Heritage Commerce Corp
Reports Financial Results For 2007
San Jose, CA – January 30, 2008 — Heritage Commerce Corp (Nasdaq: HTBK), parent company of Heritage Bank of Commerce, announced today that strong loan growth and solid asset quality contributed to earnings for 2007 of $14.1million, or $1.12 per diluted share. Heritage Commerce Corp earned $17.3 million, or $1.44 per diluted share, for the year ended December 31, 2006. In the fourth quarter of 2007, net income was $2.8 million, or $0.21 per diluted share, compared to $4.4 million, or $0.37 per diluted share, for the same quarter a year ago. The year end and fourth quarter results reflected the acquisition of Diablo Valley Bank (DVB), costs associated with hiring new senior level bankers, and the strategic shift from loan sales to retention of Small Business Administration (SBA) loan production, which was announced in the second quarter of 2007.
The following items impacted the fourth quarter and year-to-date results:
| ¨ | The DVB acquisition resulted in a charge of $375,000 pre-tax in the fourth quarter of 2007. This included the core deposit intangible (CDI) amortization of $167,000, consulting agreement expense of $188,000, and non-compete agreement expense of $20,000. Year-to-date, the DVB acquisition resulted in an aggregate charge of $1,253,000 pre-tax for 2007. This included the CDI amortization of $352,000, consulting agreement expense of $400,000 that expired on December 31, 2007, non-compete agreement expense of $40,000, and compensation expense of $461,000 for DVB employees who are no longer with the Company. The compensation expense was incurred in the second and third quarters of 2007 and included pay-to-stay bonuses for DVB employees during the transition period following the merger. |
| ¨ | Up-front costs associated with the hiring of experienced bankers for the East Bay expansion and SBA team were $308,000 in the fourth quarter and $970,000 for 2007. |
| ¨ | The provision for loan losses was $725,000 in the fourth quarter of 2007, compared to $100,000 a year ago, reflecting the substantial growth in the loan portfolio. The Company had a credit provision for loan losses of $11,000 in 2007, compared to a credit provision of $503,000 in 2006. |
| ¨ | Reflecting the strategic shift to retain SBA loan production, gains from sale of loans dropped substantially. There was no gain on sale of SBA loans in the fourth quarter of 2007, compared to $837,000 gain on sale of loans in the fourth quarter of 2006. For the full year, the gain on sale of SBA loans was $1.8 million, compared to $3.3 million in 2006. |
| ¨ | Adding several experienced bankers to the Heritage team helped drive strong loan growth with the loan portfolio growing 9% in the quarter. Net loans grew $81 million in the fourth quarter to $1 billion, a record level for the Company’s portfolio. |
| ¨ | Commercial loans increased 9% in the current quarter, and now account for 40% of total loans. |
| ¨ | The DVB acquisition increased total common shares outstanding by 1.7 million. |
| ¨ | For the year 2007, the Company repurchased 698,190 shares of its common stock pursuant to its on-going common stock repurchase program. |
Operating Results
Net interest income was $13.8 million for the fourth quarter of 2007, approximately the same as the third quarter of 2007. Year-to-date net interest income grew 3% to $51.7 million in 2007 from $50.4 million in 2006. The fourth quarter of 2007 net interest margin was 4.70%, up 5 basis points compared to 4.65% for the third quarter of 2007. Year-to-date net interest margin was 4.86% in 2007, down 20 basis points from 5.06% in 2006. The decrease in net interest margin for 2007 was due to lower interest rates.
The Company’s operating results are affected by market rates of interest. During the fourth quarter of 2007, the Board of Governors of the Federal Reserve System reduced short-term interest rates by 50 basis points. This decrease in short-term interest rates immediately affected the rates applicable to the majority of the Company’s loans. While the decrease in interest rates also lowered the cost of interest bearing deposits, which represent the Company’s primary funding source, these deposits tend to reprice more slowly than floating rate loans. The Federal Reserve reduced the short-term interest rates by another 125 basis points in January 2008. Reductions in short-term interest rates can be expected to similarly affect the Company’s net interest margin and net interest income.
Noninterest income was $1.6 million for the fourth quarter of 2007, approximately the same as the third quarter of 2007. Year-to-date noninterest income was $8.1 million in 2007, compared to $9.8 million in 2006. The decrease was primarily due to a reduction in SBA loans sales in 2007. The year-to-date gain on sale of SBA loans was $1.8 million in 2007, compared to $3.3 million in 2006. There was also a gain of $671,000 from the sale of specialty loans in 2006.
Noninterest expense was $10.2 million for the fourth quarter of 2007, down from $10.5 million for the third quarter of 2007. Year-to-date noninterest expense increased to $37.5 million in 2007, compared to $34.3 million in 2006. DVB related charges accounted for $1,253,000 of the increase, including $352,000 for CDI amortization, $400,000 of consulting agreement expense, $40,000 of non-compete agreement expense, and compensation expense of $461,000 for DVB employees who are no longer with the Company. Compensation expense increased 22% in the fourth quarter of 2007 from the same period in 2006. Year-to-date compensation expense increased 9% in 2007 compared to a year ago. The increase in compensation expense was primarily due to the merger with DVB, the addition of senior level bankers and hiring of a new SBA team during 2007. Up front costs associated with the hiring of new bankers for the East Bay expansion and SBA team totaled $970,000 in 2007, including $308,000 in the fourth quarter.
The efficiency ratio was 66.2% in the fourth quarter of 2007, down from 68.2% in the third quarter of 2007. The year-to-date efficiency ratio in 2007 increased to 62.8% from 56.9% a year ago. The higher efficiency ratio reflects the additional senior level bankers, SBA team hired and the DVB acquisition.
Income tax expense in 2007 was 37% of pre-tax income, compared to 35% in 2006. The increase in 2007 was primarily due to adjustments in 2007 resulting from the previously announced audit of the Company’s California state tax returns by the State of California Franchise Tax Board.
The annualized returns on average assets (ROAA) and average equity (ROAE) for the fourth quarter of 2007 were 0.84% and 6.62%, compared to 0.96% and 7.56% for the third quarter of 2007, respectively. Year-to-date ROAA and ROAE were 1.18% and 9.47% for 2007, compared to 1.57% and 14.62% for 2006, respectively. The annualized returns on average tangible assets (ROATA) and average tangible equity (ROATE) for the fourth quarter of 2007 were 0.87% and 9.26%, compared to 1.00% and 10.55% for the third quarter of 2007, respectively. Year-to-date ROATA and ROATE were 1.21% and 11.43% for 2007, compared to 1.57% and 14.62% for 2006, respectively.
Balance Sheet, Capital Management and Credit Quality
At December 31, 2007, total assets were $1.35 billion, compared to $1.04 billion a year ago, and $1.33 billion at September 30, 2007. Total deposits were $1.06 billion at December 31, 2007, compared to $847 million a year ago, and $1.10 billion at September 30, 2007. Total loans were $1.04 billion at December 31, 2007, compared to $709 million a year ago, and $955 million at September 30, 2007.
Nonperforming assets totaled $4.5 million, or 0.34% of total assets, at December 31, 2007, compared to $4.3 million, or 0.42% of total assets, a year ago, and $3.4 million, or 0.25% of total assets, at September 30, 2007. Approximately $900,000 in nonperforming loans at December 31, 2007 were paid off in January 2008. Of the $4.5 million nonperforming assets, approximately $2.0 million were SBA loans.
The allowance for loan losses was $12.2 million at December 31, 2007, representing 1.18% of total loans and 353% of nonperforming loans compared to $9.3 million at December 31, 2006, representing 1.28% of total loans and 215% of nonperforming loans. At September 30, 2007, the allowance for loan losses was $11.5 million or 1.20% of total loans and 398% of nonperforming loans. Net recoveries were $21,000, or 0.01% of average loans, in the fourth quarter of 2007, compared to net charge-offs of $200,000, or 0.11% of average loans, in the fourth quarter of 2006. Net recoveries were $868,000, or 0.37% of average loans, in the third quarter of 2007. For the year, net recoveries were $825,000 in 2007, compared to $442,000 of net charge-offs in 2006.
Shareholders’ equity increased 34% to $165 million at December 31, 2007, compared to $123 million a year ago. At year end, tangible book value per share was $9.20, compared to $10.54 a year ago and $9.18 at September 30, 2007. Capital ratios continue to be above the well-capitalized guidelines established by regulatory agencies, allowing the Company to grow its balance sheet while paying dividends and repurchasing shares. The quarterly dividend is now $0.08 per share, compared to $0.05 in 2006 and zero in 2005. The leverage ratio at December 31, 2007 was 11.05%, compared to 13.47% at December 31, 2006, and 11.19% at September 30, 2007.
During the fourth quarter of 2007, the Company repurchased 358,490 shares of its common stock at an average price of $17.23 under the previously announced common stock repurchase program. Shares were purchased on the open market using available cash. The Company’s Board of Directors authorized the purchase of up to $30 million of its common stock over two years. The repurchase program expires in July 2009. The repurchase program may be modified, suspended or terminated by the Board of Directors at any time without notice. The extent to which the Company repurchases its shares and the timing of such repurchases will depend upon market conditions and other corporate considerations.
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 Loan Production Offices in Fresno, Sacramento, Oakland and Santa Rosa, California. For more information, please visit www.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, the Company’s ability to sustain dividend payments, fluctuations in interest rates and monetary policy established by the Federal Reserve, inflation, government regulations, general economic conditions, the ability to maintain adequate liquidity to support loan growth, 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 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.
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