interest income on taxable securities
		(6	)		—		Income tax expense
		8			—		Net of tax
Amortization of defined benefit pension plan items(2)
Prior service cost		—			(7	)
Actuarial losses		(71	)		(63	)
		(71	)		(70	)	Income before income tax
		30			29		Income tax expense
		(41	)		(41	)	Net of tax
Total reclassification for the period	$	(15	)	$	(25	)

(1)

Amounts in parenthesis indicate debits.

(2)

This AOCI component is included in the computation of net periodic benefit cost (see Note 7—Benefit Plans).

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Equity Plan (Tables)

3 Months Ended

Mar. 31, 2013

Equity Plan

Schedule of stock option activity under the Equity Plan

Total Stock Options	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value
Outstanding at January 1, 2013		1,314,347		$	12.90
Granted		15,000		$	6.51
Exercised		(1,221	)	$	3.57
Forfeited or expired		(4,159	)	$	4.96
Outstanding at March 31, 2013		1,323,967		$	12.80		5.6	$	794,000
Vested or expected to vest		1,257,769					5.6	$	755,000
Exercisable at March 31, 2013		1,011,067					4.6	$	484,000

Schedule of restricted stock activity under the Equity Plan

Total Restricted Stock Award	Number of Shares		Weighted Average Grant Date Fair Value
Nonvested shares at January 1, 2013		88,000	$	5.74
Granted		10,000	$	6.51
Vested		—	$	—
Forfeited		—	$	—
Nonvested shares at March 31, 2013		98,000	$	5.82

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Loans (Details 4) (USD $)	Mar. 31, 2013	Dec. 31, 2012	Mar. 31, 2012
Nonperforming loans by class
Nonaccrual loans - held-for-sale			$ 184,000
Nonaccrual loans - held-for-investment	16,115,000	17,335,000	14,005,000
Nonaccrual	16,115,000	17,335,000
Restructured and Loans Over 90 Days Past Due and Still Accruing	549,000	859,000	2,155,000
Total	16,664,000	18,194,000	16,344,000
Other restructured loans	1,717,000	1,450,000	431,000
Impaired loans, excluding loans held-for-sale	18,381,000	19,644,000	16,591,000
Aging of past due loans by class of loans
30-59 Days Past Due	1,635,000	4,044,000
60-89 Days Past Due	646,000	355,000
90 Days or Greater Past Due	9,965,000	10,533,000
Total Past Due	12,246,000	14,932,000
Loans Not Past Due	789,776,000	797,402,000
Total loan balance	802,022,000	812,334,000
30 days or greater past due nonaccrual loans	11,267,000	12,020,000
Less than 30 days past due nonaccrual loans held-for-investment	4,848,000	5,315,000
Commercial
Nonperforming loans by class
Nonaccrual	5,863,000	7,852,000
Restructured and Loans Over 90 Days Past Due and Still Accruing	549,000	859,000
Total	6,412,000	8,711,000
Aging of past due loans by class of loans
30-59 Days Past Due	1,445,000	1,699,000
60-89 Days Past Due	646,000	355,000
90 Days or Greater Past Due	4,368,000	5,120,000
Total Past Due	6,459,000	7,174,000
Loans Not Past Due	350,229,000	368,295,000
Total loan balance	356,688,000	375,469,000
Real estate
Aging of past due loans by class of loans
Total loan balance	431,298,000	421,151,000
Real estate | Commercial and residential
Nonperforming loans by class
Nonaccrual	5,503,000	4,676,000
Total	5,503,000	4,676,000
Aging of past due loans by class of loans
30-59 Days Past Due		1,603,000
90 Days or Greater Past Due	3,485,000	3,290,000
Total Past Due	3,485,000	4,893,000
Loans Not Past Due	357,855,000	350,041,000
Total loan balance	361,340,000	354,934,000
Real estate | Land and construction
Nonperforming loans by class
Nonaccrual	2,177,000	2,223,000
Total	2,177,000	2,223,000
Aging of past due loans by class of loans
90 Days or Greater Past Due	69,000	78,000
Total Past Due	69,000	78,000
Loans Not Past Due	24,542,000	22,274,000
Total loan balance	24,611,000	22,352,000
Real estate | Home equity
Nonperforming loans by class
Nonaccrual	2,431,000	2,437,000
Total	2,431,000	2,437,000
Aging of past due loans by class of loans
30-59 Days Past Due	87,000	742,000
90 Days or Greater Past Due	2,043,000	2,045,000
Total Past Due	2,130,000	2,787,000
Loans Not Past Due	43,217,000	41,078,000
Total loan balance	45,347,000	43,865,000
Consumer
Nonperforming loans by class
Nonaccrual	141,000	147,000
Total	141,000	147,000
Aging of past due loans by class of loans
30-59 Days Past Due	103,000
Total Past Due	103,000
Loans Not Past Due	13,933,000	15,714,000
Total loan balance	$ 14,036,000	$ 15,714,000

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Basis of Presentation (Policies)

3 Months Ended

Mar. 31, 2013

Basis of Presentation

Reclassifications

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

Adoption of New Accounting Standards

        In February 2013, the FASB issued an accounting standards update with the primary objective of improving the reporting of reclassifications out of accumulated other comprehensive income ("AOCI"). For significant reclassifications that are required to be presented in their entirety in net income in the same reporting period by U.S. GAAP, the update requires an entity to report the effect of these reclassifications out of AOCI on the respective line items of net income either on the face of the statement that reports net income or in the financial statement notes. For AOCI items that that are not reclassified to net income in their entirety, presentation in the financial statement notes is required. This update is effective for public companies for fiscal years and interim periods within those years beginning after December 15, 2012, or the first quarter of 2013 for calendar year-end companies, and is required to be applied prospectively. The effect of adopting this standard did not have a material effect on the Company's operating results or financial condition, but the additional disclosures are included in Note 3.