SAN JOSE, Calif., Aug. 7 /PRNewswire-FirstCall/ -- Heritage Commerce Corp , parent company of Heritage Bank of Commerce, today reported that second quarter net income totaled $4.0 million, or $0.33 per diluted share, compared with $4.2 million, or $0.35 per diluted share, for the same quarter a year ago. For the first half of 2007, net income was $8.0 million, or $0.68 per diluted share, compared to $8.6 million, or $0.71 per diluted share, in the first half of 2006.
The merger with Diablo Valley Bank ("DVB") was completed on June 20, 2007. The consolidated financial statements of Heritage Commerce Corp for the three and six months ended June 30, 2007 reflect the completion of the merger, including the preliminary purchase accounting adjustments to reflect the DVB assets and liabilities at their estimated fair values. The completion of the acquisition of Diablo Valley Bank contributed to a 29% increase in loans and a 30% increase in deposits year-over-year. Revenue and expenses from the operations of DVB have only been included for the 10 day period from the closing of the merger, and they were not significant for the three and six months reported.
"Our focus during the second quarter has been on completing the merger with Diablo Valley Bank and preparing for a smooth integration and conversion of their operations with ours," said Walter Kaczmarek, President and Chief Executive Officer. "We have also brought on board a number of seasoned bankers from other financial institutions with strong reputations in our markets. The combination of the talent from Diablo and the other new people hired by Heritage this quarter should help us gain market share during the remainder of this year and into next year. In addition, we are preparing to open our first office in Walnut Creek, further expanding our presence in the affluent East Bay market."
Second Quarter 2007 Financial Highlights:
-- Produced an annualized return on average assets of 1.50%.
-- Completed the acquisition of Diablo Valley Bank, adding $257 million in
deposits and $214 million in loans.
-- Net interest margin expanded to 5.11% from 5.06% in the first quarter
of 2007 and 4.98% in the second quarter a year ago.
-- Commercial loans increased 22% in the quarter and 31% year-over-year,
and now account for 38% of total loans.
-- Received approval to open a new office in Walnut Creek, further
expanding presence in Contra Costa County.
Operating Results
"Several factors contributed to a small decline in revenue for the quarter and year-to-date periods," said Mr. Kaczmarek. "Our SBA lending team was understaffed during most of the quarter and, consequently, SBA loan originations and gains on the sale of SBA loans were both down. As we rebuild the SBA lending team, we anticipate activity will improve. In addition, the Company has also decided to change its strategy regarding its SBA loan business. Beginning in the third quarter of 2007, we will retain most of our SBA production in lieu of selling it. Thus, quarterly gains on sale will most likely be significantly lower. However, as the SBA portfolio increases over time, our net interest income should also increase."
Net interest income decreased 2% to $12.4 million for the second quarter of 2007, compared to $12.6 million for the second quarter of 2006. For the first half of 2007, net interest income decreased 3% to $24.1 million from $24.8 million for the same period of 2006.
The net interest margin was 5.11% for the three months ended June 30, 2007, compared to 5.06% for the first quarter of 2007 and 4.98% for the three months ended June 30, 2006. For the first six months of 2007, net interest margin improved to 5.09% from 4.94% for the first six months of 2006.
No provision for loan losses was recognized in the second quarter of 2007, compared to a reverse provision for loan losses of $236,000 recognized in the first quarter of 2007. Reverse provisions for loan losses were $114,000 and $603,000 for the three and six months ended June 30, 2006.
Noninterest income was $2.3 million for the second quarter of 2007, compared to $2.3 million for second quarter of 2006 and $2.5 million for the first quarter of 2007. Noninterest income was primarily comprised of the gain on sale of Small Business Administration ("SBA") and other guaranteed loans, loan servicing income, the increase in cash surrender value of life insurance, and service charges on deposit accounts. In the first six months of 2007, noninterest income was $4.8 million, compared to $5.2 million in the first six months a year ago.
Heritage's second quarter noninterest expense was approximately the same as the second quarter a year ago at $8.5 million and up slightly from $8.3 million in the first quarter of 2007. In the first six months of 2007, noninterest expense decreased 3% to $16.8 million from $17.3 million in the first six months a year ago. Compensation expense decreased 4% from the first quarter to the second quarter but increased 1% from the second quarter a year ago.
The efficiency ratio was 58.00% in the second quarter of 2007, compared to 58.26% in the first quarter of 2007, and 57.06% in the second quarter of 2006. The efficiency ratio for the first six months of 2007 increased to 58.13% from 57.57% a year ago. The annualized returns on average assets and average equity for the second quarter of 2007 were 1.50% and 12.17%, compared to 1.50% and 14.35% for the second quarter ended June 30, 2006, respectively. Returns on average assets and average equity for the first six months of 2007 were 1.53% and 12.63%, compared to 1.55% and 14.93% for the first six months of 2006, respectively.
Balance Sheet, Capital Management and Credit Quality
Heritage's assets totaled $1.35 billion at June 30, 2007, compared to $1.09 billion a year ago, and $1.07 billion at March 31, 2007. Deposits totaled $1.12 billion at June 30, 2007, compared to $0.91 billion at June 30, 2006, and $0.88 billion at March 31, 2007. The Company added a net $23 million of brokered deposits in the second quarter of 2007, compared to the first quarter of 2007. Total loans, excluding loans held for sale, were $0.94 billion at June 30, 2007, compared to $0.71 billion at June 30, 2006, and $0.70 billion at March 31, 2007.
Nonperforming assets increased to $6.3 million, or 0.47% of total assets, at the end of June, compared to $1.6 million, or 0.15% of total assets, a year ago, and $3.3 million, or 0.31% of total assets, at March 31, 2007. Approximately $3.7 million of the nonperforming assets at June 30, 2007 were acquired in the Diablo Valley Bank merger. Of the total nonperforming assets at June 30, 2007, so far $900,000 were paid off during the third quarter of 2007. Net charge-offs in the second quarter of 2007 were $35,000, or 0.02% of average loans, compared to net charge-offs of $29,000, or 0.02% of average loans, in the preceding quarter. Net charge-offs in the second quarter a year ago were $536,000, or 0.31% of average loans. The allowance for loan losses at June 30, 2007 was $11.1 million, or 1.18% of total loans, and represented 192% of nonperforming loans. The allowance for loan losses at June 30, 2006, was $9.1 million, or 1.27% of total loans, and represented 564% of nonperforming loans. The allowance for loan losses at December 31, 2006, was $9.3 million, or 1.28% of total loans, and represented 215% of nonperforming loans.
Shareholders' equity increased 44% to $170 million at June 30, 2007, compared to $118 million a year ago, and $126 million at March 31, 2007. Capital ratios continue to be above the well-capitalized guidelines established by regulatory agencies. The Company's leverage ratio at June 30, 2007, was 14.29%, compared to 12.70% at June 30, 2006, and 14.43% at March 31, 2007. Since the Diablo Valley Bank acquisition occurred on June 20, 2007, the transaction did not have much effect on the quarterly average assets used in the leverage ratio calculation. If period end total assets were the denominator instead of average assets, the leverage ratio would have been 11.31% at June 30, 2007.
During the second quarter of 2007, the Company repurchased 25,200 shares of its common stock with an average price of $24.00 a share under the Company's $10 million common stock repurchase program, which was approved by the Company's Board of Directors in February, 2006. Shares were purchased on the open market financed by available cash. The authorization for this repurchase program expired as of June 30, 2007.
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, Morgan Hill, Gilroy, Mountain View, and Los Altos. Heritage Bank of Commerce is also an SBA Preferred Lender ranked the fourth largest SBA lender in Northern California and fourteenth in the State of California, with Loan Production Offices in San Jose, Chico, Fremont, Fresno, and Sacramento, California. For more information, please visit http://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, 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.
Percent
For the Three Months Ended: Change From:
CONSOLIDATED INCOME June March June March June
STATEMENTS 30, 31, 30, 31, 30,
(in $000's, unaudited) 2007 2007 2006 2007 2006
Interest Income $18,317 $17,234 $18,392 6% 0%
Interest Expense 5,924 5,503 5,766 8% 3%
Net Interest Income 12,393 11,731 12,626 6% -2%
Provision for Loan Losses 0 (236) (114) 100% -100%
Net Interest income
after Provision for
Loan Losses 12,393 11,967 12,740 4% -3%
Noninterest Income:
Gain on Sale of Loans 695 1,011 842 -31% -17%
Servicing Income 534 517 441 3% 21%
Increase in Cash
Surrender Value of
Life Insurance 353 344 360 3% -2%
Service Charges and Other
Fees on Deposit Accounts 336 274 327 23% 3%
Other 344 369 287 -7% 20%
Total Noninterest Income 2,262 2,515 2,257 -10% 0%
Noninterest Expense:
Salaries & Employee
Benefits 4,685 4,888 4,653 -4% 1%
Occupancy & Equipment 889 875 922 2% -4%
Other 2,926 2,537 2,917 15% 0%
Total Noninterest Expense 8,500 8,300 8,492 2% 0%
Income Before Income Taxes 6,155 6,182 6,505 0% -5%
Provision for Income Taxes 2,140 2,149 2,316 0% -8%
Net Income $4,015 $4,033 $4,189 0% -4%
PER SHARE DATA
(unaudited)
Basic Earnings Per Share $0.34 $0.35 $0.35 -3% -3%
Diluted Earnings Per Share $0.33 $0.34 $0.35 -3% -6%
Common Shares Outstanding 13,375,163 11,636,828 11,820,563 15% 13%
Book Value Per Share $12.72 $10.83 $9.98 17% 27%
Tangible Book Value Per
Share $9.12 $10.83 $9.98 -16% -9%
KEY FINANCIAL RATIOS
(unaudited)
Annualized Return on
Average Equity 12.17% 13.12% 14.35% -7% -15%
Annualized Return on
Average Assets 1.50% 1.57% 1.50% -4% 0%
Net Interest Margin 5.11% 5.06% 4.98% 1% 3%
Efficiency Ratio 58.00% 58.26% 57.06% 0% 2%
AVERAGE BALANCES
(in $000's, unaudited)
Average Assets $1,075,271 $1,039,975 $1,120,108 3% -4%
Tangible Average Assets $1,070,251 $1,039,975 $1,120,108 3% -4%
Average Earning Assets $972,016 $939,604 $1,017,290 3% -4%
Average Total Loans $730,337 $700,647 $702,817 4% 4%
Average Loans Held For
Sale $12,823 $18,596 $32,494 -31% -61%
Average Deposits $880,079 $846,736 $929,000 4% -5%
Average Demand Deposits -
Noninterest Bearing $223,415 $218,039 $228,891 2% -2%
Average Interest Bearing
Deposits $656,664 $628,697 $700,109 4% -6%
Average Interest Bearing
Liabilities $696,773 $674,050 $749,533 3% -7%
Average Equity $132,347 $124,642 $117,126 6% 13%
Tangible Average Equity $127,196 $124,642 $117,126 2% 9%
For the Six Months Ended:
CONSOLIDATED INCOME STATEMENTS June 30, June 30, Percent
(in $000's, unaudited) 2007 2006 Change
Interest Income $35,551 $35,652 0%
Interest Expense 11,427 10,835 5%
Net Interest Income 24,124 24,817 -3%
Provision for Loan Losses (236) (603) -61%
Net Interest income after
Provision for Loan Losses 24,360 25,420 -4%
Noninterest Income:
Gain on Sale of Loans 1,706 2,339 -27%
Servicing Income 1,050 909 16%
Increase in Cash Surrender Value
of Life Insurance 697 707 -1%
Service Charges and Other Fees on
Deposit Accounts 610 654 -7%
Other 713 542 32%
Total Noninterest Income 4,776 5,151 -7%
Noninterest Expense:
Salaries & Employee Benefits 9,573 9,762 -2%
Occupancy & Equipment 1,764 1,808 -2%
Other 5,463 5,683 -4%
Total Noninterest Expense 16,800 17,253 -3%
Income Before Income Taxes 12,336 13,318 -7%
Provision for Income Taxes 4,288 4,753 -10%
Net Income $8,048 $8,565 -6%
PER SHARE DATA
(unaudited)
Basic Earnings Per Share $0.69 $0.72 -4%
Diluted Earnings Per Share $0.68 $0.71 -4%
Common Shares Outstanding 13,375,163 11,820,563 13%
Book Value Per Share $12.72 $9.98 27%
Tangible Book Value Per Share $9.12 $9.98 -9%
KEY FINANCIAL RATIOS
(unaudited)
Annualized Return on Average Equity 12.63% 14.93% -15%
Annualized Return on Average Assets 1.53% 1.55% -1%
Net Interest Margin 5.09% 4.94% 3%
Efficiency Ratio 58.13% 57.57% 1%
AVERAGE BALANCES
(in $000's, unaudited)
Average Assets $1,057,683 $1,117,193 -5%
Tangible Average Assets $1,055,059 $1,117,193 -6%
Average Earning Assets $955,874 $1,013,600 -6%
Average Total Loans $715,562 $702,376 2%
Average Loans Held For Sale $15,693 $35,464 -56%
Average Deposits $863,422 $924,496 -7%
Average Demand Deposits - Noninterest
Bearing $220,727 $232,072 -5%
Average Interest Bearing Deposits $642,695 $692,424 -7%
Average Interest Bearing Liabilities $685,412 $745,245 -8%
Average Equity $128,509 $115,705 11%
Tangible Average Equity $125,919 $115,705 9%
Percent
End of Period: Change From:
CONSOLIDATED BALANCE June March June March June
SHEETS 30, 31, 30, 31, 30,
(in $000's, unaudited) 2007 2007 2006 2007 2006
ASSETS
Cash and Due from Banks $45,881 $33,718 $39,390 36% 16%
Federal Funds Sold 57,810 90,400 47,000 -36% 23%
Securities Available-for-
Sale, at Fair Value 169,498 164,800 191,471 3% -11%
Loans Held For Sale 6,095 11,351 30,325 -46% -80%
Loans:
Commercial Loans 358,095 294,010 273,208 22% 31%
Real Estate-Mortgage 330,422 239,082 242,125 38% 36%
Real Estate-Land and
Construction 203,457 128,663 149,168 58% 36%
Home Equity 42,474 36,067 46,690 18% -9%
Consumer Loans 4,715 2,620 1,389 80% 239%
Total Loans 939,163 700,442 712,580 34% 32%
Deferred Loan Costs, net 504 624 1,184 -19% -57%
Loans, Net of Deferred
Costs 939,667 701,066 713,764 34% 32%
Allowance for Loan Losses (11,104) (9,014) (9,098) 23% 22%
Net Loans 928,563 692,052 704,666 34% 32%
Company Owned Life
Insurance 37,900 36,519 35,442 4% 7%
Premises & Equipment, Net 9,186 2,446 2,406 276% 282%
Goodwill 43,172 - - N/A N/A
Intangible Assets 5,049 - - N/A N/A
Accrued Interest
Receivable and Other
Assets 43,777 39,778 43,964 10% 0%
Total Assets $1,346,931 $1,071,064 $1,094,664 26% 23%
LIABILITIES &
SHAREHOLDERS' EQUITY
Liabilities:
Deposits
Demand Deposits-
Noninterest Bearing $266,404 $221,206 $221,438 20% 20%
Demand Deposits-
Interest Bearing 162,003 141,395 144,120 15% 12%
Savings and Money
Market 448,528 351,005 366,892 28% 22%
Time Deposits, Under
$100 33,735 30,730 31,476 10% 7%
Time Deposits, $100
and Over 143,544 96,813 110,513 48% 30%
Brokered Deposits,
$100 and Over 65,439 42,748 34,048 53% 92%
Total Deposits 1,119,653 883,897 908,487 27% 23%
Securities Sold under
Agreement to Repurchase 10,900 15,100 21,800 -28% -50%
Notes Payable To
Subsidiary Grantor Trusts 23,702 23,702 23,702 0% 0%
Accrued Interest Payable
and Other Liabilities 22,522 22,333 22,708 1% -1%
Total Liabilities 1,176,777 945,032 976,697 25% 20%
Shareholders' Equity:
Common Stock 103,498 61,958 66,726 67% 55%
Accumulated Other
Comprehensive Loss (2,446) (1,712) (3,681) 43% -34%
Retained Earnings 69,102 65,786 54,922 5% 26%
Total Shareholders' Equity 170,154 126,032 117,967 35% 44%
Total Liabilities &
Shareholders' Equity $1,346,931 $1,071,064 $1,094,664 26% 23%
CREDIT QUALITY DATA
(in $000's, unaudited)
Nonaccrual Loans $3,192 $3,315 $1,612 -4% 98%
Loans Over 90 Days Past
Due and Still Accruing 2,604 0 0 N/A N/A
Total Nonperforming Loans 5,796 3,315 1,612 75% 260%
Other Real Estate Owned 487 0 0 N/A N/A
Total Nonperforming
Assets $6,283 $3,315 $1,612 90% 290%
Net Charge-offs $35 $29 $536 -21% -93%
Net Charge-offs as Percent
of Average Loans 0.02% 0.02% 0.31% 0% -94%
Allowance for Loan Losses
to Total Loans 1.18% 1.29% 1.27% -9% -7%
Allowance for Loan Losses
to Nonperforming Loans 191.58% 271.92% 564.39% -30% -66%
Nonperforming Assets to
Total Assets 0.47% 0.31% 0.15% 52% 213%
Nonperforming Loans to
Total Loans 0.62% 0.47% 0.23% 32% 170%
OTHER PERIOD-END STATISTICS
(unaudited)
Shareholders' Equity /
Total Assets 12.63% 11.77% 10.78% 7% 17%
Loan to Deposit Ratio 83.92% 79.32% 78.57% 6% 7%
Noninterest Bearing
Deposits / Total Deposits 23.79% 25.03% 24.37% -5% -2%
Leverage Ratio 14.29% 14.43% 12.70% -1% 13%
For the Three Months Ended
June 30, 2007
NET INTEREST INCOME AND NET INTEREST Interest Average
MARGIN Average Income/ Yield/
(in $000's, unaudited) Balance Expense Rate
Assets:
Loans, gross $743,160 $15,589 8.41%
Securities 171,896 1,982 4.62%
Interest bearing deposits in other
financial institutions 3,243 40 4.95%
Federal funds sold 53,717 706 5.27%
Total interest earning assets 972,016 $18,317 7.56%
Cash and due from banks 33,305
Premises and equipment, net 3,111
Other assets 66,839
Total assets $1,075,271
Liabilities and shareholders' equity:
Deposits:
Demand, interest bearing $141,230 $780 2.22%
Savings and money market 328,580 2,456 3.00%
Time deposits, under $100 30,872 301 3.91%
Time deposits, $100 and over 102,284 1,067 4.18%
Brokered time deposits, $100 and over 53,698 617 4.61%
Notes payable to subsidiary grantor
trusts 23,702 583 9.87%
Securities sold under agreement to
repurchase 16,407 120 2.93%
Total interest bearing liabilities 696,773 $5,924 3.41%
Demand, noninterest bearing 223,415
Other liabilities 22,736
Total liabilities 942,924
Shareholders' equity: 132,347
Total liabilities and shareholders'
equity $1,075,271
Net interest income / margin $12,393 5.11%
For the Three Months Ended
June 30, 2006
NET INTEREST INCOME AND NET INTEREST Interest Average
MARGIN Average Income/ Yield/
(in $000's, unaudited) Balance Expense Rate
Assets:
Loans, gross $735,311 $15,344 8.37%
Securities 195,743 1,977 4.05%
Interest bearing deposits in other
financial institutions 2,728 42 6.18%
Federal funds sold 83,508 1,029 4.94%
Total interest earning assets 1,017,290 $18,392 7.25%
Cash and due from banks 36,224
Premises and equipment, net 2,393
Other assets 64,201
Total assets $1,120,108
Liabilities and shareholders' equity:
Deposits:
Demand, interest bearing $148,635 $830 2.24%
Savings and money market 373,697 2,698 2.90%
Time deposits, under $100 32,264 251 3.12%
Time deposits, $100 and over 111,024 929 3.36%
Brokered time deposits, $100 and over 34,489 325 3.78%
Notes payable to subsidiary grantor
trusts 23,702 575 9.73%
Securities sold under agreement to
repurchase 25,722 158 2.46%
Total interest bearing liabilities 749,533 $5,766 3.09%
Demand, noninterest bearing 228,891
Other liabilities 24,558
Total liabilities 1,002,982
Shareholders' equity: 117,126
Total liabilities and shareholders'
equity $1,120,108
Net interest income / margin $12,626 4.98%
For the Six Months Ended
June 30, 2007
NET INTEREST INCOME AND NET INTEREST Interest Average
MARGIN Average Income/ Yield/
(in $000's, unaudited) Balance Expense Rate
Assets:
Loans, gross $731,255 $30,259 8.34%
Securities 172,603 3,934 4.60%
Interest bearing deposits in other
financial institutions 2,936 73 5.01%
Federal funds sold 49,080 1,285 5.28%
Total interest earning assets 955,874 $35,551 7.50%
Cash and due from banks 34,311
Premises and equipment, net 2,807
Other assets 64,691
Total assets $1,057,683
Liabilities and shareholders' equity:
Deposits:
Demand, interest bearing $138,876 $1,545 2.24%
Savings and money market 323,549 4,740 2.95%
Time deposits, under $100 30,929 590 3.85%
Time deposits, $100 and over 101,741 2,079 4.12%
Brokered time deposits, $100 and over 47,600 1,052 4.46%
Notes payable to subsidiary grantor
trusts 23,702 1,164 9.90%
Securities sold under agreement to
repurchase 19,015 257 2.73%
Total interest bearing liabilities 685,412 $11,427 3.36%
Demand, noninterest bearing 220,727
Other liabilities 23,035
Total liabilities 929,174
Shareholders' equity: 128,509
Total liabilities and shareholders'
equity $1,057,683
Net interest income / margin $24,124 5.09%
For the Six Months Ended
June 30, 2006
NET INTEREST INCOME AND NET INTEREST Interest Average
MARGIN Average Income/ Yield/
(in $000's, unaudited) Balance Expense Rate
Assets:
Loans, gross $737,840 $30,065 8.22%
Securities 198,394 3,769 3.83%
Interest bearing deposits in other
financial institutions 2,783 60 4.35%
Federal funds sold 74,583 1,758 4.75%
Total interest earning assets 1,013,600 $35,652 7.09%
Cash and due from banks 36,588
Premises and equipment, net 2,435
Other assets 64,570
Total assets $1,117,193
Liabilities and shareholders' equity:
Deposits:
Demand, interest bearing $153,288 $1,668 2.19%
Savings and money market 360,983 4,779 2.67%
Time deposits, under $100 33,232 497 3.02%
Time deposits, $100 and over 109,656 1,750 3.22%
Brokered time deposits, $100 and over 35,265 658 3.76%
Notes payable to subsidiary grantor
trusts 23,702 1,137 9.67%
Securities sold under agreement to
repurchase 29,119 346 2.40%
Total interest bearing liabilities 745,245 $10,835 2.93%
Demand, noninterest bearing 232,072
Other liabilities 24,171
Total liabilities 1,001,488
Shareholders' equity: 115,705
Total liabilities and shareholders'
equity $1,117,193
Net interest income / margin $24,817 4.94%
