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Heritage Commerce Corp Earns Record $13.7 Million for the Third Quarter of 2021, and $33.7 Million for the First Nine Months of 2021
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Rhea-AI Summary
Heritage Commerce Corp (HTBK) reported strong financial performance for Q3 2021, with net income of $13.7 million ($0.23 per diluted share), up from $11.2 million in Q3 2020. Year-to-date net income increased to $33.7 million from $23.7 million. The company achieved a 21% rise in total deposits, reaching $4.73 billion, bolstered by significant loan growth in commercial and industrial sectors. Nonperforming assets dropped 54% year-over-year, and the allowance for credit losses was robust at 1.54% of total loans. Despite temporary deposits impacting totals, the company is well-positioned for future growth.
Positive
Net income for Q3 2021 increased to $13.7 million from $11.2 million in Q3 2020.
Total deposits rose 21% to $4.73 billion compared to $3.89 billion a year prior.
Nonperforming assets decreased 54% from the previous year.
Allowance for credit losses on loans stood strong at 1.54% of total loans.
Negative
Total noninterest income declined to $2.4 million in Q3 2021 from $2.6 million in Q3 2020.
Noninterest expense increased to $21.8 million in Q3 2021, rising from $21.2 million a year ago.
SAN JOSE, Calif., Oct. 28, 2021 (GLOBE NEWSWIRE) -- Heritage Commerce Corp (Nasdaq: HTBK), the holding company (the “Company”) for Heritage Bank of Commerce (the “Bank”), today announced third quarter 2021 net income of $13.7 million, or $0.23 per average diluted common share, compared to $11.2 million, or $0.19 per average diluted common share, for the third quarter of 2020, and $8.8 million, or $0.15 per average diluted common share, for the second quarter of 2021. For the nine months ended September 30, 2021, net income was $33.7 million, or $0.56 per average diluted common share, compared to $23.7 million, or $0.39 per average diluted common share, for the nine months ended September 30, 2020. Earnings for the first nine months of 2021 included a $4.0 million reserve for litigation as noninterest expense during the second quarter of 2021. Earnings for the first nine months of 2020 were impacted by the effect of a $14.6 million pre-tax related provision for potential credit losses on loans, incorporating the forecasted effects on economic activity from the Coronavirus pandemic, and $2.5 million of pre-tax merger-related costs. All results are unaudited.
“We generated record earnings for the third quarter of 2021, propelled by higher net interest income, solid loan growth notably in commercial and industrial (“C&I”) and commercial real estate (“CRE”), ongoing strong core deposit growth and an acceleration of Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loan fee income as a result of PPP loan forgiveness,” said Walter Kaczmarek, President and Chief Executive Officer. “Core loans, excluding PPP loans and purchased residential mortgage loans, increased by $170.9 million, or 7%, from a year ago, and increased by $121.9 million, or 5%, from the second quarter of 2021. Total deposits increased $836.0 million, or 21%, to $4.73 billion at September 30, 2021, compared to $3.89 billion at September 30, 2020, and increased $381.9 million, or 9%, from $4.34 billion at June 30, 2021. Total deposits at September 30, 2021 included $336.0 million of temporary deposits from one customer (these deposits are anticipated to leave by the end of the fourth quarter of 2021).” Excluding the $336.0 million in temporary deposits, total deposits increased $500.0 million, or 13%, from a year ago, and increased $45.9 million from the second quarter of 2021.
“As a result of our continued solid operating performance, and steadily improving economic conditions, credit metrics improved substantially during the third quarter of 2021 with nonperforming assets (“NPAs”) declining 54% from the year ago quarter and 23% from the immediate prior quarter,” said Mr. Kaczmarek. “We had a $514,000 negative provision for credit losses on loans during the third quarter of 2021 with net recoveries of $238,000, compared to a provision for credit losses on loans of $197,000 and net charge-offs of $219,000 for the third quarter a year ago. In the second quarter of 2021, we had a $493,000 negative provision for credit losses on loans and booked net recoveries of $153,000.” The allowance for credit losses on loans (“ACLL”) to total loans was strong at 1.54%, and the ACLL to total nonperforming loans was 922.88%, at September 30, 2021.
“With our solid capital ratios and strong balance sheet, we remain well positioned to benefit from improving economic conditions and continue to implement our growth strategy which calls for the profitable deployment of our excess liquidity into new loans and investment securities. During the third quarter of 2021, our excess liquidity was primarily deployed into new C&I and CRE loans and overnight funds,” said Mr. Kaczmarek. “We were pleased and encouraged by the results delivered by the Company this quarter and once again, I would like to offer sincere thanks to all of our dedicated employees for their commitment and effort in supporting our clients, communities and shareholders.”
Third Quarter Ended September 30, 2021 Operating Results, Balance Sheet Review, Capital Management, and Credit Quality
(as of, or for the periods ended September 30, 2021, compared to September 30, 2020, and June 30, 2021, except as noted):
Operating Results:
Diluted earnings per share were $0.23 for the third quarter of 2021, compared to $0.19 for the third quarter of 2020, and $0.15 for the second quarter of 2021. Diluted earnings per share were $0.56 for the first nine months of 2021, compared to $0.39 for the first nine 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 Nine Months Ended
September 30,
June 30,
September 30,
September 30,
September 30,
(unaudited)
2021
2021
2020
2021
2020
Return on average tangible assets
1.10
%
0.73
%
1.02
%
0.94
%
0.76
%
Return on average tangible equity
13.49
%
8.84
%
11.41
%
11.29
%
8.12
%
Net interest income, before provision for credit losses on loans, increased 12% to $38.2 million for the third quarter of 2021, compared to $34.2 million for the third quarter of 2020, and increased 9% from $34.9 million for the second quarter of 2021, primarily due to higher interest and fees on PPP loans and prepayment fees, and an increase in the accretion of the loan purchase discount into interest income from acquired loans.
•
For the first nine months of 2021, net interest income, before provision for credit losses on loans, increased to $108.0 million, compared to $107.7 million for the first nine months of 2020, primarily due to higher interest and fees on PPP loans and prepayment fees, and an increase in the accretion of the loan purchase discount into interest income from acquired loans, partially offset by decreases in the prime rate and decreases in yields on investment securities and overnight funds.
•
The fully tax equivalent (“FTE”) net interest margin contracted 6 basis points to 3.18% for the third quarter of 2021, from 3.24% for the third quarter of 2020, primarily due to declines in the average yields on investment securities and overnight funds, partially offset by an increase in the average yield on loans supported by higher loan prepayment fees and fees on PPP loans, an increase in the accretion of the loan purchase discount into interest income from acquired loans, and a decline in the cost of interest-bearing liabilities. The FTE net interest margin expanded 18 basis points for the third quarter of 2021 from 3.00% for the second quarter of 2021, primarily due to an increase in the average yield on loans resulting primarily from the accretion of the loan purchase discount into interest income from acquired loans, higher fees on PPP loans and higher prepayment fees.
•
For the first nine months of 2021, the FTE net interest margin contracted 49 basis points to 3.13%, compared to 3.62% for the first nine months of 2020, primarily due to declines in the average yields on loans, investment securities, and overnight funds, partially offset by an increase in the accretion of the loan purchase discount into interest income from acquired loans and higher interest and fee income from PPP loans and prepayment fees.
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 increased to 5.18% for the third quarter of 2021, compared to 4.86% for the third quarter of 2020, primarily due to higher fees on PPP loans and prepayment fees, and an increase in the accretion of the loan purchase discount into interest income from acquired loans, partially offset by a decline in the core bank and asset-based lending average yield.
For the Quarter Ended
For the Quarter Ended
September 30, 2021
September 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
$
2,361,442
$
26,062
4.38
%
$
2,266,227
$
26,354
4.63
%
Prepayment fees
—
1,282
0.22
%
—
154
0.03
%
SBA PPP loans
218,098
548
1.00
%
324,518
816
1.00
%
PPP fees, net
—
2,508
4.56
%
—
1,305
1.60
%
Bay View Funding factored receivables
50,674
2,815
22.04
%
40,300
2,431
24.00
%
Purchased residential mortgages
141,073
1,019
2.87
%
29,399
180
2.44
%
Purchased CRE loans
9,177
91
3.93
%
22,603
195
3.43
%
Loan fair value mark / accretion
(8,923
)
1,882
0.32
%
(13,353
)
1,200
0.21
%
Total loans (includes loans held-for-sale)
$
2,771,541
$
36,207
5.18
%
$
2,669,694
$
32,635
4.86
%
•
The average yield on the total loan portfolio increased to 5.18% for the third quarter of 2021, compared to 4.80% for the second quarter of 2021, primarily due to higher fees on PPP loans and prepayment fees, and an increase in the accretion of the loan purchase discount into interest income from acquired loans, partially offset by a decline in the core bank and asset-based lending average yield.
For the Quarter Ended
For the Quarter Ended
September 30, 2021
June 30, 2021
Average
Interest
Average
Average
Interest
Average
(in $000’s, unaudited)
Balance
Income
Yield
Balance
Income
Yield
Loans, core bank and asset-based lending
$
2,361,442
$
26,062
4.38
%
$
2,293,398
$
25,500
4.46
%
Prepayment fees
—
1,282
0.22
%
—
504
0.09
%
SBA PPP loans
218,098
548
1.00
%
334,604
831
1.00
%
PPP fees, net
—
2,508
4.56
%
—
1,876
2.25
%
Bay View Funding factored receivables
50,674
2,815
22.04
%
48,993
2,772
22.69
%
Purchased residential mortgages
141,073
1,019
2.87
%
113,467
981
3.47
%
Purchased CRE loans
9,177
91
3.93
%
14,602
110
3.02
%
Loan fair value mark / accretion
(8,923
)
1,882
0.32
%
(10,643
)
865
0.15
%
Total loans (includes loans held-for-sale)
$
2,771,541
$
36,207
5.18
%
$
2,794,421
$
33,439
4.80
%
•
The average yield on the total loan portfolio decreased to 5.07% for the nine months ended September 30, 2021, compared to 5.10% for the nine months ended September 30, 2020, primarily due to decreases in the prime rate on loans, and increases in the average balances of lower yielding PPP loans and purchased residential mortgages, partially offset by increases in interest and fees on PPP loans and prepayment fees, and in the accretion of the loan purchase discount into interest income from acquired loans.
For the Nine Months Ended
For the Nine Months Ended
September 30, 2021
September 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
$
2,293,892
$
76,629
4.47
%
$
2,351,369
$
83,440
4.74
%
Prepayment fees
—
2,303
0.13
%
—
864
0.05
%
SBA PPP loans
290,253
2,163
1.00
%
186,497
1,398
1.00
%
PPP fees, net
—
7,784
3.59
%
—
1,942
1.39
%
Bay View Funding factored receivables
49,263
8,237
22.36
%
44,102
7,871
23.84
%
Purchased residential mortgages
92,680
2,118
3.06
%
31,224
607
2.60
%
Purchased CRE loans
13,618
372
3.65
%
25,152
655
3.48
%
Loan fair value mark / accretion
(10,387
)
3,876
0.23
%
(14,672
)
3,485
0.20
%
Total loans (includes loans held-for-sale)
$
2,729,319
$
103,482
5.07
%
$
2,623,672
$
100,262
5.10
%
•
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 $8.3 million at September 30, 2021.
The average cost of total deposits was 0.10% for the third quarter of 2021, compared to 0.16% for the third quarter of 2020 and 0.11% for the second quarter of 2021. The average cost of total deposits was 0.11% for the nine months ended September 30, 2021, compared to 0.18% for the nine months ended September 30, 2020.
During the third quarter of 2021, there was a $514,000 negative provision for credit losses on loans, primarily due to recoveries on previously charged-off loans, compared to a $197,000 provision for credit losses on loans taken in the third quarter of 2020, and a $493,000 negative provision for credit losses on loans for the second quarter of 2021. There was a $2.5 million negative provision for credit losses on loans for the nine months ended September 30, 2021, compared to a $14.6 million provision for credit losses on loans for the nine months ended September 30, 2020.
•
The higher provision for credit losses on loans for the first nine months of 2020 was driven primarily by a significantly deteriorating economic outlook resulting from the Coronavirus pandemic. Ongoing impacts of the current expected credit losses (“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 $2.4 million for the third quarter of 2021, compared to $2.6 million for the third quarter of 2020 and $2.2 million for the second quarter of 2021.
•
For the nine months ended September 30, 2021, total noninterest income decreased to $6.9 million, compared to $7.9 million for the nine months ended September 30, 2020, primarily as a result of lower service charges and fees on deposits during the first nine months of 2021, and a $791,000 gain on disposition of foreclosed assets, a $335,000 realized gain on warrants exercised, and a $270,000 gain on the sale of securities during the first nine months of 2020. These decreases were partially offset by a higher gain on sales of SBA loans and a $571,000 gain on proceeds for company owned life insurance during the first nine months of 2021.
Total noninterest expense for the third quarter of 2021 increased to $21.8 million, compared to $21.2 million for the third quarter of 2020, primarily due to higher salaries and employee benefits and insurance expense during the third quarter of 2021. Noninterest expense for the third quarter of 2021 decreased from $25.8 million for the second quarter of 2021, primarily due to a $4.0 million reserve for a litigation matter that settled in the second quarter of 2021.
•
Noninterest expense for the nine months ended September 30, 2021 increased to $70.9 million, compared to $68.0 million for the nine months ended September 30, 2020, primarily due to a $4.0 million reserve for a litigation matter that settled in the second quarter of 2021, higher severance, professional fees, occupancy and equipment, and insurance expense, partially offset by higher merger-related costs during the first nine 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 Nine Months Ended
MERGER-RELATED COSTS
September 30,
June 30,
September 30,
September 30,
September 30,
(in $000’s, unaudited)
2021
2021
2020
2021
2020
Salaries and employee benefits
$
—
$
—
$
—
$
—
$
356
Other
(7
)
(24
)
17
27
2,144
Total merger-related costs
$
(7
)
$
(24
)
$
17
$
27
$
2,500
•
Full time equivalent employees were 325 at September 30, 2021, and 342 at September 30, 2020, and 330 at June 30, 2021.
The efficiency ratio improved to 53.78% for the third quarter of 2021, compared to 57.58% for the third quarter of 2020, and 69.58% for the second quarter of 2021. The efficiency ratio for the nine months ended September 30, 2021 was 61.67%, compared to 58.81% for the nine months ended September 30, 2020. Excluding the $4.0 million reserve for litigation, the efficiency ratio was 58.18% for the first nine months of 2021.
Income tax expense was $5.6 million for the third quarter of 2021, compared to $4.2 million for the third quarter of 2020, and $3.0 million the second quarter of 2021. The effective tax rate for the third quarter of 2021 was 28.8 %, compared to 27.3% for the third quarter of 2020, and 25.1% for the second quarter of 2021. Income tax expense for the nine months ended September 30, 2021 was $12.8 million, compared to $9.3 million for the nine months ended September 30, 2020. The effective tax rate for the nine months ended September 30, 2021 was 27.5%, compared to 28.3% for the nine months ended September 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 increased 19% to $5.46 billion at September 30, 2021, compared to $4.61 billion at September 30, 2020, and increased 8% from $5.07 billion at June 30, 2021. Total deposits increased 21% to $4.73 billion at September 30, 2021, compared to $3.89 billion at September 30, 2020, and increased 9% from $4.34 billion at June 30, 2021. Total deposits at September 30, 2021 included $336.0 million of temporary deposits from one customer held in a money market account that were received late in the third quarter of 2021, resulting in higher overnight funds.
Securities available-for-sale, at fair value, totaled $121.0 million at September 30, 2021, compared to $294.4 million at September 30, 2020, and $146.0 million at June 30, 2021. At September 30, 2021, the Company’s securities available-for-sale portfolio was comprised of $116.0 million of agency mortgage-backed securities (all issued by U.S. Government sponsored entities), and $5.0 million of U.S. Treasury securities. The pre-tax unrealized gain on securities available-for-sale at September 30, 2021 was $4.0 million, compared to a pre-tax unrealized gain on securities available-for-sale of $6.9 million at September 30, 2020, and a pre-tax unrealized gain on securities available-for-sale of $4.3 million at June 30, 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 September 30, 2021, securities held-to-maturity, at amortized cost, totaled $537.3 million, compared to $295.6 million at September 30, 2020, and $421.3 million at June 30, 2021. At September 30, 2021, the Company’s securities held-to-maturity portfolio was comprised of $480.3 million of agency mortgage-backed securities, and $57.0 million of tax-exempt municipal bonds. During the third quarter of 2021, the Company purchased $140.5 million of agency mortgage-backed securities (securities held-to-maturity), with a book yield of 1.43% and an average life of 5.50 years. During the first nine months of 2021, the Company purchased $322.5 million of agency mortgage-backed securities (securities held-to-maturity), with a book yield of 1.49% and an average life of 5.67 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
September 30, 2021
June 30, 2021
September 30, 2020
(in $000’s, unaudited)
Balance
% to Total
Balance
% to Total
Balance
% to Total
Commercial
$
578,944
20
%
$
557,686
20
%
$
574,359
21
%
Paycheck Protection Program Loans
164,506
6
%
286,461
10
%
323,550
12
%
Real estate:
CRE - owner occupied
580,624
20
%
583,091
21
%
561,528
21
%
CRE - non-owner occupied
829,022
29
%
742,135
26
%
713,563
27
%
Land and construction
141,277
5
%
129,426
4
%
142,632
5
%
Home equity
106,690
4
%
107,873
4
%
111,468
4
%
Multifamily
205,952
7
%
198,771
7
%
169,791
6
%
Residential mortgages
211,467
8
%
205,904
7
%
91,077
3
%
Consumer and other
20,106
1
%
21,519
1
%
17,511
1
%
Total Loans
2,838,588
100
%
2,832,866
100
%
2,705,479
100
%
Deferred loan costs (fees), net
(5,729
)
—
(8,070
)
—
(8,463
)
—
Loans, net of deferred costs and fees
$
2,832,859
100
%
$
2,824,796
100
%
$
2,697,016
100
%
•
Loans, excluding loans held-for-sale, increased $135.8 million, or 5%, to $2.83 billion at September 30, 2021, compared to $2.70 billion at September 30, 2020, and increased $8.0 million from $2.82 billion at June 30, 2021. Total loans at September 30, 2021 included $164.5 million of PPP loans, compared to $323.6 million at September 30, 2020 and $286.5 million at June 30, 2021. Total loans at September 30, 2021 included $211.5 million of residential mortgages, compared to $91.1 million at September 30, 2020 and $205.9 million at June 30, 2021.
•
In response to economic stimulus laws passed by Congress in 2020 and 2021, the Bank funded two rounds of PPP loans. At September 30, 2021, after accounting for loan payoffs and SBA loan forgiveness, “Round 1” PPP loans were $5.8 million and “Round 2” PPP loans were $158.7 million. In total, the Bank had $164.5 million in outstanding PPP loan balances at September 30, 2021. The following table shows interest income, fee income and deferred origination costs generated by the PPP loans, outstanding PPP loan balances and related deferred fees and costs for the periods indicated:
At or For the Quarter Ended:
At or For the Nine Months Ended:
PPP LOANS
September 30,
June 30,
September 30,
September 30,
September 30,
(in $000’s, unaudited)
2021
2021
2020
2021
2020
Interest income
$
548
$
831
$
816
$
2,163
$
1,398
Fee income, net
2,508
1,876
1,305
7,784
1,942
Total
$
3,056
$
2,707
$
2,121
$
9,947
$
3,340
Deferred origination costs (contra expense)
$
—
$
41
$
—
$
807
$
1,240
PPP loans outstanding at period end:
Round 1
$
5,795
$
91,849
$
323,550
$
5,795
$
323,550
Round 2
158,711
194,612
—
158,711
—
Total
$
164,506
$
286,461
$
323,550
$
164,506
$
323,550
Deferred fees outstanding at period end
$
(4,831
)
$
(7,747
)
$
(8,966
)
$
(4,831
)
$
(8,966
)
Deferred costs outstanding at period end
461
869
995
461
995
Total
$
(4,370
)
$
(6,878
)
$
(7,971
)
$
(4,370
)
$
(7,971
)
•
During the third quarter of 2021, the Company purchased a single family residential mortgage loan portfolio totaling $41.9 million, tied to homes all located in California, with average principal balances of $974,000, and a weighted average yield of approximately 2.92% (net of servicing fees). During the second quarter of 2021, the Company purchased two single family residential mortgage loan portfolios totaling $140.0 million, tied to homes all located in California, with average principal balances of $585,000, and a weighted average yield of approximately 3.37% (net of servicing fees).
•
C&I line usage relatively steady at 27% at September 30, 2021, compared to 28% at September 30, 2020, and 27% at June 30, 2021.
•
At September 30, 2021, 41% of the CRE loan portfolio was secured by owner-occupied real estate.
•
At September 30, 2021, approximately 42% 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 Nine Months Ended
ALLOWANCE FOR CREDIT LOSSES ON LOANS
September 30,
June 30,
September 30,
September 30,
September 30,
(in $000’s, unaudited)
2021
2021
2020
2021
2020
Balance at beginning of period
$
43,956
$
44,296
$
45,444
$
44,400
$
23,285
Charge-offs during the period
(65
)
(105
)
(598
)
(433
)
(1,736
)
Recoveries during the period
303
258
379
2,232
722
Net recoveries (charge-offs) during the period
238
153
(219
)
1,799
(1,014
)
Impact of adopting Topic 326
—
—
—
8,570
Provision for (recapture of) credit losses on loans during the period
(514
)
(493
)
197
(2,519
)
14,581
Balance at end of period
$
43,680
$
43,956
$
45,422
$
43,680
$
45,422
Total loans, net of deferred fees
$
2,832,859
$
2,824,796
$
2,697,016
$
2,832,859
$
2,697,016
Total nonperforming loans
$
4,733
$
6,180
$
10,262
$
4,733
$
10,262
Allowance for credit losses on loans ("ACLL") to total loans
1.54
%
1.56
%
1.68
%
1.54
%
1.68
%
ACLL to total nonperforming loans
922.88
%
711.26
%
442.62
%
922.88
%
442.62
%
•
The ACLL was 1.54% of total loans at September 30, 2021 while the ACLL to total nonperforming loans was 922.88%. The ACLL was 1.68% of total loans and the ACLL to nonperforming loans was 442.62% at September 30, 2020. The ACLL was 1.56% of total loans and the ACLL to total nonperforming loans was 711.26% at June 30, 2021. The ACLL to total loans, excluding PPP loans, was 1.63% at September 30, 2021, 1.91% at September 30, 2020 and 1.73% at June 30, 2021.
•
The following table shows the drivers of change in ACLL under CECL for each of the first three quarters of 2021:
DRIVERS OF CHANGE IN ACLL UNDER CECL
(in $000’s, unaudited)
ACLL 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 during the third quarter of 2021
238
Portfolio changes during the third quarter of 2021
2,485
Qualitative and quantitative changes during the third quarter of 2021 including changes in economic forecasts
(2,999
)
ACLL at September 30, 2021
$
43,680
•
Net recoveries totaled $238,000 for the third quarter of 2021, compared to net charge-offs of $219,000 for the third quarter of 2020, and net recoveries of $153,000 for the second quarter of 2021.
•
The following is a breakout of NPAs at the periods indicated:
End of Period:
NONPERFORMING ASSETS
September 30, 2021
June 30, 2021
September 30, 2020
(in $000’s, unaudited)
Balance
% of Total
Balance
% of Total
Balance
% of Total
CRE loans
$
2,260
48
%
$
2,923
47
%
$
4,328
42
%
Commercial loans
1,330
28
%
1,793
29
%
2,908
28
%
Restructured and loans over 90 days past due and still accruing
642
13
%
889
14
%
601
6
%
Consumer and other loans
407
9
%
407
7
%
1,464
14
%
Home equity loans
94
2
%
168
3
%
961
10
%
Total nonperforming assets
$
4,733
100
%
$
6,180
100
%
$
10,262
100
%
•
NPAs totaled $4.7 million, or 0.09% of total assets, at September 30, 2021, compared to $10.3 million, or 0.22% of total assets, at September 30, 2020, $6.2 million, or 0.12% of total assets, at June 30, 2021.
•
There were no foreclosed assets on the balance sheet at September 30, 2021, September 30, 2020, or June 30, 2021.
•
Classified assets decreased to $31.9 million, or 0.58% of total assets, at September 30, 2021, compared to $33.0 million, or 0.72% of total assets, at September 30, 2020, and decreased from $32.4 million, or 0.64% of total assets, at June 30, 2021.
The following table summarizes the distribution of deposits and the percentage of distribution in each category for the periods indicated:
DEPOSITS
September 30, 2021
June 30, 2021
September 30, 2020
(in $000’s, unaudited)
Balance
% to Total
Balance
% to Total
Balance
% to Total
Demand, noninterest-bearing
$
1,804,965
38
%
$
1,840,516
42
%
$
1,698,027
44
%
Demand, interest-bearing
1,141,944
24
%
1,140,867
26
%
926,041
24
%
Savings and money market
1,600,754
34
%
1,174,587
27
%
1,108,252
28
%
Time deposits — under $250
39,628
1
%
42,118
1
%
46,684
1
%
Time deposits — $250 and over
103,046
2
%
110,111
3
%
92,276
2
%
CDARS — interest-bearing demand, money market and time deposits
36,044
1
%
36,273
1
%
19,121
1
%
Total deposits
$
4,726,381
100
%
$
4,344,472
100
%
$
3,890,401
100
%
•
Total deposits increased $836.0 million, or 21%, to $4.73 billion at September 30, 2021, compared to $3.89 billion at September 30, 2020, and increased $381.9 million, or 9%, from $4.34 billion at June 30, 2021.
•
Deposits, excluding all time deposits and CDARS deposits, increased $815.3 million, or 22%, to $4.55 billion at September 30, 2021, compared to $3.73 billion at September 30, 2020, and increased $391.7 million, or 9%, compared to $4.16 billion at June 30, 2021.
•
Total deposits at September 30, 2021 included $336.0 million of temporary deposits of one customer held in a money market account. Excluding the $336.0 million temporary deposits, total deposits increased $500.0 million, or 13%, to $4.39 billion at September 30, 2021, compared to $3.89 billion at September 30, 2020, and increased $45.9 million from $4.34 billion at June 30, 2021. Deposits, excluding the $336.0 million in temporary deposits as well as all time deposits and CDARS deposits, increased $479.3 million, or 13%, to $4.21 billion at September 30, 2021, compared to $3.73 billion at September 30, 2020, and increased $55.7 million, compared to $4.16 billion at June 30, 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 September 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
15.1
%
14.5
%
10.0
%
10.5
%
Tier 1 Capital
12.9
%
13.5
%
8.0
%
8.5
%
Common Equity Tier 1 Capital
12.9
%
13.5
%
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
September 30,
June 30,
September 30,
(in $000’s, unaudited)
2021
2021
2020
Unrealized gain on securities available-for-sale
$
2,434
$
2,674
$
4,495
Remaining unamortized unrealized gain on securities available-for-sale transferred to held-to-maturity
234
243
271
Split dollar insurance contracts liability
(6,143
)
(6,142
)
(4,839
)
Supplemental executive retirement plan liability
(8,409
)
(8,506
)
(6,662
)
Unrealized gain on interest-only strip from SBA loans
178
199
351
Total accumulated other comprehensive loss
$
(11,706
)
$
(11,532
)
$
(6,384
)
Tangible equity was $408.1 million at September 30, 2021, compared to $392.5 million at September 30, 2020, and $400.6 million at June 30, 2021. Tangible book value per share was $6.77 at September 30, 2021, compared to $6.55 at September 30, 2020, and $6.65 at June 30, 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) the effect of the COVID-19 pandemic, and other infectious illness outbreaks that may arise in the future, on our customers, employees, businesses, liquidity, and financial results; (2) 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; (3) 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; (4) our ability to anticipate interest rate changes and manage interest rate risk; (5) changes in inflation, interest rates, and market liquidity which may impact interest margins and impact funding sources; (6) volatility in credit and equity markets and its effect on the global economy; (7) 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; (8) our ability to achieve loan growth and attract deposits; (9) risks associated with concentrations in real estate related loans; (10) the relative strength or weakness of the commercial and real estate markets where our borrowers are located, including related asset and market prices; (11) credit related impairment charges to our securities portfolio; (12) changes in the level of nonperforming assets and charge offs and other credit quality measures, and their impact on the adequacy of our allowance for credit losses and our provision for credit losses; (13) 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; (14) regulatory limits on Heritage Bank of Commerce’s ability to pay dividends to the Company; (15) changes in our capital management policies, including those regarding business combinations, dividends, and share repurchases; (16) 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; (17) 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; (18) possible adjustment of the valuation of our deferred tax assets; (19) 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; (20) inability of our framework to manage risks associated with our business, including operational risk and credit risk; (21) risks of loss of funding of Small Business Administration (“SBA”) or SBA loan programs, or changes in those programs; (22) compliance with governmental and regulatory requirements, including the Dodd-Frank Act and others relating to banking, consumer protection, securities, accounting and tax matters; (23) significant changes in applicable laws and regulations, including those concerning taxes, banking and securities; (24) 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; (25) costs and effects of legal and regulatory developments, including resolution of regulatory or other governmental inquiries, and the results of regulatory examinations or reviews; (26) the expense and uncertain resolution of litigation matters whether occurring in the ordinary course of business or otherwise; (27) availability of and competition for acquisition opportunities; (28) risks resulting from domestic terrorism; (29) risks resulting from social unrest and protests: (30) risks of natural disasters (including earthquakes) and other events beyond our control; (31) changes in governmental policy and regulation, 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; (32) 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 ability of customers to comply with requirements and otherwise perform with respect to loans obtained under such programs; (33) our success in managing the risks involved in the foregoing factors.
Net interest income before provision for credit losses on loans
38,182
34,876
34,165
9
%
12
%
108,016
107,685
0
%
Provision for (recapture of) credit losses on loans
(514
)
(493
)
197
(4
)
%
(361
)
%
(2,519
)
14,581
(117
)
%
Net interest income after provision for credit losses on loans
38,696
35,369
33,968
9
%
14
%
110,535
93,104
19
%
Noninterest income:
Gain on sales of SBA loans
594
83
400
616
%
49
%
1,227
467
163
%
Service charges and fees on deposit accounts
584
659
632
(11
)
%
(8
)
%
1,844
2,251
(18
)
%
Increase in cash surrender value of life insurance
470
458
464
3
%
1
%
1,384
1,380
0
%
Servicing income
129
104
187
24
%
(31
)
%
415
575
(28
)
%
Gain on proceeds from company owned life insurance
109
396
—
(72
)
%
N/A
571
—
N/A
Gain on the disposition of foreclosed assets
—
—
—
N/A
N/A
—
791
(100
)
%
Gain on sales of securities
—
—
—
N/A
N/A
—
270
(100
)
%
Other
522
469
912
11
%
(43
)
%
1,437
2,132
(33
)
%
Total noninterest income
2,408
2,169
2,595
11
%
(7
)
%
6,878
7,866
(13
)
%
Noninterest expense:
Salaries and employee benefits
12,461
12,572
11,967
(1
)
%
4
%
38,991
38,470
1
%
Occupancy and equipment
2,151
2,247
2,283
(4
)
%
(6
)
%
6,672
5,821
15
%
Professional fees
1,211
1,771
1,352
(32
)
%
(10
)
%
4,701
3,942
19
%
Other
6,008
9,185
5,566
(35
)
%
8
%
20,486
19,721
4
%
Total noninterest expense
21,831
25,775
21,168
(15
)
%
3
%
70,850
67,954
4
%
Income before income taxes
19,273
11,763
15,395
64
%
25
%
46,563
33,016
41
%
Income tax expense
5,555
2,950
4,198
88
%
32
%
12,828
9,340
37
%
Net income
$
13,718
$
8,813
$
11,197
56
%
23
%
$
33,735
$
23,676
42
%
PER COMMON SHARE DATA
(unaudited)
Basic earnings per share
$
0.23
$
0.15
$
0.19
53
%
21
%
$
0.56
$
0.40
40
%
Diluted earnings per share
$
0.23
$
0.15
$
0.19
53
%
21
%
$
0.56
$
0.39
44
%
Weighted average shares outstanding - basic
60,220,717
60,089,327
59,589,243
0
%
1
%
60,078,953
59,432,178
1
%
Weighted average shares outstanding - diluted
60,760,189
60,730,141
60,141,412
0
%
1
%
60,635,304
60,143,763
1
%
Common shares outstanding at period-end
60,266,316
60,202,766
59,914,987
0
%
1
%
60,266,316
59,914,987
1
%
Dividend per share
$
0.13
$
0.13
$
0.13
0
%
0
%
$
0.39
$
0.39
0
%
Book value per share
$
9.79
$
9.69
$
9.64
1
%
2
%
$
9.79
$
9.64
2
%
Tangible book value per share
$
6.77
$
6.65
$
6.55
2
%
3
%
$
6.77
$
6.55
3
%
KEY FINANCIAL RATIOS
(unaudited)
Annualized return on average equity
9.29
%
6.06
%
7.73
%
53
%
20
%
7.74
%
5.49
%
41
%
Annualized return on average tangible equity
13.49
%
8.84
%
11.41
%
53
%
18
%
11.29
%
8.12
%
39
%
Annualized return on average assets
1.06
%
0.70
%
0.98
%
51
%
8
%
0.90
%
0.73
%
23
%
Annualized return on average tangible assets
1.10
%
0.73
%
1.02
%
51
%
8
%
0.94
%
0.76
%
24
%
Net interest margin (FTE)
3.18
%
3.00
%
3.24
%
6
%
(2
)
%
3.13
%
3.62
%
(14
)
%
Efficiency ratio
53.78
%
69.58
%
57.58
%
(23
)
%
(7
)
%
61.67
%
58.81
%
5
%
AVERAGE BALANCES
(in $000’s, unaudited)
Average assets
$
5,139,239
$
5,047,097
$
4,562,412
2
%
13
%
$
4,988,076
$
4,344,067
15
%
Average tangible assets
$
4,956,738
$
4,863,814
$
4,376,533
2
%
13
%
$
4,804,814
$
4,157,370
16
%
Average earning assets
$
4,778,574
$
4,678,084
$
4,203,902
2
%
14
%
$
4,626,853
$
3,982,386
16
%
Average loans held-for-sale
$
4,810
$
4,053
$
5,169
19
%
(7
)
%
$
4,112
$
3,689
11
%
Average total loans
$
2,766,731
$
2,790,368
$
2,664,525
(1
)
%
4
%
$
2,725,207
$
2,619,983
4
%
Average deposits
$
4,396,315
$
4,307,555
$
3,846,652
2
%
14
%
$
4,252,214
$
3,632,556
17
%
Average demand deposits - noninterest-bearing
$
1,835,219
$
1,808,638
$
1,700,972
1
%
8
%
$
1,786,035
$
1,600,522
12
%
Average interest-bearing deposits
$
2,561,096
$
2,498,917
$
2,145,680
2
%
19
%
$
2,466,179
$
2,032,034
21
%
Average interest-bearing liabilities
$
2,601,002
$
2,538,747
$
2,185,439
2
%
19
%
$
2,506,025
$
2,071,813
21
%
Average equity
$
586,012
$
583,009
$
576,135
1
%
2
%
$
582,751
$
576,042
1
%
Average tangible equity
$
403,511
$
399,726
$
390,256
1
%
3
%
$
399,489
$
389,345
3
%
For the Quarter Ended:
CONSOLIDATED INCOME STATEMENTS
September 30,
June 30,
March 31,
December 31,
September 30,
(in $000’s, unaudited)
2021
2021
2021
2020
2020
Interest income
$
39,907
$
36,632
$
36,761
$
36,145
$
36,252
Interest expense
1,725
1,756
1,803
1,940
2,087
Net interest income before provision for credit losses on loans
38,182
34,876
34,958
34,205
34,165
Provision for (recapture of) credit losses on loans
(514
)
(493
)
(1,512
)
(1,348
)
197
Net interest income after provision for credit losses on loans
38,696
35,369
36,470
35,553
33,968
Noninterest income:
Gain on sales of SBA loans
594
83
550
372
400
Service charges and fees on deposit accounts
584
659
601
608
632
Increase in cash surrender value of life insurance
470
458
456
465
464
Servicing income
129
104
182
98
187
Gain on proceeds from company owned life insurance
109
396
66
—
—
Gain on sales of securities
—
—
—
7
—
Other
522
469
446
506
912
Total noninterest income
2,408
2,169
2,301
2,056
2,595
Noninterest expense:
Salaries and employee benefits
12,461
12,572
13,958
12,457
11,967
Occupancy and equipment
2,151
2,247
2,274
2,197
2,283
Professional fees
1,211
1,771
1,719
1,396
1,352
Other
6,008
9,185
5,293
5,507
5,566
Total noninterest expense
21,831
25,775
23,244
21,557
21,168
Income before income taxes
19,273
11,763
15,527
16,052
15,395
Income tax expense
5,555
2,950
4,323
4,429
4,198
Net income
$
13,718
$
8,813
$
11,204
$
11,623
$
11,197
PER COMMON SHARE DATA
(unaudited)
Basic earnings per share
$
0.23
$
0.15
$
0.19
$
0.19
$
0.19
Diluted earnings per share
$
0.23
$
0.15
$
0.19
$
0.19
$
0.19
Weighted average shares outstanding - basic
60,220,717
60,089,327
59,926,816
59,616,951
59,589,243
Weighted average shares outstanding - diluted
60,760,189
60,730,141
60,404,213
60,247,296
60,141,412
Common shares outstanding at period-end
60,266,316
60,202,766
59,932,334
59,917,457
59,914,987
Dividend per share
$
0.13
$
0.13
$
0.13
$
0.13
$
0.13
Book value per share
$
9.79
$
9.69
$
9.71
$
9.64
$
9.64
Tangible book value per share
$
6.77
$
6.65
$
6.64
$
6.57
$
6.55
KEY FINANCIAL RATIOS
(unaudited)
Annualized return on average equity
9.29
%
6.06
%
7.85
%
7.99
%
7.73
%
Annualized return on average tangible equity
13.49
%
8.84
%
11.50
%
11.75
%
11.41
%
Annualized return on average assets
1.06
%
0.70
%
0.95
%
0.98
%
0.98
%
Annualized return on average tangible assets
1.10
%
0.73
%
0.99
%
1.02
%
1.02
%
Net interest margin (FTE)
3.18
%
3.00
%
3.22
%
3.15
%
3.24
%
Efficiency ratio
53.78
%
69.58
%
62.38
%
59.45
%
57.58
%
AVERAGE BALANCES
(in $000’s, unaudited)
Average assets
$
5,139,239
$
5,047,097
$
4,773,878
$
4,703,154
$
4,562,412
Average tangible assets
$
4,956,738
$
4,863,814
$
4,589,861
$
4,518,279
$
4,376,533
Average earning assets
$
4,778,574
$
4,678,084
$
4,419,963
$
4,338,117
$
4,203,902
Average loans held-for-sale
$
4,810
$
4,053
$
3,458
$
2,772
$
5,169
Average total loans
$
2,766,731
$
2,790,368
$
2,616,876
$
2,652,019
$
2,664,525
Average deposits
$
4,396,315
$
4,307,555
$
4,048,953
$
3,980,017
$
3,846,652
Average demand deposits - noninterest-bearing
$
1,835,219
$
1,808,638
$
1,712,903
$
1,749,837
$
1,700,972
Average interest-bearing deposits
$
2,561,096
$
2,498,917
$
2,336,050
$
2,230,180
$
2,145,680
Average interest-bearing liabilities
$
2,601,002
$
2,538,747
$
2,375,851
$
2,269,960
$
2,185,439
Average equity
$
586,012
$
583,009
$
579,157
$
578,560
$
576,135
Average tangible equity
$
403,511
$
399,726
$
395,140
$
393,685
$
390,256
End of Period:
Percent Change From:
CONSOLIDATED BALANCE SHEETS
September 30,
June 30,
September 30,
June 30,
September 30,
(in $000’s, unaudited)
2021
2021
2020
2021
2020
ASSETS
Cash and due from banks
$
33,013
$
41,904
$
33,353
(21
)
%
(1
)
%
Other investments and interest-bearing deposits in other financial institutions
1,588,334
1,286,418
926,915
23
%
71
%
Securities available-for-sale, at fair value
121,000
145,955
294,438
(17
)
%
(59
)
%
Securities held-to-maturity, at amortized cost
537,285
421,286
295,609
28
%
82
%
Loans held-for-sale - SBA, including deferred costs
3,678
4,344
3,565
(15
)
%
3
%
Loans:
Commercial
578,944
557,686
574,359
4
%
1
%
SBA PPP loans
164,506
286,461
323,550
(43
)
%
(49
)
%
Real estate:
CRE - owner occupied
580,624
583,091
561,528
0
%
3
%
CRE - non-owner occupied
829,022
742,135
713,563
12
%
16
%
Land and construction
141,277
129,426
142,632
9
%
(1
)
%
Home equity
106,690
107,873
111,468
(1
)
%
(4
)
%
Multifamily
205,952
198,771
169,791
4
%
21
%
Residential mortgages
211,467
205,904
91,077
3
%
132
%
Consumer and other
20,106
21,519
17,511
(7
)
%
15
%
Loans
2,838,588
2,832,866
2,705,479
0
%
5
%
Deferred loan fees, net
(5,729
)
(8,070
)
(8,463
)
(29
)
%
(32
)
%
Total loans, net of deferred costs and fees
2,832,859
2,824,796
2,697,016
0
%
5
%
Allowance for credit losses on loans
(43,680
)
(43,956
)
(45,422
)
(1
)
%
(4
)
%
Loans, net
2,789,179
2,780,840
2,651,594
0
%
5
%
Company-owned life insurance
77,509
77,393
77,059
0
%
1
%
Premises and equipment, net
9,821
10,040
10,412
(2
)
%
(6
)
%
Goodwill
167,631
167,631
167,631
0
%
0
%
Other intangible assets
14,423
15,177
17,628
(5
)
%
(18
)
%
Accrued interest receivable and other assets
121,129
121,887
128,581
(1
)
%
(6
)
%
Total assets
$
5,463,002
$
5,072,875
$
4,606,785
8
%
19
%
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand, noninterest-bearing
$
1,804,965
$
1,840,516
$
1,698,027
(2
)
%
6
%
Demand, interest-bearing
1,141,944
1,140,867
926,041
0
%
23
%
Savings and money market
1,600,754
1,174,587
1,108,252
36
%
44
%
Time deposits-under $250
39,628
42,118
46,684
(6
)
%
(15
)
%
Time deposits-$250 and over
103,046
110,111
92,276
(6
)
%
12
%
CDARS - money market and time deposits
36,044
36,273
19,121
(1
)
%
89
%
Total deposits
4,726,381
4,344,472
3,890,401
9
%
21
%
Subordinated debt, net of issuance costs
39,878
39,832
39,693
0
%
0
%
Accrued interest payable and other liabilities
106,625
105,127
98,884
1
%
8
%
Total liabilities
4,872,884
4,489,431
4,028,978
9
%
21
%
Shareholders’ Equity:
Common stock
496,622
495,665
493,126
0
%
1
%
Retained earnings
105,202
99,311
91,065
6
%
16
%
Accumulated other comprehensive loss
(11,706
)
(11,532
)
(6,384
)
(2
)
%
(83
)
%
Total shareholders' equity
590,118
583,444
577,807
1
%
2
%
Total liabilities and shareholders’ equity
$
5,463,002
$
5,072,875
$
4,606,785
8
%
19
%
End of Period:
CONSOLIDATED BALANCE SHEETS
September 30,
June 30,
March 31,
December 31,
September 30,
(in $000’s, unaudited)
2021
2021
2021
2020
2020
ASSETS
Cash and due from banks
$
33,013
$
41,904
$
36,534
$
30,598
$
33,353
Other investments and interest-bearing deposits in other financial institutions
1,588,334
1,286,418
1,406,520
1,100,475
926,915
Securities available-for-sale, at fair value
121,000
145,955
196,718
235,774
294,438
Securities held-to-maturity, at amortized cost
537,285
421,286
306,535
297,389
295,609
Loans held-for-sale - SBA, including deferred costs
3,678
4,344
2,834
1,699
3,565
Loans:
Commercial
578,944
557,686
559,698
555,707
574,359
SBA PPP loans
164,506
286,461
349,744
290,679
323,550
Real estate:
CRE - owner occupied
580,624
583,091
568,637
560,362
561,528
CRE - non-owner occupied
829,022
742,135
700,117
693,103
713,563
Land and construction
141,277
129,426
159,504
144,594
142,632
Home equity
106,690
107,873
104,303
111,885
111,468
Multifamily
205,952
198,771
168,917
166,425
169,791
Residential mortgages
211,467
205,904
82,181
85,116
91,077
Consumer and other
20,106
21,519
19,872
18,116
17,511
Loans
2,838,588
2,832,866
2,712,973
2,625,987
2,705,479
Deferred loan fees, net
(5,729
)
(8,070
)
(8,266
)
(6,726
)
(8,463
)
Total loans, net of deferred fees
2,832,859
2,824,796
2,704,707
2,619,261
2,697,016
Allowance for credit losses on loans
(43,680
)
(43,956
)
(44,296
)
(44,400
)
(45,422
)
Loans, net
2,789,179
2,780,840
2,660,411
2,574,861
2,651,594
Company-owned life insurance
77,509
77,393
77,421
77,523
77,059
Premises and equipment, net
9,821
10,040
10,220
10,459
10,412
Goodwill
167,631
167,631
167,631
167,631
167,631
Other intangible assets
14,423
15,177
15,931
16,664
17,628
Accrued interest receivable and other assets
121,129
121,887
120,635
121,041
128,581
Total assets
$
5,463,002
$
5,072,875
$
5,001,390
$
4,634,114
$
4,606,785
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand, noninterest-bearing
$
1,804,965
$
1,840,516
$
1,813,962
$
1,661,655
$
1,698,027
Demand, interest-bearing
1,141,944
1,140,867
1,101,807
960,179
926,041
Savings and money market
1,600,754
1,174,587
1,189,566
1,119,968
1,108,252
Time deposits-under $250
39,628
42,118
42,596
45,027
46,684
Time deposits-$250 and over
103,046
110,111
102,508
103,746
92,276
CDARS - money market and time deposits
36,044
36,273
28,663
23,911
19,121
Total deposits
4,726,381
4,344,472
4,279,102
3,914,486
3,890,401
Subordinated debt, net of issuance costs
39,878
39,832
39,786
39,740
39,693
Accrued interest payable and other liabilities
106,625
105,127
100,839
101,999
98,884
Total liabilities
4,872,884
4,489,431
4,419,727
4,056,225
4,028,978
Shareholders’ Equity:
Common stock
496,622
495,665
494,617
493,707
493,126
Retained earnings
105,202
99,311
98,314
94,899
91,065
Accumulated other comprehensive loss
(11,706
)
(11,532
)
(11,268
)
(10,717
)
(6,384
)
Total shareholders' equity
590,118
583,444
581,663
577,889
577,807
Total liabilities and shareholders’ equity
$
5,463,002
$
5,072,875
$
5,001,390
$
4,634,114
$
4,606,785
End of Period:
Percent Change From:
CREDIT QUALITY DATA
September 30,
June 30,
September 30,
June 30,
September 30,
(in $000’s, unaudited)
2021
2021
2020
2021
2020
Nonaccrual loans - held-for-investment
$
4,091
$
5,291
$
9,661
(23
)
%
(58
)
%
Restructured and loans over 90 days past due and still accruing
642
889
601
(28
)
%
7
%
Total nonperforming loans
4,733
6,180
10,262
(23
)
%
(54
)
%
Foreclosed assets
—
—
—
N/A
N/A
Total nonperforming assets
$
4,733
$
6,180
$
10,262
(23
)
%
(54
)
%
Other restructured loans still accruing
$
90
$
93
$
98
(3
)
%
(8
)
%
Net charge-offs (recoveries) during the quarter
$
(238
)
$
(153
)
$
219
(56
)
%
(209
)
%
Provision for (recapture of) credit losses on loans during the quarter
$
(514
)
$
(493
)
$
197
(4
)
%
(361
)
%
Allowance for credit losses on loans
$
43,680
$
43,956
$
45,422
(1
)
%
(4
)
%
Classified assets
$
31,937
$
32,402
$
33,024
(1
)
%
(3
)
%
Allowance for credit losses on loans to total loans
1.54
%
1.56
%
1.68
%
(1
)
%
(8
)
%
Allowance for credit losses on loans to total nonperforming loans
922.88
%
711.26
%
442.62
%
30
%
109
%
Nonperforming assets to total assets
0.09
%
0.12
%
0.22
%
(25
)
%
(59
)
%
Nonperforming loans to total loans
0.17
%
0.22
%
0.38
%
(23
)
%
(55
)
%
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)
$
408,064
$
400,636
$
392,548
2
%
4
%
Shareholders’ equity / total assets
10.80
%
11.50
%
12.54
%
(6
)
%
(14
)
%
Tangible common equity / tangible assets (2)
7.73
%
8.19
%
8.88
%
(6
)
%
(13
)
%
Loan to deposit ratio
59.94
%
65.02
%
69.32
%
(8
)
%
(14
)
%
Noninterest-bearing deposits / total deposits
38.19
%
42.36
%
43.65
%
(10
)
%
(13
)
%
Total capital ratio
15.1
%
15.6
%
16.0
%
(3
)
%
(6
)
%
Tier 1 capital ratio
12.9
%
13.3
%
13.5
%
(3
)
%
(4
)
%
Common Equity Tier 1 capital ratio
12.9
%
13.3
%
13.5
%
(3
)
%
(4
)
%
Tier 1 leverage ratio
8.6
%
8.6
%
9.3
%
0
%
(8
)
%
Heritage Bank of Commerce:
Total capital ratio
14.5
%
15.0
%
15.2
%
(3
)
%
(5
)
%
Tier 1 capital ratio
13.5
%
13.9
%
14.1
%
(3
)
%
(4
)
%
Common Equity Tier 1 capital ratio
13.5
%
13.9
%
14.1
%
(3
)
%
(4
)
%
Tier 1 leverage ratio
9.0
%
9.0
%
9.7
%
0
%
(7
)
%
_______________
(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
September 30,
June 30,
March 31,
December 31,
September 30,
(in $000’s, unaudited)
2021
2021
2021
2021
2020
Nonaccrual loans - held-for-investment
$
4,091
$
5,291
$
5,542
$
7,788
$
9,661
Restructured and loans over 90 days past due and still accruing
642
889
51
81
601
Total nonperforming loans
4,733
6,180
5,593
7,869
10,262
Foreclosed assets
—
—
—
—
—
Total nonperforming assets
$
4,733
$
6,180
$
5,593
$
7,869
$
10,262
Other restructured loans still accruing
$
90
$
93
$
152
$
169
$
98
Net charge-offs (recoveries) during the quarter
$
(238
)
$
(153
)
$
(1,408
)
$
(326
)
$
219
Provision for (recapture of) credit losses on loans during the quarter
$
(514
)
$
(493
)
$
(1,512
)
$
(1,348
)
$
197
Allowance for credit losses on loans
$
43,680
$
43,956
$
44,296
$
44,400
$
45,422
Classified assets
$
31,937
$
32,402
$
33,420
$
34,028
$
33,024
Allowance for credit losses on loans to total loans
1.54
%
1.56
%
1.64
%
1.70
%
1.68
%
Allowance for credit losses on loans to total nonperforming loans
922.88
%
711.26
%
791.99
%
564.24
%
442.62
%
Nonperforming assets to total assets
0.09
%
0.12
%
0.11
%
0.17
%
0.22
%
Nonperforming loans to total loans
0.17
%
0.22
%
0.21
%
0.30
%
0.38
%
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)
$
408,064
$
400,636
$
398,101
$
393,594
$
392,548
Shareholders’ equity / total assets
10.80
%
11.50
%
11.63
%
12.47
%
12.54
%
Tangible common equity / tangible assets (2)
7.73
%
8.19
%
8.26
%
8.85
%
8.88
%
Loan to deposit ratio
59.94
%
65.02
%
63.21
%
66.91
%
69.32
%
Noninterest-bearing deposits / total deposits
38.19
%
42.36
%
42.39
%
42.45
%
43.65
%
Total capital ratio
15.1
%
15.6
%
16.5
%
16.5
%
16.0
%
Tier 1 capital ratio
12.9
%
13.3
%
14.0
%
14.0
%
13.5
%
Common Equity Tier 1 capital ratio
12.9
%
13.3
%
14.0
%
14.0
%
13.5
%
Tier 1 leverage ratio
8.6
%
8.6
%
9.1
%
9.1
%
9.3
%
Heritage Bank of Commerce:
Total capital ratio
14.5
%
15.0
%
15.8
%
15.8
%
15.2
%
Tier 1 capital ratio
13.5
%
13.9
%
14.7
%
14.6
%
14.1
%
Common Equity Tier 1 capital ratio
13.5
%
13.9
%
14.7
%
14.6
%
14.1
%
Tier 1 leverage ratio
9.0
%
9.0
%
9.5
%
9.5
%
9.7
%
_______________
(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
September 30, 2021
September 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)
$
2,771,541
$
36,207
5.18
%
$
2,669,694
$
32,635
4.86
%
Securities - taxable
557,890
2,320
1.65
%
550,423
2,481
1.79
%
Securities - exempt from Federal tax (3)
58,679
485
3.28
%
72,625
586
3.21
%
Other investments and interest-bearing deposits in other financial institutions
1,390,464
998
0.28
%
911,160
673
0.29
%
Total interest earning assets (3)
4,778,574
40,010
3.32
%
4,203,902
36,375
3.44
%
Cash and due from banks
37,963
36,505
Premises and equipment, net
9,962
9,884
Goodwill and other intangible assets
182,501
185,879
Other assets
130,239
126,242
Total assets
$
5,139,239
$
4,562,412
Liabilities and shareholders’ equity:
Deposits:
Demand, noninterest-bearing
$
1,835,219
$
1,700,972
Demand, interest-bearing
1,142,762
473
0.16
%
934,892
506
0.22
%
Savings and money market
1,234,109
513
0.16
%
1,052,800
762
0.29
%
Time deposits - under $100
14,721
7
0.19
%
17,298
16
0.37
%
Time deposits - $100 and over
132,247
147
0.44
%
121,949
219
0.71
%
CDARS - money market and time deposits
37,257
1
0.01
%
18,741
1
0.02
%
Total interest-bearing deposits
2,561,096
1,141
0.18
%
2,145,680
1,504
0.28
%
Total deposits
4,396,315
1,141
0.10
%
3,846,652
1,504
0.16
%
Subordinated debt, net of issuance costs
39,851
583
5.80
%
39,663
583
5.85
%
Short-term borrowings
55
1
7.21
%
96
—
0.00
%
Total interest-bearing liabilities
2,601,002
1,725
0.26
%
2,185,439
2,087
0.38
%
Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds
4,436,221
1,725
0.15
%
3,886,411
2,087
0.21
%
Other liabilities
117,006
99,866
Total liabilities
4,553,227
3,986,277
Shareholders’ equity
586,012
576,135
Total liabilities and shareholders’ equity
$
5,139,239
$
4,562,412
Net interest income (3) / margin
38,285
3.18
%
34,288
3.24
%
Less tax equivalent adjustment (3)
(103
)
(123
)
Net interest income
$
38,182
$
34,165
_______________
(1)
Includes loans held-for-sale. Nonaccrual loans are included in average balances.
(2)
Yield amounts earned on loans include fees and costs. The accretion of net deferred loan fees into loan interest income was $2,809,000 for the third quarter of 2021 (of which $2,508,000 was from PPP loans), compared to $1,441,000 for the third quarter of 2020 (of which $1,305,000 was from PPP loans). Prepayment fees totaled $1,282,000 for the third quarter of 2021, compared to $154,000 for the third quarter of 2020.
(3)
Reflects the FTE adjustment for Federal tax-exempt income based on a 21% tax rate.
For the Quarter Ended
For the Quarter Ended
September 30, 2021
June 30, 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)
$
2,771,541
$
36,207
5.18
%
$
2,794,421
$
33,439
4.80
%
Securities - taxable
557,890
2,320
1.65
%
479,419
1,944
1.63
%
Securities - exempt from Federal tax (3)
58,679
485
3.28
%
62,257
511
3.29
%
Other investments and interest-bearing deposits in other financial institutions
1,390,464
998
0.28
%
1,341,987
845
0.25
%
Total interest earning assets (3)
4,778,574
40,010
3.32
%
4,678,084
36,739
3.15
%
Cash and due from banks
37,963
42,449
Premises and equipment, net
9,962
10,147
Goodwill and other intangible assets
182,501
183,283
Other assets
130,239
133,134
Total assets
$
5,139,239
$
5,047,097
Liabilities and shareholders’ equity:
Deposits:
Demand, noninterest-bearing
$
1,835,219
$
1,808,638
Demand, interest-bearing
1,142,762
473
0.16
%
1,139,090
477
0.17
%
Savings and money market
1,234,109
513
0.16
%
1,179,321
528
0.18
%
Time deposits - under $100
14,721
7
0.19
%
15,335
8
0.21
%
Time deposits - $100 and over
132,247
147
0.44
%
133,935
164
0.49
%
CDARS - money market and time deposits
37,257
1
0.01
%
31,236
2
0.03
%
Total interest-bearing deposits
2,561,096
1,141
0.18
%
2,498,917
1,179
0.19
%
Total deposits
4,396,315
1,141
0.10
%
4,307,555
1,179
0.11
%
Subordinated debt, net of issuance costs
39,851
583
5.80
%
39,802
577
5.81
%
Short-term borrowings
55
1
7.21
%
28
—
0.00
%
Total interest-bearing liabilities
2,601,002
1,725
0.26
%
2,538,747
1,756
0.28
%
Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds
4,436,221
1,725
0.15
%
4,347,385
1,756
0.16
%
Other liabilities
117,006
116,703
Total liabilities
4,553,227
4,464,088
Shareholders’ equity
586,012
583,009
Total liabilities and shareholders’ equity
$
5,139,239
$
5,047,097
Net interest income (3) / margin
38,285
3.18
%
34,983
3.00
%
Less tax equivalent adjustment (3)
(103
)
(107
)
Net interest income
$
38,182
$
34,876
_______________
(1)
Includes loans held-for-sale. Nonaccrual loans are included in average balances.
(2)
Yield amounts earned on loans include fees and costs. The accretion of net deferred loan fees into loan interest income was $2,809,000 for the third quarter of 2021 (of which $2,508,000 was from PPP loans), compared to $2,192,000 for the second quarter of 2021 (of which $1,876,000 was from PPP loans). Prepayment fees totaled $504,000 for the second quarter of 2021, compared to $154,000 for the third quarter of 2020.
(3)
Reflects the FTE adjustment for Federal tax-exempt income based on a 21% tax rate.
For the Nine Months Ended
For the Nine Months Ended
September 30, 2021
September 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)
$
2,729,319
$
103,482
5.07
%
$
2,623,672
$
100,262
5.10
%
Securities - taxable
491,832
5,992
1.63
%
610,590
9,584
2.10
%
Securities - exempt from Federal tax (3)
62,454
1,538
3.29
%
76,371
1,845
3.23
%
Other investments, interest-bearing deposits in other financial institutions and Federal funds sold