Heritage Commerce Corp Earns $11.2 Million for the First Quarter of 2021

Heritage Commerce Corp
·32 min read

SAN JOSE, Calif., April 22, 2021 (GLOBE NEWSWIRE) -- Heritage Commerce Corp (Nasdaq: HTBK), the holding company (the “Company”) for Heritage Bank of Commerce (the “Bank”), today announced first quarter 2021 net income of $11.2 million, or $0.19 per average diluted common share, compared to $1.9 million, or $0.03 per average diluted common share, for the first quarter of 2020, and $11.6 million, or $0.19 per average diluted common share, for the fourth quarter of 2020. First quarter 2021 results included the recapture of $1.5 million of provision for credit losses on loans, compared to a provision for credit losses on loans of $13.3 million for the first quarter of 2020. All results are unaudited.

“While facing prolonged challenges posed by the COVID-19 crisis, and the related economic uncertainty, the Company has continued to generate solid financial results, and the first quarter 2021 earnings were no exception,” said Walter Kaczmarek, President and Chief Executive Officer. “Total deposits grew by 27%, year-over-year, fueled by successful deposit gathering efforts that attracted over $900 million. Gross loans also increased 6%, year-over-year, and by 3% on a linked quarter basis. Our return on assets improved to 0.99% in the first quarter compared to 0.19% a year ago. Our year-over-year improvement in first quarter results benefited from our higher than usual provision for credit losses in the first quarter of 2020 taken in light of a downturn in the economy caused by the COVID-19 pandemic, and from our decision to adopt the Current Expected Credit Loss (“CECL”) rate methodology early in 2020,” said Mr. Kaczmarek.

Mr. Kaczmarek continued, “Our positive credit trends continue with nonperforming assets (“NPAs”) decreasing (54%) to $5.6 million at March 31, 2021, versus $12.1 million a year earlier, and declining (29%) from $7.9 million on a linked quarter basis. We had net loan recoveries of $1.4 million from previously charged-off accounts, compared to net charge-offs of $422,000 for the first quarter a year ago.” The allowance for credit losses on loans (“ACLL”) to total loans declined slightly to 1.64%, and the ratio of ACLL to total loans, excluding PPP loans, was 1.88%, at March 31, 2021, compared to 1.70% and 1.91%, respectively, at December 31, 2020.

“Our local markets and customers have been negatively impacted by government actions necessary to contain the health crisis, and we are closely tracking our loan portfolio and responding to the needs of our customers,” said Mr. Kaczmarek. “In the meantime, our capital, ACLL, and excess liquidity positions all remain strong. The total capital ratio was 16.5% and leverage ratio was 9.1% for the Company, and 15.8% and 9.5%, respectively, for the Bank, at March 31, 2021. Notably, despite the adverse impact to the economy brought on by the pandemic, the Company’s total assets increased 23% from a year ago and surpassed the milestone of $5 billion at quarter-end. With a solid earnings performance, a large core deposit base, and excellent credit quality, we believe we have a solid foundation on which to grow as the economy recovers from the COVID-19 pandemic.”

In response to economic stimulus laws passed by Congress in 2020 and 2021, Heritage Bank of Commerce has now funded two rounds of Small Business Administration (“SBA”) Payment Protection Program (“PPP”) loans. At March 31, 2021, after accounting for loan payoffs and SBA loan forgiveness, Round 1 PPP loans were $170.4 million and Round 2 PPP loans were $179.3 million. In total the Bank had $349.7 million in outstanding PPP loan balances at quarter-end. These loans generated $784,000 in interest income, $3.4 million in net deferred fee revenue ($2.4 million from loans forgiven or paid off and $969,000 from net deferred fees), and $766,000 in deferred origination costs on Round 2 PPP loans during the first quarter of 2021. At March 31, 2021, the PPP loan portfolio had remaining deferred fees of ($8.8) million and deferred costs of $1.1 million.

On April 7, 2020, the U.S. banking agencies issued the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus. The statement describes accounting for COVID-19-related loan modifications, including clarifying the interaction between current accounting rules and the temporary relief provided by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The Bank made accommodations for initial payment deferrals for a number of customers with a window of up to 90 days, with the potential of an additional 90 days of payment deferral (180 days maximum) upon application. The Bank also waived all customary applicable fees. Of the loans for which deferrals were originally granted, nearly all have returned to regular payment status.

The following table shows the remaining deferments at March 31, 2021 by category:

Underlying Collateral

NON-SBA LOANS

Business

Real

(in $000’s, unaudited)

Assets

Estate

Total

Initial Deferments(1)

$

-

$

4,102

$

4,102

2nd Deferments(2)

3,146

724

3,870

Total

$

3,146

$

4,826

$

7,972

(1) Initial deferments were generally for 3 months

(2) 2nd deferments were for an additional 3 months

On December 27, 2020, the President signed into law the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Act”) which revised rules regarding PPP loans, provided supplemental PPP loan funding for new and existing borrowers and expanded the types of business expenses that are forgivable under the PPP program. On January 6, 2021, Treasury issued new Interim Final Rules (“IFRs”) to address the Act’s creation of PPP Second Draw Loans as well as other changes to the PPP program requirements. The IFRs codified aspects of the PPP program not specifically addressed in the Act:

  • Extending the application deadline to submit a PPP loan application to May 31, 2021, and the SBA approval deadline to June 30, 2021.

  • Allowing new PPP borrowers to use either 2019 or 2020 for business records in determining maximum loan amount.

  • Maintaining a $2 million loan amount necessity certification safe harbor.

  • Allowing borrowers who returned or did not originally accept PPP loan proceeds to reapply for receipt of those funds.

In addition to its portfolio of SBA PPP loans, the Bank also has a portfolio of SBA 7(a) loans totaling $45.9 million as of April 12, 2021 (the most recent available data). The following table reflects the status of these SBA 7(a) loans as of April 12, 2021:

SBA 7(a) LOANS

Number

(in $000’s, unaudited)

Balance

of Loans

SBA 7(a) loans (monthly payments are made

through the Economic Aid Act )

$

25,265

150

Payments Not Made / NSF / Returned

1,547

17

Due dates later in the month

12

2

New loans / No payment due

330

3

CARES

18,774

85

Total Portfolio

$

45,928

257

The CARES Act was amended in December 2020 to include $3.5 billion of extended debt relief payments for SBA borrowers. The program was subsequently modified by the SBA to provide two additional monthly payments of principal and interest totaling a maximum of $9,000 per month and an additional three payments to borrowers considered “underserved” as defined in the amended legislation.

Credit Quality and Performance

At March 31, 2021, NPAs declined by ($6.5) million, or (54%), to $5.6 million, compared to $12.1 million at March 31, 2020, and decreased by ($2.3) million, or (29%) from $7.9 million at December 31, 2020. The decrease in NPAs at March 31, 2021, compared to March 31, 2020 and December 31, 2020, was primarily from the sale of properties that resulted in the payoff of loans and other paid down loans, which were partially offset by additional loans that went on NPA status during the first quarter of 2021. Classified assets decreased to $33.4 million, or 0.67% of total assets, at March 31, 2021, compared to $39.6 million, or 0.97% of total assets, at March 31, 2020, and $34.0 million, or 0.73% of total assets, at December 31, 2020.

The Company continues to monitor portfolio loans made to commercial customers with businesses in higher risk sectors due to the COVID-19 pandemic. The following table provides a breakdown of such loans as a percentage of total loans for the periods indicated:

% of Total

% of Total

% of Total

Loans at

Loans at

Loans at

HIGHER RISK SECTORS (unaudited)

March 31, 2021

December 31, 2020

March 31, 2020

Health care and social assistance:

Offices of dentists

2.06

%

2.01

%

1.63

%

Offices of physicians (except mental health specialists)

0.89

%

0.81

%

0.70

%

Other community housing services

0.24

%

0.28

%

0.11

%

All others

1.99

%

2.15

%

1.84

%

Total health care and social assistance

5.18

%

5.25

%

4.28

%

Retail trade:

Gasoline stations with convenience stores

2.54

%

2.16

%

1.98

%

All others

2.16

%

2.34

%

2.18

%

Total retail trade

4.70

%

4.50

%

4.16

%

Accommodation and food services:

Full-service restaurants

1.56

%

1.30

%

0.86

%

Limited-service restaurants

0.64

%

0.57

%

0.63

%

Hotels (except casino hotels) and motels

0.86

%

0.95

%

0.94

%

All others

0.75

%

0.68

%

0.52

%

Total accommodation and food services

3.81

%

3.50

%

2.95

%

Educational services:

Elementary and secondary schools

0.58

%

0.58

%

0.15

%

Education support services

0.46

%

0.45

%

0.15

%

All others

0.24

%

0.19

%

0.17

%

Total educational services

1.28

%

1.22

%

0.47

%

Arts, entertainment, and recreation

1.40

%

1.34

%

1.09

%

Purchased participations in micro loan portfolio

0.50

%

0.60

%

0.95

%

Total higher risk sectors

16.87

%

16.41

%

13.90

%

The increase in higher risk sector loans at March 31, 2021 and December 31, 2020, compared to March 31, 2020, was primarily due to the addition of PPP loans after the first quarter of 2020.

Capital and Liquidity

The Company’s and the Bank’s consolidated capital ratios exceeded regulatory guidelines for a well-capitalized financial institution, and the Basel III minimum regulatory requirements at March 31, 2021.

Our liquidity position supports our ability to maintain cash flows sufficient to fund operations, meet all of our financial obligations and commitments, and accommodate unexpected sudden changes in balances of loans and deposits in a timely manner. At various times the Company requires funds to meet short term cash requirements brought about by loan growth or deposit outflows, the purchase of assets, or repayment of liabilities. An integral part of the Company’s ability to manage its liquidity position appropriately is derived from its large base of core deposits, which are generated by offering traditional banking services in its service area and which have historically been a stable source of funds.

At March 31, 2021, the Company had a strong liquidity position with $1.44 billion in cash and cash equivalents, and $783.7 million in available borrowing capacity from sources including the Federal Home Loan Bank, the Federal Reserve Bank of San Francisco, Federal funds facilities with several financial institutions, and a line of credit with a correspondent bank. The Company also had $465.6 million (at fair market value) in unpledged securities available at March 31, 2021.

The loan to deposit ratio was 63.21% at March 31, 2021, compared to 75.86% at March 31, 2020, and 66.91% at December 31, 2020.

First Quarter Ended March 31, 2021
Operating Results, Balance Sheet Review, Capital Management, and Credit Quality
(as of, or for the periods ended March 31, 2021, compared to March 31, 2020, and December 31, 2020, except as noted):

Operating Results:

  • Diluted earnings per share were $0.19 for the first quarter of 2021, compared to $0.03 for the first quarter of 2020, and $0.19 for the fourth quarter of 2020.

  • 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

March 31,

December 31,

March 31,

(unaudited)

2021

2020

2020

Return on average tangible assets

0.99

%

1.02

%

0.19

%

Return on average tangible equity

11.50

%

11.75

%

1.91

%

  • Net interest income, before provision for credit losses on loans, decreased (9%) to $35.0 million for the first quarter of 2021, compared to $38.6 million for the first quarter of 2020, primarily due to decreases in the prime rate and decreases in yields on investment securities and overnight funds, which were partially offset by interest income and fees on PPP loans. Net interest income increased 2% to $35.0 million for the first quarter of 2021, compared to $34.2 million for the fourth quarter of 2020, primarily due to higher fees on PPP loans and an increase in the accretion of the loan purchase discount into interest income from acquired loans.

    • The fully tax equivalent (“FTE”) net interest margin contracted 103 basis points to 3.22% for the first quarter of 2021, from 4.25% for the first quarter of 2020, primarily due to declines in the average yields on loans, investment securities, and overnight funds, partially offset by a decline in the cost of interest-bearing liabilities and higher interest income and fees on PPP loans. The FTE net interest margin increased seven basis points for the first quarter of 2021 from 3.15% for the fourth quarter of 2020.

  • 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 decreased to 5.24% for the first quarter of 2021, compared to 5.57% for the first quarter of 2020, primarily due to a decline in the prime rate and new average balances of lower yielding PPP loans, partially offset by interest income and fees on PPP loans.

For the Quarter Ended

For the Quarter Ended

March 31, 2021

March 31, 2020

Average

Interest

Average

Average

Interest

Average

(in $000’s, unaudited)

Balance

Income

Yield

Balance

Income

Yield

Loans, core bank and asset-based lending

$

2,225,342

$

25,581

4.66

%

$

2,422,020

$

30,104

5.00

%

SBA PPP loans

319,168

784

1.00

%

N/A

PPP fees, net

3,401

4.32

%

N/A

Bay View Funding factored receivables

48,094

2,650

22.35

%

47,470

2,877

24.38

%

Purchased residential mortgages

22,194

119

2.17

%

33,075

230

2.80

%

Purchased commercial real estate ("CRE") loans

17,162

172

4.06

%

27,340

249

3.66

%

Loan fair value mark / accretion

(11,626

)

1,129

0.21

%

(16,180

)

1,322

0.22

%

Total loans (includes loans held-for-sale)

$

2,620,334

$

33,836

5.24

%

$

2,513,725

$

34,782

5.57

%


The average yield on the total loan portfolio increased to 5.24% for the first quarter of 2021 compared to 4.93% for the fourth quarter of 2020, primarily due to higher fees from PPP loans and an increase in the accretion of the loan purchase discount into interest income from acquired loans.


For the Quarter Ended

For the Quarter Ended

March 31, 2021

December 31, 2020

Average

Interest

Average

Average

Interest

Average

(in $000’s, unaudited)

Balance

Income

Yield

Balance

Income

Yield

Loans, core bank and asset-based lending

$

2,225,342

$

25,581

4.66

%

$

2,256,944

$

26,348

4.64

%

SBA PPP loans

319,168

784

1.00

%

313,335

787

1.00

%

PPP fees, net

3,401

4.32

%

1,935

2.46

%

Bay View Funding factored receivables

48,094

2,650

22.35

%

50,720

2,856

22.40

%

Purchased residential mortgages

22,194

119

2.17

%

24,955

118

1.88

%

Purchased CRE loans

17,162

172

4.06

%

20,854

176

3.36

%

Loan fair value mark / accretion

(11,626

)

1,129

0.21

%

(12,017

)

687

0.12

%

Total loans (includes loans held-for-sale)

$

2,620,334

$

33,836

5.24

%

$

2,654,791

$

32,907

4.93

%


In aggregate, the original total net purchase discount on loans from the Focus Business Bank, Tri-Valley Bank, United American Bank, and Presidio Bank loan portfolio was $25.2 million. In aggregate, the remaining net purchase discount on total loans acquired was $11.0 million at March 31, 2021.

  • The average cost of total deposits was 0.12% for the first quarter of 2021, compared to 0.22% for the first quarter of 2020 and 0.14% for the fourth quarter of 2020.

  • During the first quarter of 2021, there was a recapture of ($1.5) million in provision for credit losses on loans, primarily due to recoveries on previously charged-off loans, compared to a $13.3 provision for credit losses on loans taken in the first quarter of 2020, and the recapture of ($1.3) million to the provision for credit losses on loans taken in the fourth quarter of 2020.

    • The higher provision for credit losses on loans for the first quarter of 2020 was driven primarily by a significantly deteriorated economic outlook resulting from the Coronavirus pandemic. Ongoing impacts of the CECL methodology will be dependent upon changes in economic conditions and forecasts, originated and acquired loan portfolio composition, portfolio duration, and other factors.

  • Total noninterest income was $2.3 million for the first quarter of 2021, compared to $3.2 million for the first quarter of 2020, primarily due to a gain on the disposition of foreclosed assets and from higher service charges and fees on deposit accounts for the first quarter of 2020. Total noninterest income increased to $2.3 million for the first quarter of 2021 from $2.1 million for the fourth quarter of 2020, primarily due to an increase in gains on the sale of SBA loans and servicing income.

  • Total noninterest expense for the first quarter of 2021 decreased to $23.2 million, compared to $25.8 million for the first quarter of 2020, primarily due to lower merger-related costs, partially offset by higher severance expense during the first quarter of 2021. For the fourth quarter of 2020, total noninterest expense was $21.6 million.

    • The following table reflects pre-tax merger-related costs resulting from the merger with Presidio for the periods indicated:

For the Quarter Ended

MERGER-RELATED COSTS

March 31,

December 31,

March 31,

(in $000’s, unaudited)

2021

2020

2020

Salaries and employee benefits

$

$

$

356

Other

58

101

2,068

Total merger-related costs

$

58

$

101

$

2,424


Noninterest expense for the first quarter of 2021 included approximately $1.5 million in severance expense, partially offset by $766,000 in deferred origination costs on Round 2 PPP loans.

Full time equivalent employees were 325 at March 31, 2021, and 337 at March 31, 2020, and 331 at December 31, 2020.

  • The efficiency ratio was 62.38% for the first quarter of 2021, compared to 61.70% for the first quarter of 2020, and 59.45% for the fourth quarter of 2020.

  • Income tax expense was $4.3 million for the first quarter of 2021, compared to $868,000 for the first quarter of 2020, and $4.4 million for the fourth quarter of 2020. The effective tax rate for the first quarter of 2021 was 27.8%, compared to 31.8% for the first quarter of 2020, and 27.6% for the fourth quarter of 2020. The higher effective tax rate for the first quarter of 2020 was primarily due to an increase in tax expense for forfeited stock options and merger-related stock options. The effective tax rate for the first quarter of 2020 would have been 26.8% without these items.

    • 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 reached $5.00 billion at March 31, 2021, an increase of 23% from $4.08 billion at March 31, 2020, and increased 8% from $4.63 billion at December 31, 2020.

  • Securities available-for-sale, at fair value, totaled $196.7 million at March 31, 2021, compared to $373.6 million at March 31, 2020, and $235.8 million at December 31, 2020. At March 31, 2021, the Company’s securities available-for-sale portfolio was comprised of $151.5 million of agency mortgage-backed securities (all issued by U.S. Government sponsored entities), and $45.2 million of U.S. Treasury securities. The pre-tax unrealized gain on securities available-for-sale at March 31, 2021 was $4.9 million, compared to a pre-tax unrealized gain on securities available-for-sale of $9.4 million at March 31, 2020, and a pre-tax unrealized gain on securities available-for-sale of $5.8 million at December 31, 2020. All other factors remaining the same, when market interest rates are decreasing, the Company will experience a higher unrealized gain (or a lower unrealized loss) on the securities portfolio.

  • At March 31, 2021, securities held-to-maturity, at amortized cost, totaled $306.5 million, compared to $348.0 million at March 31, 2020, and $297.4 million at December 31, 2020. At March 31, 2021, the Company’s securities held-to-maturity portfolio was comprised of $242.7 million of agency mortgage-backed securities, and $63.8 million of tax-exempt municipal bonds. During the first quarter of 2021, the Company purchased $40.4 million of agency mortgage-backed securities (securities held-to-maturity), with a book yield of 1.54% and an average life of 5.6 years.

  • 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

March 31, 2021

December 31, 2020

March 31, 2020

(in $000’s, unaudited)

Balance

% to Total

Balance

% to Total

Balance

% to Total

Commercial

$

559,698

20

%

$

555,707

21

%

$

696,168

27

%

Paycheck Protection Program Loans

349,744

13

%

290,679

11

%

0

%

Real estate:

CRE - owner occupied

568,637

21

%

560,362

21

%

539,465

21

%

CRE - non-owner occupied

700,117

26

%

693,103

27

%

748,245

29

%

Land and construction

159,504

6

%

144,594

6

%

153,321

6

%

Home equity

104,303

4

%

111,885

4

%

117,544

5

%

Multifamily

168,917

6

%

166,425

6

%

170,292

7

%

Residential mortgages

82,181

3

%

85,116

3

%

95,808

4

%

Consumer and other

19,872

1

%

18,116

1

%

33,326

1

%

Total Loans

2,712,973

100

%

2,625,987

100

%

2,554,169

100

%

Deferred loan costs (fees), net

(8,266

)

(6,726

)

(258

)

Loans, net of deferred costs and fees

$

2,704,707

100

%

$

2,619,261

100

%

$

2,553,911

100

%


Loans, excluding loans held-for-sale, increased $150.8 million, or 6%, to $2.70 billion at March 31, 2021, compared to $2.55 billion at March 31, 2020, and increased $85.4 million, or 3% from $2.62 billion at December 31, 2020. Total loans at March 31, 2021 included $349.7 million of PPP loans, compared to $290.7 million at December 31, 2020. Total loans at March 31, 2021, excluding PPP loans, increased $26.4 million from December 31, 2020.

Commercial and industrial line usage was 28% at March 31, 2021, compared to 36% at March 31, 2020, and 28% at December 31, 2020.

At March 31, 2021, 45% of the CRE loan portfolio was secured by owner-occupied real estate.

At March 31, 2021, approximately 40% of the Company’s loan portfolio consisted of floating rate interest loans.

The following table summarizes the allowance for credit losses on loans for the periods indicated:


For the Quarter Ended

ALLOWANCE FOR CREDIT LOSSES ON LOANS

March 31,

December 31,

March 31,

(in $000’s, unaudited)

2021

2020

2020

Balance at beginning of period

$

44,400

$

45,422

$

23,285

Charge-offs during the period

(263

)

(144

)

(673

)

Recoveries during the period

1,671

470

251

Net recoveries (charge-offs) during the period

1,408

326

(422

)

Impact of adopting Topic 326

8,570

Provision (recapture) for credit losses on loans during the period

(1,512

)

(1,348

)

13,270

Balance at end of period

$

44,296

$

44,400

$

44,703

Total loans, net of deferred fees

$

2,704,707

$

2,619,261

$

2,553,911

Total nonperforming loans

$

5,593

$

7,869

$

12,088

Allowance for credit losses on loans to total loans

1.64

%

1.70

%

1.75

%

Allowance for credit losses on loans to total nonperforming loans

791.99

%

564.24

%

369.81

%


The ACLL was 1.64% of total loans at March 31, 2021 and the ACLL to total nonperforming loans was 791.99% at March 31, 2021. The ACLL was 1.75% of total loans and the ACLL to nonperforming loans was 369.81% at March 31, 2020. The ACLL was 1.70% of total loans and the ACLL to total nonperforming loans was 564.24% at December 31, 2020. The ACLL to total loans, excluding PPP loans, was 1.88% at March 31, 2021, and 1.91% at December 31, 2020. There were no PPP loans at March 31, 2020.

The following table shows the drivers of change in ACLL under CECL for the quarter ended March 31, 2021:


DRIVERS OF CHANGE IN ACLL UNDER CECL

(in $000’s, unaudited)

ALLL at December 31, 2020

$

44,400

Net recoveries during the first quarter of 2021

1,408

Portfolio changes during the first quarter of 2021

313

Economic factors during the first quarter of 2021

(1,825

)

ACLL at March 31, 2021

$

44,296


Net recoveries totaled $1.4 million for the first quarter of 2021, compared to net charge-offs of $422,000 for the first quarter of 2020, and net recoveries of $326,000 for the fourth quarter of 2020.

The following is a breakout of NPAs at the periods indicated:


End of Period:

NONPERFORMING ASSETS

March 31, 2021

December 31, 2020

March 31, 2020

(in $000’s, unaudited)

Balance

% of Total

Balance

% of Total

Balance

% of Total

CRE loans

$

2,973

53

%

$

3,706

47

%

$

7,346

61

%

Commercial loans

1,985

36

%

2,726

35

%

3,403

28

%

Consumer and other loans

407

7

%

407

5

%

771

6

%

Home equity loans

177

3

%

949

12

%

442

4

%

Restructured and loans over 90 days past due and still accruing

51

1

%

81

1

%

126

1

%

Total nonperforming assets

$

5,593

100

%

$

7,869

100

%

$

12,088

100

%


NPAs totaled $5.6 million, or 0.11% of total assets, at March 31, 2021, compared to $12.1 million, or 0.30% of total assets, at March 31, 2020, and $7.9 million, or 0.17% of total assets, at December 31, 2020.

There were no foreclosed assets on the balance sheet at March 31, 2021, March 31, 2020, or December 31, 2020.

Classified assets decreased to $33.4 million, or 0.67% of total assets, at March 31, 2021, compared to $39.6 million, or 0.97% of total assets, at March 31, 2020, and decreased from $34.0 million, or 0.73% of total assets, at December 31, 2020.

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

DEPOSITS

March 31, 2021

December 31, 2020

March 31, 2020

(in $000’s, unaudited)

Balance

% to Total

Balance

% to Total

Balance

% to Total

Demand, noninterest-bearing

$

1,813,962

42

%

$

1,661,655

42

%

$

1,444,534

42

%

Demand, interest-bearing

1,101,807

26

%

960,179

24

%

810,425

24

%

Savings and money market

1,189,566

28

%

1,119,968

29

%

949,076

28

%

Time deposits — under $250

42,596

1

%

45,027

1

%

51,009

2

%

Time deposits — $250 and over

102,508

2

%

103,746

3

%

96,540

3

%

CDARS — interest-bearing demand,

money market and time deposits

28,663

1

%

23,911

1

%

15,055

1

%

Total deposits

$

4,279,102

100

%

$

3,914,486

100

%

$

3,366,639

100

%


Total deposits increased $912.5 million, or 27%, to $4.28 billion at March 31, 2021, compared to $3.37 billion at March 31, 2020. Total deposits increased $364.6 million, or 9%, from $3.91 billion at December 31, 2020.

Deposits, excluding all time deposits and CDARS deposits, increased $901.3 million, or 28%, to $4.11 billion at March 31, 2021, compared to $3.20 billion at March 31, 2020. Deposits, excluding all time deposits and CDARS increased $363.5 million, or 10%, to $4.11 billion at March 31, 2021, compared to $3.74 billion at December 31, 2020.

  • 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, 2021, as reflected in the following table:

Well-capitalized

Financial

Institution

Basel III

Heritage

Heritage

Basel III PCA

Minimum

Commerce

Bank of

Regulatory

Regulatory

CAPITAL RATIOS (unaudited)

Corp

Commerce

Guidelines

Requirement (1)

Total Capital

16.5

%

15.8

%

10.0

%

10.5

%

Tier 1 Capital

14.0

%

14.7

%

8.0

%

8.5

%

Common Equity Tier 1 Capital

14.0

%

14.7

%

6.5

%

7.0

%

Tier 1 Leverage

9.1

%

9.5

%

5.0

%

4.0

%


________________________

(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:

ACCUMULATED OTHER COMPREHENSIVE LOSS

March 31,

December 31,

March 31,

(in $000’s, unaudited)

2021

2020

2020

Unrealized gain on securities available-for-sale

$

3,113

$

3,709

$

6,299

Remaining unamortized unrealized gain on securities

available-for-sale transferred to held-to-maturity

252

261

288

Split dollar insurance contracts liability

(6,148

)

(6,140

)

(4,850

)

Supplemental executive retirement plan liability

(8,698

)

(8,767

)

(6,774

)

Unrealized gain on interest-only strip from SBA loans

213

220

328

Total accumulated other comprehensive loss

$

(11,268

)

$

(10,717

)

$

(4,709

)

  • Tangible equity was $398.1 million at March 31, 2021, compared to $384.5 million at March 31, 2020, and $393.6 million at December 31, 2020. Tangible book value per share was $6.64 at March 31, 2021, compared to $6.46 at March 31, 2020, and $6.57 at December 31, 2020.

Heritage Commerce Corp, a bank holding company established in October 1997, 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, Palo Alto, Pleasanton, Redwood City, San Francisco, San Jose, San Mateo, San Rafael, 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 San Jose, 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 (“SEC”), Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, 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 our 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 NPAs and charge offs and other credit quality measures, and their impact on the adequacy of the Company’s allowance for credit losses and the Company’s provision for credit 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) possible adjustment of the valuation of our deferred tax assets; (18) 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; (19) inability of our framework to manage risks associated with our business, including operational risk and credit risk; (20) risks of loss of funding of SBA or SBA loan programs, or changes in those programs; (21) compliance with governmental and regulatory requirements, including the Dodd-Frank Act and others relating to banking, consumer protection, securities, accounting and tax matters; (22) significant changes in applicable laws and regulations, including those concerning taxes, banking and securities; (23) 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; (24) costs and effects of legal and regulatory developments, including resolution of regulatory or other governmental inquiries, and the results of regulatory examinations or reviews; (25) the expense and uncertain resolution of litigation matters whether occurring in the ordinary course of business or otherwise; (26) availability of and competition for acquisition opportunities; (27) risks resulting from domestic terrorism; (28) risks of natural disasters (including earthquakes) and other events beyond our control; (29) the effect of the COVID-19 pandemic, and other infectious illness outbreaks that may arise in the future, on the Bank’s customers, employees, businesses, liquidity, financial results and overall condition and which has created significant uncertainties in U.S. and global markets, including our customers' ability to make timely payments on obligations, and operating expense due to alternative approaches to doing business; (30) changes in governmental policy and regulation, including measures taken in response to economic, business, political and social conditions, such as the SBA Paycheck Protection Program (“PPP”), the Federal Reserve Board's efforts to provide liquidity to the financial system and provide credit to private commercial and municipal borrowers, and other programs designed to address the effects of the COVID-19 pandemic; (31) the Bank's participation as a lender in the PPP and similar programs and its effect on the Bank's liquidity, financial results, businesses and customers, including the availability of program funds and the ability of customers to comply with requirements and otherwise perform with respect to loans obtained under such programs; (32) our success in managing the risks involved in the foregoing factors.

Member FDIC

For additional information, contact:
Debbie Reuter
EVP, Corporate Secretary
Direct: (408) 494-4542
Debbie.Reuter@herbank.com




For the Quarter Ended:

Percent Change From:

CONSOLIDATED INCOME STATEMENTS

March 31,

December 31,

March 31,

December 31,

March 31,

(in $000’s, unaudited)

2021

2020

2020

2020

2020

Interest income

$

36,761

$

36,145

$

40,942

2

%

(10

)

%

Interest expense

1,803

1,940

2,362

(7

)

%

(24

)

%

Net interest income before provision

for credit losses on loans

34,958

34,205

38,580

2

%

(9

)

%

Provision (recapture) for credit losses on loans

(1,512

)

(1,348

)

13,270

(12

)

%

(111

)

%

Net interest income after provision

for credit losses on loans

36,470

35,553

25,310

3

%

44

%

Noninterest income:

Service charges and fees on deposit accounts

601

608

969

(1

)

%

(38

)

%

Gain on sales of SBA loans

550

372

67

48

%

721

%

Increase in cash surrender value of

life insurance

456

465

458

(2

)

%

0

%

Servicing income

182

98

183

86

%

(1

)

%

Gain on sales of securities

11

7

100

57

%

(89

)

%

Gain on the disposition of foreclosed assets

791

N/A

(100

)

%

Other

501

506

625

(1

)

%

(20

)

%

Total noninterest income

2,301

2,056

3,193

12

%

(28

)

%

Noninterest expense:

Salaries and employee benefits

13,958

12,457

14,203

12

%

(2

)

%

Occupancy and equipment

2,274

2,197

1,772

4

%

28

%

Professional fees

1,719

1,396

1,435

23

%

20

%

Other

5,293

5,507

8,364

(4

)

%

(37

)

%

Total noninterest expense

23,244

21,557

25,774

8

%

(10

)

%

Income before income taxes

15,527

16,052

2,729

(3

)

%

469

%

Income tax expense

4,323

4,429

868

(2

)

%...

398

%

Net income

$

11,204

$

11,623

$

1,861

(4

)

%

502

%

PER COMMON SHARE DATA

(unaudited)

Basic earnings per share

$

0.19

$

0.19

$

0.03

0

%

533

%

Diluted earnings per share

$

0.19

$

0.19

$

0.03

0

%

533

%

Weighted average shares outstanding - basic

59,641,309

59,616,951

59,286,927

0

%

1

%

Weighted average shares outstanding - diluted

60,404,213

60,247,296

60,194,025

0

%

0

%

Common shares outstanding at period-end

59,932,334

59,917,457

59,568,219

0

%

1

%

Dividend per share

$

0.13

$

0.13

$

0.13

0

%

0

%

Book value per share

$

9.71

$

9.64

$

9.59

1

%

1

%

Tangible book value per share

$

6.64

$

6.57

$

6.46

1

%

3

%

KEY FINANCIAL RATIOS

(unaudited)

Annualized return on average equity

7.85

%

7.99

%

1.29

%

(2

)

%

509

%

Annualized return on average tangible equity

11.50

%

11.75

%

1.91

%

(2

)

%

502

%

Annualized return on average assets

0.95

%

0.98

%

0.19

%

(3

)

%

400

%

Annualized return on average tangible assets

0.99

%

1.02

%

0.19

%

(3

)

%

421

%

Net interest margin (FTE)

3.22

%

3.15

%

4.25

%

2

%

(24

)

%

Efficiency ratio

62.38

%

59.45

%

61.70

%

5

%

1

%

AVERAGE BALANCES

(in $000’s, unaudited)

Average assets

$

4,773,878

$

4,703,154

$

4,033,151

2

%

18

%

Average tangible assets

$

4,589,861

$

4,518,279

$

3,845,646

2

%

19

%

Average earning assets

$

4,419,963

$

4,338,117

$

3,665,151

2

%

21

%

Average loans held-for-sale

$

3,458

$

2,772

$

2,265

25

%

53

%

Average total loans

$

2,616,876

$

2,652,019

$

2,511,460

(1

)

%

4

%

Average deposits

$

4,048,953

$

3,980,017

$

3,327,812

2

%

22

%

Average demand deposits - noninterest-bearing

$

1,712,903

$

1,749,837

$

1,438,944

(2

)

%

19

%

Average interest-bearing deposits

$

2,336,050

$

2,230,180

$

1,888,868

5

%

24

%

Average interest-bearing liabilities

$

2,375,851

$

2,269,960

$

1,928,770

5

%

23

%

Average equity

$

579,157

$

578,560

$

579,051

0

%

0

%

Average tangible equity

$

395,140

$

393,685

$

391,546

0

%

1

%



For the Quarter Ended:

CONSOLIDATED INCOME STATEMENTS

March 31,

December 31,

September 30,

June 30,

March 31,

(in $000’s, unaudited)

2021

2020

2020

2020

2020

Interest income

$

36,761

$

36,145

$

36,252

$

37,132

$

40,942

Interest expense

1,803

1,940

2,087

2,192

2,362

Net interest income before provision for credit losses on loans

34,958

34,205

34,165

34,940

38,580

Provision (recapture) for credit losses on loans

(1,512

)

(1,348

)

197

1,114

13,270

Net interest income after provision for credit losses on loans

36,470

35,553

33,968

33,826

25,310

Noninterest income:

Service charges and fees on deposit accounts

601

608

632

650

969

Gain on sales of SBA loans

550

372

400

67

Increase in cash surrender value of life insurance

456

465

464

458

458

Servicing income

182

98

187

205

183

Gain on sales of securities

11

7

170

100

Gain on the disposition of foreclosed assets

791

Other

501

506

912

595

625

Total noninterest income

2,301

2,056

2,595

2,078

3,193

Noninterest expense:

Salaries and employee benefits

13,958

12,457

11,967

12,300

14,203

Occupancy and equipment

2,274

2,197

2,283

1,766

1,772

Professional fees

1,719

1,396

1,352

1,155

1,435

Other

5,293

5,507

5,566

5,791

8,364

Total noninterest expense

23,244

21,557

21,168

21,012

25,774

Income before income taxes

15,527

16,052

15,395

14,892

2,729

Income tax expense

4,323

4,429

4,198

4,274

868

Net income

$

11,204

$

11,623

$

11,197

$

10,618

$

1,861

PER COMMON SHARE DATA

(unaudited)

Basic earnings per share

$

0.19

$

0.19

$

0.19

$

0.18

$

0.03

Diluted earnings per share

$

0.19

$

0.19

$

0.19

$

0.18

$

0.03

Weighted average shares outstanding - basic

59,641,309

59,616,951

59,589,243

59,420,592

59,286,927

Weighted average shares outstanding - diluted

60,404,213

60,247,296

60,141,412

60,112,423

60,194,025

Common shares outstanding at period-end

59,932,334

59,917,457

59,914,987

59,856,767

59,568,219

Dividend per share

$

0.13

$

0.13

$

0.13

$

0.13

$

0.13

Book value per share

$

9.71

$

9.64

$

9.64

$

9.60

$

9.59

Tangible book value per share

$

6.64

$

6.57

$

6.55

$

6.49

$

6.46

KEY FINANCIAL RATIOS

(unaudited)

Annualized return on average equity

7.85

%

7.99

%

7.73

%

7.45

%

1.29

%

Annualized return on average tangible equity

11.50

%

11.75

%

11.41

%

11.06

%

1.91

%

Annualized return on average assets

0.95

%

0.98

%

0.98

%

0.96

%

0.19

%

Annualized return on average tangible assets

0.99

%

1.02

%

1.02

%

1.01

%

0.19

%

Net interest margin (FTE)

3.22

%

3.15

%

3.24

%

3.46

%

4.25

%

Efficiency ratio

62.38

%

59.45

%

57.58

%

56.76

%

61.70

%

AVERAGE BALANCES

(in $000’s, unaudited)

Average assets

$

4,773,878

$

4,703,154

$

4,562,412

$

4,434,238

$

4,033,151

Average tangible assets

$

4,589,861

$

4,518,279

$

4,376,533

$

4,247,522

$

3,845,646

Average earning assets

$

4,419,963

$

4,338,117

$

4,203,902

$

4,075,673

$

3,665,151

Average loans held-for-sale

$

3,458

$

2,772

$

5,169

$

3,617

$

2,265

Average total loans

$

2,616,876

$

2,652,019

$

2,664,525

$

2,683,476

$

2,511,460

Average deposits

$

4,048,953

$

3,980,017

$

3,846,652

$

3,720,850

$

3,327,812

Average demand deposits - noninterest-bearing

$

1,712,903

$

1,749,837

$

1,700,972

$

1,660,547

$

1,438,944

Average interest-bearing deposits

$

2,336,050

$

2,230,180

$

2,145,680

$

2,060,303

$

1,888,868

Average interest-bearing liabilities

$

2,375,851

$

2,269,960

$

2,185,439

$

2,099,982

$

1,928,770

Average equity

$

579,157

$

578,560

$

576,135

$

572,939

$

579,051

Average tangible equity

$

395,140

$

393,685

$

390,256

$

386,223

$

391,546



End of Period:

Percent Change From:

CONSOLIDATED BALANCE SHEETS

March 31,

December 31,

March 31,

December 31,

March 31,

(in $000’s, unaudited)

2021

2020

2020

2020

2020

ASSETS

Cash and due from banks

$

36,534

$

30,598

$

36,998

19

%

(1

)

%

Other investments and interest-bearing deposits in other financial institutions

1,406,520

1,100,475

406,399

28

%

246

%

Securities available-for-sale, at fair value

196,718

235,774

373,570

(17

)

%

(47

)

%

Securities held-to-maturity, at amortized cost

306,535

297,389

348,044

3

%

(12

)

%

Loans held-for-sale - SBA, including deferred costs

2,834

1,699

2,415

67

%

17

%

Loans:

Commercial

559,698

555,707

696,168

1

%

(20

)

%

SBA PPP loans

349,744

290,679

20

%

N/A

Real estate:

CRE - owner occupied

568,637

560,362

539,465

1

%

5

%

CRE - non-owner occupied

700,117

693,103

748,245

1

%

(6

)

%

Land and construction

159,504

144,594

153,321

10

%

4

%

Home equity

104,303

111,885

117,544

(7

)

%

(11

)

%

Multifamily

168,917

166,425

170,292

1

%

(1

)

%

Residential mortgages

82,181

85,116

95,808

(3

)

%

(14

)

%

Consumer and other

19,872

18,116

33,326

10

%

(40

)

%

Loans

2,712,973

2,625,987

2,554,169

3

%

6

%

Deferred loan fees, net

(8,266

)

(6,726

)

(258

)

23

%

3104

%

Total loans, net of deferred costs and fees

2,704,707

2,619,261

2,553,911

3

%

6

%

Allowance for credit losses on loans

(44,296

)

(44,400

)

(44,703

)

0

%

(1

)

%

Loans, net

2,660,411

2,574,861

2,509,208

3

%

6

%

Company-owned life insurance

77,421

77,523

76,485

0

%

1

%

Premises and equipment, net

10,220

10,459

9,025

(2

)

%

13

%

Goodwill

167,631

167,631

167,371

0

%

0

%

Other intangible assets

15,931

16,664

19,557

(4

)

%

(19

)

%

Accrued interest receivable and other assets

120,635

121,041

129,090

0

%

(7

)

%

Total assets

$

5,001,390

$

4,634,114

$

4,078,162

8

%

23

%

LIABILITIES AND SHAREHOLDERS’ EQUITY

Liabilities:

Deposits:

Demand, noninterest-bearing

$

1,813,962

$

1,661,655

$

1,444,534

9

%

26

%

Demand, interest-bearing

1,101,807

960,179

810,425

15

%

36

%

Savings and money market

1,189,566

1,119,968

949,076

6

%

25

%

Time deposits-under $250

42,596

45,027

51,009

(5

)

%

(16

)

%

Time deposits-$250 and over

102,508

103,746

96,540

(1

)

%

6

%

CDARS - money market and time deposits

28,663

23,911

15,055

20

%

90

%

Total deposits

4,279,102

3,914,486

3,366,639

9

%

27

%

Subordinated debt, net of issuance costs

39,786

39,740

39,600

0

%

0

%

Accrued interest payable and other liabilities

100,839

101,999

100,482

(1

)

%

0

%

Total liabilities

4,419,727

4,056,225

3,506,721

9

%

26

%

Shareholders’ Equity:

Common stock

494,617

493,707

491,347

0

%

1

%

Retained earnings

98,314

94,899

84,803

4

%

16

%

Accumulated other comprehensive loss

(11,268

)

(10,717

)

(4,709

)

(5

)

%

(139

)

%

Total shareholders' equity

581,663

577,889

571,441

1

%

2

%

Total liabilities and shareholders’ equity

$

5,001,390

$

4,634,114

$

4,078,162

8

%

23

%



End of Period:

CONSOLIDATED BALANCE SHEETS

March 31,

December 31,

September 30,

June 30,

March 31,

(in $000’s, unaudited)

2021

2020

2020

2020

2020

ASSETS

Cash and due from banks

$

36,534

$

30,598

$

33,353

$

40,108

$

36,998

Other investments and interest-bearing deposits

in other financial institutions

1,406,520

1,100,475

926,915

885,792

406,399

Securities available-for-sale, at fair value

196,718

235,774

294,438

323,565

373,570

Securities held-to-maturity, at amortized cost

306,535

297,389

295,609

322,677

348,044

Loans held-for-sale - SBA, including deferred costs

2,834

1,699

3,565

4,324

2,415

Loans:

Commercial

559,698

555,707

574,359

553,843

696,168

SBA PPP loans

349,744

290,679

323,550

324,550

Real estate: