Exhibit 99.1
Heritage Commerce Corp Restates Financial Results
San Jose, CA - March 15, 2005.
Heritage Commerce Corp management and the Board of Directors have concluded that the Company's financial statements for the years ended December 31, 2002, December 31, 2003, and the first three quarters in 2004 ending March 31, June 30 and September 30, should no longer be relied upon and should be restated as a result of accounting errors. The Company will restate its 2002 and 2003 annual financial statements that will be included in its Annual Report on Form 10-K for the year ended December 31, 2004, however these restatements are not considered by management to be material. The Company will amend its Form 10-Q for each of the first three quarters of 2004. The restatement of the financial statements for the first three quarters of 2004 will not materially impact the Company's previously announced income for 2004. The restatements relate to three accounting errors that led to accounting changes in the periods being restated.
The first accounting error relates to an asset which the Company had previously accounted for as a direct financing lease and classified as a part of the loan portfolio. Upon further review of the asset and the related management agreements, the Company has determined that the accounting it applied was incorrect and that the asset should have been accounted for as equipment subject to an operating lease and classified as an other asset. The asset was originally classified as an operating lease in 2002, and then due to an amendment to the agreement, it was moved to the loan portfolio in December 2003. As a result of this error, the Company will restate its balance sheet for the fiscal year ended December 31, 2003, and its financial statements for the first three quarters of 2004. The Company expects to restate its December 31, 2003 balance sheet in connection with the issuance of its 2004 financial statements when it files its Form 10-K for the year ended December 31, 2004. The effect of the misclassification of the asset on the 2003 statements of income and cash flows was insignificant and those statements will not be restated for this error. The Company will restate its 2004 interim financial statements and expects to file amendments to its Forms 10-Q for the first, second and third quarters of 2004, accordingly such interim financial statements should not be relied upon.
Because of timing differences related to the accounting for loans compared to the accounting for assets subject to operating leases, earnings in the first, second and third quarters of 2004 will differ from what had previously been reported in the interim financial statements. The adjustments will reflect changes in loans, the allowance for loan and lease losses, the provision for loan losses, interest income, rental income, other assets - leased equipment, accrued interest receivable, other liabilities, equity, provision for income taxes, depreciation expense, accumulated depreciation and operating losses related to the impairment of other assets - leased equipment.
In the fourth quarter of 2004, prior to the identification of this error, the Company determined that this asset was impaired and recorded a bad debt provision to reduce the net carrying value of the asset to its estimated fair value. The restatement for this error does not impact the asset's estimated fair value, accordingly there is no change in the net recorded value of the asset at December 31, 2004 from the amounts reported in the Company's press release dated February 3, 2005. The book value of the equipment subject to an operating lease related to this restatement is approximately $722,000 at December 31, 2004.
A second accounting error relates to how the Company accounted for its unconditional and legally binding delayed-equity contributions to low income housing partnerships. The Company increased other assets and other liabilities $4,375,000 as of December 31, 2004, from the amounts previously reported in the February 3, 2005 press release, to record unconditional, legally binding delayed equity contributions to low income housing partnerships. The Company will restate its balance sheet in relation to this error for the fiscal year ended December 31, 2003 when it files its Annual Report on Form 10-K. This restatement is considered by management to be immaterial. These changes had no effect on net income for 2003 and 2004.
A third accounting error relates to leased facilities. On February 7, 2005, the Office of the Chief Accountant of the Securities and Exchange Commission ("SEC") issued a letter to the American Institute of Certified Public Accountants expressing its views regarding certain operating lease accounting issues and their application under generally accepted accounting principles in the United States of America ("GAAP"). In light of this letter, the Company's management initiated a review of its accounting for leased facilities. As a result of this review management has determined that it's current methods of accounting for rent holidays were not consistent with GAAP. As a result, the Company will restate its 2003 and 2002 financial statements when it files its 2004 Annual Report on Form 10-K. These restatements are considered by management to be immaterial. The after-tax effect of all the accounting adjustments for the year ended December 31, 2004 was to increase income by $19,000 and to reduce retained earnings by $342,000 from the amounts reported in the February 3, 2005 press release. The after-tax income statement effect for years ended December 31, 2003 and 2002 was to reduce income by $6,000 and $23,000, respectively.
Unaudited summary financial statements reflecting the balance sheet and income statement changes for each reporting period are included at the end of this announcement.
Based on the definition of "material weakness" in the Public Company Accounting Oversight Board's Auditing Standard No. 2, An Audit of Internal Control Over Financial Reporting Performed in Conjunction With an Audit of Financial Statements, restatement of financial statements in prior filings with the SEC is a strong indicator of the existence of a "material weakness" in the design or operation of internal control over financial reporting. Based on that, management has concluded that a material weakness existed in the Company's internal control over financial reporting.
The Company's Board of Directors has discussed the restatement and the issues relating to the restatement along with the "material weakness" with the Company's independent registered public accounting firm. Due to this restatement, it is anticipated that the Company will file a Form 12b-25 with Securities and Exchange Commission requesting a 15 calendar day extension to file its 2004 Form 10-K Annual Report.
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 and monetary policy established by the Federal Reserve, inflation, government regulations, general economic conditions, competition within the business areas in which the Company is conducting its operations, including the real estate market in California, the ability to recognize identified cost savings, 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 onForms 10-K and10-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.
For the Three Months Ended: For the Year Ended:
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As Previously As As Previously As As Previously As As Previously As As Previously As
CONSOLIDATED INCOME STATEMENT Reported Restated Reported Restated Reported Restated Reported Restated Reported Restated
(in $000's, unaudited) 12/31/2004 12/31/2004 09/30/2004 09/30/2004 06/30/2004 06/30/2004 03/31/2004 03/31/2004 12/31/2004 12/31/2004
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Interest Income $ 14,385 $ 14,330 $ 13,633 $ 13,563 $ 12,690 $ 12,617 $ 11,984 $ 11,907 $ 52,692 $ 52,417
Interest Expense 2,677 2,677 2,484 2,484 2,298 2,298 2,189 2,189 9,648 9,648
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Net Interest Income 11,708 11,653 11,149 11,079 10,392 10,319 9,795 9,718 43,044 42,769
(Reversal of) Provision for Loan Losses 1,480 (726) 600 254 600 575 600 563 3,280 666
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Net Interest Income after (Reversal of) Loan Loss Provision 10,228 12,379 10,549 10,825 9,792 9,744 9,195 9,155 39,764 42,103
Noninterest Income:
Gain on Sale of Loans 766 766 920 920 639 639 727 727 3,052 3,052
Servicing Income 643 643 616 616 561 561 505 505 2,325 2,325
Service Charges and Other Fees on Deposit Accounts 414 414 415 415 497 497 473 473 1,799 1,799
Appreciation of Company Owned Life Insurance 232 232 236 236 234 234 329 329 1,031 1,031
Equipment Leasing 0 136 0 245 0 245 0 245 0 871
Gain on Sale of Securities Available-For-Sale 0 0 0 0 264 264 212 212 476 476
Mortgage Brokerage Fees 0 0 19 19 30 30 119 119 168 168
Other 167 167 157 157 79 79 109 109 512 512
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Total Noninterest Income 2,222 2,358 2,363 2,608 2,304 2,549 2,474 2,719 9,363 10,234
Noninterest Expense:
Salaries & Employee Benefits 4,277 4,277 4,301 4,301 5,456 5,456 4,720 4,720 18,754 18,754
Occupancy & Equipment 1,112 1,104 1,089 1,081 1,135 1,127 1,287 1,279 4,623 4,591
Other 3,576 6,020 3,499 3,749 4,325 4,575 2,705 2,971 14,105 17,315
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Total Noninterest Expense 8,965 11,401 8,889 9,131 10,916 11,158 8,712 8,970 37,482 40,660
Income Before Taxes 3,485 3,336 4,023 4,302 1,180 1,135 2,957 2,904 11,645 11,677
Provision for Income Taxes 721 690 1,135 1,210 380 366 950 933 3,186 3,199
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Net Income $ 2,764 $ 2,646 $ 2,888 $ 3,092 $ 800 $ 769 $ 2,007 $ 1,971 $ 8,459 $ 8,478
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For the Three Months Ended: For the Year Ended:
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As Previously As As Previously As As Previously As As Previously As As Previously As
PER SHARE DATA Reported Restated Reported Restated Reported Restated Reported Restated Reported Restated
(unaudited) 12/31/2004 12/31/2004 09/30/2004 09/30/2004 06/30/2004 06/30/2004 03/31/2004 03/31/2004 12/31/2004 12/31/2004
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Basic Earnings Per Share $ 0.23 $ 0.23 $ 0.25 $ 0.26 $ 0.07 $ 0.07 $ 0.18 $ 0.17 $ 0.73 $ 0.73
Diluted Earnings Per Share $ 0.23 $ 0.23 $ 0.24 $ 0.26 $ 0.07 $ 0.06 $ 0.17 $ 0.16 $ 0.71 $ 0.71
Weighted Average Basic Shares Outstanding 11,645,202 11,645,202 11,621,963 11,621,963 11,543,552 11,543,552 11,375,388 11,375,388 11,559,155 11,559,155
Weighted Average Diluted Shares Outstanding 12,106,197 12,106,197 11,998,520 11,998,520 11,954,572 11,954,572 11,798,329 11,798,329 11,986,856 11,986,856
Common Shares Outstanding 11,669,837 11,669,837 11,657,865 11,657,865 11,596,491 11,596,491 11,495,008 11,495,008 11,669,837 11,669,837
Book Value Per Share $ 8.48 $ 8.45 $ 8.29 $ 8.27 $ 7.83 $ 7.79 $ 8.12 $ 8.09 $ 8.48 $ 8.45
Tangible Book Value Per Share $ 8.48 $ 8.45 $ 8.29 $ 8.27 $ 7.83 $ 7.79 $ 8.12 $ 8.09 $ 8.48 $ 8.45
For the Three Months Ended: For the Year Ended:
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As Previously As As Previously As As Previously As As Previously As As Previously As
KEY FINANCIAL RATIOS Reported Restated Reported Restated Reported Restated Reported Restated Reported Restated
(unaudited) 12/31/2004 12/31/2004 09/30/2004 09/30/2004 06/30/2004 06/30/2004 03/31/2004 03/31/2004 12/31/2004 12/31/2004
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Annualized Return on Average Equity 11.20% 10.76% 12.19% 13.10% 3.47% 3.35% 8.83% 8.71% 8.99% 9.04%
Annualized Return on Average Assets 1.00% 0.95% 1.05% 1.12% 0.30% 0.29% 0.82% 0.81% 0.80% 0.80%
Net Interest Margin 4.57% 4.56% 4.42% 4.41% 4.27% 4.26% 4.38% 4.37% 4.41% 4.40%
Efficiency Ratio 64.36% 81.37% 65.79% 66.71% 85.98% 86.71% 71.01% 72.12% 71.51% 76.71%
For the Three Months Ended: For the Year Ended:
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As Previously As As Previously As As Previously As As Previously As As Previously As
AVERAGE BALANCES Reported Restated Reported Restated Reported Restated Reported Restated Reported Restated
(in $000's, unaudited) 12/31/2004 12/31/2004 09/30/2004 09/30/2004 06/30/2004 06/30/2004 03/31/2004 03/31/2004 12/31/2004 12/31/2004
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Average Assets $ 1,104,112 $ 1,110,207 $ 1,094,330 $ 1,100,807 $ 1,067,833 $ 1,070,735 $ 979,787 $ 982,156 $ 1,061,327 $ 1,065,795
Average Earning Assets $ 1,020,308 $ 1,016,980 $ 1,003,903 $ 1,000,408 $ 979,039 $ 975,377 $ 898,992 $ 895,149 $ 975,815 $ 972,233
Average Gross Loans & Leases $ 728,695 $ 725,367 $ 715,957 $ 712,462 $ 690,283 $ 686,621 $ 660,446 $ 656,603 $ 698,784 $ 695,202
Average Deposits $ 920,870 $ 920,870 $ 917,476 $ 917,476 $ 892,206 $ 892,206 $ 824,714 $ 824,714 $ 889,039 $ 889,039
Average Demand Deposits - Noninterest Bearing $ 294,109 $ 294,109 $ 288,096 $ 288,096 $ 283,460 $ 283,460 $ 234,693 $ 234,693 $ 275,192 $ 275,192
Average Demand Deposits - Interest Bearing $ 626,761 $ 626,761 $ 629,380 $ 629,380 $ 608,746 $ 608,746 $ 590,021 $ 590,021 $ 613,847 $ 613,847
Average Interest Bearing Liabilities $ 698,372 $ 698,372 $ 700,602 $ 700,602 $ 680,266 $ 680,266 $ 642,212 $ 642,212 $ 680,689 $ 680,689
Average Equity $ 98,196 $ 97,841 $ 94,275 $ 93,920 $ 92,641 $ 92,286 $ 91,380 $ 91,025 $ 94,131 $ 93,775
End of Period
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As Previously As As Previously As As Previously As As Previously As As Previously As
CONSOLIDATED BALANCE SHEET Reported Restated Reported Restated Reported Restated Reported Restated Reported Restated
(in $000's, unaudited) 12/31/2004 12/31/2004 09/30/2004 09/30/2004 06/30/2004 06/30/2004 03/31/2004 03/31/2004 12/31/2003 12/31/2003
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ASSETS
Cash and Due from Banks $ 33,646 $ 33,646 $ 47,347 $ 47,347 $ 56,404 $ 56,404 $ 51,725 $ 51,725 $ 42,017 $ 42,017
Fed Funds Sold 24,100 24,100 5,800 5,800 13,800 13,800 67,700 67,700 72,200 72,200
Investment Securities 232,809 232,809 228,483 228,483 230,435 230,435 204,705 204,705 153,473 153,473
Loans Held For Sale 37,178 37,178 28,782 28,782 31,916 31,916 25,512 25,512 30,638 30,638
Loans:
Real Estate-Mortgage 303,154 303,154 301,249 301,249 290,956 290,956 287,833 287,833 276,908 276,908
Real Estate-Land and Construction 118,290 118,290 106,303 106,303 111,161 111,161 101,389 101,389 101,082 101,082
Commercial Loans 300,321 300,321 314,007 314,007 298,828 298,828 275,536 275,536 281,561 281,561
Direct Financing Lease 1,231 131 3,538 135 3,578 0 3,749 0 3,931 0
Consumer Loans 2,908 2,908 2,051 2,051 1,625 1,625 1,715 1,715 1,743 1,743
------------ ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross Loans 725,904 724,804 727,148 723,745 706,148 702,570 670,222 666,473 665,225 661,294
Deferred Loan Costs 726 726 467 467 709 709 517 517 863 863
------------ ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Loans, Net of Deferred Costs 726,630 725,530 727,615 724,212 706,857 703,279 670,739 666,990 666,088 662,157
Allowance for Loan Losses (12,876) (12,497) (13,381) (12,973) (12,688) (12,626) (12,151) (12,114) (13,451) (13,451)
------------ ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net Loans 713,754 713,033 714,234 711,239 694,169 690,653 658,588 654,876 652,637 648,706
Premises & Equipment, Net 3,183 3,183 3,489 3,489 3,641 3,641 3,711 3,711 4,034 4,034
Accrued Interest Receivable and Other Assets 57,555 64,224 54,197 62,898 53,022 64,184 48,782 53,897 48,202 54,914
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Total Assets $ 1,102,225 $ 1,108,173 $ 1,082,332 $ 1,088,038 $ 1,083,387 $ 1,091,033 $ 1,060,723 $ 1,062,126 $ 1,003,201 $ 1,005,982
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LIABILITIES & SHAREHOLDERS' EQUITY
Liabilities:
Deposits
Demand Deposits-Noninterest Bearing $ 277,451 $ 277,451 $ 290,845 $ 290,845 $ 301,329 $ 301,329 $ 287,633 $ 287,633 $ 238,423 $ 238,423
Demand Deposits-Interest Bearing 120,890 120,890 115,911 115,911 111,282 111,282 108,764 108,764 105,260 105,260
Savings/Money Market 357,318 357,318 349,004 349,004 364,124 364,124 340,212 340,212 345,886 345,886
Time Deposits, Under $100 38,295 38,295 38,170 38,170 38,293 38,293 39,724 39,724 39,869 39,869
Time Deposits, $100 and Over 124,581 124,581 108,726 108,726 104,141 104,141 108,652 108,652 105,972 105,972
------------ ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Deposits 918,535 918,535 902,656 902,656 919,169 919,169 884,985 884,985 835,410 835,410
Other Borrowings 47,800 47,800 47,800 47,800 39,800 39,800 48,600 48,600 43,600 43,600
Notes Payable To Subsidiary Grantor Trusts 23,702 23,702 23,702 23,702 23,702 23,702 23,702 23,702 23,702 23,702
Accrued Interest Payable and Other Liabilities 13,267 19,557 11,539 17,469 9,897 17,971 10,057 11,857 10,643 13,785
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Total Liabilities 1,003,304 1,009,594 985,697 991,627 992,568 1,000,642 967,344 969,144 913,355 916,497
Shareholders' Equity:
Common Stock 67,216 67,216 66,235 66,235 65,656 65,656 65,396 65,396 64,791 64,791
Accumlated Other Comprehensive (Loss) Income, Net of Taxes (1,730) (1,730) (271) (271) (2,620) (2,620) 1,000 1,000 79 79
Retained Earnings 33,435 33,093 30,671 30,447 27,783 27,355 26,983 26,586 24,976 24,615
------------ ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Shareholders' Equity 98,921 98,579 96,635 96,411 90,819 90,391 93,379 92,982 89,846 89,485
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Total Liabilities & Shareholders' Equity $ 1,102,225 $ 1,108,173 $ 1,082,332 $ 1,088,038 $ 1,083,387 $ 1,091,033 $ 1,060,723 $ 1,062,126 $ 1,003,201 $ 1,005,982
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End of Period
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As Previously As As Previously As As Previously As As Previously As As Previously As
CREDIT QUALITY DATA Reported Restated Reported Restated Reported Restated Reported Restated Reported Restated
(in $000's, unaudited) 12/31/2004 12/31/2004 09/30/2004 09/30/2004 06/30/2004 06/30/2004 03/31/2004 03/31/2004 12/31/2003 12/31/2003
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Nonaccrual Loans $ 2,128 $ 1,028 $ 1,926 $ 1,926 $ 2,102 $ 2,102 $ 4,171 $ 4,171 $ 3,972 $ 3,972
Over 90 Days Past Due and Still Accruing 302 302 711 711 530 530 630 630 608 608
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Total Nonperforming Loans 2,430 1,330 2,637 2,637 2,632 2,632 4,801 4,801 4,580 4,580
Other Real Estate Owned 0 0 0 0 0 0 0 0 0 0
------------ ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Nonperforming Assets $ 2,430 $ 1,330 $ 2,637 $ 2,637 $ 2,632 $ 2,632 $ 4,801 $ 4,801 $ 4,580 $ 4,580
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Net (Recoveries) Charge-offs $ 1,705 $ (531) $ (94) $ (94) $ 63 $ 63 $ 1,901 $ 1,901 $ (12) $ (12)
Net (Recoveries) Charge-offs as Percent of Average Loans 0.93% -0.29% -0.05% -0.05% 0.04% 0.04% 1.16% 1.16% -0.01% -0.01%
Allowance for Loan Losses to Total Loans 1.77% 1.72% 1.84% 1.79% 1.79% 1.80% 1.81% 1.82% 2.02% 2.03%
Allowance for Loan Losses to Nonperforming Loans 529.88% 939.62% 507.43% 491.96% 482.07% 479.71% 253.09% 252.32% 293.69% 293.69%
Nonperforming Assets to Total Assets 0.22% 0.12% 0.24% 0.24% 0.24% 0.24% 0.45% 0.45% 0.46% 0.46%
Nonperforming Loans to Total Loans 0.33% 0.18% 0.36% 0.36% 0.37% 0.37% 0.72% 0.72% 0.69% 0.69%
End of Period
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As Previously As As Previously As As Previously As As Previously As As Previously As
OTHER PERIOD-END STATISTICS Reported Restated Reported Restated Reported Restated Reported Restated Reported Restated
(unaudited) 12/31/2004 12/31/2004 09/30/2004 09/30/2004 06/30/2004 06/30/2004 03/31/2004 03/31/2004 12/31/2003 12/31/2003
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Shareholders Equity / Total Assets 8.97% 8.90% 8.93% 8.86% 8.38% 8.28% 8.80% 8.75% 8.96% 8.90%
Loan to Deposit Ratio 79.11% 78.99% 80.61% 80.23% 76.90% 76.51% 75.79% 75.37% 79.73% 79.26%
Noninterest Bearing Deposits / Total Deposits 30.21% 30.21% 32.22% 32.22% 32.78% 32.78% 32.50% 32.50% 28.54% 28.54%
Leverage Ratio 10.96% 10.87% 10.72% 10.63% 10.67% 10.60% 11.54% 11.47% 11.17% 11.10%
