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

| Source: Heritage Commerce Corp Heritage Commerce Corp

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.

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 Nine Months Ended:
CONSOLIDATED INCOME STATEMENTS    September 30,     June 30,     September 30,     June 30,     September 30,      September 30,     September 30,     Percent 
(in $000’s, unaudited) 2021  2021  2020 2021 2020  2021 2020 Change 
Interest income $39,907  $36,632  $36,252 9 %10 % $113,300  $114,326 (1)%
Interest expense  1,725   1,756   2,087 (2)%(17)%  5,284   6,641 (20)%
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  1,343,248  2,611  0.26% 671,753  3,022  0.60%
Total interest earning assets (3)  4,626,853  113,623  3.28% 3,982,386  114,713  3.85%
Cash and due from banks  40,401       39,575      
Premises and equipment, net  10,158       9,198      
Goodwill and other intangible assets  183,262       186,697      
Other assets  127,402       126,211      
Total assets $4,988,076      $4,344,067      
                  
Liabilities and shareholders’ equity:                 
Deposits:                 
Demand, noninterest-bearing $1,786,035      $1,600,522      
                  
Demand, interest-bearing  1,103,114  1,429  0.17% 875,501  1,573  0.24%
Savings and money market  1,184,108  1,613  0.18% 994,314  2,470  0.33%
Time deposits - under $100  15,315  24  0.21% 17,964  56  0.42%
Time deposits - $100 and over  132,347  482  0.49% 127,360  801  0.84%
CDARS - money market and time deposits  31,295  4  0.02% 16,894  4  0.03%
Total interest-bearing deposits  2,466,179  3,552  0.19% 2,032,034  4,904  0.32%
Total deposits  4,252,214  3,552  0.11% 3,632,556  4,904  0.18%
                  
Subordinated debt, net of issuance costs  39,804  1,731  5.81% 39,617  1,737  5.86%
Short-term borrowings  42  1  3.18% 162  —  0.00%
Total interest-bearing liabilities  2,506,025  5,284  0.28% 2,071,813  6,641  0.43%
Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds  4,292,060  5,284  0.16% 3,672,335  6,641  0.24%
Other liabilities  113,265       95,690      
Total liabilities  4,405,325       3,768,025      
Shareholders’ equity  582,751       576,042      
Total liabilities and shareholders’ equity $4,988,076      $4,344,067      
                  
Net interest income (3) / margin     108,339  3.13%    108,072  3.62%
Less tax equivalent adjustment (3)     (323)       (387)   
Net interest income     $108,016         $107,685     

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(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 $8,690,000 for the first nine months of 2021 (of which $7,784,000 was from PPP loans), compared to $2,353,000 for the first nine months of 2020 (of which $1,942,000 was from PPP loans). Prepayment fees totaled $2,303,000 for the first nine months of 2021, compared to $864,000 for the first nine months of 2020.
(3)Reflects the FTE adjustment for Federal tax-exempt income based on a 21% tax rate.

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BANKING EARNINGS