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Heritage Commerce Corp Earns $8.8 Million for the Second Quarter of 2021, and $20.0 Million for the First Six Months of 2021

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Heritage Commerce Corp (HTBK) reported second quarter 2021 net income of $8.8 million ($0.15 per diluted share), down from $10.6 million ($0.18) a year prior. Year-to-date net income reached $20 million ($0.33), up from $12.5 million ($0.21). The company set aside $4 million for a legal settlement. Core loans rose $65.6 million (3%) year-over-year, with total loans increasing by $138.4 million (5%). Total deposits surged by $444.2 million (11%). Nonperforming assets declined to $6.2 million (32% decrease). The bank continues to manage strong credit quality and a diversified loan portfolio amidst economic recovery.

Positive
  • Net income for Q2 2021 increased to $8.8 million, compared to $10.6 million in Q2 2020, and $20 million for six months, up from $12.5 million.
  • Core loans rose by $65.6 million (3%) year-over-year and total loans increased by $138.4 million (5%).
  • Total deposits climbed by $444.2 million (11%) year-over-year.
  • Nonperforming assets decreased to $6.2 million, a 32% decrease from Q2 2020.
Negative
  • Net income per diluted share declined to $0.15 in Q2 2021 from $0.18 in Q2 2020 and $0.19 in Q1 2021.
  • The company's efficiency ratio worsened to 69.58% in Q2 2021 from 56.76% in Q2 2020, largely due to a $4 million legal reserve.

SAN JOSE, Calif., July 22, 2021 (GLOBE NEWSWIRE) -- Heritage Commerce Corp (Nasdaq: HTBK), the holding company (the “Company”) for Heritage Bank of Commerce (the “Bank”), today announced second quarter 2021 net income of $8.8 million, or $0.15 per average diluted common share, compared to $10.6 million, or $0.18 per average diluted common share, for the second quarter of 2020, and $11.2 million, or $0.19 per average diluted common share, for the first quarter of 2021. For the six months ended June 30, 2021, net income was $20.0 million, or $0.33 per average diluted common share, compared to $12.5 million, or $0.21 per average diluted common share, for the six months ended June 30, 2020. Earnings for the second quarter and first six months of 2021 included a $4.0 million reserve for a legal settlement as noninterest expense, which was previously disclosed in the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 7, 2021. Earnings for the first six months of 2020 were impacted by the effect of $14.4 million in pre-tax current expected credit losses (“CECL”) related provision for credit losses on loans, driven by forecasted effects on economic activity from the Coronavirus pandemic and $2.5 million of pre-tax merger-related costs in the first six months of 2020. All results are unaudited.

“Reflective of an improving local economy, we delivered solid second quarter earnings, supported by higher levels of loans on both a year-over-year and linked quarter basis. Core loans, excluding Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans and residential mortgage loans, increased by $65.6 million, or 3%, from a year ago, and increased by $59.6 million, or 3%, from the first quarter of 2021. Total loans increased by $138.4 million, or 5%, from a year ago, and increased by $120.1 million, or 4%, from the first quarter of 2021, while total deposits were higher by $444.2 million, or 11%, year-over-year, and increased $65.4 million, or 2%, from the first quarter of 2021. Our disciplined approach to managing core operating expenses also contributed to profitability during the second quarter of 2021,” said Mr. Walter Kaczmarek, President and Chief Executive Officer. “In addition, second quarter results benefitted from the recapture of ($493,000) in credit losses on loans, compared to a provision for credit losses on loans of $1.1 million taken in the second quarter of 2020.”

“From the onset of the pandemic, we have been an active participant in the SBA PPP loan program,” said Mr. Kaczmarek. “PPP loans generated interest and fee income of $2.7 million during the second quarter of 2021, and $6.9 million for the first six months of 2021.” As of June 30, 2021, the Company had a total of $286.5 million in PPP loans outstanding and $6.9 million of remaining net deferred fees outstanding.

“Our credit quality remained strong, as nonperforming assets (“NPAs”) declined ($2.9) million, or (32%), at June 30, 2021 to $6.2 million, from $9.1 million at June 30, 2020, and increased $587,000 from $5.6 million at March 31, 2021. In addition, net recoveries totaled $153,000 for the current quarter, compared to $373,000 in net charge-offs for the second quarter of 2020, and net recoveries of $1.4 million for the first quarter of 2021,” said Mr. Kaczmarek. “We believe that with our healthy capital and liquidity positions, strong earnings power, conservative credit culture, and dedicated employees, we remain well positioned for growth as we head into the second half of the year.”

SBA PPP Loan Program:

In response to economic stimulus laws passed by Congress in 2020 and 2021, the Bank has now funded two rounds of PPP loans. At June 30, 2021, after accounting for loan payoffs and SBA loan forgiveness, “Round 1” PPP loans were $91.9 million and “Round 2” PPP loans were $194.6 million. In total the Bank had $286.5 million in outstanding PPP loan balances at June 30, 2021. The following table shows interest income, fee income and deferred origination costs generated by the PPP loans, and the PPP loan outstanding balances and related deferred fees and costs for the periods indicated:

                
  At or For the Quarter Ended: At or For the Six Months Ended:
PPP LOANS June 30,  March 31,  June 30,  June 30,  June 30, 
(in $000’s, unaudited) 2021 2021 2020 2021 2020
Interest income $831  $784  $582  $1,615  $582 
Fee income, net  1,876   3,401   637   5,276   637 
Total $2,707  $4,185  $1,219  $6,891  $1,219 
                
Deferred origination costs (contra expense) $41  $766  $1,240  $807  $1,240 
                
PPP loans outstanding at period end:               
Round 1 $91,849  $170,391  $324,550  $91,849  $324,550 
Round 2  194,612   179,353      194,612    
Total $286,461  $349,744  $324,550  $286,461  $324,550 
                
Deferred fees outstanding at period end $(7,747) $(8,757) $(10,430) $(7,747) $(10,430)
Deferred costs outstanding at period end  869   1,099   1,155   869   1,155 
Total $(6,878) $(7,658) $(9,275) $(6,878) $(9,275)

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.

Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”):

On April 7, 2020, 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 and clarifies the interaction between current accounting rules and the temporary relief provided by the CARES Act. Initially, the Bank made accommodations for 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. At June 30, 2021, there were three remaining second deferments totaling $1.8 million.

In addition to its portfolio of SBA PPP loans, the Bank also had a portfolio of SBA 7(a) loans totaling $46.5 million as of June 30, 2021. The following table reflects the status of these SBA 7(a) loans as of June 30, 2021:

      
SBA 7(a) LOANS    Number
(in $000’s, unaudited)  Balance of Loans
SBA 7(a) loans (monthly payments are made     
through the CARES Act) $28,075 158
CARES extended SBA payment  17,858 81
Payments Not Made / NSF / Returned  410 2
New loans / No payment due  120 5
Total Portfolio $46,463 246

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 June 30, 2021, NPAs declined by ($2.9) million, or (32%), to $6.2 million, compared to $9.1 million at June 30, 2020, and increased by $587,000, or 10% from $5.6 million at March 31, 2021.   The change in NPAs at June 30, 2021, compared to June 30, 2020 and March 31, 2021, resulted primarily from the sale of underlying properties and the payoff of related loans and the paydown of other loans, partially offset by additional loans that went on NPA status during the first six months of 2021. Classified assets increased to $32.4 million, or 0.64% of total assets, at June 30, 2021, compared to $31.5 million, or 0.68% of total assets, at June 30, 2020, and decreased from $33.4 million, or 0.67% of total assets, at March 31, 2021.

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)    June 30, 2021  March 31, 2021  June 30, 2020 
Health care and social assistance:         
Offices of dentists 1.88%   2.06%   1.79%  
Offices of physicians (except mental health specialists) 0.76%   0.89%   0.76%  
Other community housing services 0.23%   0.24%   0.27%  
All others 2.12%   1.99%   2.21%  
Total health care and social assistance 4.99%   5.18%   5.03%  
Retail trade:         
Gasoline stations with convenience stores 2.42%   2.54%   1.90%  
All others 1.91%   2.16%   2.44%  
Total retail trade 4.33%   4.70%   4.34%  
Accommodation and food services:         
Full-service restaurants 1.41%   1.56%   1.38%  
Limited-service restaurants 0.56%   0.64%   0.79%  
Hotels (except casino hotels) and motels 0.81%   0.86%   0.89%  
All others 0.68%   0.75%   0.70%  
Total accommodation and food services 3.46%   3.81%   3.76%  
Educational services:         
Elementary and secondary schools 0.58%   0.58%   0.65%  
Education support services 0.44%   0.46%   0.40%  
All others 0.20%   0.24%   0.24%  
Total educational services 1.22%   1.28%   1.29%  
Arts, entertainment, and recreation 1.31%   1.40%   1.26%  
Purchased participations in micro loan portfolio 0.39%   0.50%   0.80%  
Total higher risk sectors 15.70%   16.87%   16.48%  

The decrease in higher risk sector loans at June 30, 2021, compared to June 30, 2020 and March 31, 2021 was primarily due to the forgiveness of PPP loans.


Second Quarter Ended June 30, 2021
Operating Results, Balance Sheet Review, Capital Management, and Credit Quality
(as of, or for the periods ended June 30, 2021, compared to June 30, 2020, and March 31, 2021, except as noted):

Operating Results:

  • Diluted earnings per share were $0.15 for the second quarter of 2021, compared to $0.18 for the second quarter of 2020, and $0.19 for the first quarter of 2021. Diluted earnings per share were $0.33 for the first six months of 2021, compared to $0.21 for the first six months 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 For the Six Months Ended
  June 30,  March 31,  June 30,  June 30,  June 30, 
(unaudited) 2021 2021 2020 2021 2020
Return on average tangible assets 0.73%  0.99%  1.01%  0.85%  0.62% 
Return on average tangible equity 8.84%  11.50%  11.06%  10.16%  6.45% 


 The decrease in the return of average tangible assets and the return on average tangible equity for the second quarter of 2021, compared to the second quarter of 2020 and the first quarter of 2021, was primarily due to the $4.0 million reserve for a legal settlement.
  • Net interest income, before provision for credit losses on loans, remained relatively flat at $34.9 million for the second quarter of 2021, compared to $34.9 million for the second quarter of 2020 and $35.0 million for the first quarter of 2021. Net interest income, before provision for credit losses on loans decreased (5%) to $69.8 million for the first six months of 2021, compared to $73.5 million for the first six months 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.

    • The fully tax equivalent (“FTE”) net interest margin contracted 46 basis points to 3.00% for the second quarter of 2021, from 3.46% for the second 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 decreased 22 basis points for the second quarter of 2021 from 3.22% for the first quarter of 2021, primarily due to declines in the average yields on loans, and a decrease in fees on PPP loans.

    • For the first six months of 2021, the FTE net interest margin contracted 73 basis points to 3.10%, compared to 3.83% for the first six months of 2020, primarily due to the impact of decreases in the yields on loans, investment securities, and overnight funds, partially offset by additional interest and fee income from PPP loans.

  • 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 4.80% for the second quarter of 2021, compared to 4.92% for the second quarter of 2020, primarily due to a decline in the average yield on loans, and an increase in the average balances of lower yielding residential mortgages and PPP loans relative to the average yield on core bank and asset-based lending loans, partially offset by an increase in interest and fees on PPP loans.
  For the Quarter Ended For the Quarter Ended 
  June 30, 2021 June 30, 2020 
  Average Interest Average Average Interest Average 
(in $000’s, unaudited) Balance Income Yield Balance Income Yield 
Loans, core bank and asset-based lending $2,293,398  $26,004 4.55%  $2,369,004  $27,694 4.70%  
SBA PPP loans  334,604   831 1.00%   231,251   582 1.01%  
PPP fees, net     1,876 2.25%      637 1.11%  
Bay View Funding factored receivables  48,993   2,772 22.69%   44,574   2,562 23.12%  
Purchased residential mortgages  113,467   981 3.47%   31,219   197 2.54%  
Purchased commercial real estate ("CRE") loans  14,602   110 3.02%   25,542   210 3.31%  
Loan fair value mark / accretion  (10,643)  865 0.15%   (14,497)  963 0.16%  
Total loans (includes loans held-for-sale) $2,794,421  $33,439 4.80%  $2,687,093  $32,845 4.92%  


 The average yield on the total loan portfolio decreased to 4.80% for the second quarter of 2021, compared to 5.24% for the first quarter of 2021, primarily due to a decline in the average yield on loans, and an increase in the average balance of lower yielding residential mortgages, and a decrease in fees on PPP loans.


  For the Quarter Ended For the Quarter Ended 
  June 30, 2021 March 31, 2021 
  Average Interest Average Average Interest Average 
(in $000’s, unaudited) Balance Income Yield Balance Income Yield 
Loans, core bank and asset-based lending $2,293,398  $26,004 4.55%  $2,225,342  $25,581 4.66%  
SBA PPP loans  334,604   831 1.00%   319,168   784 1.00%  
PPP fees, net     1,876 2.25%      3,401 4.32%  
Bay View Funding factored receivables  48,993   2,772 22.69%   48,094   2,650 22.35%  
Purchased residential mortgages  113,467   981 3.47%   22,194   119 2.17%  
Purchased CRE loans  14,602   110 3.02%   17,162   172 4.06%  
Loan fair value mark / accretion  (10,643)  865 0.15%   (11,626)  1,129 0.21%  
Total loans (includes loans held-for-sale) $2,794,421  $33,439 4.80%  $2,620,334  $33,836 5.24%  


 The average yield on the total loan portfolio decreased to 5.01% for the six months ended June 30, 2021, compared to 5.23% for the six months ended June 30, 2020, primarily due to decreases in the prime rate on loans, and an increase in the average balance of lower yielding PPP loans, partially offset by an increase in fees on PPP loans.


  For the Six Months Ended  For the Six Months Ended  
  June 30, 2021 June 30, 2020 
  Average Interest Average Average Interest Average 
(in $000’s, unaudited) Balance Income Yield Balance Income Yield 
Loans, core bank and asset-based lending $2,259,558  $51,588 4.60%  $2,395,469  $57,798 4.85%
SBA PPP loans  326,928   1,615 1.00%   115,669   582 1.01%
PPP fees, net     5,276 3.25%      637 1.11%
Bay View Funding factored receivables  48,546   5,422 22.52%   46,022   5,439 23.77%
Purchased residential mortgages  68,083   1,099 3.26%   32,147   427 2.67%
Purchased CRE loans  15,875   281 3.57%   26,441   459 3.49%  
Loan fair value mark / accretion  (11,132)  1,994 0.18%   (15,339)  2,285 0.19%
Total loans (includes loans held-for-sale) $2,707,858  $67,275 5.01%  $2,600,409  $67,627 5.23%


 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 portfolios was $25.2 million. In aggregate, the remaining net purchase discount on total loans acquired was $10.1 million at June 30, 2021.
  • The average cost of total deposits was 0.11% for the second quarter of 2021, compared to 0.17% for the second quarter of 2020 and 0.12% for the first quarter of 2021. The average cost of total deposits was 0.12% for the six months ended June 30, 2021, compared to 0.19% for the six months ended June 30, 2020.

  • During the second quarter of 2021, there was a recapture of ($493,000) in credit losses on loans, primarily due to recoveries on previously charged-off loans, compared to a $1.1 million provision for credit losses on loans taken in the second quarter of 2020, and the recapture of ($1.5) million in credit losses on loans for the first quarter of 2021. There was a recapture of ($2.0) million in credit losses on loans for the six months ended June 30, 2021, compared to a $14.4 million provision for credit losses on loans for the six months ended June 30, 2020.

    • The higher provision for credit losses on loans for the first six months 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 $2.2 million for the second quarter of 2021, compared to $2.1 million for the second quarter of 2020 and $2.3 million for the first quarter of 2021.

    • For the six months ended June 30, 2021, total noninterest income decreased to $4.5 million, compared to $5.3 million for the six months ended June 30, 2020, primarily as a result of lower service charges and fees on deposits during the first six months of 2021, and a $791,000 gain on disposition of foreclosed assets and a $270,000 gain on the sale of securities during the first six months of 2020.

  • Total noninterest expense for the second quarter of 2021 increased to $25.8 million, compared to $21.0 million for the second quarter of 2020, primarily due to a $4.0 million reserve for a legal settlement. Noninterest expense for the second quarter of 2021 increased from $23.2 million for the first quarter of 2021, primarily due to the reserve for a legal settlement, partially offset by lower salaries and employee benefits during the second quarter of 2021.

    • Noninterest expense for the six months ended June 30, 2021 increased to $49.0 million, compared to $46.8 million for the six months ended June 30, 2020, primarily due to a reserve for a legal settlement, partially offset by higher merger-related costs during the first six months of 2020.
    • The following table reflects pre-tax merger-related costs resulting from the merger with Presidio for the periods indicated:
  For the Quarter Ended For the Six Months Ended
MERGER-RELATED COSTS    June 30,     March 31,     June 30,  June 30,     June 30, 
(in $000’s, unaudited) 2021 2021 2020 2021 2020
Salaries and employee benefits $  $ $ $ $356
Other  (24)  58  59  34  2,127
Total merger-related costs $(24) $58 $59 $34 $2,483


 Full time equivalent employees were 330 at June 30, 2021, and 340 at June 30, 2020, and 325 at March 31, 2021.
  • The efficiency ratio was 69.58% for the second quarter of 2021, compared to 56.76% for the second quarter of 2020, and 62.38% for the first quarter of 2021. The efficiency ratio for the six months ended June 30, 2021 was 65.97%, compared to 59.38% for the six months ended June 30, 2020. Excluding the $4.0 million reserve for a legal settlement, the efficiency ratio was 58.78% for the second quarter of 2021, and 60.59% for the first six months of 2021.

  • Income tax expense was $3.0 million for the second quarter of 2021, compared to $4.3 million for both the second quarter of 2020 and the first quarter of 2021. The effective tax rate for the second quarter of 2021 was 25.1%, compared to 28.7% for the second quarter of 2020, and 27.8% for the first quarter of 2021. Income tax expense for the six months ended June 30, 2021 was $7.3 million, compared to $5.1 million for the six months ended June 30, 2020. The effective tax rate for the six months ended June 30, 2021 was 26.7%, compared to 29.2% for the six months ended June 30, 2020.

    • 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 $5.1 billion at June 30, 2021, an increase of 10% from $4.61 billion at June 30, 2020, and increased 1% from $5.00 billion at March 31, 2021.

  • Securities available-for-sale, at fair value, totaled $146.0 million at June 30, 2021, compared to $323.6 million at June 30, 2020, and $196.7 million at March 31, 2021. At June 30, 2021, the Company’s securities available-for-sale portfolio was comprised of $130.9 million of agency mortgage-backed securities (all issued by U.S. Government sponsored entities), and $15.1 million of U.S. Treasury securities. The pre-tax unrealized gain on securities available-for-sale at June 30, 2021 was $4.3 million, compared to a pre-tax unrealized gain on securities available-for-sale of $8.7 million at June 30, 2020, and a pre-tax unrealized gain on securities available-for-sale of $4.9 million at March 31, 2021. 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 June 30, 2021, securities held-to-maturity, at amortized cost, totaled $421.3 million, compared to $322.7 million at June 30, 2020, and $306.5 million at March 31, 2021. At June 30, 2021, the Company’s securities held-to-maturity portfolio was comprised of $361.1 million of agency mortgage-backed securities, and $60.2 million of tax-exempt municipal bonds. During the second quarter of 2021, the Company purchased $141.6 million of agency mortgage-backed securities (securities held-to-maturity), with a book yield of 1.53% and an average life of 5.84 years. During the first six months of 2021, the Company purchased $182.0 million of agency mortgage-backed securities (securities held-to-maturity), with a book yield of 1.53% and an average life of 5.36 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  June 30, 2021 March 31, 2021 June 30, 2020 
(in $000’s, unaudited)    Balance     % to Total    Balance     % to Total    Balance     % to Total    
Commercial $557,686  20%    $559,698  20%    $553,843  21%    
Paycheck Protection Program Loans  286,461  10%     349,744  13%     324,550  12%    
Real estate:                
CRE - owner occupied  583,091  21%     568,637  21%     553,463  21%    
CRE - non-owner occupied  742,135  26%     700,117  26%     725,776  27%    
Land and construction  129,426  4%     159,504  6%     138,284  5%    
Home equity  107,873  4%     104,303  4%     112,679  4%    
Multifamily  198,771  7%     168,917  6%     169,637  6%    
Residential mortgages  205,904  7%     82,181  3%     95,033  3%    
Consumer and other  21,519  1%     19,872  1%     22,759  1%    
Total Loans  2,832,866  100%     2,712,973  100%     2,696,024  100%    
Deferred loan costs (fees), net  (8,070)   (8,266)   (9,635)  
Loans, net of deferred costs and fees  $2,824,796  100%    $2,704,707  100%    $2,686,389  100%    


 Loans, excluding loans held-for-sale, increased $138.4 million, or 5%, to $2.82 billion at June 30, 2021, compared to $2.69 billion at June 30, 2020, and increased $120.1 million, or 4% from $2.70 billion at March 31, 2021. Total loans at June 30, 2021 included $286.5 million of PPP loans, compared to $324.6 million of PPP loans at June 30, 2020 and $349.7 million of PPP loans at March 31, 2021.
   
 Commercial and industrial line usage remained flat at 27% at June 30, 2021 and June 30, 2020, and 28% at March 31, 2021.
   
 At June 30, 2021, 44% of the CRE loan portfolio was secured by owner-occupied real estate.
   
 At June 30, 2021, approximately 44% of the Company’s loan portfolio consisted of floating interest rate loans.
  • The following table summarizes the allowance for credit losses on loans for the periods indicated:
  For the Quarter Ended For the Six Months Ended  
ALLOWANCE FOR CREDIT LOSSES ON LOANS    June 30,     March 31,     June 30,  June 30,     June 30,  
(in $000’s, unaudited) 2021 2021 2020 2021 2020 
Balance at beginning of period $44,296  $44,400  $44,703  $44,400  $23,285  
Charge-offs during the period  (105)  (263)  (465)  (368)  (1,138) 
Recoveries during the period  258   1,671   92   1,929   343  
Net recoveries (charge-offs) during the period  153   1,408   (373)  1,561   (795) 
Impact of adopting Topic 326              8,570  
Provision for (recapture of) credit losses on loans during the period  (493)  (1,512)  1,114   (2,005)  14,384  
Balance at end of period $43,956  $44,296  $45,444  $43,956  $45,444  
                 
Total loans, net of deferred fees $2,824,796  $2,704,707  $2,686,389  $2,824,796  $2,686,389  
Total nonperforming loans $6,180  $5,593  $9,125  $6,180  $9,125  
Allowance for credit losses on loans ("ACLL") to total loans  1.56 %   1.64 %   1.69 % 1.56 %   1.69 %
ACLL to total nonperforming loans  711.26 %   791.99 %   498.02 % 711.26 %   498.02 %  


 The ACLL was 1.56% of total loans at June 30, 2021 and the ACLL to total nonperforming loans was 711.26% at June 30, 2021. The ACLL was 1.69% of total loans and the ACLL to nonperforming loans was 498.02% at June 30, 2020. 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 to total loans, excluding PPP loans, was 1.73% at June 30, 2021, 1.92% at June 30, 2020 and 1.88% at March 31, 2021.
   
 The following table shows the drivers of change in ACLL under CECL for each of the first two quarters of 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 and qualitative factor changes during the first quarter of 2021  (1,825)
ACLL at March 31, 2021  44,296 
Net recoveries during the second quarter of 2021  153 
Portfolio changes during the second quarter of 2021  2,153 
Economic and qualitative factor changes during the second quarter of 2021  (2,646)
    ACLL at June 30, 2021 $43,956 


 Net recoveries totaled $153,000 for the second quarter of 2021, compared to net charge-offs of $373,000 for the second quarter of 2020, and net recoveries of $1.4 million for the first quarter of 2021.
   
 The following is a breakout of NPAs at the periods indicated:


  End of Period: 
NONPERFORMING ASSETS June 30, 2021 March 31, 2021 June 30, 2020 
(in $000’s, unaudited)    Balance    % of Total    Balance    % of Total    Balance    % of Total 
CRE loans $2,923 47%  $2,973 53%  $3,679 40%
Commercial loans  1,793 29%   1,985 36%   2,416 27%
Restructured and loans over 90 days past due and still accruing  889 14%   51 1%   668 7%
Consumer and other loans  407 7%   407 7%   1,464 16%
Home equity loans  168 3%   177 3%   898 10%
Total nonperforming assets $6,180 100%  $5,593 100%  $9,125 100%


 NPAs totaled $6.2 million, or 0.12% of total assets, at June 30, 2021, compared to $9.1 million, or 0.20% of total assets, at June 30, 2020, $5.6 million, or 0.11% of total assets, at March 31, 2021.
   
 There were no foreclosed assets on the balance sheet at June 30, 2021, June 30, 2020, or March 31, 2021.
   
 Classified assets increased to $32.4 million, or 0.64% of total assets, at June 30, 2021, compared to $31.5 million, or 0.68% of total assets, at June 30, 2020, and decreased from $33.4 million, or 0.67% of total assets, at March 31, 2021.
  • The following table summarizes the distribution of deposits and the percentage of distribution in each category for the periods indicated:
DEPOSITS June 30, 2021 March 31, 2021 June 30, 2020 
(in $000’s, unaudited)    Balance    % to Total  Balance    % to Total  Balance    % to Total 
Demand, noninterest-bearing $1,840,516 42%  $1,813,962 42%  $1,714,058 42%
Demand, interest-bearing  1,140,867 26%   1,101,807 26%   934,780 24%
Savings and money market  1,174,587 27%   1,189,566 28%   1,091,740 28%
Time deposits — under $250  42,118 1%   42,596 1%   49,493 2%
Time deposits — $250 and over  110,111 3%   102,508 2%   93,822 3%
CDARS — interest-bearing demand,                
money market and time deposits  36,273 1%   28,663 1%   16,333 1%  
Total deposits $4,344,472 100%  $4,279,102 100%  $3,900,226 100%


 Total deposits increased $444.2 million, or 11%, to $4.34 billion at June 30, 2021, compared to $3.90 billion at June 30, 2020. Total deposits increased $65.4 million, or 2%, from $4.28 billion at March 31, 2021.
   
 Deposits, excluding all time deposits and CDARS deposits, increased $415.4 million, or 11%, to $4.16 billion at June 30, 2021, compared to $3.74 billion at June 30, 2020. Deposits, excluding all time deposits and CDARS increased $50.6 million, or 1%, to $4.16 billion at June 30, 2021, compared to $4.11 billion at March 31, 2021.
  • The Company’s consolidated capital ratios exceeded regulatory guidelines and the Bank’s capital ratios exceeded 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 June 30, 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 15.6%   15.0%   10.0%   10.5%
Tier 1 Capital 13.3%   13.9%   8.0%   8.5%
Common Equity Tier 1 Capital 13.3%   13.9%   6.5%   7.0%
Tier 1 Leverage 8.6%   9.0%   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 June 30,  March 31,  June 30, 
(in $000’s, unaudited)    2021 2021 2020
Unrealized gain on securities available-for-sale $2,673  $3,113  $5,767 
Remaining unamortized unrealized gain on securities         
available-for-sale transferred to held-to-maturity  243   252   280 
Split dollar insurance contracts liability  (6,142)  (6,148)  (4,865)
Supplemental executive retirement plan liability  (8,504)  (8,699)  (6,707)
Unrealized gain on interest-only strip from SBA loans  198   214   345 
Total accumulated other comprehensive loss $(11,532) $(11,268) $(5,180)
          
  • Tangible equity was $400.6 million at June 30, 2021, compared to $388.6 million at June 30, 2020, and $398.1 million at March 31, 2021. Tangible book value per share was $6.65 at June 30, 2021, compared to $6.49 at June 30, 2020, and $6.64 at March 31, 2021.

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, 2020, 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:  For the Six Months Ended:
CONSOLIDATED INCOME STATEMENTS    June 30,     March 31,     June 30,     March 31,     June 30,      June 30,     June 30,     Percent 
(in $000’s, unaudited) 2021 2021 2020 2021 2020  2021 2020 Change 
Interest income $36,632  $36,761  $37,132 0 %  (1)% $73,393  $78,074 (6)%
Interest expense  1,756   1,803   2,192 (3)%  (20)%  3,559   4,554 (22)%
Net interest income before provision                       
for credit losses on loans  34,876   34,958   34,940 0 %  0 %  69,834   73,520 (5)%
Provision for (recapture of) credit losses on loans  (493)  (1,512)  1,114 67 %  (144)%  (2,005)  14,384 (114)%
Net interest income after provision                       
for credit losses on loans  35,369   36,470   33,826 (3)%  5 %  71,839   59,136 21 %
Noninterest income:                            
Service charges and fees on deposit accounts  659   601   650 10 %  1 %  1,260   1,619 (22)%
Increase in cash surrender value of                       
life insurance  458   456   458 0 %  0 %  914   916 0 %
Gain on proceeds from company owned life insurance  396   66    500 %  N/A   462    N/A  
Servicing income  104   182   205 (43)%  (49)%  286   388 (26)%
Gain on sales of SBA loans  83   550    (85)%  N/A   633   67 845 %
Gain on sales of securities        170 N/A  (100)%     270 (100)%
Gain on the disposition of foreclosed assets         N/A  N/A       791 (100)%
Other  469   446   595 5 %  (21)%  915   1,220 (25)%
Total noninterest income  2,169   2,301   2,078 (6)%  4 %  4,470   5,271 (15)%
Noninterest expense:                              
Salaries and employee benefits  12,572   13,958   12,300 (10)%  2 %  26,530   26,503 0 %
Occupancy and equipment  2,247   2,274   1,766 (1)%  27 %  4,521   3,538 28 %
Professional fees  1,771   1,719   1,155 3 %  53 %  3,490   2,590 35 %
Other  9,185   5,293   5,791 74 %  59 %  14,478   14,155 2 %
Total noninterest expense  25,775   23,244   21,012 11 %  23 %  49,019   46,786 5 %
Income before income taxes  11,763   15,527   14,892 (24)%  (21)%  27,290   17,621 55 %
Income tax expense  2,950   4,323   4,274 (32)%  (31)%  7,273   5,142 41 %
Net income $8,813  $ 11,204  $ 10,618 (21)%  (17)% $ 20,017  $ 12,479 60 %
                        
PER COMMON SHARE DATA                          
(unaudited)                             
Basic earnings per share $0.15  $0.19  $0.18 (23)%  (19)% $0.33  $0.21 59 %
Diluted earnings per share $0.15  $0.19  $0.18 (24)%  (19)% $0.33  $0.21 57 %
Weighted average shares outstanding - basic  60,089,327   59,926,816   59,420,592 0
 %  1 %  60,008,071   59,353,759 1 %
Weighted average shares outstanding - diluted  60,730,141   60,404,213   60,112,423 1 %  1 %  60,572,457   60,152,487 1 %
Common shares outstanding at period-end  60,202,766   59,932,334   59,856,767 0 %  1 %  60,202,766   59,856,767 1 %
Dividend per share $0.13  $0.13  $0.13 0 %  0 % $0.26  $0.26 0 %
Book value per share $9.69  $9.71  $9.60 0 %  1 % $9.69  $9.60 1 %
Tangible book value per share $6.65  $6.64  $6.49 0 %  2 % $6.65  $6.49 2 %
                        
KEY FINANCIAL RATIOS                               
(unaudited)                               
Annualized return on average equity  6.06 %   7.85 %   7.45%  (23)%  (19)%  6.95 %   4.36%  59 %
Annualized return on average tangible equity  8.84 %   11.50 %   11.06%  (23)%  (20)%  10.16 %   6.45%  58 %
Annualized return on average assets  0.70 %   0.95 %   0.96%  (26)%  (27)%  0.82 %   0.59%  39 %
Annualized return on average tangible assets  0.73 %   0.99 %   1.01%  (26)%  (28)%  0.85 %   0.62%  37 %
Net interest margin (FTE)  3.00 %   3.22 %   3.46%  (7)%  (13)%  3.10 %   3.83%  (19)%
Efficiency ratio  69.58 %   62.38 %   56.76%  12 %  23 %  65.97 %   59.38%  11 %
                        
AVERAGE BALANCES                              
(in $000’s, unaudited)                               
Average assets $5,047,097  $4,773,878  $4,434,238 6 %  14 % $4,911,242  $4,233,693 16 %
Average tangible assets $4,863,814  $4,589,861  $4,247,522 6 %  15 % $4,727,594  $4,046,583 17 %
Average earning assets $4,678,084  $4,419,963  $4,075,673 6 %  15 % $4,549,736  $3,870,412 18 %
Average loans held-for-sale $4,053  $3,458  $3,617 17 %  12 % $3,757  $2,941 28 %
Average total loans $2,790,368  $2,616,876  $2,683,476 7 %  4 % $2,704,101  $2,597,468 4 %
Average deposits $4,307,555  $4,048,953  $3,720,850 6 %  16 % $4,178,968  $3,524,331 19 %
Average demand deposits - noninterest-bearing $1,808,638  $1,712,903  $1,660,547 6 %  9 % $1,761,035  $1,549,745 14 %
Average interest-bearing deposits $2,498,917  $2,336,050  $2,060,303 7 %  21 % $2,417,933  $1,974,586 22 %
Average interest-bearing liabilities $2,538,747  $2,375,851  $2,099,982 7 %  21 % $2,457,749  $2,014,376 22 %
Average equity $583,009  $579,157  $572,939 1 %  2 % $581,094  $575,995 1 %
Average tangible equity $399,726  $395,140  $386,223 1 %  3 % $397,446  $388,886 2 %


                 
  For the Quarter Ended: 
CONSOLIDATED INCOME STATEMENTS    June 30,     March 31,     December 31,    September 30,    June 30,  
(in $000’s, unaudited) 2021 2021 2020 2020 2020 
Interest income $36,632  $36,761  $36,145  $36,252 $37,132 
Interest expense  1,756   1,803   1,940   2,087  2,192 
Net interest income before provision                
for credit losses on loans  34,876   34,958   34,205   34,165  34,940 
Provision for (recapture of) credit losses on loans  (493)  (1,512)  (1,348)  197  1,114 
Net interest income after provision                
for credit losses on loans  35,369   36,470   35,553   33,968  33,826 
Noninterest income:                
Service charges and fees on deposit accounts  659   601   608   632  650 
Increase in cash surrender value of                
life insurance  458   456   465   464  458 
Gain on proceeds from company owned life insurance  396   66         
Servicing income  104   182   98   187  205 
Gain on sales of SBA loans  83   550   372   400   
Gain on sales of securities        7     170 
Gain on the disposition of foreclosed assets              
Other  469   446   506   912  595 
Total noninterest income  2,169   2,301   2,056   2,595  2,078 
Noninterest expense:                     
Salaries and employee benefits  12,572   13,958   12,457   11,967  12,300 
Occupancy and equipment  2,247   2,274   2,197   2,283  1,766 
Professional fees  1,771   1,719   1,396   1,352  1,155 
Other  9,185   5,293   5,507   5,566  5,791 
Total noninterest expense  25,775   23,244   21,557   21,168  21,012 
Income before income taxes  11,763   15,527   16,052   15,395  14,892 
Income tax expense  2,950   4,323   4,429   4,198  4,274 
Net income $8,813  $ 11,204  $ 11,623  $ 11,197 $ 10,618 
                 
PER COMMON SHARE DATA                
(unaudited)                     
Basic earnings per share $0.15  $0.19  $0.19  $0.19 $0.18 
Diluted earnings per share $0.15  $0.19  $0.19  $0.19 $0.18 
Weighted average shares outstanding - basic  60,089,327   59,926,816   59,616,951   59,589,243  59,420,592 
Weighted average shares outstanding - diluted  60,730,141   60,404,213   60,247,296   60,141,412  60,112,423 
Common shares outstanding at period-end  60,202,766   59,932,334   59,917,457   59,914,987  59,856,767 
Dividend per share $0.13  $0.13  $0.13  $0.13 $0.13 
Book value per share $9.69  $9.71  $9.64  $9.64 $9.60 
Tangible book value per share $6.65  $6.64  $6.57  $6.55 $6.49 
                 
KEY FINANCIAL RATIOS                     
(unaudited)                     
Annualized return on average equity  6.06 %   7.85 %   7.99 %   7.73%   7.45%  
Annualized return on average tangible equity  8.84 %   11.50 %   11.75 %   11.41%   11.06%  
Annualized return on average assets  0.70 %   0.95 %   0.98 %   0.98%   0.96%  
Annualized return on average tangible assets  0.73 %   0.99 %   1.02 %   1.02%   1.01%  
Net interest margin (FTE)  3.00 %   3.22 %   3.15 %   3.24%   3.46%  
Efficiency ratio  69.58 %   62.38 %   59.45 %   57.58%   56.76%  
                 
AVERAGE BALANCES                     
(in $000’s, unaudited)                     
Average assets $5,047,097  $4,773,878  $4,703,154  $4,562,412 $4,434,238 
Average tangible assets $4,863,814  $4,589,861  $4,518,279  $4,376,533 $4,247,522 
Average earning assets $4,678,084  $4,419,963  $4,338,117  $4,203,902 $4,075,673 
Average loans held-for-sale $4,053  $3,458  $2,772  $5,169 $3,617 
Average total loans $2,790,368  $2,616,876  $2,652,019  $2,664,525 $2,683,476 
Average deposits $4,307,555  $4,048,953  $3,980,017  $3,846,652 $3,720,850 
Average demand deposits - noninterest-bearing $1,808,638  $1,712,903  $1,749,837  $1,700,972 $1,660,547 
Average interest-bearing deposits $2,498,917  $2,336,050  $2,230,180  $2,145,680 $2,060,303 
Average interest-bearing liabilities $2,538,747  $2,375,851  $2,269,960  $2,185,439 $2,099,982 
Average equity $583,009  $579,157  $578,560  $576,135 $572,939 
Average tangible equity $399,726  $395,140  $393,685  $390,256 $386,223 


               
  End of Period: Percent Change From: 
CONSOLIDATED BALANCE SHEETS    June 30,     March 31,     June 30,     March 31,     June 30,  
(in $000’s, unaudited) 2021 2021 2020 2021 2020 
ASSETS                   
Cash and due from banks $41,904  $36,534  $40,108  15 %  4 %
Other investments and interest-bearing deposits              
in other financial institutions  1,286,418   1,406,520   885,792  (9)%  45 %
Securities available-for-sale, at fair value  145,955   196,718   323,565  (26)%  (55)%
Securities held-to-maturity, at amortized cost  421,286   306,535   322,677  37 %  31 %
Loans held-for-sale - SBA, including deferred costs  4,344   2,834   4,324  53 %  0 %
Loans:               
Commercial  557,686   559,698   553,843  0 %  1 %
SBA PPP loans  286,461   349,744   324,550  (18)%  (12)%
Real estate:               
CRE - owner occupied  583,091   568,637   553,463  3 %  5 %
CRE - non-owner occupied  742,135   700,117   725,776  6 %  2 %
Land and construction  129,426   159,504   138,284  (19)%  (6)%
Home equity  107,873   104,303   112,679  3 %  (4)%
Multifamily  198,771   168,917   169,637  18 %  17 %
Residential mortgages  205,904   82,181   95,033  151 %  117 %
Consumer and other  21,519   19,872   22,759  8 %  (5)%
Loans  2,832,866   2,712,973   2,696,024  4 %  5 %
Deferred loan fees, net  (8,070)  (8,266)  (9,635) (2)%  (16)%
Total loans, net of deferred costs and fees  2,824,796   2,704,707   2,686,389  4 %  5 %
Allowance for credit losses on loans  (43,956)  (44,296)  (45,444) (1)%  (3)%
Loans, net  2,780,840   2,660,411   2,640,945  5 %  5 %
Company-owned life insurance  77,393   77,421   76,944  0 %  1 %
Premises and equipment, net  10,040   10,220   9,500  (2)%  6 %
Goodwill  167,631   167,631   167,631  0 %  0 %
Other intangible assets  15,177   15,931   18,593  (5)%  (18)%
Accrued interest receivable and other assets  121,887   120,635   124,322  1 %  (2)%
Total assets $ 5,072,875  $ 5,001,390  $ 4,614,401  1 %  10 %
               
LIABILITIES AND SHAREHOLDERS’ EQUITY                
Liabilities:                
Deposits:               
Demand, noninterest-bearing $1,840,516  $1,813,962  $1,714,058  1 %  7 %
Demand, interest-bearing  1,140,867   1,101,807   934,780  4 %  22 %
Savings and money market  1,174,587   1,189,566   1,091,740  (1)%  8 %
Time deposits-under $250  42,118   42,596   49,493  (1)%  (15)%
Time deposits-$250 and over  110,111   102,508   93,822  7 %  17 %
CDARS - money market and time deposits  36,273   28,663   16,333  27 %  122 %
Total deposits  4,344,472   4,279,102   3,900,226  2 %  11 %
Subordinated debt, net of issuance costs  39,832   39,786   39,646  0 %  0 %
Accrued interest payable and other liabilities  105,127   100,839   99,722  4 %  5 %
Total liabilities  4,489,431   4,419,727   4,039,594  2 %  11 %
               
Shareholders’ Equity:                   
Common stock  495,665   494,617   492,333  0 %  1 %
Retained earnings  99,311   98,314   87,654  1 %  13 %
Accumulated other comprehensive loss  (11,532)  (11,268)  (5,180) (2)%  (123)%
Total shareholders' equity  583,444   581,663   574,807  0 %  2 %
Total liabilities and shareholders’ equity $ 5,072,875  $ 5,001,390  $ 4,614,401  1 %  10 %
               


                
  End of Period:
CONSOLIDATED BALANCE SHEETS    June 30,     March 31,     December 31,    September 30,    June 30, 
(in $000’s, unaudited) 2021 2021 2020 2020 2020
ASSETS                    
Cash and due from banks $41,904  $36,534  $30,598  $33,353  $40,108 
Other investments and interest-bearing deposits               
in other financial institutions  1,286,418   1,406,520   1,100,475   926,915   885,792 
Securities available-for-sale, at fair value  145,955   196,718   235,774   294,438   323,565 
Securities held-to-maturity, at amortized cost  421,286   306,535   297,389   295,609   322,677 
Loans held-for-sale - SBA, including deferred costs  4,344   2,834   1,699   3,565   4,324 
Loans:               
Commercial  557,686   559,698   555,707   574,359   553,843 
SBA PPP loans  286,461   349,744   290,679   323,550   324,550 
Real estate:               
CRE - owner occupied  583,091   568,637   560,362   561,528   553,463 
CRE - non-owner occupied  742,135   700,117   693,103   713,563   725,776 
Land and construction  129,426   159,504   144,594   142,632   138,284 
Home equity  107,873   104,303   111,885   111,468   112,679 
Multifamily  198,771   168,917   166,425   169,791   169,637 
Residential mortgages  205,904   82,181   85,116   91,077   95,033 
Consumer and other  21,519   19,872   18,116   17,511   22,759 
Loans  2,832,866   2,712,973   2,625,987   2,705,479   2,696,024 
Deferred loan fees, net  (8,070)  (8,266)  (6,726)  (8,463)  (9,635)
Total loans, net of deferred fees  2,824,796   2,704,707   2,619,261   2,697,016   2,686,389 
Allowance for credit losses on loans  (43,956)  (44,296)  (44,400)  (45,422)  (45,444)
Loans, net  2,780,840   2,660,411   2,574,861   2,651,594   2,640,945 
Company-owned life insurance  77,393   77,421   77,523   77,059   76,944 
Premises and equipment, net  10,040   10,220   10,459   10,412   9,500 
Goodwill  167,631   167,631   167,631   167,631   167,631 
Other intangible assets  15,177   15,931   16,664   17,628   18,593 
Accrued interest receivable and other assets  121,887   120,635   121,041   128,581   124,322 
Total assets $ 5,072,875  $ 5,001,390  $ 4,634,114  $ 4,606,785  $ 4,614,401 
                
LIABILITIES AND SHAREHOLDERS’ EQUITY               
Liabilities:                    
Deposits:                    
Demand, noninterest-bearing $1,840,516  $1,813,962  $1,661,655  $1,698,027  $1,714,058 
Demand, interest-bearing  1,140,867   1,101,807   960,179   926,041   934,780 
Savings and money market  1,174,587   1,189,566   1,119,968   1,108,252   1,091,740 
Time deposits-under $250  42,118   42,596   45,027   46,684   49,493 
Time deposits-$250 and over  110,111   102,508   103,746   92,276   93,822 
CDARS - money market and time deposits  36,273   28,663   23,911   19,121   16,333 
Total deposits  4,344,472   4,279,102   3,914,486   3,890,401   3,900,226 
Subordinated debt, net of issuance costs  39,832   39,786   39,740   39,693   39,646 
Accrued interest payable and other liabilities  105,127   100,839   101,999   98,884   99,722 
Total liabilities  4,489,431   4,419,727   4,056,225   4,028,978   4,039,594 
                
Shareholders’ Equity:                    
Common stock  495,665   494,617   493,707   493,126   492,333 
Retained earnings  99,311   98,314   94,899   91,065   87,654 
Accumulated other comprehensive loss  (11,532)  (11,268)  (10,717)  (6,384)  (5,180)
Total shareholders' equity  583,444   581,663   577,889   577,807   574,807 
Total liabilities and shareholders’ equity $ 5,072,875  $ 5,001,390  $ 4,634,114  $ 4,606,785  $ 4,614,401 
                


               
  End of Period: Percent Change From: 
CREDIT QUALITY DATA    June 30,     March 31,     June 30,     March 31,     June 30,  
(in $000’s, unaudited) 2021 2021 2020 2021 2020 
Nonaccrual loans - held-for-investment $5,291  $5,542  $8,457 (5)%  (37)%
Restructured and loans over 90 days past due              
and still accruing  889   51   668 1643 %  33 %
Total nonperforming loans  6,180   5,593   9,125 10 %  (32)%
Foreclosed assets         N/A  N/A  
Total nonperforming assets $6,180  $5,593  $9,125 10 %  (32)%
Other restructured loans still accruing $93  $152  $64 (39)%  45 %
Net charge-offs (recoveries) during the quarter $(153) $(1,408) $373 89 %  (141)%
Provision for (recapture of) credit losses on loans during the quarter $(493) $(1,512) $1,114 67 %  (144)%
Allowance for credit losses on loans $43,956  $44,296  $45,444 (1)%  (3)%
Classified assets $32,402  $33,420  $31,452 (3)%  3 %
Allowance for credit losses on loans to total loans  1.56 %   1.64 %   1.69%  (5)%  (8)%
Allowance for credit losses on loans to total nonperforming loans  711.26 %   791.99 %   498.02%  (10)%  43 %
Nonperforming assets to total assets  0.12 %   0.11 %   0.20%  9 %  (40)%
Nonperforming loans to total loans  0.22 %   0.21 %   0.34%  5 %  (35)%
Classified assets to Heritage Commerce Corp              
Tier 1 capital plus allowance for credit losses on loans  7 %   7 %   7%  0 %  0 %
Classified assets to Heritage Bank of Commerce              
Tier 1 capital plus allowance for credit losses on loans  7 %   7 %   7%  0 %  0 %
               
OTHER PERIOD-END STATISTICS                   
(in $000’s, unaudited)                   
Heritage Commerce Corp:                   
Tangible common equity (1) $400,636  $398,101  $388,583 1 %  3 %
Shareholders’ equity / total assets  11.50 %   11.63 %   12.46%  (1)%  (8)%
Tangible common equity / tangible assets (2)  8.19 %   8.26 %   8.78%  (1)%  (7)%
Loan to deposit ratio  65.02 %   63.21 %   68.88%  3 %  (6)%
Noninterest-bearing deposits / total deposits  42.36 %   42.39 %   43.95%  0 %  (4)%
Total capital ratio  15.6 %   16.5 %   15.9%  (5)%  (2
)%
Tier 1 capital ratio  13.3 %   14.0 %   13.4%  (5)%  (1)%
Common Equity Tier 1 capital ratio  13.3 %   14.0 %   13.4%  (5)%  (1)%
Tier 1 leverage ratio  8.6 %   9.1 %   9.4%  (5)%  (9)%
Heritage Bank of Commerce:              
Total capital ratio  15.0 %   15.8 %   15.1%  (5)%  (1)%
Tier 1 capital ratio  13.9 %   14.7 %   14.0%  (5)%  (1)%
Common Equity Tier 1 capital ratio  13.9 %   14.7 %   14.0%  (5)%  (1)%
Tier 1 leverage ratio  9.0 %   9.5 %   9.9%  (5)%  (9)%
               

       (1)   Represents shareholders' equity minus goodwill and other intangible assets
       (2)   Represents shareholders' equity minus goodwill and other intangible assets divided by total assets minus goodwill and other intangible assets

                 
  End of Period: 
CREDIT QUALITY DATA    June 30,     March 31,     December 31,    September 30,    June 30,  
(in $000’s, unaudited) 2021 2021 2020 2020 2020 
Nonaccrual loans - held-for-investment $5,291  $5,542  $7,788  $9,661 $8,457 
Restructured and loans over 90 days past due                
and still accruing  889   51   81   601  668 
Total nonperforming loans  6,180   5,593   7,869   10,262  9,125 
Foreclosed assets              
Total nonperforming assets $6,180  $5,593  $7,869  $10,262 $9,125 
Other restructured loans still accruing $93  $152  $169  $98 $64 
Net charge-offs (recoveries) during the quarter $(153) $(1,408) $(326) $219 $373 
Provision for (recapture of) credit losses on loans during the quarter $(493) $(1,512) $(1,348) $197 $1,114 
Allowance for credit losses on loans $43,956  $44,296  $44,400  $45,422 $45,444 
Classified assets $32,402  $33,420  $34,028  $33,024 $31,452 
Allowance for credit losses on loans to total loans  1.56 %   1.64 %   1.70 %   1.68%   1.69%  
Allowance for credit losses on loans to total nonperforming loans  711.26 %   791.99 %   564.24 %   442.62%   498.02%  
Nonperforming assets to total assets  0.12 %   0.11 %   0.17 %   0.22%   0.20%  
Nonperforming loans to total loans  0.22 %   0.21 %   0.30 %   0.38%   0.34%  
Classified assets to Heritage Commerce Corp                
Tier 1 capital plus allowance for credit losses on loans  7 %   7 %   7 %   7%   7%  
Classified assets to Heritage Bank of Commerce                
Tier 1 capital plus allowance for credit losses on loans  7 %   7 %   7 %   7%   7%  
                 
OTHER PERIOD-END STATISTICS                     
(in $000’s, unaudited)                     
Heritage Commerce Corp:                     
Tangible common equity (1) $400,636  $398,101  $393,594  $392,548 $388,583 
Shareholders’ equity / total assets  11.50 %   11.63 %   12.47 %   12.54%   12.46%  
Tangible common equity / tangible assets (2)  8.19 %   8.26 %   8.85 %   8.88%   8.78%  
Loan to deposit ratio  65.02 %   63.21 %   66.91 %   69.32%   68.88%  
Noninterest-bearing deposits / total deposits  42.36 %   42.39 %   42.45 %   43.65%   43.95%  
Total capital ratio  15.6 %   16.5 %   16.5 %   16.0%   15.9%  
Tier 1 capital ratio  13.3 %   14.0 %   14.0 %   13.5%   13.4%  
Common Equity Tier 1 capital ratio  13.3 %   14.0 %   14.0 %   13.5%   13.4%  
Tier 1 leverage ratio  8.6 %   9.1 %   9.1 %   9.3%   9.4%  
Heritage Bank of Commerce:                
Total capital ratio  15.0 %   15.8 %   15.8 %   15.2%   15.1%  
Tier 1 capital ratio  13.9 %   14.7 %   14.6 %   14.1%   14.0%  
Common Equity Tier 1 capital ratio  13.9 %   14.7 %   14.6 %   14.1%   14.0%  
Tier 1 leverage ratio  9.0 %   9.5 %   9.5 %   9.7%   9.9%  

       (1)   Represents shareholders' equity minus goodwill and other intangible assets
       (2)   Represents shareholders' equity minus goodwill and other intangible assets divided by total assets minus goodwill and other intangible assets

                  
  For the Quarter Ended For the Quarter Ended 
  June 30, 2021 June 30, 2020 
           Interest    Average          Interest    Average 
NET INTEREST INCOME AND NET INTEREST MARGIN Average Income/ Yield/ Average Income/ Yield/ 
(in $000’s, unaudited) Balance Expense Rate Balance Expense Rate 
Assets:                       
Loans, gross (1)(2) $2,794,421 $33,439  4.80%  $2,687,093 $32,845  4.92%  
Securities - taxable  479,419  1,944  1.63%   611,709  3,155  2.07%  
Securities - exempt from Federal tax (3)  62,257  511  3.29%   76,160  612  3.23%  
Other investments and interest-bearing deposits                 
in other financial institutions  1,341,987  845  0.25%   700,711  648  0.37%  
Total interest earning assets (3)  4,678,084  36,739  3.15%   4,075,673  37,260  3.68%  
Cash and due from banks  42,449        37,716       
Premises and equipment, net  10,147        9,096       
Goodwill and other intangible assets  183,283        186,716       
Other assets  133,134        125,037       
Total assets $5,047,097       $4,434,238       
                  
Liabilities and shareholders’ equity:                   
Deposits:                   
Demand, noninterest-bearing $1,808,638       $1,660,547       
                  
Demand, interest-bearing  1,139,090  477  0.17%   890,158  525  0.24%  
Savings and money market  1,179,321  528  0.18%   1,009,078  794  0.32%  
Time deposits - under $100  15,335  8  0.21%   17,825  18  0.41%  
Time deposits - $100 and over  133,935  164  0.49%   127,877  277  0.87%  
CDARS - money market and time deposits  31,236  2  0.03%   15,365  1  0.03%  
Total interest-bearing deposits  2,498,917  1,179  0.19%   2,060,303  1,615  0.32%  
Total deposits  4,307,555  1,179  0.11%   3,720,850  1,615  0.17%  
                  
Subordinated debt, net of issuance costs  39,802  577  5.81%   39,617  577  5.86%  
Short-term borrowings  28    0.00%   62    0.00%  
Total interest-bearing liabilities  2,538,747  1,756  0.28%   2,099,982  2,192  0.42%  
Total interest-bearing liabilities and demand,                 
noninterest-bearing / cost of funds  4,347,385  1,756  0.16%   3,760,529  2,192  0.23%  
Other liabilities  116,703        100,770       
Total liabilities  4,464,088        3,861,299       
Shareholders’ equity  583,009        572,939       
Total liabilities and shareholders’ equity $5,047,097       $4,434,238       
                  
Net interest income (3) / margin      34,983  3.00%       35,068  3.46%  
Less tax equivalent adjustment (3)      (107)         (128)    
Net interest income     $34,876         $34,940     


(1)Includes loans held-for-sale. Nonaccrual loans are included in average balance.
(2)Yield amounts earned on loans include fees and costs. The accretion of net deferred loan fees into loan interest income was $2,192,000 for the second quarter of 2021 (of which $1,876,000 was from PPP loans), compared to $773,000 for the second quarter of 2020 (of which $637,000 was from PPP loans).
(3)Reflects the FTE adjustment for Federal tax-exempt income based on a 21%.

         

                  
  For the Quarter Ended For the Quarter Ended 
  June 30, 2021 March 31, 2021 
           Interest    Average          Interest    Average 
NET INTEREST INCOME AND NET INTEREST MARGIN Average Income/ Yield/ Average Income/ Yield/ 
(in $000’s, unaudited) Balance Expense Rate Balance Expense Rate 
Assets:                       
Loans, gross (1)(2) $2,794,421 $33,439  4.80%  $2,620,334 $33,836  5.24%  
Securities - taxable  479,419  1,944  1.63%   436,858  1,728  1.60%  
Securities - exempt from Federal tax (3)  62,257  511  3.29%   66,513  542  3.30%  
Other investments and interest-bearing deposits                 
in other financial institutions  1,341,987  845  0.25%   1,296,258  768  0.24%  
Total interest earning assets (3)  4,678,084  36,739  3.15%   4,419,963  36,874  3.38%  
Cash and due from banks  42,449        40,823       
Premises and equipment, net  10,147        10,369       
Goodwill and other intangible assets  183,283        184,017       
Other assets  133,134        118,706       
Total assets $5,047,097       $4,773,878       
                  
Liabilities and shareholders’ equity:                   
Deposits:                   
Demand, noninterest-bearing $1,808,638       $1,712,903       
                  
Demand, interest-bearing  1,139,090  477  0.17%   1,026,210  479  0.19%  
Savings and money market  1,179,321  528  0.18%   1,137,837  572  0.20%  
Time deposits - under $100  15,335  8  0.21%   15,900  9  0.23%  
Time deposits - $100 and over  133,935  164  0.49%   130,843  171  0.53%  
CDARS - money market and time deposits  31,236  2  0.03%   25,260  1  0.02%  
Total interest-bearing deposits  2,498,917  1,179  0.19%   2,336,050  1,232  0.21%  
Total deposits  4,307,555  1,179  0.11%   4,048,953  1,232  0.12%  
                  
Subordinated debt, net of issuance costs  39,802  577  5.81%   39,757  571  5.82%  
Short-term borrowings  28    0.00%   44    0.00%  
Total interest-bearing liabilities  2,538,747  1,756  0.28%   2,375,851  1,803  0.31%  
Total interest-bearing liabilities and demand,                 
noninterest-bearing / cost of funds  4,347,385  1,756  0.16%   4,088,754  1,803  0.18%  
Other liabilities  116,703        105,967       
Total liabilities  4,464,088        4,194,721       
Shareholders’ equity  583,009        579,157       
Total liabilities and shareholders’ equity $5,047,097       $4,773,878       
                  
Net interest income (3) / margin      34,983  3.00%       35,071  3.22%  
Less tax equivalent adjustment (3)      (107)         (113)    
Net interest income     $34,876         $34,958     


(1)Includes loans held-for-sale. Nonaccrual loans are included in average balance.
(2)Yield amounts earned on loans include fees and costs. The accretion of net deferred loan fees into loan interest income was $2,192,000 for the second quarter of 2021 (of which $1,876,000 was from PPP loans), compared to $3,689,000 for the first quarter of 2021 (of which $3,401,000 was from PPP loans).
(3)Reflects the FTE adjustment for Federal tax-exempt income based on a 21%.

         

                  
  For the Six Months Ended  For the Six Months Ended  
  June 30, 2021 June 30, 2020 
           Interest    Average          Interest    Average 
NET INTEREST INCOME AND NET INTEREST MARGIN Average Income/ Yield/ Average Income/ Yield/ 
(in $000’s, unaudited) Balance Expense Rate Balance Expense Rate 
Assets:                       
Loans, gross (1)(2) $2,707,858 $67,275  5.01%  $2,600,409 $67,627  5.23%  
Securities - taxable  458,256  3,672  1.62%   641,004  7,103  2.23%  
Securities - exempt from Federal tax (3)  64,373  1,053  3.30%   78,265  1,259  3.23%  
Other investments, interest-bearing deposits in other                 
financial institutions and Federal funds sold  1,319,249  1,613  0.25%   550,734  2,349  0.86%  
Total interest earning assets (3)  4,549,736  73,613  3.26%   3,870,412  78,338  4.07%  
Cash and due from banks  41,640        41,128       
Premises and equipment, net  10,257        8,851       
Goodwill and other intangible assets  183,648        187,110       
Other assets  125,961        126,192       
Total assets $4,911,242       $4,233,693       
                  
Liabilities and shareholders’ equity: