Exhibit 99.1
Heritage Commerce Corp Reports Financial Results
for the Third Quarter Ended September 30, 2003
Earnings Up 7% Over Third Quarter 2002
Heritage Commerce Corp (the "Company") (NASDAQ: HTBK)today reported consolidated operating results for the third quarter of 2003. Consolidated net income was $1,940,000, or $0.17 per diluted share, compared to $1,812,000, or $0.16 per diluted share, for the third quarter of 2002, a 7% increase. For the nine months ended September 30, 2003, net income was $5,740,000 up 18%, or $855,000, over $4,885,000 for the nine months ended September 30, 2002.
Annualized return on average assets and return on average equity for the third quarter of 2003 were 0.78% and 8.80%, respectively, compared with returns of 0.77% and 9.05%, respectively, for the third quarter of 2002. Annualized return on average assets and return on average equity for the nine months ended September 30, 2003 increased to 0.81% and 8.95%, respectively, compared with returns of 0.71% and 8.45% for the nine months ended September 30, 2002.
The Company's net interest margin was 4.01% for the third quarter of 2003 as compared to 4.36% for the third quarter of 2002. The lower net interest margin in the third quarter of 2003 compared to the third quarter of 2002 is primarily attributable to the impact of the 75 basis point decline in interest rates since September, 2002 as the low interest rate environment has continued. The net interest margin was 4.33% for the nine months ended September 30, 2003 and 2002.
Noninterest income increased $103,000, or 4%, to $2,463,000 for the third quarter of 2003 from $2,360,000 for the third quarter of 2002. The increase was primarily due to increased service charges and other deposit related activity charges, servicing income from SBA loans sold in the secondary market and $310,000 of equipment leasing income in the third quarter of 2003 compared to no lease income in the same period in 2002. These increases were partially offset by decreases in the gain on sales of loans, gain on sale of investments and mortgage brokerage fees.
Noninterest expense decreased $36,000 for the third quarter of 2003 to $8,310,000, compared with $8,346,000 for the third quarter of 2002. The slight decrease in noninterest expense was primarily due to a decrease in salary and employee benefit expense of $145,000, offset by an increase in other expenses of $60,000 and an increase in occupancy and equipment expenses of $49,000. The increase in other expenses is primarily related to increases in amortization of the Company's investments in low income housing projects and leased equipment, partially offset by decreases in expenses for retirement plans, director fees, and correspondent bank charges. There was no amortization cost of leased equipment in the third quarter of 2002.
Heritage Commerce Corp CEO Brad L. Smith stated "Our earnings performance for 2003 in the face of the current interest rate environment confirms our attention to enhancing noninterest income while actively managing noninterest expenses as key priorities. We continue to review all opportunities for increased efficiencies without loss of focus on service to our customers."
As of September 30, 2003, the Company's total assets increased $28,438,000, or 3%, to $984,720,000, from $956,282,000 as of September 30, 2002 and increased $25,968,000, or 3%, from $958,752,000 as of December 31, 2002.
Total deposits were $835,947,000 as of September 30, 2003, compared to $841,937,000 as of September 30, 2002 and $841,936,000 as of December 31, 2002. Demand, savings, and money market deposits increased 13% to $680,838,000 at September 30, 2003 from $604,757,000 at September 30, 2002. During this same period, time deposits decreased $82,071,000, or 35%, from $237,180,000 to $155,109,000.
Smith stated "We have actively pursued core deposit growth as the priority for our funding strategy and we are pleased with our performance to date. Virtually all the 35% decline in time deposits related to more costly brokered time deposits which were not renewed at their contractual maturities. This decline was offset by a 6% increase in noninterest bearing demand deposits, an 11% increase in interest bearing demand deposits, and an 18% increase in savings and money market deposits from local businesses, professionals, and individuals."
Total loans were $642,180,000 as of September 30, 2003, up 2% from $630,684,000 as of September 30, 2002 and down 5% from $673,907,000 as of December 31, 2002. The decline in total loans from December 31, 2002 to September 30, 2003 is primarily attributable to a drop in construction loans of $30,381,000, or 21% from $147,822,000 to $117,441,000, reflecting current market conditions for this type of lending. In addition, over this same nine month period mortgage loans dropped $7,310,000, or 3%, from $259,974,000 to $252,664,000 as the result of refinancing activity in the current low interest rate environment. Offsetting these declines in real estate related loans, commercial and industrial loans grew $6,327,000, or 2%, from December 31, 2002 to September 30, 2003.
Regarding the overall condition of the Company's loan portfolio, Smith commented "Our loan portfolio has certainly been impacted by the lengthy economic downturn all businesses within our market have faced. We are pleased, however, that early in the down cycle we tightened credit underwriting criteria, aggressively sought to identify credit problems and proactively made appropriate provisions to the allowance for probable loan losses, all of which will mitigate the effects of the downturn over the longer term."
In the first quarter of 2003, the Company identified an $8,300,000 commercial loan with uncertainty about repayment in full under its original terms. In the second quarter of 2003, the Company obtained additional collateral and received a principal payment on the loan of $1,795,000 followed by another principal payment of $205,000 early in the third quarter of 2003. Shortly thereafter the loan was reevaluated as a nonperforming asset and was placed on nonaccrual status and written down by $2,000,000 to its current principal balance of $4,300,000. The Company believes that the loan is now adequately secured and does not expect any significant impact on future earnings.
After the $2,000,000 write down of this loan, the Company's allowance for loan losses was $13,039,000, or 2.03% of total loans, as of September 30, 2003, compared to $12,416,000, or 1.97% of total loans, as of September 30, 2002 and $13,227,000, or 1.96% of total loans, as of December 31, 2002. Primarily as a result of the loan discussed above, nonperforming assets increased to $7,149,000 at September 30, 2003 from $4,747,000 at September 30, 2002 and $4,571,000 at December 31, 2002.
Shareholders' equity as of September 30, 2003 increased to $87,484,000 from $80,143,000 as of September 30, 2002 and from $82,217,000 as of December 31, 2002. Book value per share increased to $7.72 as of September 30, 2003, from $7.17 as of September 30, 2002 and $7.33 as of December 31, 2002. The Company's leverage capital ratio was 10.99% as of September 30, 2003, up from 10.83% as of September 30, 2002 and 10.80% as of December 31, 2002. The Company's capital ratios continue to be above the well-capitalized guidelines established by the bank regulatory agencies.
Heritage Commerce Corp, a bank holding company established in February 1998, is the parent company of Heritage Bank of Commerce, headquartered in San Jose. Heritage Bank of Commerce has three divisions: Heritage Bank East Bay, headquartered in the city of Fremont with an office in Danville; Heritage Bank South Valley in Morgan Hill with an office in Gilroy, and Bank of Los Altos, with two locations in Los Altos and one in Mountain View. Additional, Heritage Capital Group, the bank's asset based lending division, has offices in San Jose and Los Angeles. Heritage Bank of Commerce is also an SBA Preferred Lender ranked the second largest SBA lender in Northern California, sixth in the entire state, and has SBA Loan Production Offices in San Jose, Fresno, Santa Cruz, Elk Grove, Watsonville, Chico, Pittsburg, and Glendale.
The Company's common stock is listed on the Nasdaq National Market under the symbol "HTBK".
For further information about the Company's financial performance, contact Brad L. Smith, Chief Executive Officer, at (408) 947-6900 or visit the Company's website atwww.heritagecommercecorp.com.
Forward Looking Statement Disclaimer
This release may contain forward-looking statements that are subject to risks and uncertainties. Such risks and uncertainties may include but are not necessarily limited to fluctuations in interest rates, inflation, government regulations and general economic conditions, and competition within the business areas in which the Company is conducting its operations, including the real estate market in California and other factors beyond the Company's control. Such risks and uncertainties could cause results for subsequent interim periods or for the entire year to differ materially from those indicated. For a discussion of factors which could cause results to differ, please see the Company's reports on Forms 10-K and 10-Q as filed with the Securities and Exchange Commission and the Company's press releases. Readers should not place undue reliance on the forward-looking statements, which reflect management's view only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect subsequent events or circumstances.
HERITAGE COMMERCE CORP
Condensed Consolidated Financial Information (Unaudited)
At and For the Three Months Ended Percent Change From At and For the Nine Months Ended
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(Dollars in thousands, September 30, June 30, September 30, June 30, September 30September 30, September 30,Percent
except Per Share amounts) 2003 2003 2002 2003 2002 2003 2002 Change
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Per Share Data
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Earnings Per Share (EPS):
Basic EPS $ 0.17 $ 0.17 $ 0.16 0 % 6 % $ 0.51 $ 0.44 16 %
Diluted EPS $ 0.17 $ 0.16 $ 0.16 6 % 6 % $ 0.50 $ 0.43 16 %
End of Period (EOP)
Book Value Per Share $ 7.72 $ 7.68 $ 7.17 1 % 8 % $ 7.72 $ 7.17 8 %
EOP Shares Outstanding 11,326,163 11,296,868 11,184,917 0 % 1 % 11,326,163 11,184,917 1 %
Weighted Average Basic
Shares Outstanding 11,254,328 11,163,723 11,076,443 1 % 2 % 11,201,345 11,050,399 1 %
Weighted Average Diluted
Shares Outstanding 11,696,207 11,548,831 11,354,937 1 % 3 % 11,568,940 11,330,594 2 %
Income Statement Data
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Interest Income $ 11,556 $ 11,873 $ 13,051 (3)% (11)% $ 35,877 $ 39,412 (9)%
Interest Expense 2,369 2,552 3,655 (7)% (35)% 7,694 11,941 (36)%
Net Interest Income 9,187 9,321 9,396 (1)% (2)% 28,183 27,471 3 %
Loan Loss Provision 600 600 750 0 % (20)% 2,500 2,066 21 %
Noninterest Income:
Service Charges and Other Fees 480 441 360 9 % 33 % 1,332 1,047 27 %
Gain on Sale of Loans 561 587 596 (4)% (6)% 1,705 1,574 8 %
Gain on sale of Securities
Available-For-Sale 74 33 361 124 % (80)% 532 786 (32)%
Servicing Income 463 451 362 3 % 28 % 1,339 941 42 %
Other Noninterest Income 885 1,004 681 (12)% 30 % 3,035 1,889 61 %
Total Noninterest Income 2,463 2,516 2,360 (2)% 4 % 7,943 6,237 27 %
Noninterest Expense:
Salaries & Employee Benefits 4,423 4,521 4,568 (2)% (3)% 13,664 13,725 0 %
Occupancy & Equipment 1,242 1,202 1,193 3 % 4 % 3,654 3,384 8 %
Other Noninterest Expense 2,645 2,763 2,585 (4)% 2 % 7,978 7,255 10 %
Total Noninterest Expense 8,310 8,486 8,346 (2)% 0 % 25,296 24,364 4 %
Income Before Taxes 2,740 2,751 2,660 0 % 3 % 8,330 7,278 14 %
Income Taxes 800 880 848 (9)% (6)% 2,590 2,393 8 %
Net Income $ 1,940 $ 1,871 $ 1,812 4 % 7 % $ 5,740 $ 4,885 18 %
Average Balances
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Average Loans $ 637,345 $ 642,181 $ 631,995 (1)% 1 % $ 647,629 $ 635,780 2 %
Average Other Earning Assets $ 270,798 $ 211,774 $ 222,303 28 % 22 % $ 221,757 $ 211,495 5 %
Average Earning Assets $ 908,143 $ 853,955 $ 854,298 6 % 6 % $ 869,386 $ 847,275 3 %
Average Assets $ 989,430 $ 931,071 $ 928,430 6 % 7 % $ 947,455 $ 919,035 3 %
Average Interest Bearing Deposits $ 580,679 $ 574,447 $ 609,537 1 % (5)% $ 580,501 $ 607,545 (4)%
Average Equity $ 87,428 $ 85,789 $ 79,434 2 % 10 % $ 85,721 $ 77,324 11 %
Average Deposits $ 839,679 $ 810,004 $ 819,488 4 % 2 % $ 817,897 $ 811,590 1 %
End of Period Balances
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EOP Loans:
Real Estate - Land and Contruction $ 117,441 $ 118,887 $ 136,631 (1)% (14)% $ 117,441 $ 136,631 (14)%
Real Estate - Mortgage 252,664 253,125 261,037 0 % (3)% 252,664 261,037 (3)%
Commercial 269,588 262,987 228,696 3 % 18 % 269,588 228,696 18 %
Consumer 2,487 2,564 4,320 (3)% (42)% 2,487 4,320 (42)%
Total EOP Loans $ 642,180 $ 637,563 $ 630,684 1 % 2 % $ 642,180 $ 630,684 2 %
EOP Assets $ 984,720 $ 996,451 $ 956,282 (1)% 3 % $ 984,720 $ 956,282 3 %
EOP Deopsits:
Demand Deposits - Noninterest Bearing $ 252,133 $ 275,950 $ 237,776 (9)% 6 % $ 252,133 $ 237,776 6 %
Demand Deposits - Interest Bearing 94,092 98,025 84,581 (4)% 11 % 94,092 84,581 11 %
Savings/Money Market 334,613 307,715 282,400 9 % 18 % 334,613 282,400 18 %
Time Deposits 155,109 166,215 237,180 (7)% (35)% 155,109 237,180 (35)%
Total EOP Deposits $ 835,947 $ 847,905 $ 841,937 (1)% (1)% $ 835,947 $ 841,937 (1)%
EOP Equity $ 87,484 $ 86,729 $ 80,143 1 % 9 % $ 87,484 $ 80,143 9 %
Credit Quality Data
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EOP Nonaccrual Loans $ 6,497 $ 767 $ 4,747 747 % 37 % $ 6,497 $ 4,747 37 %
EOP Other Real Estate Owned $ 652 $ 832 $ 0 (22)% N/A $ 652 $ 0 N/A
EOP Total Nonperforming Assets $ 7,149 $ 1,599 $ 4,747 347 % 51 % $ 7,149 $ 4,747 51 %
EOP 90-day Past Due Loans and
Still Accruing $ 395 $ 1,032 $ 0 (62)% N/A $ 395 $ 0 N/A
EOP Net Charge-Offs $ 2,253 $ 154 $ 191 1,363 % 1,080 % $ 2,687 $ 804 234 %
Net Charge-offs as Percent
of Average Loans 1.40 % 0.10 % 0.12 % 1,300 % 1,067 % 0.55 % 0.17 % 224 %
EOP Loan Loss Reserves $ 13,039 $ 14,692 $ 12,416 (11)% 5 % $ 13,039 $ 12,416 5 %
Ratios
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Annualized ROA 0.78 % 0.81 % 0.77 % (4)% 1 % 0.81 % 0.71 % 14 %
Annualized ROE 8.80 % 8.75 % 9.05 % 1 % (3)% 8.95 % 8.45 % 6 %
Efficiency Ratio 71.33 % 71.69 % 70.99 % (1)% 0 % 70.02 % 72.28 % (3)%
Noninterest Expense as
Percent of Average Assets 3.33 % 3.66 % 3.57 % (9)% (7)% 3.57 % 3.54 % 1 %
Net Interest Margin 4.01 % 4.38 % 4.36 % (8)% (8)% 4.33 % 4.33 % 0 %
Allowance for Loan Losses:
to Total Loans 2.03 % 2.30 % 1.97 % (12)% 3 % 2.03 % 1.97 % 3 %
to Nonperforming Loans 201 % 1,916 % 262 % (90)% (23)% 201 % 262 % (23)%
Leverage Ratio 10.99 % 11.51 % 10.83 % (5)% 1 % 10.99 % 10.83 % 1 %