News Details

SAN JOSE, Calif.--(BUSINESS WIRE)-- Heritage Commerce Corp (Nasdaq: HTBK), the holding company (“the Company”) for Heritage Bank of Commerce (“the Bank”), today reported net income of $2.1 million on an unaudited basis for the first quarter ended March 31, 2012, compared to $1.6 million for the first quarter a year ago. After accrued dividends and discount accretion on preferred stock of $1.2 million, net income available to common shareholders was $869,000, or $0.03 per average diluted common share, for the first quarter of 2012. Net income available to common shareholders was $985,000, or $0.03 per average diluted common share, for the first quarter of 2011, after accrued dividends and discount accretion on preferred stock of $596,000.

The Company repurchased the $40 million of Series A preferred stock issued to the U.S. Treasury Department under the TARP Capital Purchase Program and paid the final dividend of approximately $122,000 on March 7, 2012, in accordance with approvals received from the U.S. Treasury and the Federal Reserve. The preferred stock was initially recorded at a discount, and the repurchase accelerated the accretion of the remaining discount on the preferred stock. While the accelerated accretion did not impact net income, it resulted in a one-time non-cash reduction in net income available to common shareholders of approximately $765,000 in the first quarter of 2012. Total dividends and discount accretion on preferred stock, including the accelerated accretion, reduced net income available to common shareholders by $1.2 million in the first quarter of 2012.

“With continued profitability, strong capital levels and a solid balance sheet, the Company exited the TARP Capital Purchase Program in early March, 2012. We repaid the entire investment made by the U.S. Treasury from our current capital and liquidity,” said Walter Kaczmarek, President and Chief Executive Officer. “The repurchase of our TARP funds reflects the strength of our balance sheet and earnings. In addition, we will save $2 million annually in dividend payments as a result of the preferred share repurchase. During the time we participated in the TARP Capital Purchase Program, the Company paid $6.6 million in cash dividends to the U.S. Treasury.”

First Quarter 2012 Highlights (at or for the periods ended March 31, 2012, compared to March 31, 2011, and December 31, 2011)

• The net interest margin increased 11 basis points to 4.06% for the first quarter of 2012, from 3.95% for the first quarter of 2011, and increased 19 basis points from 3.87% for the fourth quarter of 2011, primarily as a result of a higher yield on loans and a lower cost of deposits.
• Core deposits continued to increase for the first quarter of 2012:
  • Noninterest-bearing demand deposits rose 10% to $356.6 million at March 31, 2012, from $325.1 million at March 31, 2011, and increased 4% from $344.3 million at December 31, 2011.
  • Interest-bearing demand deposits rose 6% to $144.0 million at March 31, 2012, from $135.9 million at March 31, 2011, and increased 7% from $134.1 million at December 31, 2011.
  • Savings and money market deposits rose 11% to $292.0 million at March 31, 2012, from $262.8 million at March 31, 2011, and increased 3% from $282.5 million at December 31, 2011.
• The total cost of deposits decreased 25 basis points to 0.27% during the first quarter of 2012 from 0.52% during the first quarter of 2011, and decreased one basis point from 0.28% during the fourth quarter of 2011, primarily as a result of maturing higher-cost wholesale funding and growth in core deposits.
• Loans declined to $756.9 million at March 31, 2012, compared to $803.4 million at March 31, 2011, and $764.6 million at December 31, 2011.
• Asset quality remained strong as reflected in the following metrics:
  • Nonperforming assets declined 25% year-over-year to $19.5 million, or 1.49% of total assets at March 31, 2012, from $26.1 million, or 2.08% of total assets at March 31, 2011, and increased 2% from $19.1 million, or 1.47% of total assets at December 31, 2011.
  • Classified assets (net of SBA guarantees) decreased 33% to $54.2 million at March 31, 2012, from $81.4 million at March 31, 2011, and decreased 9% from $59.5 million at December 31, 2011.
  • Classified assets (net of SBA guarantees) to Tier 1 capital plus the allowance for loans losses at the holding company and the bank level were 30% and 31% at March 31, 2012, respectively, compared to 38% and 43% at March 31, 2011, and 27% and 30% at December 31, 2011.
  • The provision for loan losses was $100,000 in the first quarter of 2012, compared to $770,000 in the first quarter of 2011, and $1.2 million in the fourth quarter of 2011.
  • The allowance for loan losses totaled $20.3 million, or 2.68% of total loans at March 31, 2012, compared to $24.0 million, or 2.99% of total loans at March 31, 2011, and $20.7 million, or 2.71% of total loans at December 31, 2011.
  • The allowance for loan losses to total nonperforming loans (excluding nonaccrual loans held-for-sale) improved to 125.66% at March 31, 2012, compared to 103.59% at March 31, 2011, and 124.37% at December 31, 2011.
  • Net charge-offs declined 75% in the first quarter of 2012 to $494,000, compared to $2.0 million in the first quarter of 2011, and decreased 69% from $1.6 million in the fourth quarter of 2011.
• Capital ratios substantially exceed regulatory requirements for a well-capitalized financial institution at the holding company and bank level at March 31, 2012:

Balance Sheet Review, Capital Management and Credit Quality

Heritage Commerce Corp’s total assets increased 4% to $1.31 billion at March 31, 2012, from $1.26 billion a year ago, and remained flat compared to $1.31 billion at December 31, 2011.

The investment securities portfolio totaled $385.8 million at March 31, 2012, an increase of 54% from $250.1 million at March 31, 2011, and increased 1% from $380.5 million from December 31, 2011. At March 31, 2012, the investment portfolio was comprised of $340.2 million agency mortgage-backed securities, all of which were issued by U.S. Government sponsored entities, $10.6 million of corporate bonds, and $35.0 million of single entity issue trust preferred securities.

Loans, excluding loans held-for-sale, totaled $756.9 million at March 31, 2012, down 6% from $803.4 million at March 31, 2011, and down 1% from $764.6 million at December 31, 2011. The loan portfolio remains well-diversified with commercial and industrial (“C&I”) loans accounting for 47% of the portfolio at March 31, 2012. Commercial and residential real estate loans accounted for 42% of the total loan portfolio, of which 49% were owner-occupied by businesses. Land and construction loans continued to decrease, accounting for 3% of the loan portfolio at March 31, 2012, compared to 6% at March 31, 2011 and 3% of the total loan portfolio at December 31, 2011. Consumer and home equity loans accounted for the remaining 8% of total loans at March 31, 2012.

The yield on the loan portfolio was 5.41% for the first quarter of 2012, compared to 5.28% for the same period in 2011, and 5.39% for the fourth quarter of 2011.

“The banking industry continues to face sluggish loan demand, but as the economy improves, we expect to more rapidly deploy our liquidity into loans to credit worthy customers,” said Mr. Kaczmarek.

The following table summarizes the allowance for loan losses:

Nonperforming assets declined $6.6 million to $19.5 million, or 1.49% of total assets, at March 31, 2012, from $26.1 million, or 2.08% of total assets a year ago. At December 31, 2011, nonperforming assets totaled $19.1 million or 1.47% of total assets.

The following is a breakout of nonperforming assets at March 31, 2012: 28% SBA loans; 18% commercial real estate loans; 15% commercial and industrial loans; 12% land and construction loans; 11% restructured and loans over 90 days past due and still accruing; and 16% other real estate owned (“OREO”) and other foreclosed assets. At March 31, 2012, the $19.5 million of nonperforming assets included $1.7 million of loans guaranteed by the SBA and $2.2 million of restructured loans still accruing interest income.

Foreclosed assets were $3.2 million at March 31, 2012, compared to $918,000 at March 31, 2011, and $2.3 million at December 31, 2011. Classified assets (net of SBA guarantees) decreased to $54.2 million at March 31, 2012, from $81.4 million at March 31, 2011, and from $59.5 million at December 31, 2011.

Total deposits were $1.08 billion at March 31, 2012, compared to $1.0 billion at March 31, 2011, and $1.05 billion at December 31, 2011. Noninterest-bearing demand deposits increased $31.5 million to $356.6 million at March 31, 2012, compared to $325.1 million at March 31, 2011, and increased $12.3 million compared to $344.3 million at December 31, 2011. Interest-bearing demand deposits increased $8.1 million to $144.0 million at March 31, 2012, from $135.9 million at March 31, 2011, and increased $9.9 from $134.1 million at December 31, 2011. Savings and money market deposits increased $29.2 million to $292.0 million at March 31, 2012, from $262.8 million at March 31, 2011, and increased $9.5 million from $282.5 million at December 31, 2011. “Deposit growth remained strong with noninterest-bearing demand deposits increasing 10% year-over-year as we develop new client relationships,” said Mr. Kaczmarek.

At March 31, 2012, brokered deposits declined 13% to $84.7 million, from $97.8 million at March 31, 2011, and remained flat from $84.7 million at December 31, 2011. Total deposits, excluding brokered deposits, were $995.5 million at March 31, 2012, compared to $905.5 million at March 31, 2011, and $964.7 million at December 31, 2011. The total cost of deposits decreased 25 basis points to 0.27% during the first quarter of 2012 from 0.52% during the first quarter of 2011, and decreased one basis point from 0.28% during the fourth quarter of 2011, primarily as a result of maturing higher-cost wholesale funding and higher noninterest-bearing demand deposit balances.

Due primarily to the $40 million repurchase of the Series A Preferred Stock during the first quarter of 2012, tangible equity was $157.5 million at March 31, 2012, compared to $180.3 million at March 31, 2011, and $195.3 million at December 31, 2011. Tangible book value per common share was $5.25 at March 31, 2012, compared to $4.65 a year ago, and $5.20 at December 31, 2011. In the per common share data attached, the Company presents the pro forma tangible book value per share, assuming the Company’s outstanding Series C Preferred Stock issued in June 2010 is converted into common stock. There were 21,004 shares of Series C Preferred Stock outstanding at March 31, 2012 and the Series C Preferred Stock is convertible into an aggregate of 5.6 million shares of common stock at a conversion price of $3.75, upon a transfer of the Series C Preferred Stock in a widely dispersed offering.

The Company’s accumulated other comprehensive income was $1.2 million at March 31, 2012, compared to an accumulated other comprehensive loss of ($4.8) million a year ago, and accumulated other comprehensive income of $955,000 at December 31, 2011. The components of other comprehensive income, net of taxes, at March 31, 2012 include the following: an unrealized gain on available-for-sale securities of $5.2 million; an unrealized loss on split dollar insurance contracts of ($2.2) million; an unrealized loss on the supplemental executive retirement plan of ($3.0) million; and an unrealized gain on interest-only strip from SBA loans of $1.2 million.

Operating Results

Net interest income, before the provision for loan losses, increased 9% to $12.3 million in the first quarter of 2012, compared to $11.2 million in the first quarter a year ago, and increased 4% from $11.8 million in the fourth quarter of 2011. Net interest income increased primarily due to an increase in the average balance of investment securities, and a decrease in the rates paid on interest-bearing liabilities, partially offset by a decrease in the average balance of loans.

The net interest margin expanded to 4.06% for the first quarter of 2012, compared to 3.95% for the first quarter a year ago, and 3.87% for the fourth quarter of 2011. The increase in the net interest margin was primarily attributed to a higher yield on loans and a lower cost of deposits.

The Company recorded a $100,000 provision for loan losses in the first quarter of 2012, compared to $770,000 in the first quarter a year ago, and $1.2 million in the fourth quarter of 2011. The decrease in the provision for loan losses reflects a lower volume of classified assets and nonperforming loans, a decrease in loan charge-offs, and contraction of the loan portfolio during the first quarter of 2012.

Noninterest income was $1.7 million for the first quarter of 2012, compared to $1.9 million for the first quarter a year ago, and $2.4 million for the fourth quarter of 2011. The decrease in noninterest income in the first quarter of 2012, compared to the first and fourth quarters of 2011, was primarily due to a lower gain on sales of SBA loans in the first quarter of 2012. A lower gain on the sales of securities added to the decline in the first quarter of 2012, compared to the fourth quarter of 2011.

Noninterest expense in the first quarter of 2012 increased 4% to $10.9 million, compared to $10.4 million in the first quarter of 2011, and increased 10% from $9.9 million in the fourth quarter of 2011. The increase in noninterest expense from the first quarter of 2011 was primarily due to a $500,000 accrual for probable costs related to an anticipated legal claim that has not yet been asserted, regarding an apparent transfer of funds for personal use by an authorized signatory of a customer. Noninterest expense increased from the fourth quarter of 2011 primarily from the previously discussed legal matter, as well as an increase in salaries and employee benefits expense that was consistent with the Company’s cyclical salary and employee benefits expense in prior years.

Income tax expense for the quarter ended March 31, 2012 was $951,000, compared to $331,000 for the first quarter of 2011, and $234,000 for the fourth quarter of 2011. Income tax expense in the fourth quarter of 2011 was net of a $700,000 reversal of a partial valuation allowance on deferred tax assets. The effective tax rate for the first quarter of 2012 was 31%, compared to 17% for the first quarter of 2011, and 7% for the fourth quarter of 2011. The difference in the effective tax rate compared to the combined Federal and state statutory tax rate of 42% in this and past quarters 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 the deferred tax asset valuation allowance.

The efficiency ratio for the first quarter of 2012 was 77.64%, compared to 79.55% for the first quarter of 2011, and 69.38% for the fourth quarter of 2011. The increase in the efficiency ratio in the first quarter of 2012 compared to the fourth quarter of 2011 was primarily due to higher salary and benefits expense and professional fees, and lower gains on sales of SBA loans and sales of securities in the first quarter of 2012.

Annual Meeting of Shareholders

Heritage Commerce Corp will hold its Annual Meeting of Shareholders at its Company Headquarters in San Jose, California, on May 24, 2012, at 1:00 p.m. (PDT).

Heritage Commerce Corp, a bank holding company established in February 1998, is the parent company of Heritage Bank of Commerce, established in 1994 and headquartered in San Jose with full-service branches in Los Gatos, Fremont, Danville, Pleasanton, Walnut Creek, Morgan Hill, Gilroy, Mountain View, and Los Altos. Heritage Bank of Commerce is an SBA Preferred Lender with an additional Loan Production Office in Santa Rosa, California. For more information, please visit www.heritagecommercecorp.com.

Forward-Looking Statement Disclaimer

Forward-looking statements are based on management’s knowledge and belief as of today and include information concerning the Company’s possible or assumed future financial condition, and its results of operations, business and earnings outlook. These forward-looking statements are subject to risks and uncertainties. A number of factors, some of which are beyond the Company’s ability to control or predict, could cause future results to differ materially from those contemplated by such forward-looking statements. The forward-looking statements could be affected by many factors, including but not limited to: (1) competition for loans and deposits and failure to attract or retain deposits and loans; (2) 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; (3) risks associated with concentrations in real estate related loans; (4) 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; (5) 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; (6) stability of funding sources and continued availability of borrowings; (7) our ability to raise capital or incur debt on reasonable terms; (8) Regulatory limits on Heritage Bank of Commerce’s ability to pay dividends to the Company; (9) continued volatility in credit and equity markets and its effect on the global economy; (10) the impact of reputational risk on such matters as business generation and retention, funding and liquidity; (11) oversupply of inventory and continued deterioration in values of California commercial real estate; (12) a prolonged slowdown in construction activity; (13) 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; (14) the effects of security breaches and computer viruses that may affect our computer systems; (15) changes in consumer spending, borrowings and saving habits; (16) changes in the competitive environment among financial or bank holding companies and other financial service providers; (17) 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; (18) 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; (19) the ability to increase market share and control expenses; and (20) our success in managing the risks involved in the foregoing items. For a discussion of factors which could cause results to differ, please see the Company’s reports on Forms 10-K and 10-Q as filed with the Securities and Exchange Commission and the Company’s press releases. Readers should not place undue reliance on the forward-looking statements, which reflect management's view only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect subsequent events or circumstances.

Member FDIC

Heritage Commerce Corp
Debbie Reuter, 408-494-4542
SVP, Corporate Secretary

Source: Heritage Commerce Corp