San Jose, CA – July 24, 2008 — Heritage Commerce Corp (Nasdaq: HTBK), parent company of Heritage Bank of Commerce, today reported a second quarter net loss of $3.1 million, or ($0.26) per diluted share, compared with net income of $4.0 million, or $0.33 per diluted share, for the same quarter a year ago. The second quarter net loss was primarily the result of the previously announced $5.1 million provision for loan losses for loans to one customer, William J. "Boots" Del Biaggio III. For the first half of 2008, the Company reported a net loss of $1.4 million, or ($0.11) per diluted share, compared to net income of $8.0 million, or $0.68 per diluted share, in the first half of 2007.
“When we recognized that there was a substantial problem with the validity of the collateral on our loan relationship with Boots Del Biaggio, we took the conservative approach by immediately placing all of his loans on nonaccrual and increasing our loan loss provision for the entire $5.1 million in loans outstanding to him,” said Walter Kaczmarek, President and Chief Executive Officer. “We are pursuing all avenues for recovery of these funds from the borrower, as well as other parties. Due to the problems with the securities pledged as collateral for the majority of the debt and the bankruptcy filing of the borrower, we do not expect a quick resolution to this issue.”
Boots Del Biaggio is not, and has not been, a director, officer or employee of Heritage Bank of Commerce or Heritage Commerce Corp for over ten years. He is the son of William J. Del Biaggio, Jr., an executive officer and former director with Heritage Bank of Commerce and Heritage Commerce Corp.
“Despite the Boots Del Biaggio loans, we have generated strong loan growth by gaining traction in the new markets we entered last year and building strength in our traditional footprint in the greater Silicon Valley market,” said Mr. Kaczmarek. “The outstanding banking team we have built over the past few years remains focused and has gained market share by filling the pipeline with new business. Their performance has exceeded our expectations.”
Second Quarter 2008 Financial Highlights
| ¨ | As of June 30, 2008, total assets were $1.49 billion, an increase of 10% from June 30, 2007 and 5% from March 31, 2008. |
| ¨ | Loans increased to $1.21 billion, an increase of $283 million or 31% from the second quarter of 2007 and an increase of $77 million or 7% compared to March 31, 2008. Loans increased $173 million or 17% in the first six months of 2008 from $1.04 billion at December 31, 2007. |
| ¨ | Commercial loans accounted for 42% of the loan portfolio at June 30, 2008, compared to 37% a year ago. |
| ¨ | The Company has no exposure to subprime and mortgage company loans. |
| ¨ | Deposits were $1.16 billion, an increase of $40 million or 4% from the second quarter of 2007 and a decrease of $12 million or 1% from March 31, 2008. |
| ¨ | The leverage ratio was 8.36% at June 30, 2008. |
| ¨ | Heritage Commerce Corp completed its previously announced stock repurchase program during the second quarter of 2008 by repurchasing 394,387 shares of its common stock. |
Balance Sheet and Capital Management
Heritage’s assets totaled $1.49 billion at June 30, 2008, compared to $1.35 billion a year ago and $1.41 billion at March 31, 2008. Total loans, excluding loans held for sale, were $1.21 billion at June 30, 2008, compared to $0.93 billion at June 30, 2007 and $1.13 billion at March 31, 2008. Deposits totaled $1.16 billion at June 30, 2008, compared to $1.12 billion at June 30, 2007 and $1.17 billion at March 31, 2008.
The Company’s loan portfolio at June 30, 2008 consisted of 42% commercial loans, 33% commercial real estate mortgage loans, 20% land and construction and 5% consumer and other loans. Of the land and construction portfolio, 58% was secured by “for sale” residential properties and 42% was secured by commercial properties and owner-occupied housing properties.
The Company’s deposits increased by 4% over the same period in the previous year, which included a $43 million increase in Brokered deposits. The decrease in savings and money market balances was primarily due to a reduction of 1031 exchange company deposits which had a significant reduction in business due to market conditions.
During the second quarter of 2008, the Company repurchased 394,387 shares of its common stock at an average price of $17.47 and a cost of $6.9 million. This, along with the second quarter net loss, reduced shareholders’ equity to $142 million, or $12.01 book value per share and $7.96 tangible book value per share, at June 30, 2008. Shareholders’ equity was $170 million, or $12.72 book value per share and $9.12 tangible book value per share at June 30, 2007, and $153 million, or $12.55 book value per share and $8.61 tangible book value per share, at March 31, 2008. The Company adopted the guidance in Emerging Issues Task Force (EITF) Issue 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements, on January 1, 2008. The adoption of EITF 06-4 resulted in a cumulative effect adjustment to decrease retained earnings by $3.2 million, net of deferred income taxes, at January 1, 2008.
The share repurchases completed the previously announced common stock repurchase program. Shares were repurchased on the open market using available cash rather than debt. The Company’s Board of Directors had authorized the repurchase of up to $30 million of its common stock over two years. From August 13, 2007 through May 27, 2008, the Company bought back 1,645,607 shares at a cost of $29.9 million.
Credit Quality
Nonperforming assets (NPAs) totaled $14.3 million, or 0.96% of total assets, at June 30, 2008, compared to $6.3 million, or 0.47% of total assets, at June 30, 2007 and $5.4 million, or 0.38% of total assets, at March 31, 2008. Excluding the $5.1 million of Boots Del Biaggio loans and the $2.0 million SBA guaranteed portion of SBA loans, nonperforming assets were $7.3 million or 0.49% of total assets at June 30, 2008. At June 30, 2007, nonperforming assets were $6.0 million or 0.45% of total assets, excluding the $0.3 million SBA guaranteed portion of SBA loans. At March 31, 2008, nonperforming assets were $3.4 million or 0.24% of total assets, excluding the $2.0 million SBA guaranteed portion of SBA loans.
Net charge-offs in the second quarter of 2008 were $370,000 or 0.13% of average loans, compared to net charge-offs of $35,000 or 0.02% of average loans in the second quarter of 2007 and $434,000 or 0.16% of average loans in the first quarter of 2008.
The Company’s provision for loan losses in the second quarter of 2008 was $7.8 million, compared to no provision in the second quarter of 2007 and $1.7 million in the first quarter of 2008. The second quarter 2008 provision for loan losses includes $5.1 million for the Boots Del Biaggio loans. The rest of the second quarter 2008 provision is primarily due to $77 million of loan growth and additional risk in the loan portfolio.
When excluding the $5.1 million specific loss allocation for the Boots Del Biaggio loans, the allowance for loan losses at June 30, 2008 was $15.8 million, or 1.30% of total loans, and represented 183% of nonperforming loans. The allowance for loan losses at June 30, 2007 was $11.1 million, or 1.20% of total loans, and represented 192% of nonperforming loans. The allowance for loan losses at March 31, 2008 was $13.4 million, or 1.19% of total loans, and represented 293% of nonperforming loans.
Operating Results
Comparison of 2008 operating results to 2007 includes the effects of acquiring Diablo Valley Bank (“DVB”) on June 20, 2007. In the DVB transaction, the Company acquired $269 million of tangible assets, including $204 million of net loans, and assumed $249 million of deposits.
Net interest income increased 5% to $13.0 million for the second quarter of 2008 from $12.4 million for the second quarter of 2007 and decreased 1% from $13.1 million for the first quarter of 2008. For the first six months of 2008, net interest income increased 8% to $26.1 million from $24.1 million for the same period of 2007, primarily due to an increase in interest-earning assets. The net interest margin was 4.00% for the second quarter of 2008, compared to 5.11% for the second quarter of 2007 and 4.32% for the first quarter of 2008. For the first six months of 2008, the net interest margin decreased to 4.15% from 5.09% for the first six months of 2007. Decreases in the net interest margin are primarily the result of the 325 basis point decline in short-term interest rates from September 2007 through March 2008.
Noninterest income was $1.8 million for the second quarter of 2008, compared to $2.3 million for the second quarter of 2007 and $1.5 million for the first quarter of 2008. In the first six months of 2008, noninterest income was $3.3 million, compared to $4.8 million in the first six months a year ago. Noninterest income declined in 2008 primarily due to the strategic shift to retain, rather than sell, SBA loan production. Gains on sales of SBA loans were $695,000 in the second quarter of 2007 and $1.7 million in the first six months of 2007, with no corresponding income in 2008. Noninterest income was primarily comprised of loan servicing income, the increase in cash surrender value of Company owned life insurance, and service charges on deposit accounts.
Noninterest expense was $11.0 million for the second quarter of 2008, compared to $8.5 million in the second quarter of 2007 and $10.6 million in the first quarter of 2008. In the first six months of 2008, noninterest expense was $21.6 million, compared to $16.8 million in the first six months a year ago. Operating expenses increased in 2008 due to the acquisition of DVB, the new office in Walnut Creek, and the addition of experienced banking professionals.
The efficiency ratio was 74.51% in the second quarter of 2008, compared to 58.00% in the second quarter of 2007 and 72.38% in the first quarter of 2008. The efficiency ratio for the first six months of 2008 increased to 73.45% from 58.13% a year ago. The efficiency ratio increased in 2008 primarily due to compression of the net interest margin, a decrease in noninterest income and an increase in expenses, as discussed above. The annualized returns on average assets and average equity for the second quarter of 2008 were (0.85%) and (8.34%), compared to 1.50% and 12.17% for the quarter ended June 30, 2007, respectively. Returns on average assets and average equity for the first six months of 2008 were (0.20%) and (1.81%), compared to 1.53% and 12.63% for the first six months of 2007, respectively.
