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

Thursday, 22. April 2021 23:26

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

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

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

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

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

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

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

   Underlying Collateral  
          
NON-SBA LOANS  Business  Real    
(in $000’s, unaudited)  Assets  Estate  Total
          
Initial Deferments(1) $- $4,102 $4,102
2nd Deferments(2)  3,146  724  3,870
Total $3,146 $4,826 $7,972
          
(1) Initial deferments were generally for 3 months
(2) 2nd deferments were for an additional 3 months

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

  • Extending the application deadline to submit a PPP loan application to May 31, 2021, and the SBA approval deadline to June 30, 2021.
  • Allowing new PPP borrowers to use either 2019 or 2020 for business records in determining maximum loan amount.
  • Maintaining a $2 million loan amount necessity certification safe harbor.
  • Allowing borrowers who returned or did not originally accept PPP loan proceeds to reapply for receipt of those funds.

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

SBA 7(a) LOANS    Number
(in $000’s, unaudited)  Balance of Loans
SBA 7(a) loans (monthly payments are made     
through the Economic Aid Act ) $25,265 150
Payments Not Made / NSF / Returned  1,547 17
Due dates later in the month  12 2
New loans / No payment due  330 3
CARES  18,774 85
Total Portfolio $45,928 257

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

Credit Quality and Performance

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

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

  % of Total  % of Total  % of Total 
  Loans at  Loans at  Loans at 
HIGHER RISK SECTORS (unaudited)    March 31, 2021  December 31, 2020  March 31, 2020 
Health care and social assistance:         
Offices of dentists 2.06% 2.01% 1.63%
Offices of physicians (except mental health specialists) 0.89% 0.81% 0.70%
Other community housing services 0.24% 0.28% 0.11%
All others 1.99% 2.15% 1.84%
Total health care and social assistance 5.18% 5.25% 4.28%
Retail trade:         
Gasoline stations with convenience stores 2.54% 2.16% 1.98%
All others 2.16% 2.34% 2.18%
Total retail trade 4.70% 4.50% 4.16%
Accommodation and food services:         
Full-service restaurants 1.56% 1.30% 0.86%
Limited-service restaurants 0.64% 0.57% 0.63%
Hotels (except casino hotels) and motels 0.86% 0.95% 0.94%
All others 0.75% 0.68% 0.52%
Total accommodation and food services 3.81% 3.50% 2.95%
Educational services:         
Elementary and secondary schools 0.58% 0.58% 0.15%
Education support services 0.46% 0.45% 0.15%
All others 0.24% 0.19% 0.17%
Total educational services 1.28% 1.22% 0.47%
Arts, entertainment, and recreation 1.40% 1.34% 1.09%
Purchased participations in micro loan portfolio 0.50% 0.60% 0.95%
Total higher risk sectors 16.87% 16.41% 13.90%

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

Capital and Liquidity

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

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

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

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

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

Operating Results:

  • Diluted earnings per share were $0.19 for the first quarter of 2021, compared to $0.03 for the first quarter of 2020, and $0.19 for the fourth quarter of 2020.
  • The following table indicates the ratios for the return on average tangible assets and the return on average tangible equity for the periods indicated:
  For the Quarter Ended
  March 31,  December 31,  March 31, 
(unaudited) 2021 2020 2020
Return on average tangible assets 0.99%  1.02%  0.19% 
Return on average tangible equity 11.50%  11.75%  1.91% 
             
  • Net interest income, before provision for credit losses on loans, decreased (9%) to $35.0 million for the first quarter of 2021, compared to $38.6 million for the first quarter of 2020, primarily due to decreases in the prime rate and decreases in yields on investment securities and overnight funds, which were partially offset by interest income and fees on PPP loans. Net interest income increased 2% to $35.0 million for the first quarter of 2021, compared to $34.2 million for the fourth quarter of 2020, primarily due to higher fees on PPP loans and an increase in the accretion of the loan purchase discount into interest income from acquired loans.

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

    • The average yield on the total loan portfolio decreased to 5.24% for the first quarter of 2021, compared to 5.57% for the first quarter of 2020, primarily due to a decline in the prime rate and new average balances of lower yielding PPP loans, partially offset by interest income and fees on PPP loans.
  For the Quarter Ended For the Quarter Ended 
  March 31, 2021 March 31, 2020 
  Average Interest Average Average Interest Average 
(in $000’s, unaudited) Balance Income Yield Balance Income Yield 
Loans, core bank and asset-based lending $2,225,342  $25,581  4.66%$2,422,020  $30,104  5.00%
SBA PPP loans  319,168   784  1.00%      N/A 
PPP fees, net     3,401  4.32%      N/A 
Bay View Funding factored receivables  48,094   2,650  22.35% 47,470   2,877  24.38%
Purchased residential mortgages  22,194   119  2.17% 33,075   230  2.80%
Purchased commercial real estate ("CRE") loans  17,162   172  4.06% 27,340   249  3.66%
Loan fair value mark / accretion  (11,626)  1,129  0.21% (16,180)  1,322  0.22%
Total loans (includes loans held-for-sale) $2,620,334  $33,836  5.24%$2,513,725  $34,782  5.57%


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


  For the Quarter Ended For the Quarter Ended 
  March 31, 2021 December 31, 2020 
  Average Interest Average Average Interest Average 
(in $000’s, unaudited) Balance Income Yield Balance Income Yield 
Loans, core bank and asset-based lending $2,225,342  $25,581  4.66%$2,256,944  $26,348  4.64%
SBA PPP loans  319,168   784  1.00% 313,335   787  1.00%
PPP fees, net     3,401  4.32%    1,935  2.46%
Bay View Funding factored receivables  48,094   2,650  22.35% 50,720   2,856  22.40%
Purchased residential mortgages  22,194   119  2.17% 24,955   118  1.88%
Purchased CRE loans  17,162   172  4.06% 20,854   176  3.36%
Loan fair value mark / accretion  (11,626)  1,129  0.21% (12,017)  687  0.12%
Total loans (includes loans held-for-sale) $2,620,334  $33,836  5.24%$2,654,791  $32,907  4.93%


 In aggregate, the original total net purchase discount on loans from the Focus Business Bank, Tri-Valley Bank, United American Bank, and Presidio Bank loan portfolio was $25.2 million. In aggregate, the remaining net purchase discount on total loans acquired was $11.0 million at March 31, 2021.
  • The average cost of total deposits was 0.12% for the first quarter of 2021, compared to 0.22% for the first quarter of 2020 and 0.14% for the fourth quarter of 2020.
  • During the first quarter of 2021, there was a recapture of ($1.5) million in provision for credit losses on loans, primarily due to recoveries on previously charged-off loans, compared to a $13.3 provision for credit losses on loans taken in the first quarter of 2020, and the recapture of ($1.3) million to the provision for credit losses on loans taken in the fourth quarter of 2020.

    • The higher provision for credit losses on loans for the first quarter of 2020 was driven primarily by a significantly deteriorated economic outlook resulting from the Coronavirus pandemic. Ongoing impacts of the CECL methodology will be dependent upon changes in economic conditions and forecasts, originated and acquired loan portfolio composition, portfolio duration, and other factors.
  • Total noninterest income was $2.3 million for the first quarter of 2021, compared to $3.2 million for the first quarter of 2020, primarily due to a gain on the disposition of foreclosed assets and from higher service charges and fees on deposit accounts for the first quarter of 2020. Total noninterest income increased to $2.3 million for the first quarter of 2021 from $2.1 million for the fourth quarter of 2020, primarily due to an increase in gains on the sale of SBA loans and servicing income.
  • Total noninterest expense for the first quarter of 2021 decreased to $23.2 million, compared to $25.8 million for the first quarter of 2020, primarily due to lower merger-related costs, partially offset by higher severance expense during the first quarter of 2021. For the fourth quarter of 2020, total noninterest expense was $21.6 million.

    • The following table reflects pre-tax merger-related costs resulting from the merger with Presidio for the periods indicated:
  For the Quarter Ended
MERGER-RELATED COSTS March 31,  December 31,  March 31, 
(in $000’s, unaudited) 2021 2020 2020
Salaries and employee benefits $ $ $356
Other  58  101  2,068
Total merger-related costs $58 $101 $2,424


 Noninterest expense for the first quarter of 2021 included approximately $1.5 million in severance expense, partially offset by $766,000 in deferred origination costs on Round 2 PPP loans.
   
 Full time equivalent employees were 325 at March 31, 2021, and 337 at March 31, 2020, and 331 at December 31, 2020.
   
  • The efficiency ratio was 62.38% for the first quarter of 2021, compared to 61.70% for the first quarter of 2020, and 59.45% for the fourth quarter of 2020.
  • Income tax expense was $4.3 million for the first quarter of 2021, compared to $868,000 for the first quarter of 2020, and $4.4 million for the fourth quarter of 2020. The effective tax rate for the first quarter of 2021 was 27.8%, compared to 31.8% for the first quarter of 2020, and 27.6% for the fourth quarter of 2020. The higher effective tax rate for the first quarter of 2020 was primarily due to an increase in tax expense for forfeited stock options and merger-related stock options. The effective tax rate for the first quarter of 2020 would have been 26.8% without these items.

    • The difference in the effective tax rate for the periods reported compared to the combined Federal and state statutory tax rate of 29.6% is primarily the result of the Company’s investment in life insurance policies whose earnings are not subject to taxes, tax credits related to investments in low-income housing limited partnerships (net of low-income housing investment losses), and tax-exempt interest income earned on municipal bonds.

Balance Sheet Review, Capital Management and Credit Quality:

  • Total assets reached $5.00 billion at March 31, 2021, an increase of 23% from $4.08 billion at March 31, 2020, and increased 8% from $4.63 billion at December 31, 2020.
  • Securities available-for-sale, at fair value, totaled $196.7 million at March 31, 2021, compared to $373.6 million at March 31, 2020, and $235.8 million at December 31, 2020. At March 31, 2021, the Company’s securities available-for-sale portfolio was comprised of $151.5 million of agency mortgage-backed securities (all issued by U.S. Government sponsored entities), and $45.2 million of U.S. Treasury securities. The pre-tax unrealized gain on securities available-for-sale at March 31, 2021 was $4.9 million, compared to a pre-tax unrealized gain on securities available-for-sale of $9.4 million at March 31, 2020, and a pre-tax unrealized gain on securities available-for-sale of $5.8 million at December 31, 2020. All other factors remaining the same, when market interest rates are decreasing, the Company will experience a higher unrealized gain (or a lower unrealized loss) on the securities portfolio.
  • At March 31, 2021, securities held-to-maturity, at amortized cost, totaled $306.5 million, compared to $348.0 million at March 31, 2020, and $297.4 million at December 31, 2020. At March 31, 2021, the Company’s securities held-to-maturity portfolio was comprised of $242.7 million of agency mortgage-backed securities, and $63.8 million of tax-exempt municipal bonds. During the first quarter of 2021, the Company purchased $40.4 million of agency mortgage-backed securities (securities held-to-maturity), with a book yield of 1.54% and an average life of 5.6 years.
  • The loan portfolio remains well-diversified as reflected in the following table which summarizes the distribution of loans, excluding loans held-for-sale, and the percentage of distribution in each category for the periods indicated:
LOANS  March 31, 2021 December 31, 2020 March 31, 2020 
(in $000’s, unaudited) Balance  % to Total Balance  % to Total Balance  % to Total 
Commercial $559,698  20%$555,707  21%$696,168  27%
Paycheck Protection Program Loans  349,744  13% 290,679  11%   0%
Real estate:                
CRE - owner occupied  568,637  21% 560,362  21% 539,465  21%
CRE - non-owner occupied  700,117  26% 693,103  27% 748,245  29%
Land and construction  159,504  6% 144,594  6% 153,321  6%
Home equity  104,303  4% 111,885  4% 117,544  5%
Multifamily  168,917  6% 166,425  6% 170,292  7%
Residential mortgages  82,181  3% 85,116  3% 95,808  4%
Consumer and other  19,872  1% 18,116  1% 33,326  1%
Total Loans  2,712,973  100% 2,625,987  100% 2,554,169  100%
Deferred loan costs (fees), net  (8,266)   (6,726)   (258)  
Loans, net of deferred costs and fees $2,704,707  100%$2,619,261  100%$2,553,911  100%


 Loans, excluding loans held-for-sale, increased $150.8 million, or 6%, to $2.70 billion at March 31, 2021, compared to $2.55 billion at March 31, 2020, and increased $85.4 million, or 3% from $2.62 billion at December 31, 2020.   Total loans at March 31, 2021 included $349.7 million of PPP loans, compared to $290.7 million at December 31, 2020. Total loans at March 31, 2021, excluding PPP loans, increased $26.4 million from December 31, 2020.
   
 Commercial and industrial line usage was 28% at March 31, 2021, compared to 36% at March 31, 2020, and 28% at December 31, 2020.
   
 At March 31, 2021, 45% of the CRE loan portfolio was secured by owner-occupied real estate.
   
 At March 31, 2021, approximately 40% of the Company’s loan portfolio consisted of floating rate interest loans.
   
 The following table summarizes the allowance for credit losses on loans for the periods indicated:


  For the Quarter Ended 
ALLOWANCE FOR CREDIT LOSSES ON LOANS March 31,  December 31,  March 31,  
(in $000’s, unaudited) 2021 2020 2020 
Balance at beginning of period $44,400  $45,422  $23,285  
Charge-offs during the period  (263)  (144)  (673) 
Recoveries during the period  1,671   470   251  
Net recoveries (charge-offs) during the period  1,408   326   (422) 
Impact of adopting Topic 326        8,570  
Provision (recapture) for credit losses on loans during the period  (1,512)  (1,348)  13,270  
Balance at end of period $44,296  $44,400  $44,703  
           
Total loans, net of deferred fees $2,704,707  $2,619,261  $2,553,911  
Total nonperforming loans $5,593  $7,869  $12,088  
Allowance for credit losses on loans to total loans  1.64 % 1.70 % 1.75 %
Allowance for credit losses on loans to total nonperforming loans  791.99 % 564.24 % 369.81 %


 The ACLL was 1.64% of total loans at March 31, 2021 and the ACLL to total nonperforming loans was 791.99% at March 31, 2021. The ACLL was 1.75% of total loans and the ACLL to nonperforming loans was 369.81% at March 31, 2020. The ACLL was 1.70% of total loans and the ACLL to total nonperforming loans was 564.24% at December 31, 2020. The ACLL to total loans, excluding PPP loans, was 1.88% at March 31, 2021, and 1.91% at December 31, 2020. There were no PPP loans at March 31, 2020.
   
 The following table shows the drivers of change in ACLL under CECL for the quarter ended March 31, 2021:


DRIVERS OF CHANGE IN ACLL UNDER CECL  
(in $000’s, unaudited)  
ALLL at December 31, 2020 $44,400 
Net recoveries during the first quarter of 2021  1,408 
Portfolio changes during the first quarter of 2021  313 
Economic factors during the first quarter of 2021  (1,825)
ACLL at March 31, 2021 $44,296 


 Net recoveries totaled $1.4 million for the first quarter of 2021, compared to net charge-offs of $422,000 for the first quarter of 2020, and net recoveries of $326,000 for the fourth quarter of 2020.
   
 The following is a breakout of NPAs at the periods indicated:


  End of Period: 
NONPERFORMING ASSETS March 31, 2021 December 31, 2020 March 31, 2020 
(in $000’s, unaudited)    Balance    % of Total    Balance    % of Total    Balance    % of Total 
CRE loans $2,973 53%$3,706 47%$7,346 61%
Commercial loans  1,985 36% 2,726 35% 3,403 28%
Consumer and other loans  407 7% 407 5% 771 6%
Home equity loans  177 3% 949 12% 442 4%
Restructured and loans over 90 days past due and still accruing  51 1% 81 1% 126 1%
Total nonperforming assets $5,593 100%$7,869 100%$12,088 100%


 NPAs totaled $5.6 million, or 0.11% of total assets, at March 31, 2021, compared to $12.1 million, or 0.30% of total assets, at March 31, 2020, and $7.9 million, or 0.17% of total assets, at December 31, 2020.
   
 There were no foreclosed assets on the balance sheet at March 31, 2021, March 31, 2020, or December 31, 2020.
   
 Classified assets decreased to $33.4 million, or 0.67% of total assets, at March 31, 2021, compared to $39.6 million, or 0.97% of total assets, at March 31, 2020, and decreased from $34.0 million, or 0.73% of total assets, at December 31, 2020.
   
  • The following table summarizes the distribution of deposits and the percentage of distribution in each category for the periods indicated:
DEPOSITS March 31, 2021 December 31, 2020 March 31, 2020 
(in $000’s, unaudited) Balance % to Total Balance % to Total Balance % to Total 
Demand, noninterest-bearing $1,813,962 42%$1,661,655 42%$1,444,534 42%
Demand, interest-bearing  1,101,807 26% 960,179 24% 810,425 24%
Savings and money market  1,189,566 28% 1,119,968 29% 949,076 28%
Time deposits — under $250  42,596 1% 45,027 1% 51,009 2%
Time deposits — $250 and over  102,508 2% 103,746 3% 96,540 3%
CDARS — interest-bearing demand,                
money market and time deposits  28,663 1% 23,911 1% 15,055 1%
Total deposits $4,279,102 100%$3,914,486 100%$3,366,639 100%


 Total deposits increased $912.5 million, or 27%, to $4.28 billion at March 31, 2021, compared to $3.37 billion at March 31, 2020. Total deposits increased $364.6 million, or 9%, from $3.91 billion at December 31, 2020.
   
 Deposits, excluding all time deposits and CDARS deposits, increased $901.3 million, or 28%, to $4.11 billion at March 31, 2021, compared to $3.20 billion at March 31, 2020. Deposits, excluding all time deposits and CDARS increased $363.5 million, or 10%, to $4.11 billion at March 31, 2021, compared to $3.74 billion at December 31, 2020.
   
  • The Company’s consolidated capital ratios exceeded regulatory guidelines and the Bank’s capital ratios exceeded the regulatory guidelines under the Basel III prompt corrective action (“PCA”) regulatory guidelines for a well-capitalized financial institution, and the Basel III minimum regulatory requirements at March 31, 2021, as reflected in the following table:
                       Well-capitalized  
        Financial  
        Institution Basel III
  Heritage Heritage Basel III PCA Minimum
  Commerce Bank of Regulatory Regulatory
CAPITAL RATIOS (unaudited) Corp Commerce Guidelines Requirement (1)
Total Capital 16.5% 15.8% 10.0% 10.5%
Tier 1 Capital 14.0% 14.7% 8.0% 8.5%
Common Equity Tier 1 Capital 14.0% 14.7% 6.5% 7.0%
Tier 1 Leverage 9.1% 9.5% 5.0% 4.0%


________________________
(1) Basel III minimum regulatory requirements for both the Company and the Bank include a 2.5% capital conservation buffer, except the leverage ratio.
________________________


The following table reflects the components of accumulated other comprehensive loss, net of taxes, for the periods indicated:

ACCUMULATED OTHER COMPREHENSIVE LOSS March 31,  December 31,  March 31, 
(in $000’s, unaudited) 2021 2020 2020
Unrealized gain on securities available-for-sale $3,113  $3,709  $6,299 
Remaining unamortized unrealized gain on securities         
available-for-sale transferred to held-to-maturity  252   261   288 
Split dollar insurance contracts liability  (6,148)  (6,140)  (4,850)
Supplemental executive retirement plan liability  (8,698)  (8,767)  (6,774)
Unrealized gain on interest-only strip from SBA loans  213   220   328 
Total accumulated other comprehensive loss $(11,268) $(10,717) $(4,709)
             
  • Tangible equity was $398.1 million at March 31, 2021, compared to $384.5 million at March 31, 2020, and $393.6 million at December 31, 2020. Tangible book value per share was $6.64 at March 31, 2021, compared to $6.46 at March 31, 2020, and $6.57 at December 31, 2020.

Heritage Commerce Corp, a bank holding company established in October 1997, is the parent company of Heritage Bank of Commerce, established in 1994 and headquartered in San Jose, CA with full-service branches in Danville, Fremont, Gilroy, Hollister, Livermore, Los Altos, Los Gatos, Morgan Hill, Palo Alto, Pleasanton, Redwood City, San Francisco, San Jose, San Mateo, San Rafael, Sunnyvale, and Walnut Creek. Heritage Bank of Commerce is an SBA Preferred Lender. Bay View Funding, a subsidiary of Heritage Bank of Commerce, is based in San Jose, CA and provides business-essential working capital factoring financing to various industries throughout the United States. For more information, please visit www.heritagecommercecorp.com.

Forward-Looking Statement Disclaimer

These forward-looking statements are subject to various risks and uncertainties that may be outside our control and our actual results could differ materially from our projected results. Risks and uncertainties that could cause our financial performance to differ materially from our goals, plans, expectations and projections expressed in forward-looking statements include those set forth in our filings with the Securities and Exchange Commission (“SEC”), Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, and the following: (1) current and future economic and market conditions in the United States generally or in the communities we serve, including the effects of declines in property values and overall slowdowns in economic growth should these events occur; (2) effects of and changes in trade, monetary and fiscal policies and laws, including the interest rate policies of the Federal Open Market Committee of the Federal Reserve Board; (3) our ability to anticipate interest rate changes and manage interest rate risk; (4) changes in inflation, interest rates, and market liquidity which may impact interest margins and impact funding sources; (5) volatility in credit and equity markets and its effect on the global economy; (6) our ability to effectively compete with other banks and financial services companies and the effects of competition in the financial services industry on our business; (7) our ability to achieve loan growth and attract deposits; (8) risks associated with concentrations in real estate related loans; (9) the relative strength or weakness of the commercial and real estate markets where our borrowers are located, including related asset and market prices; (10) other than temporary impairment charges to our securities portfolio; (11) changes in the level of NPAs and charge offs and other credit quality measures, and their impact on the adequacy of the Company’s allowance for credit losses and the Company’s provision for credit losses; (12) increased capital requirements for our continual growth or as imposed by banking regulators, which may require us to raise capital at a time when capital is not available on favorable terms or at all; (13) regulatory limits on Heritage Bank of Commerce’s ability to pay dividends to the Company; (14) changes in our capital management policies, including those regarding business combinations, dividends, and share repurchases; (15) operational issues stemming from, and/or capital spending necessitated by, the potential need to adapt to industry changes in information technology systems, on which we are highly dependent; (16) our inability to attract, recruit, and retain qualified officers and other personnel could harm our ability to implement our strategic plan, impair our relationships with customers and adversely affect our business, results of operations and growth prospects; (17) possible adjustment of the valuation of our deferred tax assets; (18) our ability to keep pace with technological changes, including our ability to identify and address cyber-security risks such as data security breaches, “denial of service” attacks, “hacking” and identity theft; (19) inability of our framework to manage risks associated with our business, including operational risk and credit risk; (20) risks of loss of funding of SBA or SBA loan programs, or changes in those programs; (21) compliance with governmental and regulatory requirements, including the Dodd-Frank Act and others relating to banking, consumer protection, securities, accounting and tax matters; (22) significant changes in applicable laws and regulations, including those concerning taxes, banking and securities; (23) effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; (24) costs and effects of legal and regulatory developments, including resolution of regulatory or other governmental inquiries, and the results of regulatory examinations or reviews; (25) the expense and uncertain resolution of litigation matters whether occurring in the ordinary course of business or otherwise; (26) availability of and competition for acquisition opportunities; (27) risks resulting from domestic terrorism; (28) risks of natural disasters (including earthquakes) and other events beyond our control; (29) the effect of the COVID-19 pandemic, and other infectious illness outbreaks that may arise in the future, on the Bank’s customers, employees, businesses, liquidity, financial results and overall condition and which has created significant uncertainties in U.S. and global markets, including our customers' ability to make timely payments on obligations, and operating expense due to alternative approaches to doing business; (30) changes in governmental policy and regulation, including measures taken in response to economic, business, political and social conditions, such as the SBA Paycheck Protection Program (“PPP”), the Federal Reserve Board's efforts to provide liquidity to the financial system and provide credit to private commercial and municipal borrowers, and other programs designed to address the effects of the COVID-19 pandemic; (31) the Bank's participation as a lender in the PPP and similar programs and its effect on the Bank's liquidity, financial results, businesses and customers, including the availability of program funds and the ability of customers to comply with requirements and otherwise perform with respect to loans obtained under such programs; (32) our success in managing the risks involved in the foregoing factors.

Member FDIC

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




  For the Quarter Ended: Percent Change From: 
CONSOLIDATED INCOME STATEMENTS    March 31,     December 31,     March 31,     December 31,     March 31,  
(in $000’s, unaudited) 2021 2020 2020 2020 2020 
Interest income $36,761  $36,145  $40,942  2 %(10)%
Interest expense  1,803   1,940   2,362  (7)%(24)%
Net interest income before provision               
for credit losses on loans  34,958   34,205   38,580  2 %(9)%
Provision (recapture) for credit losses on loans  (1,512)  (1,348)  13,270  (12)%(111)%
Net interest income after provision               
for credit losses on loans  36,470   35,553   25,310  3 %44 %
Noninterest income:               
Service charges and fees on deposit accounts  601   608   969  (1)%(38)%
Gain on sales of SBA loans  550   372   67  48 %721 %
Increase in cash surrender value of               
life insurance  456   465   458  (2)%0 %
Servicing income  182   98   183  86 %(1)%
Gain on sales of securities  11   7   100  57 %(89)%
Gain on the disposition of foreclosed assets        791  N/A  (100)%
Other  501   506   625  (1)%(20)%
Total noninterest income  2,301   2,056   3,193  12 %(28)%
Noninterest expense:               
Salaries and employee benefits  13,958   12,457   14,203  12 %(2)%
Occupancy and equipment  2,274   2,197   1,772  4 %28 %
Professional fees  1,719   1,396   1,435  23 %20 %
Other  5,293   5,507   8,364  (4)%(37)%
Total noninterest expense  23,244   21,557   25,774  8 %(10)%
Income before income taxes  15,527   16,052   2,729  (3)%469 %
Income tax expense  4,323   4,429   868  (2)%398 %
Net income $ 11,204  $ 11,623  $ 1,861  (4)%502 %
                
PER COMMON SHARE DATA                 
(unaudited)                    
Basic earnings per share $0.19  $0.19  $0.03  0 %533 %
Diluted earnings per share $0.19  $0.19  $0.03  0 %533 %
Weighted average shares outstanding - basic  59,641,309   59,616,951   59,286,927  0 %1 %
Weighted average shares outstanding - diluted  60,404,213   60,247,296   60,194,025  0 %0 %
Common shares outstanding at period-end  59,932,334   59,917,457   59,568,219  0 %1 %
Dividend per share $0.13  $0.13  $0.13  0 %0 %
Book value per share $9.71  $9.64  $9.59  1 %1 %
Tangible book value per share $6.64  $6.57  $6.46  1 %3 %
                
KEY FINANCIAL RATIOS                    
(unaudited)                    
Annualized return on average equity  7.85 % 7.99 % 1.29 %(2)%509 %
Annualized return on average tangible equity  11.50 % 11.75 % 1.91 %(2)%502 %
Annualized return on average assets  0.95 % 0.98 % 0.19 %(3)%400 %
Annualized return on average tangible assets  0.99 % 1.02 % 0.19 %(3)%421 %
Net interest margin (FTE)  3.22 % 3.15 % 4.25 %2 %(24)%
Efficiency ratio  62.38 % 59.45 % 61.70 %5 %1 %
                
AVERAGE BALANCES                   
(in $000’s, unaudited)                    
Average assets $4,773,878  $4,703,154  $4,033,151  2 %18 %
Average tangible assets $4,589,861  $4,518,279  $3,845,646  2 %19 %
Average earning assets $4,419,963  $4,338,117  $3,665,151  2 %21 %
Average loans held-for-sale $3,458  $2,772  $2,265  25 %53 %
Average total loans $2,616,876  $2,652,019  $2,511,460  (1)%4 %
Average deposits $4,048,953  $3,980,017  $3,327,812  2 %22 %
Average demand deposits - noninterest-bearing $1,712,903  $1,749,837  $1,438,944  (2)%19 %
Average interest-bearing deposits $2,336,050  $2,230,180  $1,888,868  5 %24 %
Average interest-bearing liabilities $2,375,851  $2,269,960  $1,928,770  5 %23 %
Average equity $579,157  $578,560  $579,051  0 %0 %
Average tangible equity $395,140  $393,685  $391,546  0 %1 %



                    
  For the Quarter Ended: 
CONSOLIDATED INCOME STATEMENTS    March 31,     December 31,     September 30,    June 30,    March 31,  
(in $000’s, unaudited) 2021 2020 2020 2020 2020 
Interest income $36,761  $36,145  $36,252  $37,132  $40,942  
Interest expense  1,803   1,940   2,087   2,192   2,362  
Net interest income before provision for credit losses on loans  34,958   34,205   34,165   34,940   38,580  
Provision (recapture) for credit losses on loans  (1,512)  (1,348)  197   1,114   13,270  
Net interest income after provision for credit losses on loans  36,470   35,553   33,968   33,826   25,310  
Noninterest income:                   
Service charges and fees on deposit accounts  601   608   632   650   969  
Gain on sales of SBA loans  550   372   400      67  
Increase in cash surrender value of life insurance  456   465   464   458   458  
Servicing income  182   98   187   205   183  
Gain on sales of securities  11   7      170   100  
Gain on the disposition of foreclosed assets              791  
Other  501   506   912   595   625  
Total noninterest income  2,301   2,056   2,595   2,078   3,193  
Noninterest expense:                   
Salaries and employee benefits  13,958   12,457   11,967   12,300   14,203  
Occupancy and equipment  2,274   2,197   2,283   1,766   1,772  
Professional fees  1,719   1,396   1,352   1,155   1,435  
Other  5,293   5,507   5,566   5,791   8,364  
Total noninterest expense  23,244   21,557   21,168   21,012   25,774  
Income before income taxes  15,527   16,052   15,395   14,892   2,729  
Income tax expense  4,323   4,429   4,198   4,274   868  
Net income $ 11,204  $ 11,623  $ 11,197  $ 10,618  $ 1,861  
                    
PER COMMON SHARE DATA                   
(unaudited)                        
Basic earnings per share $0.19  $0.19  $0.19  $0.18  $0.03  
Diluted earnings per share $0.19  $0.19  $0.19  $0.18  $0.03  
Weighted average shares outstanding - basic  59,641,309   59,616,951   59,589,243   59,420,592   59,286,927  
Weighted average shares outstanding - diluted  60,404,213   60,247,296   60,141,412   60,112,423   60,194,025  
Common shares outstanding at period-end  59,932,334   59,917,457   59,914,987   59,856,767   59,568,219  
Dividend per share $0.13  $0.13  $0.13  $0.13  $0.13  
Book value per share $9.71  $9.64  $9.64  $9.60  $9.59  
Tangible book value per share $6.64  $6.57  $6.55  $6.49  $6.46  
                    
KEY FINANCIAL RATIOS                   
(unaudited)                        
Annualized return on average equity  7.85 % 7.99 % 7.73 % 7.45 % 1.29 %
Annualized return on average tangible equity  11.50 % 11.75 % 11.41 % 11.06 % 1.91 %
Annualized return on average assets  0.95 % 0.98 % 0.98 % 0.96 % 0.19 %
Annualized return on average tangible assets  0.99 % 1.02 % 1.02 % 1.01 % 0.19 %
Net interest margin (FTE)  3.22 % 3.15 % 3.24 % 3.46 % 4.25 %
Efficiency ratio  62.38 % 59.45 % 57.58 % 56.76 % 61.70 %
                    
AVERAGE BALANCES                        
(in $000’s, unaudited)                        
Average assets $4,773,878  $4,703,154  $4,562,412  $4,434,238  $4,033,151  
Average tangible assets $4,589,861  $4,518,279  $4,376,533  $4,247,522  $3,845,646  
Average earning assets $4,419,963  $4,338,117  $4,203,902  $4,075,673  $3,665,151  
Average loans held-for-sale $3,458  $2,772  $5,169  $3,617  $2,265  
Average total loans $2,616,876  $2,652,019  $2,664,525  $2,683,476  $2,511,460  
Average deposits $4,048,953  $3,980,017  $3,846,652  $3,720,850  $3,327,812  
Average demand deposits - noninterest-bearing $1,712,903  $1,749,837  $1,700,972  $1,660,547  $1,438,944  
Average interest-bearing deposits $2,336,050  $2,230,180  $2,145,680  $2,060,303  $1,888,868  
Average interest-bearing liabilities $2,375,851  $2,269,960  $2,185,439  $2,099,982  $1,928,770  
Average equity $579,157  $578,560  $576,135  $572,939  $579,051  
Average tangible equity $395,140  $393,685  $390,256  $386,223  $391,546  



               
  End of Period: Percent Change From: 
CONSOLIDATED BALANCE SHEETS    March 31,     December 31,     March 31,     December 31,     March 31,  
(in $000’s, unaudited) 2021 2020 2020 2020 2020 
ASSETS              
Cash and due from banks $36,534  $30,598  $36,998  19 %(1)%
Other investments and interest-bearing deposits in other financial institutions  1,406,520   1,100,475   406,399  28 %246 %
Securities available-for-sale, at fair value  196,718   235,774   373,570  (17)%(47)%
Securities held-to-maturity, at amortized cost  306,535   297,389   348,044  3 %(12)%
Loans held-for-sale - SBA, including deferred costs  2,834   1,699   2,415  67 %17 %
Loans:              
Commercial  559,698   555,707   696,168  1 %(20)%
SBA PPP loans  349,744   290,679     20 %N/A  
Real estate:              
CRE - owner occupied  568,637   560,362   539,465  1 %5 %
CRE - non-owner occupied  700,117   693,103   748,245  1 %(6)%
Land and construction  159,504   144,594   153,321  10 %4 %
Home equity  104,303   111,885   117,544  (7)%(11)%
Multifamily  168,917   166,425   170,292  1 %(1)%
Residential mortgages  82,181   85,116   95,808  (3)%(14)%
Consumer and other  19,872   18,116   33,326  10 %(40)%
Loans  2,712,973   2,625,987   2,554,169  3 %6 %
Deferred loan fees, net  (8,266)  (6,726)  (258) 23 %3104 %
Total loans, net of deferred costs and fees  2,704,707   2,619,261   2,553,911  3 %6 %
Allowance for credit losses on loans  (44,296)  (44,400)  (44,703) 0 %(1)%
Loans, net  2,660,411   2,574,861   2,509,208  3 %6 %
Company-owned life insurance  77,421   77,523   76,485  0 %1 %
Premises and equipment, net  10,220   10,459   9,025  (2)%13 %
Goodwill  167,631   167,631   167,371  0 %0 %
Other intangible assets  15,931   16,664   19,557  (4)%(19)%
Accrued interest receivable and other assets  120,635   121,041   129,090  0 %(7)%
Total assets $ 5,001,390  $ 4,634,114  $ 4,078,162  8 %23 %
               
LIABILITIES AND SHAREHOLDERS’ EQUITY              
Liabilities:              
Deposits:              
Demand, noninterest-bearing $1,813,962  $1,661,655  $1,444,534  9 %26 %
Demand, interest-bearing  1,101,807   960,179   810,425  15 %36 %
Savings and money market  1,189,566   1,119,968   949,076  6 %25 %
Time deposits-under $250  42,596   45,027   51,009  (5)%(16)%
Time deposits-$250 and over  102,508   103,746   96,540  (1)%6 %
CDARS - money market and time deposits  28,663   23,911   15,055  20 %90 %
Total deposits  4,279,102   3,914,486   3,366,639  9 %27 %
Subordinated debt, net of issuance costs  39,786   39,740   39,600  0 %0 %
Accrued interest payable and other liabilities  100,839   101,999   100,482  (1)%0 %
Total liabilities  4,419,727   4,056,225   3,506,721  9 %26 %
               
Shareholders’ Equity:              
Common stock  494,617   493,707   491,347  0 %1 %
Retained earnings  98,314   94,899   84,803  4 %16 %
Accumulated other comprehensive loss  (11,268)  (10,717)  (4,709) (5)%(139)%
Total shareholders' equity  581,663   577,889   571,441  1 %2 %
Total liabilities and shareholders’ equity $ 5,001,390  $ 4,634,114  $ 4,078,162  8 %23 %



                
  End of Period:
CONSOLIDATED BALANCE SHEETS    March 31,     December 31,     September 30,    June 30,    March 31, 
(in $000’s, unaudited) 2021 2020 2020 2020 2020
ASSETS                    
Cash and due from banks $36,534  $30,598  $33,353  $40,108  $36,998 
Other investments and interest-bearing deposits               
in other financial institutions  1,406,520   1,100,475   926,915   885,792   406,399 
Securities available-for-sale, at fair value  196,718   235,774   294,438   323,565   373,570 
Securities held-to-maturity, at amortized cost  306,535   297,389   295,609   322,677   348,044 
Loans held-for-sale - SBA, including deferred costs  2,834   1,699   3,565   4,324   2,415 
Loans:               
Commercial  559,698   555,707   574,359   553,843   696,168 
SBA PPP loans  349,744   290,679   323,550   324,550    
Real estate:               
CRE - owner occupied  568,637   560,362   561,528   553,463   539,465 
CRE - non-owner occupied  700,117   693,103   713,563   725,776   748,245 
Land and construction  159,504   144,594   142,632   138,284   153,321 
Home equity  104,303   111,885   111,468   112,679   117,544 
Multifamily  168,917   166,425   169,791   169,637   170,292 
Residential mortgages  82,181   85,116   91,077   95,033   95,808 
Consumer and other  19,872   18,116   17,511   22,759   33,326 
Loans  2,712,973   2,625,987   2,705,479   2,696,024   2,554,169 
Deferred loan fees, net  (8,266)  (6,726)  (8,463)  (9,635)  (258)
Total loans, net of deferred fees  2,704,707   2,619,261   2,697,016   2,686,389   2,553,911 
Allowance for credit losses on loans  (44,296)  (44,400)  (45,422)  (45,444)  (44,703)
Loans, net  2,660,411   2,574,861   2,651,594   2,640,945   2,509,208 
Company-owned life insurance  77,421   77,523   77,059   76,944   76,485 
Premises and equipment, net  10,220   10,459   10,412   9,500   9,025 
Goodwill  167,631   167,631   167,631   167,631   167,371 
Other intangible assets  15,931   16,664   17,628   18,593   19,557 
Accrued interest receivable and other assets  120,635   121,041   128,581   124,322   129,090 
Total assets $ 5,001,390  $ 4,634,114  $ 4,606,785  $ 4,614,401  $ 4,078,162 
                
LIABILITIES AND SHAREHOLDERS’ EQUITY               
Liabilities:                    
Deposits:                    
Demand, noninterest-bearing $1,813,962  $1,661,655  $1,698,027  $1,714,058  $1,444,534 
Demand, interest-bearing  1,101,807   960,179   926,041   934,780   810,425 
Savings and money market  1,189,566   1,119,968   1,108,252   1,091,740   949,076 
Time deposits-under $250  42,596   45,027   46,684   49,493   51,009 
Time deposits-$250 and over  102,508   103,746   92,276   93,822   96,540 
CDARS - money market and time deposits  28,663   23,911   19,121   16,333   15,055 
Total deposits  4,279,102   3,914,486   3,890,401   3,900,226   3,366,639 
Subordinated debt, net of issuance costs  39,786   39,740   39,693   39,646   39,600 
Other short-term borrowings               
Accrued interest payable and other liabilities  100,839   101,999   98,884   99,722   100,482 
Total liabilities  4,419,727   4,056,225   4,028,978   4,039,594   3,506,721 
                
Shareholders’ Equity:                    
Common stock  494,617   493,707   493,126   492,333   491,347 
Retained earnings  98,314   94,899   91,065   87,654   84,803 
Accumulated other comprehensive loss  (11,268)  (10,717)  (6,384)  (5,180)  (4,709)
Total shareholders' equity  581,663   577,889   577,807   574,807   571,441 
Total liabilities and shareholders’ equity $ 5,001,390  $ 4,634,114  $ 4,606,785  $ 4,614,401  $ 4,078,162 



                
  End of Period: Percent Change From: 
CREDIT QUALITY DATA    March 31,     December 31,     March 31,     December 31,     March 31,  
(in $000’s, unaudited) 2021 2020 2020 2020 2020 
Nonaccrual loans - held-for-investment $5,542  $7,788  $11,646  (29)%(52)%
Restructured and loans over 90 days past due and still accruing  51   81   442  (37)%(88)%
Total nonperforming loans  5,593   7,869   12,088  (29)%(54)%
Foreclosed assets          N/A  N/A  
Total nonperforming assets $5,593  $7,869  $12,088  (29)%(54)%
Other restructured loans still accruing $152  $169  $103  (10)%48 %
Net charge-offs (recoveries) during the quarter $(1,408) $(326) $422  (332)%(434)%
Provision (recapture) for credit losses on loans during the quarter $(1,512) $(1,348) $13,270  (12)%(111)%
Allowance for credit losses on loans $44,296  $44,400  $44,703  0 %(1)%
Classified assets $33,420  $34,028  $39,603  (2)%(16)%
Allowance for credit losses on loans to total loans  1.64 % 1.70 % 1.75 %(4)%(6)%
Allowance for credit losses on loans to total nonperforming loans  791.99 % 564.24 % 369.81 %40 %114 %
Nonperforming assets to total assets  0.11 % 0.17 % 0.30 %(35)%(63)%
Nonperforming loans to total loans  0.21 % 0.30 % 0.47 %(30)%(55)%
Classified assets to Heritage Commerce Corp               
Tier 1 capital plus allowance for credit losses on loans  7 % 7 % 9 %0 %(22)%
Classified assets to Heritage Bank of Commerce               
Tier 1 capital plus allowance for credit losses on loans  7 % 7 % 9 %0 %(22)%
                
OTHER PERIOD-END STATISTICS                    
(in $000’s, unaudited)                    
Heritage Commerce Corp:               
Tangible common equity (1) $398,101  $393,594  $384,513  1 %4 %
Shareholders’ equity / total assets  11.63 % 12.47 % 14.01 %(7)%(17)%
Tangible common equity / tangible assets (2)  8.26 % 8.85 % 9.88 %(7)%(16)%
Loan to deposit ratio  63.21 % 66.91 % 75.86 %(6)%(17)%
Noninterest-bearing deposits / total deposits  42.39 % 42.45 % 42.91 %0 %(1)%
Total capital ratio  16.5 % 16.5 % 14.8 %0 %11 %
Tier 1 capital ratio  14.0 % 14.0 % 12.5 %0 %12 %
Common Equity Tier 1 capital ratio  14.0 % 14.0 % 12.5 %0 %12 %
Tier 1 leverage ratio  9.1 % 9.1 % 10.3 %0 %(12)%
Heritage Bank of Commerce:               
Total capital ratio  15.8 % 15.8 % 14.1 %0 %12 %
Tier 1 capital ratio  14.7 % 14.6 % 13.0 %1 %13 %
Common Equity Tier 1 capital ratio  14.7 % 14.6 % 13.0 %1 %13 %
Tier 1 leverage ratio  9.5 % 9.5 % 10.7 %0 %(11)%

 

________________________
(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    March 31,     December 31,     September 30,    June 30,    March 31,  
(in $000’s, unaudited) 2021 2020 2020 2020 2020 
Nonaccrual loans - held-for-investment $5,542  $7,788  $9,661  $8,457  $11,646  
Restructured and loans over 90 days past due                   
and still accruing  51   81   601   668   442  
Total nonperforming loans  5,593   7,869   10,262   9,125   12,088  
Foreclosed assets                
Total nonperforming assets $5,593  $7,869  $10,262  $9,125  $12,088  
Other restructured loans still accruing $152  $169  $98  $64  $103  
Net charge-offs (recoveries) during the quarter $(1,408) $(326) $219  $373  $422  
Provision (recapture) for credit losses on loans during the quarter $(1,512) $(1,348) $197  $1,114  $13,270  
Adoption of Topic 326 $  $  $  $  $8,570  
Allowance for credit losses on loans $44,296  $44,400  $45,422  $45,444  $44,703  
Classified assets $33,420  $34,028  $33,024  $31,452  $39,603  
Allowance for credit losses on loans to total loans  1.64 %   1.70 %   1.68 %   1.69 %   1.75 %  
Allowance for credit losses on loans to total nonperforming loans  791.99 %   564.24 %   442.62 %   498.02 %   369.81 %  
Nonperforming assets to total assets  0.11 %   0.17 %   0.22 %   0.20 %   0.30 %  
Nonperforming loans to total loans  0.21 %   0.30 %   0.38 %   0.34 %   0.47 %  
Classified assets to Heritage Commerce Corp                   
Tier 1 capital plus allowance for credit losses on loans  7 %   7 %   7 %   7 %   9 %  
Classified assets to Heritage Bank of Commerce                   
Tier 1 capital plus allowance for credit losses on loans  7 %   7 %   7 %   7 %   9 %  
                    
OTHER PERIOD-END STATISTICS                        
(in $000’s, unaudited)                        
Heritage Commerce Corp:                        
Tangible common equity (1) $398,101  $393,594  $392,548  $388,583  $384,513  
Shareholders’ equity / total assets  11.63 %   12.47 %   12.54 %   12.46 %   14.01 %  
Tangible common equity / tangible assets (2)  8.26 %   8.85 %   8.88 %   8.78 %   9.88 %  
Loan to deposit ratio  63.21 %   66.91 %   69.32 %   68.88 %   75.86 %  
Noninterest-bearing deposits / total deposits  42.39 %   42.45 %   43.65 %   43.95 %   42.91 %  
Total capital ratio  16.5 %   16.5 %   16.0 %   15.9 %   14.8 %  
Tier 1 capital ratio  14.0 %   14.0 %   13.5 %   13.4 %   12.5 %  
Common Equity Tier 1 capital ratio  14.0 %   14.0 %   13.5 %   13.4 %   12.5 %  
Tier 1 leverage ratio  9.1 %   9.1 %   9.3 %   9.4 %   10.3 %  
Heritage Bank of Commerce:                   
Total capital ratio  15.8 %   15.8 %   15.2 %   15.1 %   14.1 %  
Tier 1 capital ratio  14.7 %   14.6 %   14.1 %   14.0 %   13.0 %  
Common Equity Tier 1 capital ratio  14.7 %   14.6 %   14.1 %   14.0 %   13.0 %  
Tier 1 leverage ratio  9.5 %   9.5 %   9.7 %   9.9 %   10.7 %  

 

________________________
(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 
  March 31, 2021 March 31, 2020 
NET INTEREST INCOME AND NET INTEREST MARGIN Average Interest
Income/
 Average
Yield/
 Average Interest
Income/
 Average
Yield/
 
(in $000’s, unaudited) Balance Expense Rate Balance Expense Rate 
Assets:                   
Loans, gross (1)(2) $2,620,334  $33,836  5.24%$2,513,725  $34,782  5.57%
Securities - taxable  436,858   1,728  1.60% 670,299   3,948  2.37%
Securities - exempt from Federal tax (3)  66,513   542  3.30% 80,369   647  3.24%
Other investments and interest-bearing deposits in other financial institutions  1,296,258   768  0.24% 400,758   1,701  1.71%
Total interest earning assets (3)  4,419,963   36,874  3.38% 3,665,151   41,078  4.51%
Cash and due from banks  40,823        44,539       
Premises and equipment, net  10,369        8,607       
Goodwill and other intangible assets  184,017        187,505       
Other assets  118,706        127,349       
Total assets $4,773,878       $4,033,151       
                    
Liabilities and shareholders’ equity:                   
Deposits:                   
Demand, noninterest-bearing $1,712,903       $1,438,944       
                    
Demand, interest-bearing  1,026,210   479  0.19% 800,800   542  0.27%
Savings and money market  1,137,837   572  0.20% 920,422   914  0.40%
Time deposits - under $100  15,900   9  0.23% 18,777   22  0.47%
Time deposits - $100 and over  130,843   171  0.53% 132,314   305  0.93%
CDARS - money market and time deposits  25,260   1  0.02% 16,555   2  0.05%
Total interest-bearing deposits  2,336,050   1,232  0.21% 1,888,868   1,785  0.38%
Total deposits  4,048,953   1,232  0.12% 3,327,812   1,785  0.22%
                    
Subordinated debt, net of issuance costs  39,757   571  5.82% 39,571   577  5.86%
Short-term borrowings  44     0.00% 331     0.00%
Total interest-bearing liabilities  2,375,851   1,803  0.31% 1,928,770   2,362  0.49%
Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds  4,088,754   1,803  0.18% 3,367,714   2,362  0.28%
Other liabilities  105,967        86,386       
Total liabilities  4,194,721        3,454,100       
Shareholders’ equity  579,157        579,051       
Total liabilities and shareholders’ equity $4,773,878       $4,033,151       
                    
Net interest income (3) / margin      35,071  3.22%     38,716  4.25%
Less tax equivalent adjustment (3)      (113)        (136)   
Net interest income     $34,958        $38,580    

 

________________________
(1) Includes loans held-for-sale. Nonaccrual loans are included in average balance.
(2) Yield amounts earned on loans include fees and costs. The accretion of net deferred loan fees into loan interest income was $3,689,000 for the first quarter of 2021 (of which $3,401,000 was from PPP loans), compared to $139,000 for the first quarter of 2020.
(3) Reflects the FTE adjustment for Federal tax-exempt income based on a 21%.



                    
  For the Quarter Ended For the Quarter Ended 
  March 31, 2021 December 31, 2020 
NET INTEREST INCOME AND NET INTEREST MARGIN Average Interest
Income/
 Average
Yield/
 Average Interest
Income/
 Average
Yield/
 
(in $000’s, unaudited) Balance Expense Rate Balance Expense Rate 
Assets:                   
Loans, gross (1)(2) $2,620,334  $33,836  5.24%$2,654,791  $32,907  4.93%
Securities - taxable  436,858   1,728  1.60% 482,951   2,053  1.69%
Securities - exempt from Federal tax (3)  66,513   542  3.30% 70,318   570  3.22%
Other investments and interest-bearing deposits in other financial institutions  1,296,258   768  0.24% 1,130,057   735  0.26%
Total interest earning assets (3)  4,419,963   36,874  3.38% 4,338,117   36,265  3.33%
Cash and due from banks  40,823        42,861       
Premises and equipment, net  10,369        10,387       
Goodwill and other intangible assets  184,017        184,875       
Other assets  118,706        126,914       
Total assets $4,773,878       $4,703,154       
                    
Liabilities and shareholders’ equity:                   
Deposits:                   
Demand, noninterest-bearing $1,712,903       $1,749,837       
                    
Demand, interest-bearing  1,026,210   479  0.19% 939,203   462  0.20%
Savings and money market  1,137,837   572  0.20% 1,121,636   674  0.24%
Time deposits - under $100  15,900   9  0.23% 16,748   11  0.26%
Time deposits - $100 and over  130,843   171  0.53% 131,740   208  0.63%
CDARS - money market and time deposits  25,260   1  0.02% 20,853   1  0.02%
Total interest-bearing deposits  2,336,050   1,232  0.21% 2,230,180   1,356  0.24%
Total deposits  4,048,953   1,232