Heritage Commerce Corp Earnings increase 35% to $4.1 Million for the First Quarter of 2015 from the First Quarter of 2014

SAN JOSE, Calif., April 23, 2015 (GLOBE NEWSWIRE) -- Heritage Commerce Corp (Nasdaq:HTBK), the holding company (the "Company") for Heritage Bank of Commerce (the "Bank"), today reported that net income increased 35% to $4.1 million, or $0.13 per average diluted common share, for the first quarter of 2015, compared to $3.1 million, or $0.10 per average diluted common share for the first quarter of 2014, and increased 15% from $3.6 million, or $0.11 per average diluted common share for the fourth quarter of 2014. All results are unaudited.

"After delivering solid profitability in 2014, our first quarter earnings showed significant growth and were amongst the highest we have produced in more than six years," said Walter Kaczmarek, President and Chief Executive Officer. "Benefitting from a full quarter of revenues from the year-end acquisition of Bay View Funding, our net interest income increased 26% and net interest margin improved 53 basis points for the first quarter of 2015, compared to the first quarter of 2014." Bay View Funding operations have been included in the Company's results of operations beginning November 1, 2014.

"We continue to foster sound customer relationships, as the economic environment in the San Francisco Bay Area continues to perform well. Our customers look to us as a strong and stable banking partner to help them achieve their financial objectives," added Mr. Kaczmarek. "Total deposits increased 13% year-over-year, with noninterest-bearing deposits increasing 23% from the first quarter a year ago. We continue to improve upon our performance metrics, with a return on average tangible assets of 1.04%, a return on average tangible equity of 9.89%, and an improved efficiency ratio of 65.35% for the first quarter of 2015. This solid financial performance is a reflection of the hard work of our employees and their commitment to our customers."

First Quarter 2015 Highlights (as of, or for the period ended March 31, 2015, except as noted):

• Diluted earnings per share increased 30% to $0.13 for the first quarter of 2015, compared to $0.10 for the first quarter of 2014, and increased 18% from $0.11 for the fourth quarter of 2014.
   
• Net interest income increased 26% to $16.9 million for the first quarter of 2015, compared to $13.3 million for the first quarter of 2014, and increased 5% from $16.1 million for the fourth quarter of 2014. 
   
• Professional fees decreased to $95,000 at March 31, 2015, compared to $586,000 at March 31, 2014, and $562,000 at December 31, 2014, primarily due to the recovery of legal expenses on two problem loans that were paid off during the first quarter of 2015. 
   
• The fully tax equivalent ("FTE") net interest margin increased 53 basis point to 4.58% for the first quarter of 2015, from 4.05% for the first quarter of 2014 and increased 25 basis points from 4.33% for the fourth quarter of 2014. 
   
• Loans (excluding loans-held-for-sale) increased 17% to $1.10 billion at March 31, 2015, compared to $941.8 million at March 31, 2014, and increased 1% from $1.09 billion at December 31, 2014.
   
• Nonperforming assets ("NPAs") at March 31, 2015 were $8.4 million, or 0.51% of total assets, compared to $11.4 million, or 0.77% of total assets, at March 31, 2014, and $6.6 million, or 0.41% of total assets, at December 31, 2014. The increase in NPAs at March 31, 2015 from December 31, 2014 was the result of a $3.6 million real estate secured loan that was a classified loan and placed on nonperforming loan status during the quarter due to lack of performance by the borrower. 
   
• Classified assets, net of Small Business Administration ("SBA") guarantees, decreased 18% to $16.6 million at March 31, 2015, from $20.2 million at March 31, 2014, and increased 4% from $16.0 million at December 31, 2014.
   
• The Company had net recoveries of $235,000 for the first quarter of 2015, compared to net charge-offs of $337,000 for the first quarter of 2014, and net charge-offs of $56,000 for the fourth quarter of 2014.
   
• There was a $60,000 credit provision for loan losses for the first quarter of 2015, compared to a $10,000 credit provision for loan losses for the first quarter of 2014, and a $106,000 credit provision for loan losses for the fourth quarter of 2014. 
   
• The allowance for loan losses ("ALLL") was 1.68% of total loans at March 31, 2015, compared to 2.00% at March 31, 2014, and 1.69% at December 31, 2014.
   
• Deposits totaled $1.42 billion at March 31, 2015, compared to $1.26 billion at March 31, 2014, and $1.39 billion at December 31, 2014. Deposits (excluding all time deposits and CDARS deposits) increased $174.3 million, or 18%, to $1.17 billion at March 31, 2015, from $992.0 million at March 31, 2014, and increased $38.2 million, or 3%, from $1.13 billion at December 31, 2014. 
   
• As of January 1, 2015, we along with other community banking organizations became subject to new capital requirements, and certain provisions of the new rules will be phased in from 2015 through 2019.   The Federal Banking regulators approved the new rules to implement the revised capital adequacy standards of the Basel Committee on Banking Supervision, commonly called Basel III, and address relevant provisions of The Dodd Frank Wall Street Reform and Consumer Protection Act of 2010, as amended. The Company's consolidated capital ratios and the Bank's capital ratios exceeded the regulatory guidelines for a well-capitalized financial institution under the Basel III regulatory requirements at March 31, 2015.

Operating Results

As a result of growth in the loan portfolio, contribution to revenue from a full quarter of operations from Bay View Funding, and increases in core deposits, net interest income increased 26% to $16.9 million for the first quarter of 2015, compared to $13.3 million for the first quarter of 2014, and increased 5% from $16.1 million for the fourth quarter of 2014.

The net interest margin (FTE) improved to 4.58% for the first quarter of 2015, compared to 4.05% for the first quarter of 2014, and 4.33% for the fourth quarter of 2014. The increase for the first quarter of 2015 was primarily due to a full quarter of revenue from the higher yielding Bay View Funding factored receivables portfolio.

There was a $60,000 credit provision for loan losses for the first quarter of 2015, compared to a $10,000 credit provision for loan losses for the first quarter of 2014, and a $106,000 credit provision for loan losses for the fourth quarter of 2014.

Noninterest income was $1.9 million for the first quarter of 2015, compared to $2.0 million for the first quarter of 2014, and $1.8 million for the fourth quarter of 2014. Noninterest income was lower for the first quarter ended March 31, 2015, compared to the same period in 2014, primarily due to a $50,000 gain on sales of securities and higher servicing income in the first quarter of 2014. Noninterest income was higher for the first quarter of 2015 compared to fourth quarter of 2014 due to a higher gain on sales of SBA loans. 

Total noninterest expense for the first quarter of 2015 increased to $12.3 million, from $10.5 million for the first quarter of 2014, and decreased from $12.4 million for the fourth quarter of 2014. The increase in noninterest expense for the first quarter of 2015, compared to the first quarter of 2014, was primarily due to the operating costs of Bay View Funding. The increase was partially offset by the recovery of legal expenses on two problem loans that were paid off in the first quarter of 2015. The decrease in noninterest expense in the first quarter of 2015, compared to the fourth quarter of 2014, was primarily due to one-time costs related to the Bay View Funding acquisition incurred in the fourth quarter of 2014, and lower professional fees, partially offset by a full quarter of operating costs of Bay View Funding, and increased compensation expenses, consistent with cyclical salaries and employee benefits expense in prior years. Full time equivalent employees were 251, 195, and 242 at March 31, 2015, March 31, 2014, and December 31, 2014, respectively. 

Primarily due to a higher net interest income, the efficiency ratio for the first quarter of 2015 improved to 65.35%, compared to 68.70% for the first quarter of 2014, and 69.34% for the fourth quarter of 2014. 

Income tax expense for the first quarter of 2015 was $2.4 million, compared to $1.7 million for the first quarter of 2014, and $2.0 million for the fourth quarter of 2014. The effective tax rate for the first quarter of 2015 increased to 37.0%, compared to 36.1% for the first quarter of 2014 and 35.6% for the fourth quarter of 2014.  The difference in the effective tax rate for the periods reported, 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 (net of low income housing investment losses), and tax-exempt interest income earned on municipal bonds. The increase in the effective tax rate for the first quarter of 2015, compared to the first and fourth quarters of 2014 was primarily due to higher pre-tax income, while the net credits related to investment in low income housing limited partnerships and tax-exempt interest income earned on municipal bonds remained relatively flat.

Balance Sheet Review, Capital Management and Credit Quality

Total assets were $1.65 billion at March 31, 2015, compared to $1.47 billion at March 31, 2014, and $1.62 billion at December 31, 2014.  

The investment securities available-for-sale portfolio totaled $200.8 million at March 31, 2015, compared to $262.4 million at March 31, 2014, and $206.3 million at December 31, 2014. At March 31, 2015, the securities available-for-sale portfolio was comprised of $148.1 million agency mortgage-backed securities (all issued by U.S. Government sponsored entities), $37.2 million of corporate bonds, and $15.5 million of single entity issue trust preferred securities. The pre-tax unrealized gain on securities available-for-sale at March 31, 2015 was $5.7 million, compared to a pre-tax unrealized gain on securities available-for-sale of $294,000 at March 31, 2014, and a pre-tax unrealized gain on securities available-for-sale of $4.8 million at December 31, 2014. 

At March 31, 2015, investment securities held-to-maturity totaled $94.6 million, compared to $95.5 million at March 31, 2014, and $95.4 million at December 31, 2014. At March 31, 2015, the securities held-to-maturity portfolio, at amortized cost, was comprised of $79.9 million tax-exempt municipal bonds and $14.7 million agency mortgage-backed securities.

Loans, excluding loans held-for-sale, increased 17% to $1.10 billion at March 31, 2015, from $941.8 million at March 31, 2014, and increased 1% from $1.09 billion at December 31, 2014. The loan portfolio remains well-diversified with commercial and industrial ("C&I") loans accounting for 42% of the loan portfolio at March 31, 2015, which included the $44.6 million of factored receivables at Bay View Funding. Commercial and residential real estate loans accounted for 44% of the total loan portfolio, of which 50% were owner-occupied by businesses. Consumer and home equity loans accounted for 7% of total loans, and land and construction loans accounted for the remaining 7% of total loans at March 31, 2015. C&I line usage was 37% at March 31, 2015, compared to 36% at March 31, 2014, and 42% at December 31, 2014. 

The yield on the loan portfolio was 5.71% for the first quarter of 2015, compared to 4.86% for the first quarter of 2014, and 5.39% for the fourth quarter of 2014. The increase in the yield on the loan portfolio for the first quarter of 2015, from the first and fourth quarters of 2014, primarily reflects the higher yielding Bay View Funding portfolio. 

NPAs at March 31, 2015 were $8.4 million, or 0.51% of total assets, compared to $11.4 million, or 0.77% of total assets, at March 31, 2014, and $6.6 million, or 0.41% of total assets, at December 31, 2014.  The increase in NPAs at March 31, 2015 from December 31, 2014 was the result of a $3.6 million real estate secured loan that was a classified loan and placed on nonperforming loan status during the quarter due to lack of performance by the borrower. At March 31, 2015, the NPAs also included $79,000 of loans guaranteed by the SBA. Foreclosed assets were $1.7 million at March 31, 2015, compared to $551,000 at March 31, 2014, and $696,000 at December 31, 2014. The following is a breakout of NPAs at the periods indicated:

Classified assets (net of SBA guarantees) were $16.6 million at March 31, 2015, compared to $20.2 million at March 31, 2014, and $16.0 million at December 31, 2014. 

The following table summarizes the allowance for loan losses:

The ALLL at March 31, 2015 was 1.68% of total loans, compared to 2.00% at March 31, 2014, and 1.69% at December 31, 2014. The decrease in the ALLL to total loans at March 31, 2015 from March 31, 2014 was primarily due to increasing loan balances. The ALLL to total nonperforming loans was 275.57% at March 31, 2015, compared to 173.85% at March 31, 2014, and 313.90% at December 31, 2014.

Total deposits increased $161.7 million to $1.42 billion at March 31, 2015, compared to $1.26 billion at March 31, 2014, and increased $35.3 million from $1.39 billion at December 31, 2014. Noninterest-bearing demand deposits increased $103.5 million at March 31, 2015 from March 31, 2014, and increased $26.7 million from December 31, 2014. Interest-bearing demand deposits increased $43.3 million at March 31, 2015 from March 31, 2014, and increased $15.7 million from December 31, 2014. Brokered deposits decreased $12.3 million at March 31, 2015 from March 31, 2014, and remained flat from December 31, 2014. Deposits (excluding all time deposits and CDARS deposits) increased $174.3 million, or 18%, to $1.17 billion at March 31, 2015, from $992.0 million at March 31, 2014, and increased $38.2 million, or 3%, from $1.13 billion at December 31, 2014.

The total cost of deposits decreased 2 basis points to 0.15% for the first quarter of 2015, from 0.17% for the first quarter of 2014, and remained the same from the fourth quarter of 2014.  

Tangible equity was $170.6 million at March 31, 2015, compared to $175.4 million at March 31, 2014 and $168.0 million at December 31, 2014. The decrease in tangible equity at March 31, 2015 from March 31, 2014 was primarily due to the addition of goodwill in other intangible assets from the Bay View Funding acquisition, partially offset by an increase in retained earnings, and a decrease in accumulated other comprehensive loss. Tangible book value per common share was $5.70 at March 31, 2015, compared to $5.91 at March 31, 2014, and $5.60 at December 31, 2014. There were 21,004 shares of Series C Preferred Stock outstanding at March 31, 2015, March 31, 2014, and December 31, 2014, 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.  Pro forma tangible book value per common share, assuming the Company's outstanding Series C Preferred Stock was converted into common stock, was $5.31 at March 31, 2015, compared to $5.49 at March 31, 2014, and $5.23 at December 31, 2014.

Accumulated other comprehensive loss was ($1.3) million at March 31, 2015, compared to accumulated other comprehensive loss of ($2.5) million a year ago, and accumulated other comprehensive loss of ($1.9) million at December 31, 2014. The unrealized gain on securities available-for-sale included in accumulated other comprehensive loss was an unrealized gain of $3.3 million, net of taxes, at March 31, 2015, compared to an unrealized gain of $171,000 net of taxes, at March 31, 2014, and an unrealized gain of $2.8 million, net of taxes, at December 31, 2014. The components of accumulated other comprehensive loss, net of taxes, at March 31, 2015 include the following: an unrealized gain on available-for-sale securities of $3.3 million; the remaining unamortized unrealized gain on securities available-for-sale transferred to held-to-maturity of $426,000; a split dollar insurance contracts liability of ($2.1) million; a supplemental executive retirement plan liability of ($3.8) million; and an unrealized gain on interest-only strip from SBA loans of $866,000.

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 Danville, Fremont, Gilroy, Hollister, Los Altos, Los Gatos, Morgan Hill, Pleasanton, Sunnyvale, and Walnut Creek. Heritage Bank of Commerce is an SBA Preferred Lender. Bay View Funding, a subsidiary of Heritage Bank of Commerce, is based in Santa Clara and provides business‑essential working capital factoring financing to various industries throughout the United States. For more information, please visit www.heritagecommercecorp.com.

Forward Looking Statement Disclaimer

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: (1) 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; (2) changes in the financial performance or condition of the Company's customers, or changes in the performance or creditworthiness of our customers' suppliers or other counterparties, which could lead to decreased loan utilization rates, delinquencies, or defaults and could negatively affect our customers' ability to meet certain credit obligations; (3) volatility in credit and equity markets and its effect on the global economy; (4) changes in consumer spending, borrowings and saving habits; (5) competition for loans and deposits and failure to attract or retain deposits and loans; (6) our ability to increase market share and control expenses; (7) our ability to develop and promote customer acceptance of new products and services in a timely manner; (8) risks associated with concentrations in real estate related loans; (9) other‑than‑temporary impairment charges to our securities portfolio; (10) an oversupply of inventory and deterioration in values of California commercial real estate; (11) a prolonged slowdown in construction activity; (12) 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; (13) 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; (14) changes in inflation, interest rates, and market liquidity which may impact interest margins and impact funding sources; (15) our ability to raise capital or incur debt on reasonable terms; (16) regulatory limits on Heritage Bank of Commerce's ability to pay dividends to the Company; (17) the impact of reputational risk on such matters as business generation and retention, funding and liquidity; (18) the impact of cyber security attacks or other disruptions to the Company's information systems and any resulting compromise of data or disruptions in service; (19) the effect and uncertain impact on the Company of the enactment of the Dodd‑Frank Wall Street Reform and Consumer Protection Act of 2010 and the rules and regulations promulgated by supervisory and oversight agencies implementing the new legislation; (20) the impact of revised capital requirements under Basel III; (21) significant changes in applicable laws and regulations, including those concerning taxes, banking and securities; (22) changes in the competitive environment among financial or bank holding companies and other financial service providers; (23) 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; (24) 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; (25) the successful integration of the business, employees and operations of Bay View Funding with the Company and our ability to achieve the projected synergies of this acquisition; and (26) our success in managing the risks involved in the foregoing factors.

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