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Heritage Commerce Corp Earns $11.3 Million for the Third Quarter of 2019 and $34.8 Million for the Nine Months Ended September 30, 2019

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SAN JOSE, Calif., Oct. 24, 2019 (GLOBE NEWSWIRE) -- Heritage Commerce Corp (NASDAQ:HTBK), the holding company (the "Company") for Heritage Bank of Commerce (the "Bank"), today announced net income was $11.3 million, or $0.26 per average diluted common share, for the third quarter of 2019, compared to $12.4 million, or $0.28 per average diluted common share, for the third quarter of 2018, and $11.4 million, or $0.26 per average diluted common share, for the second quarter of 2019. For the nine months ended September 30, 2019, net income was $34.8 million, or $0.80 per average diluted common share, compared to $22.1 million, or $0.53 per average diluted common share, for the nine months ended September 30, 2018. All results are unaudited.

Earnings for the second quarter of 2019, the third quarter of 2019, and the first nine months of 2019 were reduced by merger-related costs of $540,000, $661,000, and $1.2 million, respectively, related to the merger with Presidio Bank ("Presidio") which was completed on October 11, 2019. Earnings for the third quarter of 2018 and for the first nine months of 2018 were reduced by merger-related costs of $199,000 and $9.0 million, respectively, for the acquisitions of Tri-Valley Bank ("Tri-Valley") and United American Bank ("United American") which were completed on April 6, 2018 and May 4, 2018, respectively.

"Our solid third quarter of 2019 financial results continue to demonstrate the strength of our franchise, generating record earnings for the first nine months of 2019," said Keith A. Wilton, President and Chief Executive Officer. "We delivered improved credit quality metrics, with noteworthy reductions in nonperforming loans and classified assets. Despite a very challenging interest rate environment, our loan and deposit trends were stable with noninterest-bearing deposits increasing 10% on a linked quarter basis and representing 41% of total deposits as of September 30, 2019.

"We completed the acquisition of Presidio Bank on October 11, 2019, and are pleased to welcome their employees, customers and shareholders to the Heritage Bank of Commerce family," added Mr. Wilton. "This continuation of our strategic growth offers our new customers a broad array of new product offerings, increased lending limits and an expanded branch delivery system that stretches throughout the Greater San Francisco Bay Area. We remain focused on creating value for all of our customers – new and old – our communities, shareholders, and our many employees who support our customers each and every day."

Third Quarter 2019 Highlights (as of, or for the periods ended September 30, 2019, compared to September 30, 2018, and June 30, 2019, except as noted):

Operating Results:

♦ Diluted earnings per share were $0.26 for the third quarter of 2019, compared to $0.28 for the third quarter of 2018, and $0.26 for the second quarter of 2019.  Diluted earnings per share were $0.80 for the first nine months of 2019, compared to $0.53 for the first nine months of 2018.  

  • Earnings for the third quarter of 2019, second quarter of 2019, and first nine months of 2019 were reduced by merger-related costs for the merger with Presidio, and earnings for the third quarter of 2018, and first nine months of 2018 were reduced by merger-related costs for the acquisitions of Tri-Valley and United American, as follows:
                 
    For the Quarter Ended   For the Nine Months Ended
MERGER-RELATED COSTS   September 30,    June 30,    September 30,    September 30,    September 30, 
(in $000's, unaudited)   2019   2019   2018   2019   2018
Salaries and employee benefits   $  —   $  —   $  183   $  —   $  3,576
Other      661      540      16      1,201      5,452
Total merger-related costs   $  661   $  540   $  199   $  1,201   $  9,028
                               

♦ The following table indicates the ratios for the return on average tangible assets and the return on average tangible equity for the periods indicated:

    For the Quarter Ended   For the Nine Months Ended  
    September 30,    June 30,    September 30,    September 30,    September 30,   
    2019   2019   2018   2019   2018  
Return on average tangible assets   1.49 %     1.53 %     1.59 %     1.55 %     1.01 %    
Return on average tangible equity   15.08 %     15.94 %     19.36 %     16.26 %     12.33 %    
                                 

♦ Net interest income, before provision for loan losses, decreased 6% to $30.6 million for the third quarter of 2019, compared to $32.5 million for the third quarter of 2018, and decreased 1% from $30.9 million for the second quarter of 2019. Net interest income increased 4% to $92.6 million for the first nine months of 2019, compared to $89.0 million for the first nine months of 2018. 

  • The fully tax equivalent ("FTE") net interest margin contracted 12 basis points to 4.24% for the third quarter of 2019, from 4.36% for the third quarter of 2018, primarily due to a decline in the average balance of loans and a higher cost of deposits. The net interest margin contracted 14 basis points for the third quarter of 2019 from 4.38% for the second quarter of 2019, primarily due to a decrease in the average yield on loans, securities and overnight funds, partially offset by a higher average balance of loans.
                 
  • For the first nine months of 2019, the net interest margin expanded 6 basis points to 4.33%, compared to 4.27% for the first nine months of 2018, primarily due to a higher average balance of loans and securities, the impact of increases in the yields on loans, investment securities, and overnight funds, and an increase in the accretion of the loan purchase discount into loan interest income from the acquisitions, partially offset by an increase in the cost of deposits, and a decrease in the average balance of Bay View Funding's factored receivables.

♦ The following tables present the average balance of loans outstanding, interest income, and the average yield for the periods indicated:

    For the Quarter Ended   For the Quarter Ended  
    September 30, 2019   September 30, 2018  
    Average   Interest   Average   Average   Interest   Average  
(in $000's, unaudited)   Balance   Income   Yield   Balance   Income   Yield  
Loans, core bank and asset-based lending   $  1,748,379     $  23,401    5.31 $  1,780,025     $  23,374    5.21 %
Bay View Funding factored receivables      47,614        2,879    23.99    69,740        4,185    23.81 %
Residential mortgages      34,639        229    2.62    40,277        272    2.68 %
Purchased commercial real estate ("CRE")  loans      30,567        284    3.69    36,167        295    3.24
Loan credit mark / accretion      (5,359
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