Heritage Commerce Corp Earns $2.8 Million in Second Quarter of 2013

SAN JOSE, Calif., July 25, 2013 (GLOBE NEWSWIRE) -- Heritage Commerce Corp (Nasdaq:HTBK), the holding company (the "Company") for Heritage Bank of Commerce (the "Bank"), today reported net income of $2.8 million for the second quarter of 2013, or $0.09 per average diluted common share, driven by solid loan and deposit growth, stable net interest margin, and lower credit costs. Net income was $2.7 million, or $0.08 per average diluted common share, for the second quarter of 2012. There were no dividends or discount accretion on preferred stock in the second quarter of 2013 and 2012. For the six months ended June 30, 2013, net income available to common shareholders was $5.0 million, or $0.16 per average diluted common share, an increase of 40% from $3.5 million, or $0.11 per average diluted common share, for the six months ended June 30, 2012. All results are unaudited.

"Our improving earnings trend gained further momentum in the second quarter of 2013," said Walter Kaczmarek, President and Chief Executive Officer. "The steady economy in the greater San Francisco Bay Area has increased loan demand from local small-to-medium sized businesses. Our total loans increased $40.0 million, or 5%, at June 30, 2013, compared to March 31, 2013, while our net interest margin remained stable. Additionally, our deposit growth continued and credit quality once again meaningfully improved. Both nonperforming assets and classified assets decreased substantially year-over-year, and we received net recoveries on loans in the second quarter totaling $270,000."

"In June, we announced plans to redeem our floating-rate subordinated debt totaling $9 million during the third quarter of this year. We incurred charges of $167,000 related to the redemptions in the second quarter of 2013 and anticipate savings of $90,000 per quarter in interest expense starting in the fourth quarter. These redemptions eliminate all of the subordinated debt from our capital structure," Mr. Kaczmarek added. "During the second quarter of 2013, we also completed the repurchase of the common stock warrant issued to the U.S. Department of the Treasury in 2008 for $140,000."

Second Quarter 2013 Highlights (as of, or for the period ended June 30, 2013, except as noted):

• Diluted earnings per share increased 13% to $0.09 for the second quarter of 2013, compared to $0.08 per diluted share for the second quarter of 2012, and increased 29% from $0.07 for the first quarter of 2013. Diluted earnings per share increased 45% to $0.16 for the first half of 2013, compared to $0.11 per diluted share for the first half of 2012.
   
• The net interest margin decreased six basis points to 3.89% for the second quarter of 2013, from 3.95% for the second quarter of 2012, primarily due to lower yields on loans and securities, partially offset by a lower cost of funds. The net interest margin increased 18 basis points from 3.71% for the first quarter of 2013, primarily due to a higher average balance of loans and a lower average balance of overnight funds at the Federal Reserve.  
   
• Total deposits grew 8% to $1.19 billion at June 30, 2013, compared to $1.10 billion at June 30, 2012, and increased 2% from $1.17 billion at March 31, 2013.
  
  
• Loans (excluding loans-held-for-sale) increased 5% to $842.0 million at June 30, 2013, compared to $798.1 million at June 30, 2012, and increased 5% from $801.9 million at March 31, 2013. 
   
• Credit quality remained strong with nonperforming assets declining 16% to $15.0 million at June 30, 2013, compared to $17.8 million at June 30, 2012, and declining 14% from $17.4 million at March 31, 2012. 
   
• Classified assets, net of Small Business Administration ("SBA") guarantees, decreased 57% to $23.8 million at June 30, 2013, from $54.9 million at June 30, 2012, and decreased 24% from $31.2 million at March 31, 2013.
   
• Net recoveries totaled $270,000 for the second quarter of 2013, compared to net charge-offs of $1.1 million for the second quarter of 2012, and net recoveries of $315,000 for the first quarter of 2013. 
   
• There was a credit to the provision for loan losses of $270,000 for the second quarter of 2013, compared to a provision for loan losses of $815,000 for the second quarter of 2012, and no provision for the first quarter of 2013. 
   
• The allowance for loan losses ("ALLL") was 2.30% of total loans at June 30, 2013, compared to 2.51% at June 30, 2012, and 2.41% at March 31, 2013. 
   
• Accumulated other comprehensive loss was ($4.7) million at June 30, 2013, compared to accumulated other comprehensive income of $3.2 million a year ago, and accumulated other comprehensive income of $1.4 million at March 31, 2013. The decrease was primarily due to an unrealized loss on securities available-for-sale of ($507,000), net of taxes, at June 30, 2013, compared to an unrealized gain on securities available-for-sale of $7.1 million, net of taxes, at June 30, 2012, and an unrealized gain on securities available-for-sale of $5.6 million, net of taxes, at March 31, 2013. 
   
• Capital ratios exceeded regulatory requirements for a well-capitalized financial institution on a holding company and bank level at June 30, 2013:

Operating Results

Net interest income increased slightly to $12.2 million for the second quarter of 2013, compared to $12.1 million for the second quarter of 2012, primarily due to a higher average volume of loans and securities. Net interest income for the first quarter of 2013 was $12.2 million. For the six months ended June 30, 2013, net interest income remained flat at $24.3 million, compared to the six months ended June 30, 2012.

The net interest margin decreased six basis points to 3.89% for the second quarter of 2013, from 3.95% for the second quarter of 2012, primarily due to lower yields on loans and securities, partially offset by a lower cost of funds.   The net interest margin increased 18 basis points from 3.71% for the first quarter of 2013, primarily due to a higher average balance of loans and a lower average balance of overnight funds at the Federal Reserve. For the first six months of 2013, the net interest margin decreased 21 basis points to 3.80%, compared to 4.01% for the first six months of 2012, primarily due to lower yields on loans and securities and a higher average balance of excess deposits at the Federal Reserve, partially offset by a higher average balance of loans and a lower cost of funds.

Improving overall asset quality and net recoveries in the first half of 2013 led to a $270,000 credit to the provision for loan losses for the second quarter of 2013, and no provision for loan losses for the first quarter of 2013. Net recoveries totaled $270,000 for the second quarter and $585,000 for the first half of 2013. The provision for loan losses was $815,000 for the second quarter and $915,000 for the first six months of 2012.

Noninterest income was $1.9 million for the second quarter of 2013, compared to $2.1 million for the second quarter of 2012, and $1.7 million for the first quarter of 2013. In the first six months of 2013, noninterest income was $3.6 million, compared to $3.8 million in the first six months of 2012. Noninterest income was lower in the second quarter and first six months of 2013, compared to the same periods in 2012, primarily due to a lower gain on sales of SBA loans and servicing income. 

Total noninterest expense for the second quarter of 2013 was $10.4 million, an increase of 10% from $9.5 million for the second quarter of 2012, and a decrease of 4% from $10.8 million for the first quarter of 2013. Noninterest expense for the first six months of 2013 increased 4% to $21.2 million, compared to $20.3 million for the first six months of 2012. The increase in noninterest expense for the second quarter and first six months of 2013, compared to the same periods a year ago, was primarily due to increased salaries and employee benefits expense due to annual salary increases and hiring of additional lending relationship officers, and a $167,000 charge in the second quarter of 2013 related to the redemption of the floating-rate subordinated debt. The decrease in noninterest expense for the second quarter of 2013, compared to the first quarter of 2013, was primarily due to lower professional fees and salaries and employee benefits expense.

Income tax expense for the second quarter of 2013 was $1.2 million, compared to $1.2 million for the second quarter of 2012, and $855,000 for the first quarter of 2013. The effective tax rate for the second quarter of 2013 decreased to 29%, compared to 31% for the second quarter of 2012, primarily due to the impact of tax-exempt interest income earned on municipal bonds. The effective tax rate for the first quarter of 2013 was 28%. Income tax expense for the first six months of 2013 was $2.0 million, compared to $2.2 million for the first six months of 2012. The effective tax rate for the six months ended June 30, 2013 was 29%, compared to 31% for the six months ended June 30, 2012.  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, and tax-exempt interest income earned on municipal bonds.

The efficiency ratio for the second quarter of 2013 was 73.85%, compared to 66.70% for the second quarter of 2012, and 78.03% for the first quarter of 2013. The efficiency ratio was 75.92% for the first six months of 2013, compared to 72.13% for the first six months of 2012.   

Balance Sheet Review, Capital Management and Credit Quality

The Company's total assets increased 6% to $1.40 billion at June 30, 2013, from $1.32 billion a year ago, and increased 1% from $1.38 billion at March 31, 2013.  

The investment securities available-for-sale portfolio totaled $293.8 million at June 30, 2013, compared to $389.8 million at June 30, 2012, and $346.8 million at March 31, 2013. At June 30, 2013, the securities available-for-sale portfolio was comprised of $225.4 million agency mortgage-backed securities (all issued by U.S. Government sponsored entities), $47.7 million of corporate bonds, and $20.7 million of single entity issue trust preferred securities. The pre-tax unrealized loss on securities available-for-sale at June 30, 2013 was ($880,000), compared to a pre-tax unrealized gain on securities available-for-sale at June 30, 2012 of $12.3 million, and a pre-tax unrealized gain on securities available-for-sale at March 31, 2013 of $9.6 million.  

At June 30, 2013, investment securities held-to-maturity totaled $81.7 million, compared to no investment securities held-to-maturity at June 30, 2012, and $68.3 million at March 31, 2013. At June 30, 2013, the securities held-to-maturity portfolio, at amortized cost, was comprised of $67.5 million tax-exempt municipal bonds and $14.2 million agency mortgage-backed securities.

Loans, excluding loans held-for-sale, totaled $842.0 million at June 30, 2013, an increase of 5% from $798.1 million at June 30, 2012, and also an increase of 5% from $801.9 million at March 31, 2013. The loan portfolio remains well-diversified with commercial and industrial ("C&I") loans accounting for 46% of the portfolio at June 30, 2013. 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 3% of total loans at June 30, 2013.

The yield on the loan portfolio was 4.93% for the second quarter of 2013, compared to 5.23% for the same period in 2012, and 5.13% for the first quarter of 2013. The yield on the loan portfolio was 5.03% for the first six months of 2013, compared to 5.32% for the same period in 2012.

Nonperforming assets ("NPAs") were $15.0 million, or 1.07% of total assets, at June 30, 2013, compared to $17.8 million, or 1.35% of total assets, a year ago. NPAs were $17.4 million, or 1.26% of total assets at March 31, 2013. The following is a detail of NPAs at June 30, 2013:

At June 30, 2013, the $15.0 million of NPAs included $458,000 of loans guaranteed by the SBA and $510,000 of restructured loans still accruing interest income. Foreclosed assets were $659,000 at June 30, 2013, compared to $3.1 million at June 30, 2012, and $738,000 at March 31, 2013.

Classified assets (net of SBA guarantees) decreased to $23.8 million at June 30, 2013, from $54.9 million at June 30, 2012, and $31.2 million at March 31, 2013.

The following table summarizes the allowance for loan losses:

Deposits totaled $1.19 billion at June 30, 2013, compared to $1.10 billion at June 30, 2012, and $1.17 billion at March 31, 2013. Noninterest-bearing deposits increased 11% to $407.5 million at June 30, 2013, from $367.9 million at June 30, 2012, and increased 3% from $397.2 million at March 31, 2013. Interest-bearing demand deposits increased 15% to $171.0 million at June 30, 2013, from $148.8 million at June 30, 2012, and increased 1% from $169.7 million at March 31, 2013. At June 30, 2013, brokered deposits decreased 21% to $76.8 million, from $97.7 million at June 30, 2012, and decreased 8% from $83.8 million at March 31, 2013. Total deposits, excluding brokered deposits, were $1.11 billion at June 30, 2013, compared to $1.01 billion at June 30, 2012, and $1.08 billion at March 31, 2013. 

The total cost of deposits decreased 6 basis points to 0.21% during the second quarter of 2013, from 0.27% during the second quarter of 2012, and remained the same as 0.21% for the first quarter of 2013.  The total cost of deposits decreased 6 basis points to 0.21% during the first six months of 2013, from 0.27% during the first six months of 2012.

Subordinated debt decreased to $9.3 million at June 30, 2013, compared to $23.7 million at June 30, 2012, as a result of the redemption of $14 million fixed-rate subordinated debt during the third quarter of 2012.  Subordinated debt was also $9.3 million at March 31, 2013. In June, 2013, the Company announced that it will redeem the remaining $9.3 million of subordinated debt in the third quarter of 2013.

Tangible equity was $165.9 million at June 30, 2013, compared to $162.4 million at June 30, 2012 and $169.0 million at March 31, 2013. Tangible book value per common share was $5.56 at June 30, 2013, compared to $5.44 a year ago, and $5.67 at March 31, 2013. There were 21,004 shares of Series C Preferred Stock outstanding at June 30, 2013, June 30, 2012, and March 31, 2013, 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 $5.19 at June 30, 2013, compared to $5.09 a year ago, and $5.29 at March 31, 2013.

Accumulated other comprehensive loss was ($4.7) million at June 30, 2013, compared to accumulated other comprehensive income of $3.2 million a year ago, and $1.4 million at March 31, 2013. The components of other comprehensive loss, net of taxes, at June 30, 2013 include the following: an unrealized loss on available-for-sale securities of ($507,000); the remaining unamortized unrealized gain on securities available-for-sale transferred to held-to-maturity of $481,000; a liability adjustment on split dollar insurance contracts of ($2.4) million; a liability adjustment on the supplemental executive retirement plan of ($3.3) million; and an unrealized gain on interest-only strip from SBA loans of $1.0 million.

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, Los Altos, Los Gatos, Morgan Hill, Pleasanton, Sunnyvale, and Walnut Creek. Heritage Bank of Commerce is an SBA Preferred Lender. 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