HTBK - Heritage Commerce Corp Earns $12.1 Million for the First Quarter of 2019 an Increase of 38% from the First Quarter of 2018

SAN JOSE, Calif., April 25, 2019 (GLOBE NEWSWIRE) -- Heritage Commerce Corp (Nasdaq: HTBK), the holding company (the “Company”) for Heritage Bank of Commerce (the “Bank” or “HBC”), today announced net income was $12.1 million, or $0.28 per average diluted common share, for the first quarter of 2019, compared to $8.8 million, or $0.23 per average diluted common share, for the first quarter of 2018. Net income was $13.2 million, or $0.30 per average diluted common share, for the fourth quarter of 2018.  All results are unaudited.

“First quarter 2019 earnings were solid, supported by an average net interest margin of 4.38%, sound credit quality, and efficient cost control, resulting in a 17.90% return on average tangible equity and a 1.63% return on average tangible assets,” said Walter Kaczmarek, President and Chief Executive Officer.  “Although total loans are down slightly on a linked quarter basis, reflecting pay offs and maturities, total loans are up 16% from a year ago.  Total deposits grew 9% year-over-year and are up by $2.7 million from the preceding quarter with noninterest-bearing accounts representing 38% of total deposits.”

First Quarter 2019 Highlights (as of, or for the periods ended March 31, 2019, compared to March 31, 2018, and December 31, 2018, except as noted):

Operating Results:

• Diluted earnings per share were $0.28 for the first quarter of 2019, compared to $0.23 for the first quarter of 2018, and $0.30 for the fourth quarter of 2018.   
    
• The return on average tangible assets was 1.63%, and the return on average tangible equity was 17.90% for the first quarter of 2019, compared to 1.31% and 16.30%, respectively, for the first quarter of 2018, and 1.69% and 20.08%, respectively, for the fourth quarter of 2018.
  
  
• Total noninterest expense for the first quarter of 2019 increased to $17.9 million from $16.9 million for the fourth quarter of 2018, primarily due to higher salaries and employee benefits, consistent with the cyclical nature of these expenses.
  
  
• Net interest income, before provision for loan losses, increased 18% to $31.0 million for the first quarter of 2019, compared to $26.3 million for the first quarter of 2018, and decreased 6% from $33.1 million for the fourth quarter of 2018. 
  
  • The fully tax equivalent (“FTE”) net interest margin improved by 25 basis points to 4.38% for the first quarter of 2019, from 4.13% for the first quarter of 2018 , primarily due to a higher average balance of loans, the accretion of the loan purchase discount into loan interest income from the Tri-Valley Bank (“Tri-Valley”) and United American Bank (“United American”) acquisitions, and the impact of increases in the prime rate and the rate on overnight funds.  The net interest margin contracted 4 basis points for the first quarter of 2019 from 4.42% for the fourth quarter of 2018, primarily due to lower average balances of Bay View Funding factored receivables and fewer days in the first quarter of 2019.
  
  
• The following tables present the average balance of loans outstanding, interest income, and the average yield for the periods indicated:

• The average yield on the total loan portfolio increased to 5.92% for the first quarter of 2019, compared to 5.76% for the first quarter of 2018, primarily due to increases in the prime rate, and an increase in the accretion of the loan purchase discount into loan interest income from the acquisitions.
  

• The average yield on the total loan portfolio decreased to 5.92% for the first quarter of 2019, compared to 6.01% for the fourth quarter of 2018, primarily due to a lower average balance of factored receivables at Bay View Funding, a decrease in the accretion of the loan purchase discount into loan interest income from the acquisitions and fewer days in the first quarter of 2019, partially offset by an increase in the prime rate.

• The total purchase discount on loans from Focus Business Bank (“Focus”) loan portfolio was $5.4 million on the acquisition date of August 20, 2015, of which $623,000 remains outstanding as of March 31, 2019.  The total purchase discount on loans from Tri-Valley loan portfolio was $2.6 million on the acquisition date of April 6, 2018, of which $2.1 million remains outstanding as of March 31, 2019.  The total purchase discount on loans from United American loan portfolio was $4.7 million on the acquisition date of May 4, 2018, of which $3.3 million remains outstanding as of March 31, 2019.

• The cost of total deposits was 0.28% for the first quarter of 2019, compared to 0.16% for the first quarter of 2018 and 0.25% for the fourth quarter of 2018. The increase in the cost of total deposits for the first quarter of 2019 was consistent with the increase in market interest rates. 
  
  
• There was a $1.1 million credit to the provision for loan losses for the first quarter of 2019, compared to a $506,000 provision for loan losses for the first quarter of 2018, and a $142,000 provision for loan losses for the fourth quarter of 2018.  
  
  
• Total noninterest income increased 12% to $2.5 million for the first quarter of 2019, compared to $2.2 million for the first quarter of 2018, primarily due to higher service charges and fees on deposit accounts and higher termination fees at Bay View Funding included in other noninterest income, partially offset by lower gain on sales of Small Business Administration (“SBA”) loans and no gain on sales of securities in the first quarter of 2019.  Noninterest income increased to $2.5 million at March 31, 2019  from $2.4 million for the fourth quarter of 2018. 
  
  
• Total noninterest expense for the first quarter of 2019 increased to $17.9 million, compared to $16.0 million for the first quarter of 2018, primarily due to higher salaries and employee benefits as a result of annual salary increases, and additional employees and operating costs of the Tri-Valley and United American acquisitions, partially offset by costs related to the merger transactions of $615,000 incurred in the first quarter of 2018.  Total noninterest expense for the first quarter of 2019 increased from $16.9 million for the fourth quarter of 2018, primarily due to higher salaries and employee benefits, consistent with the cyclical nature of these expenses. 
  
  • Full time equivalent employees were 309 at March 31, 2019, 271 at March 31, 2018, and 302 at December 31, 2018. 
  
  
• The efficiency ratio for the first quarter of 2019 was 53.47%, compared to 56.02% for the first quarter of 2018, and 47.78% for the fourth quarter of 2018.
  
  
• Income tax expense for the first quarter of 2019 was $4.5 million, compared to income tax expense of $3.2 million for the first quarter of 2018, and an income tax expense of $5.1 million for the fourth quarter of 2018.  The effective tax rate for the first quarter of 2019 was 27.1%, compared to 26.9% for the first quarter of 2018, and 28.0% for the fourth quarter of 2018.
  
  • The difference in the effective tax rate for the periods reported compared to the combined Federal and state statutory tax rate of 29.6% 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 (net of low income housing investment losses), and tax-exempt interest income earned on municipal bonds.

Balance Sheet Review, Capital Management and Credit Quality:

• Total assets increased 12% to $3.12 billion at March 31, 2019, compared to $2.79 billion at March 31, 2018, primarily due to the Tri-Valley and United American acquisitions.  As of March 31, 2019, Tri-Valley added $103.5 million in loans and $74.5 million in deposits.  As of March 31, 2019, United American added $174.3 million in loans and $219.1 million in deposits.  Total assets increased 1% from $3.10 billion at December 31, 2018.
  
  
• Securities available-for-sale, at fair value, totaled $452.5 million at March 31, 2019, compared to $344.8 million at March 31, 2018, and $459.0 million at December 31, 2018.  At March 31, 2019, the Company’s securities available-for-sale portfolio comprised $295.6 million of agency mortgage-backed securities (all issued by U.S. Government sponsored entities), $149.5 million of U.S. Treasury, and $7.4 million of U.S. Government sponsored entities debt securities. The pre-tax unrealized loss on securities available-for-sale at March 31, 2019 was ($2.9) million, compared to a pre-tax unrealized loss on securities available-for-sale of ($9.5) million at March 31, 2018, and a pre-tax unrealized loss on securities available-for-sale of ($7.7) million at December 31, 2018.  All other factors remaining the same, when market interest rates are rising, the Company will experience a lower unrealized gain (or a higher unrealized loss) on the securities portfolio.
  
  
• At March 31, 2019, securities held-to-maturity, at amortized cost, totaled $367.0 million, compared to $395.3 million at March 31, 2018, and $377.2 million at December 31, 2018.  At March 31, 2019, the Company’s securities held-to-maturity portfolio comprised $281.1 million of agency mortgage-backed securities, and $85.9 million of tax-exempt municipal bonds.
  
  
• The loan portfolio remains well-diversified as reflected in the following table which summarizes the distribution of loans, excluding loans held-for-sale, and the percentage of distribution in each category for the periods indicated:      

• Loans, excluding loans held-for-sale, increased $257.1 million, or 16%, to $1.85 billion at March 31, 2019, compared to $1.59 billion at March 31, 2018, which included $174.3 million in loans from United American and $103.5 million in loans from Tri-Valley, partially offset by a decrease of $6.4 million in purchased residential mortgage loans, a decrease of $4.7 million of purchased commercial real estate (“CRE”) loans, and a decrease of $9.6 million in the Company’s legacy portfolio. Loans, excluding loans held-for-sale, decreased (2%) to $1.85 billion at March 31, 2019, compared to $1.89 billion December 31, 2018, primarily due to payoffs in the commercial land and construction loan portfolios.

• The commercial loan portfolio decreased $13.1 million to $559.7 million at March 31, 2019 from $572.8 million at March 31, 2018, primarily due to a decrease of $23.4 million, or (4%), in the Company’s legacy portfolio, partially offset by $7.9 million of loans added from United American and $2.4 million of loans added from Tri-Valley.  The commercial loan portfolio decreased $38.1 million, or (6%), from $597.8 million at December 31, 2018.  C&I line usage was 37% at March 31, 2019, compared to 36% at both March 31, 2018 and December 31, 2018.

• The CRE loan portfolio increased $237.1 million, or 31%, to $1.01 billion at March 31, 2019, compared to $775.5 million at March 31, 2018, which included $123.6 million of loans added from United American and $89.7 million of loans added from Tri-Valley, and an increase of $28.5 million, or 4%, in the Company’s legacy portfolio, partially offset by a decrease of $4.7 million in purchased CRE loans.  The CRE loan portfolio increased $18.6 million, or 2%, from $994.1 million at December 31, 2018.  At March 31, 2019, 39% of the CRE loan portfolio was secured by owner-occupied real estate.

• Land and construction loans decreased $15.3 million, or (13%), to $98.2 million at March 31, 2019 from to $113.5 million at March 31, 2018. Land and construction loans decreased $24.1 million, or (20%), from $122.3 million at December 31, 2018.

• Home equity lines of credit increased $42.3 million, or 56%, to $118.4 million at March 31, 2019, compared to $76.1 million at March 31, 2018, which included $27.5 million of loans added from United American and $11.4 million of loans added from Tri-Valley, and an increase of $3.4 million, or 5%, in the Company’s legacy portfolio.  Home equity lines of credit increased $9.3 million, or 9%, from $109.1 million at December 31, 2018.

• Residential mortgage loans increased $6.9 million, or 16%, to $49.8 million at March 31, 2019, compared to $42.9 million at March 31, 2018, primarily due to $13.3 million of loans added from United American, partially offset by a $6.4 million decrease in purchased residential mortgage loans.  Residential mortgage loans decreased to $49.8 million from $51.0 million at December 31, 2018.

• The following table summarizes the allowance for loan losses (“ALLL”) for the periods indicated:

       
• The ALLL was 1.48% of total loans at March 31, 2019, compared to 1.27% at March 31, 2018, and 1.48% at December 31, 2018.  The ALLL to total nonperforming loans decreased to 157.77% at March 31, 2019, compared to 530.67% at March 31, 2018, and 187.06% at December 31, 2018.

• Net recoveries totaled $531,000 for the first quarter of 2019, compared to net charge-offs of $25,000 for the first quarter of 2018, and net recoveries of $280,000 for the fourth quarter of 2018.   

• The following is a breakout of nonperforming assets (“NPAs”) at the periods indicated:       

• NPAs totaled $17.3 million, or 0.56% of total assets, at March 31, 2019, compared to $3.8 million, or 0.14% of total assets, at March 31, 2018, and $14.9 million, or 0.48% of total assets, at December 31, 2018.  The increase in NPAs at March 31, 2019 from March 31, 2018, was primarily due to two lending relationships.

• A large lending relationship was placed on nonaccrual during the second quarter of 2018.  At March 31, 2019, the recorded investment of this lending relationship was $10.8 million, and the Company had a $5.9 million specific loan loss reserve allocated for this lending relationship, compared to a recorded investment of $12.0 million, and a $6.7 million specific loan loss reserve allocated for this lending relationship at December 31, 2018.

• In addition, the Company has two secured CRE loans outstanding to entities affiliated with DC Solar Solutions, Inc. (“DC Solar”), which were placed on nonaccrual during the first quarter of 2019.  In February, 2019, DC Solar and a number of its affiliates, including each of the borrowers of the loans, filed a Chapter 11 petition under the Bankruptcy Code, which was subsequently converted to a Chapter 7 proceeding on March 22, 2019.  At March 31, 2019, the recorded investment of these two CRE loans totaled $3.3 million. 

• There were no foreclosed assets at March 31, 2019, March 31, 2018, or December 31, 2018.

• Classified assets were $25.2 million, or 0.81% of total assets, at March 31, 2019, compared to $30.8 million, or 1.10% of total assets, at March 31, 2018, and $23.4 million, 0.76% of total assets, at December 31, 2018. 

• The following table summarizes the distribution of deposits and the percentage of distribution in each category for the periods indicated:       

• Total deposits increased $218.1 million, or 9%, to $2.64 billion at March 31, 2019, compared to $2.42 billion at March 31, 2018, which included $219.1 million in deposits from United American, $74.5 million in deposits from Tri-Valley, partially offset by a decrease of $75.5 million, or (3%) in the Company’s legacy deposits.  Total deposits remained relatively flat from $2.64 billion at December 31, 2018.

• Deposits, excluding all time deposits and CDARS deposits, increased $195.6 million, or 9%, to $2.48 billion at March 31, 2019, compared to $2.29 billion at March 31, 2018, which included $199.5 million of deposits added from United American, $68.1 million of deposits added from Tri-Valley, partially offset by a decrease of $72.0 million, or (3%), in the Company’s legacy deposits.  Deposits, excluding all time deposits and CDARS deposits, at March 31, 2019 remained relatively flat compared to $2.48 billion at December 31, 2018.

• Time deposits of $250,000 and over increased $18.6 million, or 26% to $90.0 million at March 31, 2019, compared to $71.4 million at March 31, 2018, which included $9.1 million of deposits added from United American and $2.5 million of deposits added from Tri-Valley, and an increase of $7.0 million, or 10%, in the Company’s legacy deposits.  Time deposits of $250,000 and over at March 31, 2019 increased $3.9 million, or 5%, compared to $86.1 million at December 31, 2018.

• The Company’s consolidated capital ratios exceeded regulatory guidelines and the Bank’s capital ratios exceeded the regulatory guidelines under the Basel III prompt corrective action (“PCA”) regulatory guidelines for a well-capitalized financial institution, and the Basel III minimum regulatory requirements at March 31, 2019, as reflected in the following table:

      (1) Basel III minimum regulatory requirements for both the Company and the Bank include a 2.5% capital conservation buffer, except the leverage ratio.       

• The following table reflects the components of accumulated other comprehensive loss, net of taxes, for the periods indicated:
         

• Tangible equity increased to $283.3 million at March 31, 2019, compared to $220.0 million at March 31, 2018, primarily due to the Tri-Valley and United American acquisitions.  Tangible equity was $271.7 million at December 31, 2018.  Tangible book value per share was $6.54 at March 31, 2019, compared to $5.75 at March 31, 2018, and $6.28 at December 31, 2018.              

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, CA with full-service branches in Danville, Fremont, Gilroy, Hollister, Livermore, Los Altos, Los Gatos, Morgan Hill, Pleasanton, Redwood City, San Jose, San Mateo, Sunnyvale, and Walnut Creek.  Heritage Bank of Commerce is an SBA Preferred Lender.  Bay View Funding, a subsidiary of Heritage Bank of Commerce, is based in Santa Clara, CA and provides business-essential working capital factoring financing to various industries throughout the United States.  For more information, please visit www.heritagecommercecorp.com.

Forward-Looking Statement Disclaimer

These forward-looking statements are subject to various risks and uncertainties that may be outside our control and our actual results could differ materially from our projected results.  Risks and uncertainties that could cause our financial performance to differ materially from our goals, plans, expectations and projections expressed in forward-looking statements include those set forth in our filings with the Securities and Exchange Commission, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, and the following: (1) current and future economic and market conditions in the United States generally or in the communities we serve, including the effects of declines in property values and overall slowdowns in economic growth should these events occur; (2) effects of and changes in trade, monetary and fiscal policies and laws, including the interest rate policies of the Federal Open Market Committee of the Federal Reserve Board; (3) our ability to anticipate interest rate changes and manage interest rate risk; (4) changes in inflation, interest rates, and market liquidity which may impact interest margins and impact funding sources; (5) volatility in credit and equity markets and its effect on the global economy; (6) our ability to effectively compete with other banks and financial services companies and the effects of competition in the financial services industry on our business; (7) our ability to achieve loan growth and attract deposits; (8) risks associated with concentrations in real estate related loans; (9) the relative strength or weakness of the commercial and real estate markets where are borrowers are located, including related asset and market prices; (10) other than temporary impairment charges to our securities portfolio; (11) changes in the level of nonperforming assets and charge offs and other credit quality measures, and their impact on the adequacy of the Company’s allowance for loan losses and the Company’s provision for loan losses; (12) increased capital requirements  for our continual growth or as imposed by banking regulators, which may require us to raise capital at a time when capital is not available on favorable terms or at all; (13) regulatory limits on Heritage Bank of Commerce’s ability to pay dividends to the Company; (14) changes in our capital management policies, including those regarding business combinations, dividends, and share repurchases; (15) operational issues stemming from, and/or capital spending necessitated by, the potential need to adapt to industry changes in information technology systems, on which we are highly dependent; (16) our inability to attract, recruit,  and retain qualified officers and other personnel could harm our ability to implement our strategic plan, impair our relationships with customers and adversely affect our business, results of operations and growth prospects; (17) the potential increase in reserves and allowance for loan loss as a result of the transition to the current expected credit loss standard (“CECL”) established by the Financial Accounting Standards Board to account for expected credit losses; (18) possible impairment of our goodwill and other intangible assets; (19) possible  adjustment of the valuation of our deferred tax assets; (20) expected cost savings in connection with the consolidation of recent acquisitions may not be fully realized or realized within the expected time frames, deposit attrition, customer loss; (21) our ability to keep pace with technological changes, including our ability to identify and address cyber-security risks such as data security breaches, “denial of service” attacks, “hacking” and identity theft; (22) inability of our framework to manage risks associated with our business, including operational risk and credit risk; (23) risks of loss of funding of Small Business Administration or SBA loan programs, or changes in those programs; (24) compliance with governmental and regulatory requirements, including the Dodd-Frank Act and others relating to banking, consumer protection, securities , accounting and tax matters; (25) significant changes in applicable laws and regulations, including those concerning taxes, banking and securities; (26) effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; (27) costs and effects of legal and regulatory developments, including resolution of legal proceedings or regulatory or other governmental inquiries, and the results of regulatory examinations or reviews; (28) availability of and competition for acquisition opportunities; (29) risks resulting from domestic terrorism; (30) risks of natural disasters (including earthquakes) and other events beyond our control; and (31) our success in managing the risks involved in the foregoing factors.

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