Heritage Commerce Corp (HTBK, Financial) filed Quarterly Report for the period ended 2009-09-30.
Heritage Commerce Corp. is the holding company of Heritage Bank of Commerce Heritage Bank East Bay Heritage Bank South Valley and Bank of Los Altos. The company offers a range of loans primarily commercial including real estate construction Small Business Administration) inventory and accounts receivable and equipment loans. The company also accepts checking savings and time deposits; NOW and money market deposit accounts; and provides travelers' checks safe deposit and other customary non-deposit banking services. Heritage Commerce Corp has a market cap of $40.9 million; its shares were traded at around $3.46 with a P/E ratio of 10.2 and P/S ratio of 0.6. Heritage Commerce Corp had an annual average earning growth of 16.6% over the past 5 years.
$28.3 million provision for loan losses and $1.8 million in dividends and discount accretion on preferred stock. In the nine months ended September 30, 2008, net income allocable to common shareholders was $1.1 million, or $0.09 per common share, including a provision for loan losses of $11.0 million and no dividends or discount accretion on preferred stock. The annualized returns on average assets and average equity for the first nine months of 2009 were -1.05% and -8.43%, compared to 0.10% and 0.95% for the first nine months of 2008, respectively.
Net interest income decreased 11% to $11.6 million in the third quarter of 2009 from $13.0 million in the third quarter of 2008, primarily due to compression of the net interest margin and lower average loans. Net interest income in the first nine months of 2009 decreased to $34.5 million, or 12% from $39.1 million in the first nine months of 2008, primarily due to compression of the net interest margin, partially offset by an increase in average loans. The net interest margin decreased 21 basis points to 3.62% during the third quarter of 2009, compared with 3.83% for the third quarter a year ago, but increased 7 basis points from 3.55% for the second quarter of 2009. The Company's net interest margin decreased to 3.51% for the nine months ended September 30, 2009 compared to 4.04% for the first nine months of 2008. The 7 basis point increase in the net interest margin in the third quarter of 2009, compared to the second quarter of 2009, was primarily due to lower cost of funds and higher yields on loans. The decrease in the net interest margin from the first nine months of 2008 was primarily the result of the 275 basis point decline in short-term interest rates prompted by several consecutive Federal Reserve rate cuts from March through December 2008. The provision for loan losses of $7.1 million for the third quarter of 2009, compared to $1.6 million in the third quarter of 2008 and $10.7 million in the second quarter of 2009. The provision for loan losses for the nine months ended September 30, 2009 was $28.3 million, compared to $11.0 million for the same period a year ago. Noninterest income increased 39% to $2.4 million in the third quarter of 2009 from $1.7 million in the third quarter of 2008, and increased 12% to $5.6 million in the first nine months of 2009 from $5.0 million in the first nine months of 2008, primarily due to a $643,000 gain on the sale of SBA loans. Noninterest expense increased 3% to $10.7 million in the third quarter of 2009 from $10.4 million in the third quarter of 2008, and increased 7% to $34.2 million for the nine months ended September 30, 2009 from $32.0 million for the nine months ended September 30, 2008. The increase in noninterest expense is primarily due to problem loan expenses, higher FDIC deposit insurance costs, and higher professional fees. The efficiency ratio was 76.89% and 85.38% in the three and nine months ended September 30, 2009, compared to 70.56% and 72.48% in the three and nine months ended September 30, 2008, respectively, primarily due to compression of the net interest margin and higher noninterest expense. The income tax benefit for the three and nine months ended September 30, 2009 was $1.8 million and $11.0 million, respectively, as compared to an income tax expense of $309,000 and $39,000 for the same periods in 2008. The negative effective income tax rates for the three and nine months ended September 30, 2009 were 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 loans and municipal securities. 22
Total assets decreased by $131.6 million, or 9%, to $1.37 billion at September 30, 2009 from $1.50 billion at December 31, 2008. Total loans, excluding loans held-for-sale, decreased $168.8 million, or 13%, to $1.08 billion at September 30, 2009 compared to $1.25 billion at September 30, 2008, and decreased $167.1 million, or 13%, compared to $1.25 billion at December 31, 2008. Land and construction loans decreased $59.2 million from $256.6 million at December 31, 2008 to $197.4 million at September 30, 2009. The allowance for loan losses increased to $29.0 million, or 2.68% of total loans, compared to $22.3 million, or 1.79% of total loans at September 30, 2008, and $25.0 million, or 2.00% of total loans at December 31, 2008. Nonperforming assets increased $33.1 million to $58.2 million, or 4.26% of total assets, from $25.1 million, or 1.66% of total assets at September 30, 2008, and increased $17.1 million from $41.1 million, or 2.74% of total assets at December 31, 2008. Net charge-offs increased to $9.6 million in the third quarter of 2009, compared to $129,000 in the third quarter of 2008. Deposits decreased to $1.12 billion at September 30, 2009, compared to $1.19 billion at September 30, 2008, and $1.15 billion at December 31, 2008. The ratio of noncore funding (which consists of time deposits $100,000 and over, CDARS deposits, brokered deposits, securities under agreement to repurchase, notes payable and other short-term borrowings) to total assets was 28% at September 30, 2009, compared to 32% at September 30, 2008 and December 31, 2008. The loan to deposit ratio was 96.88% at September 30, 2009, compared to 105.41% at September 30, 2008, and 108.20% at December 31, 2008. Heritage Bank of Commerce is well-capitalized with a leverage ratio of 9.82%, a tier 1 risk-based capital ratio of 11.24%, and a total risk-based capital ratio of 12.51% at September 30, 2009. Heritage Commerce Corp is well-capitalized with a leverage ratio of 10.08%, a tier 1 risk-based capital ratio of 11.55%, and a total risk-based capital ratio of 12.82% at September 30, 2009. Deposits
The composition and cost of the Company's deposit base are important in analyzing the Company's net interest margin and balance sheet liquidity characteristics. Except for brokered time deposits, the Company's depositors are generally located in its primary market area. Depending on loan demand and other funding requirements, the Company also obtains deposits from wholesale sources including deposit brokers. The Company had $181.8 million in brokered deposits at September 30, 2009, compared to $185.1 million at September 30, 2008. Deposits from title insurance companies, escrow accounts and real estate exchange facilitators decreased to $32.9 million at September 30, 2009, compared to $82.5 million at September 30, 2008. The Company has a policy to monitor all deposits that may be sensitive to interest rate changes to help assure that liquidity risk does not become excessive due to concentrations.
As of September 30, 2009, HBC's total risk-based capital ratio was 12.51%, compared to the 10% regulatory requirement for well-capitalized banks. Our Tier 1 risk-based capital ratio of 11.24% and our leverage ratio of 9.82% as of September 30, 2009 also significantly exceeded regulatory guidelines for well-capitalized banks. On November 21, 2008, the Company issued to the U.S. Treasury under its Capital Purchase Program 40,000 shares of Series A Preferred Stock and warrants to purchase 462,963 shares of common stock at an exercise price of $12.96 for $40 million. The terms of the U.S. Treasury TARP Capital Purchase Program could reduce investment returns to our shareholders by restricting dividends to common shareholders, diluting existing shareholders' interests, and restricting capital management practices. The Company accrued $511,000 of dividends in the third quarter of 2009 on the preferred stock issued to the U.S. Treasury under the TARP Capital Purchase Program.
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Heritage Commerce Corp. is the holding company of Heritage Bank of Commerce Heritage Bank East Bay Heritage Bank South Valley and Bank of Los Altos. The company offers a range of loans primarily commercial including real estate construction Small Business Administration) inventory and accounts receivable and equipment loans. The company also accepts checking savings and time deposits; NOW and money market deposit accounts; and provides travelers' checks safe deposit and other customary non-deposit banking services. Heritage Commerce Corp has a market cap of $40.9 million; its shares were traded at around $3.46 with a P/E ratio of 10.2 and P/S ratio of 0.6. Heritage Commerce Corp had an annual average earning growth of 16.6% over the past 5 years.
Highlight of Business Operations:
For the three months ended September 30, 2009, the net loss was $2.1 million. Net loss allocable to common shareholders was $2.7 million, or $(0.23) per common share for the quarter ended September 30, 2009, which included a $7.1 million provision for loan losses and $599,000 in dividends and discount accretion on preferred stock. In the quarter ended September 30, 2008, net income allocable to common shareholders was $2.4 million, or $0.21 per common share, including a provision for loan losses of $1.6 million and no dividends or discount accretion on preferred stock. The annualized returns on average assets and average equity for the third quarter of 2009 were -0.58% and -4.67%, compared to 0.65% and 6.78% for the third quarter of 2008.$28.3 million provision for loan losses and $1.8 million in dividends and discount accretion on preferred stock. In the nine months ended September 30, 2008, net income allocable to common shareholders was $1.1 million, or $0.09 per common share, including a provision for loan losses of $11.0 million and no dividends or discount accretion on preferred stock. The annualized returns on average assets and average equity for the first nine months of 2009 were -1.05% and -8.43%, compared to 0.10% and 0.95% for the first nine months of 2008, respectively.
Net interest income decreased 11% to $11.6 million in the third quarter of 2009 from $13.0 million in the third quarter of 2008, primarily due to compression of the net interest margin and lower average loans. Net interest income in the first nine months of 2009 decreased to $34.5 million, or 12% from $39.1 million in the first nine months of 2008, primarily due to compression of the net interest margin, partially offset by an increase in average loans. The net interest margin decreased 21 basis points to 3.62% during the third quarter of 2009, compared with 3.83% for the third quarter a year ago, but increased 7 basis points from 3.55% for the second quarter of 2009. The Company's net interest margin decreased to 3.51% for the nine months ended September 30, 2009 compared to 4.04% for the first nine months of 2008. The 7 basis point increase in the net interest margin in the third quarter of 2009, compared to the second quarter of 2009, was primarily due to lower cost of funds and higher yields on loans. The decrease in the net interest margin from the first nine months of 2008 was primarily the result of the 275 basis point decline in short-term interest rates prompted by several consecutive Federal Reserve rate cuts from March through December 2008. The provision for loan losses of $7.1 million for the third quarter of 2009, compared to $1.6 million in the third quarter of 2008 and $10.7 million in the second quarter of 2009. The provision for loan losses for the nine months ended September 30, 2009 was $28.3 million, compared to $11.0 million for the same period a year ago. Noninterest income increased 39% to $2.4 million in the third quarter of 2009 from $1.7 million in the third quarter of 2008, and increased 12% to $5.6 million in the first nine months of 2009 from $5.0 million in the first nine months of 2008, primarily due to a $643,000 gain on the sale of SBA loans. Noninterest expense increased 3% to $10.7 million in the third quarter of 2009 from $10.4 million in the third quarter of 2008, and increased 7% to $34.2 million for the nine months ended September 30, 2009 from $32.0 million for the nine months ended September 30, 2008. The increase in noninterest expense is primarily due to problem loan expenses, higher FDIC deposit insurance costs, and higher professional fees. The efficiency ratio was 76.89% and 85.38% in the three and nine months ended September 30, 2009, compared to 70.56% and 72.48% in the three and nine months ended September 30, 2008, respectively, primarily due to compression of the net interest margin and higher noninterest expense. The income tax benefit for the three and nine months ended September 30, 2009 was $1.8 million and $11.0 million, respectively, as compared to an income tax expense of $309,000 and $39,000 for the same periods in 2008. The negative effective income tax rates for the three and nine months ended September 30, 2009 were 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 loans and municipal securities. 22
Total assets decreased by $131.6 million, or 9%, to $1.37 billion at September 30, 2009 from $1.50 billion at December 31, 2008. Total loans, excluding loans held-for-sale, decreased $168.8 million, or 13%, to $1.08 billion at September 30, 2009 compared to $1.25 billion at September 30, 2008, and decreased $167.1 million, or 13%, compared to $1.25 billion at December 31, 2008. Land and construction loans decreased $59.2 million from $256.6 million at December 31, 2008 to $197.4 million at September 30, 2009. The allowance for loan losses increased to $29.0 million, or 2.68% of total loans, compared to $22.3 million, or 1.79% of total loans at September 30, 2008, and $25.0 million, or 2.00% of total loans at December 31, 2008. Nonperforming assets increased $33.1 million to $58.2 million, or 4.26% of total assets, from $25.1 million, or 1.66% of total assets at September 30, 2008, and increased $17.1 million from $41.1 million, or 2.74% of total assets at December 31, 2008. Net charge-offs increased to $9.6 million in the third quarter of 2009, compared to $129,000 in the third quarter of 2008. Deposits decreased to $1.12 billion at September 30, 2009, compared to $1.19 billion at September 30, 2008, and $1.15 billion at December 31, 2008. The ratio of noncore funding (which consists of time deposits $100,000 and over, CDARS deposits, brokered deposits, securities under agreement to repurchase, notes payable and other short-term borrowings) to total assets was 28% at September 30, 2009, compared to 32% at September 30, 2008 and December 31, 2008. The loan to deposit ratio was 96.88% at September 30, 2009, compared to 105.41% at September 30, 2008, and 108.20% at December 31, 2008. Heritage Bank of Commerce is well-capitalized with a leverage ratio of 9.82%, a tier 1 risk-based capital ratio of 11.24%, and a total risk-based capital ratio of 12.51% at September 30, 2009. Heritage Commerce Corp is well-capitalized with a leverage ratio of 10.08%, a tier 1 risk-based capital ratio of 11.55%, and a total risk-based capital ratio of 12.82% at September 30, 2009. Deposits
The composition and cost of the Company's deposit base are important in analyzing the Company's net interest margin and balance sheet liquidity characteristics. Except for brokered time deposits, the Company's depositors are generally located in its primary market area. Depending on loan demand and other funding requirements, the Company also obtains deposits from wholesale sources including deposit brokers. The Company had $181.8 million in brokered deposits at September 30, 2009, compared to $185.1 million at September 30, 2008. Deposits from title insurance companies, escrow accounts and real estate exchange facilitators decreased to $32.9 million at September 30, 2009, compared to $82.5 million at September 30, 2008. The Company has a policy to monitor all deposits that may be sensitive to interest rate changes to help assure that liquidity risk does not become excessive due to concentrations.
As of September 30, 2009, HBC's total risk-based capital ratio was 12.51%, compared to the 10% regulatory requirement for well-capitalized banks. Our Tier 1 risk-based capital ratio of 11.24% and our leverage ratio of 9.82% as of September 30, 2009 also significantly exceeded regulatory guidelines for well-capitalized banks. On November 21, 2008, the Company issued to the U.S. Treasury under its Capital Purchase Program 40,000 shares of Series A Preferred Stock and warrants to purchase 462,963 shares of common stock at an exercise price of $12.96 for $40 million. The terms of the U.S. Treasury TARP Capital Purchase Program could reduce investment returns to our shareholders by restricting dividends to common shareholders, diluting existing shareholders' interests, and restricting capital management practices. The Company accrued $511,000 of dividends in the third quarter of 2009 on the preferred stock issued to the U.S. Treasury under the TARP Capital Purchase Program.
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