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Heritage Commerce Corp Reports Operating Results (10-Q)

May 11, 2010 | About:
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10qk

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Heritage Commerce Corp (HTBK) filed Quarterly Report for the period ended 2010-03-31.

Heritage Commerce Corp has a market cap of $58.9 million; its shares were traded at around $4.98 with and P/S ratio of 0.8.

Highlight of Business Operations:

For the three months ended March 31, 2010, net loss was $4.1 million. Net loss allocable to common shareholders was $4.7 million, or $(0.40) per diluted common share for the first quarter ended March 31, 2010, which included a $5.1 million provision for loan losses and $591,000 in dividends and discount accretion on preferred stock. In the quarter ended March 31, 2009, net loss was $4.0 million. Net loss allocable to common shareholders was $4.5 million, or $(0.38) per diluted common share for the first quarter ended March 31, 2009, which included a $10.4 million provision for loan losses and $585,000 in dividends and discount accretion on preferred stock. The loss before income tax benefit was $4.2 million in the first quarter of 2010, compared to $9.0 million in the first quarter of 2009. The Company's return on average assets was -1.23% and return on average equity was -9.61% for the first quarter of 2010 compared to -1.08% and -8.65% a year ago.

Net interest income increased 2% to $11.4 million for the first quarter of 2010 from $11.2 million for the first quarter of 2009, primarily due to expansion of the net interest margin. The net interest margin increased 46 basis points to 3.81% for the first quarter of 2010, compared with 3.35% for the first quarter of 2009, and increased 20 basis points compared with 3.61% for the fourth quarter of 2009. The increase in the net interest margin was primarily due to lower deposits and borrowing costs. The provision for loan losses was $5.1 million for the first quarter of 2010, compared to $10.4 million for the first quarter of 2009. Noninterest income increased 4% to $1.7 million for the first quarter of 2010 from $1.6 million for the first quarter of 2009, primarily due to the gain on the sale of loans of $114,000. Noninterest expense increased 7% to $12.2 million for the first quarter of 2010 from $11.4 million for the first quarter of 2009. The increase in noninterest expense was primarily due to higher FDIC deposit insurance premiums, professional fees related to problem loans, and expenses related to OREO properties. The efficiency ratio was 93.45% for the first quarter of 2010, compared to 88.94% for the first quarter of 2009, primarily due to higher noninterest expenses. The income tax benefit for the first quarter of 2010 was $120,000, as compared to an income tax benefit of $5.1 million for the first quarter of 2009. The negative effective income tax rate was 3% for first quarter of 2010, compared to 56% for the first quarter of 2009. 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. The following are important factors in understanding our current financial condition and liquidity position:

Total assets decreased by $27.3 million, or 2%, to $1.34 billion at March 31, 2010 from $1.36 billion at December 31, 2009. Total loans, excluding loans held-for-sale, decreased $204.1 million, or 17%, to $1.01 billion at March 31, 2010, compared to $1.21 billion at March 31, 2009, and decreased $63.7 million, or 6%, from December 31, 2009. Land and construction loans decreased $90.4 million, or 37%, to $153.8 million at March 31, 2010, compared to $244.2 million at March 31, 2009, and decreased $29.1 million, or 16%, from $182.9 million at December 31, 2009. The allowance for loan losses was $26.5 million, or 2.64% of total loans at March 31, 2010, compared to $23.9 million or 1.97% of total loans at March 31, 2009, and $28.8 million, or 2.69% of total loans at December 31, 2009. Nonperforming assets were $69.0 million, or 5.17% of total assets at March 31, 2010, compared to $56.9 million or 3.89% of total assets at March 31, 2009 and $64.6 million, or 4.74% of total assets at December 31, 2009. Total deposits were $1.08 billion at March 31, 2010, compared to $1.17 billion at March 31, 2009, and $1.09 billion at December 31, 2009. 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 21

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 $174.5 million in brokered deposits at March 31, 2010, compared to $183.5 million at March 31, 2009, and $178.0 million at December 31, 2009. Deposits from title insurance companies, escrow accounts and real estate exchange facilitators decreased to $21.6 million at March 31, 2010, compared to $40.4 million at March 31, 2009, and $23.0 million at December 31, 2009. 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. Deposits at March 31, 2010 were $1.08 billion, compared to $1.17 billion at March 31, 2009, and $1.09 billion at December 31, 2009.

HBC is a member of the Certificate of Deposit Account Registry Service ("CDARS") program. The CDARS program allows customers with deposits in excess of FDIC insured limits to obtain coverage on time deposits through a network of banks within the CDARS program. Deposits gathered through this program are considered brokered deposits under regulatory guidelines. Deposits in the CDARS program totaled $18.5 million at March 31, 2010, compared to $12.3 million at March 31, 2009 and $38.2 million at December 31, 2009.

While net interest income remains the largest single component of total revenues, noninterest income is an important component. Prior to the third quarter of 2007, a significant percentage of the Company's noninterest income was associated with its SBA lending activity, consisting of gains on the sale of loans sold in the secondary market and servicing income from loans sold with servicing retained. From the third quarter of 2007 through the second quarter of 2009, the Company retained its SBA production. In the third quarter of 2009, the Company began to again sell loans in the secondary market. During the first quarter of 2010, $2.4 million of loans were sold resulting in a net gain on sale of loans of $114,000. Additionally, $3.9 million of SBA loans have been transferred to third parties during the first quarter of 2010. However, these loans are subject to a SBA warranty for a period of 90 days, which under new accounting guidance requires the Company to treat these as secured borrowings during the warranty period. The warranty period for these loans expires in the following quarter. Provided the loans remain current through the end of the warranty period all elements necessary to record the sale will have been met. The Company has deferred gains of $210,000 associated with these loans, which are included in other liabilities on the consolidated balance sheets. We expect to continue to sell loans in the secondary market in 2010 to enhance liquidity and improve noninterest income. Other sources of noninterest income include loan servicing fees, service charges and fees, and cash surrender value from company owned life insurance policies.

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10qk
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