San Jose, CA – July 23, 2009 — Heritage Commerce Corp (Nasdaq: HTBK), parent company of Heritage Bank of Commerce, today reported a second quarter 2009 net loss available to common shareholders of $6.0 million, or $(0.51) per diluted common share, which included a $10.7 million provision for loan losses and $591,000 in dividends and discount accretion on preferred stock. In the second quarter a year ago, the net loss available to common shareholders was $3.1 million, or $(0.26) per diluted common share, which included a $7.8 million provision for loan losses and no preferred dividends.
For the first half of 2009, the Company reported a net loss available to common shareholders of $10.5 million, or $(0.89) per diluted common share, which included a $21.1 million provision for loan losses and $1.2 million in dividends and discount accretion on preferred stock. For the first half of 2008, the net loss available to common shareholders was $1.4 million, or $(0.11) per diluted common share, which included a $9.5 million provision for loan losses and no preferred dividends.
Second Quarter Developments
| u | The net interest margin increased 20 basis points to 3.55% in the second quarter of 2009 from 3.35% in the first quarter of 2009. |
| u | The leverage ratio was 9.8% at June 30, 2009. |
| u | Total assets were $1.44 billion, a decrease of 3% from a year ago and a decrease of 2% over the past quarter. |
| u | $20.5 million of SBA loans were transferred to loans held-for-sale at June 30, 2009 in anticipation of loan sales. |
| u | Loans, excluding loans held-for-sale, decreased 4% to $1.16 billion from $1.21 billion a year ago and March 31, 2009, with land and construction loans down $13.4 million to $230.8 million from March 31, 2009. |
| u | Deposits remained flat at $1.16 billion at June 30, 2009, compared to $1.17 billion at the end of the prior quarter. |
| u | Nonperforming assets increased $4.9 million to $61.7 million, or 4.30% of total assets, from $56.9 million, or 3.89% of total assets at March 31, 2009. |
| u | The allowance for loan losses increased to $31.4 million, or 2.70% of total loans, compared to $20.9 million, or 1.73%, a year ago, and $23.9 million, or 1.97%, at March 31, 2009. |
“While nonperforming assets increased in the quarter, the rate of increase slowed from earlier this year. The substantial provision for loan losses resulted in a loss for the second quarter,” said Walter Kaczmarek, President and Chief Executive Officer. “However, we are seeing increased sales activity in our residential housing portfolio, which is reflected in paydowns on our land and construction loans. With low mortgage rates, the tax incentives for home buyers and rising affordability, we are seeing buyers entering the market.” According to the California Association of Realtors, the unsold inventory of single-family homes in May fell to a 4.2 months supply -- less than half the 8.7 month supply a year ago.
“We continue to focus on preserving capital, credit quality and improving the net interest margin in what continues to be a very challenging economic environment,” Mr. Kaczmarek continued. “We are proceeding cautiously in the execution of our business plan. We have filed a shelf registration statement with the SEC to provide more options and flexibility to raise capital in the future in the event strategic opportunities and/or favorable market conditions present themselves.”
Balance Sheet, Capital Management and Credit Quality
At June 30, 2009, the Company’s assets totaled $1.44 billion, compared to $1.49 billion a year ago and $1.46 billion at March 31, 2009. The Company transferred $20.5 million of SBA loans to loans held-for-sale in the second quarter of 2009. The Company plans to sell these SBA loans, as well as at least a portion of new SBA loans, to enhance its liquidity position and improve noninterest income in future periods. Loans, excluding loans held-for-sale, totaled $1.16 billion at June 30, 2009, compared to $1.21 billion at June 30, 2008 and $1.21 billion at March 31, 2009. Deposits remained essentially flat at $1.16 billion at June 30, 2009, compared to June 30, 2008 and March 31, 2009. Commercial loans account for 39% of the total loan portfolio and commercial real estate loans, of which more than half are owner occupied, account for 36% of the portfolio. Land and construction loans decreased $13.4 million from March 31, 2009 and account for 20% of the portfolio, and consumer and home equity loans account for the remaining 5% of the total.
The securities portfolio of $101.8 million at June 30, 2009 consisted primarily of U.S. government sponsored entities’ debt securities, short-term U.S. Treasury securities, mortgage-backed securities, collateralized mortgage obligations, and municipal bonds.
Nonperforming assets totaled $61.7 million, or 4.30% of total assets at June 30, 2009, compared to $14.3 million, or 0.96% of total assets a year ago, and $56.9 million, or 3.89% of total assets at March 31, 2009. The majority of nonperforming assets are in the construction and land development portfolio, accounting for 63% of nonperforming assets, with commercial and industrial loans accounting for 18%, commercial real estate loans accounting for 4%, SBA loans at 10% and other real estate owned (“OREO”) at 5%.
Total OREO was $3.1 million, comprised of six properties, at June 30, 2009, up from $802,000, comprised of two properties, at March 31, 2009. In the second quarter of 2009, five properties moved from nonaccrual status into OREO and one property was sold. The increase in OREO during the quarter was primarily from a small commercial building in Santa Clara County, and a land parcel in Contra Costa County.
The allowance for loan losses at June 30, 2009 was $31.4 million, or 2.70% of total loans, and represented 53.51% of nonperforming loans. The allowance for loan losses a year ago was $20.9 million, or 1.73% of total loans and 152.14% of nonperforming loans. The allowance for loan losses at March 31, 2009, was $23.9 million, or 1.97% of total loans and 42.63% of nonperforming loans.
Shareholders’ equity was $174.6 million, or $11.55 book value per common share, at June 30, 2009, compared to $141.7 million, or $12.01 book value per common share, a year ago. The increase in shareholders’ equity was due to the issuance of $40 million in preferred stock to the U.S. Treasury as a participant in its Capital Purchase Program during the fourth quarter of 2008. Shareholders’ equity was $180.3 million, or $12.04 book value per common share, at March 31, 2009. The Company’s consolidated leverage ratio at June 30, 2009, was 9.80%, compared to 8.36% at June 30, 2008, and 10.41% at March 31, 2009.
Operating Results
Net interest income decreased 10% to $11.7 million for the second quarter of 2009, compared to $13.0 million for the second quarter of 2008, but increased 5% from $11.2 million for the first quarter of 2009. The net interest margin was 3.55% for the second quarter of 2009, compared to 4.00% for the second quarter a year ago and 3.35% for the first quarter of 2009. The 20 basis point increase in the net interest margin for the second quarter of 2009 compared to the first quarter of 2009 was primarily due to lower cost of funds. The decrease in the net interest margin from the second quarter of 2008 was primarily the result of the 275 basis point decline in short-term interest rates from March 18, 2008 through December 16, 2008.
Noninterest income was $1.6 million for the second quarter of 2009, compared to $1.8 million for the second quarter of 2008 and $1.6 million for the first quarter of 2009. In the first six months of 2009, noninterest income was $3.2 million, compared to $3.3 million in the first six months a year ago.
Noninterest expense was $12.1 million for the second quarter of 2009, compared to $11.0 million in the second quarter of 2008 and $11.4 million in the first quarter of 2009. In the first six months of 2009, noninterest expense was $23.4 million, compared to $21.6 million in the first six months a year ago. Regulatory assessments were $1.2 million in the second quarter of 2009, including a $657,000 charge for the FDIC special assessment levied on all FDIC insured banks, compared to $196,000 in the second quarter of 2008, and $739,000 in the first quarter of 2009. Professional fees were $1.2 million in the second quarter of 2009, compared to $980,000 in the second quarter of 2008, and $913,000 in the first quarter of 2009. The increase in professional fees was primarily due to legal fees related to problem loans and the branch acquisition transaction that was terminated in the second quarter of 2009. Other noninterest expense increased primarily due to problem loan expense. Problem loan expense was $298,000 in the second quarter of 2009, compared to $5,000 in the second quarter of 2008, and $6,000 in the first quarter of 2009.
The income tax benefit for the quarter ended June 30, 2009 was $4.1 million, as compared to $955,000 in the second quarter a year ago, and $5.1 million in the first quarter of 2009. In the first six months of 2009, the income tax benefit was $9.2 million, compared to $271,000 in the first six months a year ago. The negative effective income tax rates are due to the loss before income taxes. The difference in the effective tax rate 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 interest income from tax-free municipal securities.
The efficiency ratio was 90.90% in the second quarter of 2009, compared to 74.51% in the second quarter of 2008 and 88.94% in the first quarter of 2009. The efficiency ratio for the first six months of 2009 increased to 89.94% from 73.45% a year ago. The efficiency ratio increased in 2009 primarily due to compression of the net interest margin and an increase in noninterest expense, as discussed above.
Investor Conference
Heritage Commerce Corp is scheduled to present at the Keefe, Bruyette & Woods 10th Annual Community Bank Investor Conference in New York. Walter T. Kaczmarek, President and Chief Executive Officer, and Lawrence D. McGovern, Chief Financial Officer, are scheduled to present on Tuesday, July 28th at 11:00 a.m. EDT. The presentation will be archived for 60 days after the conference, and can be viewed at http://www.kbw.com/news/conferences.html.
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 Sacramento, Oakland and Santa Rosa, California. For more information, please visit www.heritagecommercecorp.com. 