Heritage Commerce Corp Earns a Record $14.0 Million for the Fourth Quarter of 2021, and a Record $47.7 Million for 2021

Thursday, 27. January 2022 23:28

SAN JOSE, Calif., Jan. 27, 2022 (GLOBE NEWSWIRE) -- Heritage Commerce Corp (Nasdaq: HTBK), the holding company (the “Company”) for Heritage Bank of Commerce (the “Bank”), today announced fourth quarter 2021 net income of $14.0 million, or $0.23 per average diluted common share, compared to $11.6 million, or $0.19 per average diluted common share, for the fourth quarter of 2020, and $13.7 million, or $0.23 per average diluted common share, for the third quarter of 2021. For the year ended December 31, 2021, net income was $47.7 million, or $0.79 per average diluted common share, an increase of 35% as compared to $35.3 million, or $0.59 per average diluted common share, for the year ended December 31, 2020. Earnings for the year ended December 31, 2021 included a pre-tax $4.0 million reserve for litigation expense that was recorded during the second quarter of 2021. Earnings for the year end December 31, 2020, were impacted by the effect of a $13.2 million pre-tax provision for potential credit losses on loans, incorporating the forecasted effects on economic activity from the Coronavirus pandemic, and $2.6 million of pre-tax merger-related costs. All results are unaudited.

“The fourth quarter of 2021 results capped a stellar year for our Company which delivered record earnings for both the fourth quarter and for the full year of 2021. Net income for the fourth quarter of 2021 increased 20% over the fourth quarter a year ago, supported by 11% growth in net interest income, a return on average tangible equity of 13.50%, a return on average tangible assets of 1.00%, and an improving efficiency ratio of 54.32%. Earnings for the full year of 2021 increased 35% to a record $47.7 million,” said Walter Kaczmarek, President and Chief Executive Officer. “We ended the year with $5.5 billion in total assets. Our loan portfolio grew 18% from a year ago to $3.09 billion, reflecting growth in commercial loans, both owner occupied and non-owner occupied commercial real estate (“CRE”) loans, multifamily loans, and from the purchase of residential mortgage loans. Total deposits grew 22% to $4.76 billion year-over-year, with noninterest-bearing deposits representing 40% of total deposits at year end. Growth in total deposits has been consistently robust over the past several quarters, and we expect to leverage our excess liquidity in the coming quarters to increase interest income.”

“Credit metrics were also sound at year end. Nonperforming assets (“NPAs”) decreased 52% in the fourth quarter of 2021 from a year ago, and were down 21% from the preceding quarter. Despite taking a negative provision for credit losses on loans of $615,000 during the fourth quarter of 2021, the allowance for credit losses on loans (“ACLL”) to total loans remained solid at 1.40%, and the ACLL to total nonperforming loans was 1,158.11%, at December 31, 2021,” said Mr. Kaczmarek. “Although COVID-19 continues to pose a challenge to businesses and communities in our markets, our staff and this Bank remain prepared and dedicated to helping our clients navigate pandemic-related disruptions and continue to benefit from improving economic conditions in 2022.”

Fourth Quarter Ended December 31, 2021
Operating Results, Balance Sheet Review, Capital Management, and Credit Quality

(as of, or for the periods ended December 31, 2021, compared to December 31, 2020, and September 30, 2021, except as noted):

Operating Results:

  • Diluted earnings per share were $0.23 for the fourth quarter of 2021, compared to $0.19 for the fourth quarter of 2020, and $0.23 for the third quarter of 2021. Diluted earnings per share were $0.79 for the year ended December 31, 2021, compared to $0.59 for the year ended December 31, 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 Year Ended
     December 31,     September 30,     December 31,  December 31,     December 31, 
(unaudited) 2021 2021 2020 2021 2020
Return on average tangible assets 1.00% 1.10% 1.02% 0.96% 0.83%
Return on average tangible equity 13.50% 13.49% 11.75% 11.86% 9.04%
  • Net interest income, before provision for credit losses on loans, increased 11% to $38.1 million for the fourth quarter of 2021, compared to $34.2 million for the fourth quarter of 2020, primarily due to higher average balances of loans, investment securities, and overnight funds, and an increase in the accretion of the loan purchase discount into interest income from acquired loans. Net interest income remained relatively flat compared to $38.2 million for the third quarter of 2021.
 For the year ended December 31, 2021, net interest income, before provision for credit losses on loans, increased 3% to $146.1 million, compared to $141.9 million for the year ended December 31, 2020, primarily due to higher interest and fees recognized on Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans, higher loan prepayment fees, an increase in the accretion of the loan purchase discount into interest income from acquired loans, and lower costs of deposits, partially offset by decreases in the prime rate and decreases in yields on investment securities and overnight funds. There were higher fees recognized into income on PPP loans for the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily as a result of accelerated forgiveness of the PPP loans by the SBA.
   
 The fully tax equivalent (“FTE”) net interest margin contracted 31 basis points to 2.84% for the fourth quarter of 2021, from 3.15% for the fourth quarter of 2020, primarily due to a shift in the mix of earning assets toward lower yielding shorter term investments, partially offset by a decline in the cost of interest-bearing liabilities. The FTE net interest margin contracted 34 basis points for the fourth quarter of 2021 from 3.18% for the third quarter of 2021, primarily due to a decrease in the accretion of the loan purchase discount into interest income from acquired loans, lower loan prepayment fees, lower interest and fees on PPP loans, and a shift in the mix of earning assets toward lower yielding shorter term investments.
   
 For the year ended December 31, 2021, the FTE net interest margin contracted 45 basis points to 3.05%, compared to 3.50% for the year ended December 31, 2020, primarily due to declines in the average yields on loans, investment securities, and overnight funds, and a shift in the mix of earning assets toward lower yielding shorter term investments, partially offset by an increase in the accretion of the loan purchase discount into interest income from acquired loans, higher interest and fee income from PPP loans, higher loan prepayment fees, and lower costs of deposits.
  • 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 was 4.93% for both the fourth quarter of 2021 and the fourth quarter of 2020, as the benefit from higher fees on PPP loans, higher loan prepayment fees, and an increase in the accretion of the loan purchase discount into interest income from acquired loans, was offset by a decline in the core bank and asset-based lending average yield. There were higher fees recognized into income on PPP loans for the quarter ended December 31, 2021, compared to the quarter ended December 31, 2020, primarily as a result of accelerated forgiveness of the PPP loans by the SBA.

 

  For the Quarter Ended For the Quarter Ended 
  December 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 $2,496,026  $27,167  4.32%  $2,256,944  $26,091  4.60%  
Prepayment fees     397  0.06%      257  0.05%  
SBA PPP loans  127,592   318  0.99%   313,335   787  1.00%  
PPP fees, net     2,211  6.87%      1,935  2.46%  
Bay View Funding factored receivables  62,571   3,248  20.59%   50,720   2,856  22.40%  
Purchased residential mortgages  188,731   1,437  3.02%   24,955   118  1.88%  
Purchased CRE loans  8,929   69  3.07%   20,854   176  3.36%  
Loan fair value mark / accretion  (7,728)  915  0.15%   (12,017)  687  0.12%  
Total loans (includes loans held-for-sale) $2,876,121  $35,762  4.93%  $2,654,791  $32,907  4.93%  


 The average yield on the total loan portfolio decreased to 4.93% for the fourth quarter of 2021, compared to 5.18% for the third quarter of 2021, primarily due to lower loan prepayment fees, and a decrease in the accretion of the loan purchase discount into interest income from acquired loans.


  For the Quarter Ended For the Quarter Ended 
  December 31, 2021 September 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 $2,496,026  $27,167  4.32%  $2,361,442  $26,062  4.38%  
Prepayment fees     397  0.06%      1,282  0.22%  
SBA PPP loans  127,592   318  0.99%   218,098   548  1.00%  
PPP fees, net     2,211  6.87%      2,508  4.56%  
Bay View Funding factored receivables  62,571   3,248  20.59%   50,674   2,815  22.04%  
Purchased residential mortgages  188,731   1,437  3.02%   141,073   1,019  2.87%  
Purchased CRE loans  8,929   69  3.07%   9,177   91  3.93%  
Loan fair value mark / accretion  (7,728)  915  0.15%   (8,923)  1,882  0.32%  
Total loans (includes loans held-for-sale) $2,876,121  $35,762  4.93%  $2,771,541  $36,207  5.18%  


 The average yield on the total loan portfolio decreased to 5.03% for the year ended December 31, 2021, compared to 5.06% for the year ended December 31, 2020, primarily due to a decline in the average yield on core bank loans, and increases in the average balances of lower yielding purchased residential mortgages, partially offset by increases in interest and fees on PPP loans, higher loan prepayment fees, and an increase in the accretion of the loan purchase discount into interest income from acquired loans. There were higher fees recognized into income on PPP loans for the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily as a result of accelerated forgiveness of the PPP loans by the SBA.


  For the Year Ended  For the Year Ended  
  December 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 $2,344,841  $103,796  4.43%  $2,327,624  $109,531  4.71%
Prepayment fees     2,700  0.12%      1,121  0.05%
SBA PPP loans  249,253   2,481  1.00%   218,391   2,185  1.00%
PPP fees, net     9,995  4.01%      3,877  1.78%
Bay View Funding factored receivables  52,618   11,485  21.83%   45,765   10,727  23.44%
Purchased residential mortgages  116,890   3,555  3.04%   29,648   725  2.45%
Purchased CRE loans  12,436   441  3.55%   24,072   831  3.45%  
Loan fair value mark / accretion  (9,717)  4,791  0.20%   (14,005)  4,172  0.18%
Total loans (includes loans held-for-sale) $2,766,321  $139,244  5.03%  $2,631,495  $133,169  5.06%


 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 $7.3 million at December 31, 2021.
  • The average cost of total deposits was 0.10% for the fourth and third quarters of 2021, compared to 0.14% for the fourth quarter of 2020. The average cost of total deposits was 0.11% for the year ended December 31, 2021, compared to 0.17% for the year ended December 31, 2020.

  • During the fourth quarter of 2021, there was a $615,000 negative provision for credit losses on loans, primarily due to recoveries on previously charged-off loans, compared to a $1.3 million negative provision for credit losses on loans taken in the fourth quarter of 2020, and a $514,000 negative provision for credit losses on loans for the third quarter of 2021. There was a $3.1 million negative provision for credit losses on loans for the year ended December 31, 2021, compared to a $13.2 million provision for credit losses on loans for year ended December 31, 2020.
 The higher provision for credit losses on loans for the year ended December 31, 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 increased to $2.8 million for the fourth quarter of 2021, compared to $2.1 million for the fourth quarter of 2020, and $2.4 million for the third quarter of 2021, primarily due to higher termination fees at Bay View Funding, a subsidiary of the Bank.
 For the year ended December 31, 2021, total noninterest income decreased to $9.7 million, compared to $9.9 million for the year ended December 31, 2020, primarily due to lower service charges and fees on deposits and servicing income during 2021, and a $791,000 gain on disposition of foreclosed assets, a $449,000 gain on warrants, and a $277,000 gain on the sale of securities during 2020. These decreases were partially offset by a higher gain on sales of SBA loans, higher termination fees at Bay View Funding, and a $676,000 gain on proceeds for company owned life insurance during 2021.
  • Total noninterest expense for the fourth quarter of 2021 increased to $22.2 million, compared to $21.6 million for the fourth quarter of 2020, primarily due to higher salaries and employee benefits during the fourth quarter of 2021. Noninterest expense for the fourth quarter of 2021 increased from $21.8 million for the third quarter of 2021, primarily due to higher salaries and employee benefits during the fourth quarter of 2021
 Noninterest expense for the year ended December 31, 2021 increased to $93.1 million, compared to $89.5 million for the year ended December 31, 2020, primarily due to a $4.0 million reserve for a litigation matter that settled in the second quarter of 2021.
   
 The following table reflects pre-tax merger-related costs resulting from the merger with Presidio Bank for the periods indicated:

 

  For the Quarter Ended For the Year Ended
MERGER-RELATED COSTS    December 31,     September 30,     December 31,  December 31,     December 31, 
(in $000’s, unaudited) 2021 2021  2020 2021 2020
Salaries and employee benefits $  $  $  $  $356 
Other     (7)  101   27   2,245 
Total merger-related costs $  $(7) $101  $27  $2,601 


 Full time equivalent employees were 326 at December 31, 2021, and 331 at December 31, 2020, and 325 at September 30, 2021.
  • The efficiency ratio was 54.32% for the fourth quarter of 2021, compared to 59.45% for the fourth quarter of 2020, and 53.78% for the third quarter of 2021. The efficiency ratio for year ended December 31, 2021 was 59.74%, compared to 58.96% for the year ended December 31, 2020.

  • Income tax expense was $5.3 million for the fourth quarter of 2021, compared to $4.4 million for the fourth quarter of 2020, and $5.6 million the third quarter of 2021. The effective tax rate for the fourth quarter of 2021 was 27.7%, compared to 27.6% for the fourth quarter of 2020, and 28.8% for the third quarter of 2021. Income tax expense for the year ended December 31, 2021 was $18.2 million, compared to $13.8 million for the year ended December 31, 2020. The effective tax rate for the year ended December 31, 2021 was 27.6%, compared to 28.1% for the year ended December 31, 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 $5.499 billion at December 31, 2021, compared to $4.634 billion at December 31, 2020, and increased 1% from $5.463 billion at September 30, 2021.

  • Securities available-for-sale, at fair value, totaled $102.3 million at December 31, 2021, compared to $235.8 million at December 31, 2020, and $121.0 million at September 30, 2021. At December 31, 2021, the Company’s securities available-for-sale portfolio was entirely comprised of agency mortgage-backed securities (all issued by U.S. Government sponsored entities). The pre-tax unrealized gain on securities available-for-sale at December 31, 2021 was $2.9 million, compared to a pre-tax unrealized gain on securities available-for-sale of $5.8 million at December 31, 2020, and a pre-tax unrealized gain on securities available-for-sale of $4.0 million at September 30, 2021. All other factors remaining the same, when market interest rates are increasing, the Company will experience a lower unrealized gain (or a higher unrealized loss) on the securities portfolio.

  • At December 31, 2021, securities held-to-maturity, at amortized cost, totaled $658.4 million, compared to $297.4 million at December 31, 2020, and $537.3 million at September 30, 2021. At December 31, 2021, the Company’s securities held-to-maturity portfolio was comprised of $607.4 million of agency mortgage-backed securities, and $51.0 million of tax-exempt municipal bonds. During the fourth quarter of 2021, the Company purchased $151.7 million of agency mortgage-backed securities (securities held-to-maturity), with a book yield of 1.71% and an average life of 6.01 years. During 2021, the Company purchased $474.2 million of agency mortgage-backed securities (securities held-to-maturity), with a book yield of 1.56% and an average life of 5.78 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  December 31, 2021 September 30, 2021 December 31, 2020 
(in $000’s, unaudited)    Balance     % to Total    Balance     % to Total    Balance     % to Total    
Commercial $594,108  19%    $578,944  20%    $555,707  21%    
Paycheck Protection Program Loans  88,726  3%     164,506  6%     290,679  11%    
Real estate:                
CRE - owner occupied  595,934  19%     580,624  20%     560,362  21%    
CRE - non-owner occupied  902,326  29%     829,022  29%     693,103  27%    
Land and construction  147,855  5%     141,277  5%     144,594  6%    
Home equity  109,579  4%     106,690  4%     111,885  4%    
Multifamily  218,856  7%     205,952  7%     166,425  6%    
Residential mortgages  416,660  13%     211,467  8%     85,116  3%    
Consumer and other  16,744  1%     20,106  1%     18,116  1%    
Total Loans  3,090,788  100%     2,838,588  100%     2,625,987  100%    
Deferred loan costs (fees), net  (3,462)   (5,729)   (6,726)  
Loans, net of deferred costs and fees  $3,087,326  100%    $2,832,859  100%    $2,619,261  100%    


 Loans, excluding loans held-for-sale, increased $468.1 million, or 18%, to $3.087 billion at December 31, 2021, compared to $2.619 billion at December 31, 2020, and increased $254.5 million, or 9%, from $2.833 billion at September 30, 2021. Total loans at December 31, 2021 included $88.7 million of PPP loans, compared to $290.7 million at December 31, 2020 and $164.5 million at September 30, 2021. Total loans at December 31, 2021 included $416.7 million of residential mortgages, compared to $85.1 million at December 31, 2020, and $211.5 million at September 30, 2021.
     
   Loans, excluding loans held-for-sale and PPP loans, increased $666.0 million, or 29%, to $3.001 billion at December 31, 2021, compared to $2.335 billion at December 31, 2020, and increased $328.0 million, or 12%, from $2.673 billion at September 30, 2021. Loans, excluding loans held-for-sale, PPP loans and residential mortgages, increased $334.6 million, or 15%, to $2.584 billion at December 31, 2021, compared to $2.250 billion at December 31, 2020, and increased $122.8 million, or 5%, from $2.461 billion at September 30, 2021.
     
 In response to economic stimulus laws passed by Congress in 2020 and 2021, the Bank funded two rounds of PPP loans. At December 31, 2021, after accounting for loan payoffs and SBA loan forgiveness, “Round 1” PPP loans were $1.7 million and “Round 2” PPP loans were $87.0 million. In total, the Bank had $88.7 million in outstanding PPP loan balances at December 31, 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 Year Ended:
PPP LOANS    December 31,     September 30,     December 31,  December 31,     December 31, 
(in $000’s, unaudited) 2021 2021 2020 2021 2020
Interest income $318  $548  $787  $2,481  $2,185 
Fee income, net  2,211   2,508   1,935   9,995   3,877 
Total $2,529  $3,056  $2,722  $12,476  $6,062 
                
                
PPP loans outstanding at period end:               
Round 1 $1,717  $5,795  $290,679  $1,717  $290,679 
Round 2  87,009   158,711      87,009    
Total $88,726  $164,506  $290,679  $88,726  $290,679 
                
Deferred fees outstanding at period end $(2,342) $(4,831) $(6,819) $(2,342) $(6,819)
Deferred costs outstanding at period end  189   461   783   189   783 
Total $(2,153) $(4,370) $(6,036) $(2,153) $(6,036)


 During the fourth quarter of 2021, the Company purchased single family residential mortgage loans totaling $223.8 million, tied to homes all located in California, with average principal balances of approximately $1.1 million, and a weighted average yield of approximately 3.01% (net of servicing fees). During the year ended December 31, 2021, the Company purchased single family residential mortgage loans totaling $405.8 million, tied to homes all located in California, with average principal balances of approximately $853,000, and a weighted average yield of approximately 3.14% (net of servicing fees). Purchases of residential loans have been an attractive alternative for replacing mortgage-backed security paydowns in the investment securities portfolio.
   
 Commercial and industrial (“C&I”) line utilization increased to 31% at December 31, 2021, compared to 28% at December 31, 2020, and 27% at September 30, 2021.
   
 At December 31, 2021, 40% of the CRE loan portfolio was secured by owner-occupied real estate.
   
 At December 31, 2021, approximately 38% of the Company’s loan portfolio consisted of floating interest rate loans, compared to approximately 42% at both December 31, 2020 and September 30, 2021.
  • The following table summarizes the allowance for credit losses on loans for the periods indicated:
  For the Quarter Ended For the Year Ended  
ALLOWANCE FOR CREDIT LOSSES ON LOANS    December 31,     September 30,     December 31,  December 31,     December 31,  
(in $000’s, unaudited) 2021 2021 2020 2021 2020 
Balance at beginning of period $43,680  $43,956  $45,422  $44,400  $23,285  
Charge-offs during the period  (87)  (65)  (144)  (520)  (1,880) 
Recoveries during the period  312   303   470   2,544   1,192  
Net recoveries (charge-offs) during the period  225   238   326   2,024   (688) 
Impact of adopting Topic 326              8,570  
Provision for (recapture of) credit losses on loans during the period  (615)  (514)  (1,348)  (3,134)  13,233  
Balance at end of period $43,290  $43,680  $44,400  $43,290  $44,400  
                 
Total loans, net of deferred fees $3,087,326  $2,832,859  $2,619,261  $3,087,326  $2,619,261  
Total nonperforming loans $3,738  $4,733  $7,869  $3,738  $7,869  
Allowance for credit losses on loans ("ACLL") to total loans  1.40 %   1.54 %   1.70 %   1.40 %   1.70 %  
ACLL to total nonperforming loans  1,158.11 %   922.88 %   564.24 %   1,158.11 %   564.24 %  


 The ACLL was 1.40% of total loans at December 31, 2021 while the ACLL to total nonperforming loans was 1,158.11%. The ACLL was 1.70% of total loans and the ACLL to nonperforming loans was 564.24% at December 31, 2020. The ACLL was 1.54% of total loans and the ACLL to total nonperforming loans was 922.88% at September 30, 2021. The ACLL to total loans, excluding PPP loans, was 1.44 % at December 31, 2021, 1.91% at December 31, 2020 and 1.63% at September 30, 2021.
   
 The following table shows the drivers of change in ACLL under CECL for each of the first four 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 
Qualitative and quantitative changes during the first quarter of 2021 including changes in economic forecasts  (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 
Qualitative and quantitative changes during the second quarter of 2021 including changes in economic forecasts  (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 during the fourth quarter of 2021  225 
Portfolio changes during the fourth quarter of 2021  3,786 
Qualitative and quantitative changes during the fourth quarter of 2021 including changes in economic forecasts  (4,401)
ACLL at December 31, 2021 $43,290 


 Net recoveries totaled $225,000 for the fourth quarter of 2021, compared to net recoveries of $326,000 for the fourth quarter of 2020, and net recoveries of $238,000 for the third quarter of 2021.
   
 The following is a breakout of NPAs at the periods indicated:


  End of Period: 
NONPERFORMING ASSETS December 31, 2021 September 30, 2021 December 31, 2020 
(in $000’s, unaudited)    Balance    % of Total    Balance    % of Total    Balance    % of Total 
CRE loans $2,254  60%  $2,260  48%  $3,706  47%  
Commercial loans  1,122  30%   1,330  28%   2,726  35%  
Restructured and loans over 90 days past due and still accruing  278  8%   642  13%   81  1%  
Home equity loans  84  2%   94  2%   949  12%  
Consumer and other loans    %   407  9%   407  5%  
Total nonperforming assets $3,738  100%  $4,733  100%  $7,869  100%  


 NPAs totaled $3.7 million, or 0.07% of total assets, at December 31, 2021, compared to $7.9 million, or 0.17% of total assets, at December 31, 2020, $4.7 million, or 0.09% of total assets, at September 30, 2021.
   
 There were no foreclosed assets on the balance sheet at December 31, 2021, December 31, 2020, or September 30, 2021.
   
 Classified assets decreased to $33.8 million, or 0.62% of total assets, at December 31, 2021, compared to $34.0 million, or 0.73% of total assets, at December 31, 2020, and increased from $31.9 million, or 0.58% of total assets, at September 30, 2021.
  • The following table summarizes the distribution of deposits and the percentage of distribution in each category for the periods indicated:
DEPOSITS December 31, 2021 September 30, 2021 December 31, 2020 
(in $000’s, unaudited)    Balance    % to Total  Balance    % to Total  Balance    % to Total 
Demand, noninterest-bearing $1,903,768  40%  $1,804,965  38%  $1,661,655  42%  
Demand, interest-bearing  1,308,114  27%   1,141,944  24%   960,179  24%  
Savings and money market  1,375,825  29%   1,600,754  34%   1,119,968  29%  
Time deposits — under $250  38,734  1%   39,628  1%   45,027  1%  
Time deposits — $250 and over  94,700  2%   103,046  2%   103,746  3%  
CDARS — interest-bearing demand,                   
money market and time deposits  38,271  1%   36,044  1%   23,911  1%  
Total deposits $4,759,412  100%  $4,726,381  100%  $3,914,486  100%  


 Total deposits increased $844.9 million, or 22%, to $4.759 billion at December 31, 2021, compared to $3.914 billion at December 31, 2020, and increased $33.0 million, or 1%, from $4.726 billion at September 30, 2021.
   
 Deposits, excluding all time deposits and CDARS deposits, increased $845.9 million, or 23%, to $4.588 billion at December 31, 2021, compared to $3.742 billion at December 31, 2020, and increased $40.0 million, or 1%, compared to $4.548 billion at September 30, 2021.
   
 Total deposits at September 30, 2021 included $336 million of temporary deposits from one customer that were received late in the third quarter of 2021. The deposits from this customer decreased to $140 million at December 31, 2021.
  • The Company’s consolidated capital ratios exceeded regulatory guidelines and the Bank’s capital ratios exceeded regulatory guidelines under the Basel III prompt corrective action (“PCA”) regulatory guidelines for a well-capitalized financial institution, and the Basel III minimum regulatory requirements at December 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 14.3%   13.7%   10.0%   10.5%
Tier 1 Capital 12.3%   12.8%   8.0%   8.5%
Common Equity Tier 1 Capital 12.3%   12.8%   6.5%   7.0%
Tier 1 Leverage 7.9%   8.2%   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 December 31,  September 30,  December 31, 
(in $000’s, unaudited)    2021 2021 2020
Unrealized gain on securities available-for-sale $1,991  $2,435  $3,709 
Remaining unamortized unrealized gain on securities         
available-for-sale transferred to held-to-maturity     234   261 
Split dollar insurance contracts liability  (5,480)  (6,143)  (6,140)
Supplemental executive retirement plan liability  (7,668)  (8,411)  (8,767)
Unrealized gain on interest-only strip from SBA loans  161   179   220 
Total accumulated other comprehensive loss $(10,996) $(11,706) $(10,717)
  • Tangible equity was $416.7 million at December 31, 2021, compared to $393.6 million at December 31, 2020, and $408.1 million at September 30, 2021. Tangible book value per share was $6.91 at December 31, 2021, compared to $6.57 at December 31, 2020, and $6.77 at September 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 Year Ended:
CONSOLIDATED INCOME STATEMENTS    December 31,     September 30,     December 31,     September 30,
    December 31,
     December 31,     December 31,     Percent 
(in $000’s, unaudited) 2021 2021 2020 2021
 2020
  2021 2020 Change 
Interest income $39,956  $39,907  $36,145  0 %  11 % $153,256  $150,471  2 %
Interest expense  1,847   1,725   1,940  7 %  (5)%  7,131   8,581  (17)%
Net interest income before provision for credit losses on loans  38,109   38,182   34,205  0 %  11 %  146,125   141,890  3 %
Provision for (recapture of) credit losses on loans  (615)  (514)  (1,348) (20)%  54 %  (3,134)  13,233  (124)%
Net interest income after provision for credit losses on loans  38,724   38,696   35,553  0 %  9 %  149,259   128,657  16 %
Noninterest income:                               
Service charges and fees on deposit accounts  644   584   608  10 %  6 %  2,488   2,859  (13)%
Termination fees  618   32   24  1831 %  2475 %  797   89  796 %
Gain on sales of SBA loans  491   594   372  (17)%  32 %  1,718   839  105 %
Increase in cash surrender value of life insurance  454   470   465  (3)%  (2)%  1,838   1,845  0 %
Servicing income  138   129   98  7 %  41 %  553   673  (18)%
Gain on proceeds from company owned life insurance  104   109     (5)%  N/A    675   20  3275 %
Gain on sales of securities        7  N/A  (100)%     277  (100)%
Gain on the disposition of foreclosed assets          N/A  N/A       791  (100)%
Other  361   490   482  (26)%  (25)%  1,619   2,529  (36)%
Total noninterest income  2,810   2,408   2,056  17 %  37 %  9,688   9,922  (2)%
Noninterest expense:                                 
Salaries and employee benefits  12,871   12,461   12,457  3 %  3 %  51,862   50,927  2 %
Occupancy and equipment  2,366   2,151   2,197  10 %  8 %  9,038   8,018  13 %
Professional fees  1,200   1,211   1,396  (1)%  (14)%  5,901   5,338  11 %
Other  5,790   6,008   5,507  (4)%  5 %  26,276   25,228  4 %
Total noninterest expense  22,227   21,831   21,557  2 %  3 %  93,077   89,511  4 %
Income before income taxes  19,307   19,273   16,052  0 %  20 %  65,870   49,068  34 %
Income tax expense  5,342   5,555   4,429  (4)%  21 %  18,170   13,769  32 %
Net income $ 13,965  $ 13,718  $ 11,623  2 %  20 % $ 47,700  $ 35,299  35 %
                           
PER COMMON SHARE DATA                             
(unaudited)                               
Basic earnings per share $0.23  $0.23  $0.19  0 %  21 % $0.79  $0.59  34 %
Diluted earnings per share $0.23  $0.23  $0.19  0 %  21 % $0.79  $0.59  34 %
Weighted average shares outstanding - basic  60,298,424   60,220,717   59,616,951  0 %  1 %  60,133,821   59,478,343  1 %
Weighted average shares outstanding - diluted  60,844,221   60,760,189   60,247,296  0 %  1 %  60,689,062   60,169,139  1 %
Common shares outstanding at period-end  60,339,837   60,266,316   59,917,457  0 %  1 %  60,339,837   59,917,457  1 %
Dividend per share $0.13  $0.13  $0.13  0 %  0 % $0.52  $0.52  0 %
Book value per share $9.91  $9.79  $9.64  1 %  3 % $9.91  $9.64  3 %
Tangible book value per share $6.91  $6.77  $6.57  2 %  5 % $6.91  $6.57  5 %
                           
KEY FINANCIAL RATIOS                                  
(unaudited)                                  
Annualized return on average equity  9.35 %   9.29 %   7.99 %  1 %  17 %  8.15 %   6.12 %  33 %
Annualized return on average tangible equity  13.50 %   13.49 %   11.75 %  0 %  15 %  11.86 %   9.04 %  31 %
Annualized return on average assets  0.97 %   1.06 %   0.98 %  (8)%  (1)%  0.92 %   0.80 %  15 %
Annualized return on average tangible assets  1.00 %   1.10 %   1.02 %  (9)%  (2)%  0.96 %   0.83 %  16 %
Net interest margin (FTE)  2.84 %   3.18 %   3.15 %  (11)%  (10)%  3.05 %   3.50 %  (13)%
Efficiency ratio  54.32 %   53.78 %   59.45 %  1 %  (9)%  59.74 %   58.96 %  1 %
                           
AVERAGE BALANCES                                 
(in $000’s, unaudited)                                  
Average assets $5,695,136  $5,139,239  $4,703,154  11 %  21 % $5,166,294  $4,434,329  17 %
Average tangible assets $5,513,359  $4,956,738  $4,518,279  11 %  22 % $4,983,407  $4,248,090  17 %
Average earning assets $5,336,129  $4,778,574  $4,338,117  12 %  23 % $4,805,630  $4,071,805  18 %
Average loans held-for-sale $4,047  $4,810  $2,772  (16)%  46 % $4,095  $3,459  18 %
Average total loans $2,872,074  $2,766,731  $2,652,019  4 %  8 % $2,762,226  $2,628,036  5 %
Average deposits $4,945,204  $4,396,315  $3,980,017  12 %  24 % $4,426,885  $3,719,896  19 %
Average demand deposits - noninterest-bearing $1,979,940  $1,835,219  $1,749,837  8 %  13 % $1,834,909  $1,638,055  12 %
Average interest-bearing deposits $2,965,264  $2,561,096  $2,230,180  16 %  33 % $2,591,976  $2,081,841  25 %
Average interest-bearing liabilities $3,005,212  $2,601,002  $2,269,960  16 %  32 % $2,631,848  $2,121,621  24 %
Average equity $592,291  $586,012  $578,560  1 %  2 % $585,156  $576,675  1 %
Average tangible equity $410,514  $403,511  $393,685  2 %  4 % $402,269  $390,436  3 %


  For the Quarter Ended: 
CONSOLIDATED INCOME STATEMENTS    December 31,     September 30,     June 30,    March 31,    December 31, 
(in $000’s, unaudited) 2021 2021 2021 2021 2020 
Interest income $39,956  $39,907  $36,632  $36,761  $36,145  
Interest expense  1,847   1,725   1,756   1,803   1,940  
Net interest income before provision                
for credit losses on loans  38,109   38,182   34,876   34,958   34,205  
Provision for (recapture of) credit losses on loans  (615)  (514)  (493)  (1,512)  (1,348) 
Net interest income after provision                
for credit losses on loans  38,724   38,696   35,369   36,470   35,553  
Noninterest income:                
Service charges and fees on deposit accounts  644   584   659   601   608  
Termination fees  618   32   57   90   24  
Gain on sales of SBA loans  491   594   83   550   372  
Increase in cash surrender value of                
life insurance  454   470   458   456   465  
Servicing income  138   129   104   182   98  
Gain on proceeds from company owned life insurance  104   109   396   66     
Gain on sales of securities              7  
Other  361   490   412   356   482  
Total noninterest income  2,810   2,408   2,169   2,301   2,056  
Noninterest expense:                     
Salaries and employee benefits  12,871   12,461   12,572   13,958   12,457  
Occupancy and equipment  2,366   2,151   2,247   2,274   2,197  
Professional fees  1,200   1,211   1,771   1,719   1,396  
Other  5,790   6,008   9,185   5,293   5,507  
Total noninterest expense  22,227   21,831   25,775   23,244   21,557  
Income before income taxes  19,307   19,273   11,763   15,527   16,052  
Income tax expense  5,342   5,555   2,950   4,323   4,429  
Net income $ 13,965  $ 13,718  $ 8,813  $ 11,204  $ 11,623  
                 
PER COMMON SHARE DATA                
(unaudited)                     
Basic earnings per share $0.23  $0.23  $0.15  $0.19  $0.19  
Diluted earnings per share $0.23  $0.23  $0.15  $0.19  $0.19  
Weighted average shares outstanding - basic  60,298,424   60,220,717   60,089,327   59,926,816   59,616,951  
Weighted average shares outstanding - diluted  60,844,221   60,760,189   60,730,141   60,404,213   60,247,296  
Common shares outstanding at period-end  60,339,837   60,266,316   60,202,766   59,932,334   59,917,457  
Dividend per share $0.13  $0.13  $0.13  $0.13  $0.13  
Book value per share $9.91  $9.79  $9.69  $9.71  $9.64  
Tangible book value per share $6.91  $6.77  $6.65  $6.64  $6.57  
                 
KEY FINANCIAL RATIOS                     
(unaudited)                     
Annualized return on average equity  9.35 %   9.29 %   6.06 %   7.85 %   7.99 %  
Annualized return on average tangible equity  13.50 %   13.49 %   8.84 %   11.50 %   11.75 %  
Annualized return on average assets  0.97 %   1.06 %   0.70 %   0.95 %   0.98 %  
Annualized return on average tangible assets  1.00 %   1.10 %   0.73 %   0.99 %   1.02 %  
Net interest margin (FTE)  2.84 %   3.18 %   3.00 %   3.22 %   3.15 %  
Efficiency ratio  54.32 %   53.78 %   69.58 %   62.38 %   59.45 %  
                 
AVERAGE BALANCES                     
(in $000’s, unaudited)                     
Average assets $5,695,136  $5,139,239  $5,047,097  $4,773,878  $4,703,154  
Average tangible assets $5,513,359  $4,956,738  $4,863,814  $4,589,861  $4,518,279  
Average earning assets $5,336,129  $4,778,574  $4,678,084  $4,419,963  $4,338,117  
Average loans held-for-sale $4,047  $4,810  $4,053  $3,458  $2,772  
Average total loans $2,872,074  $2,766,731  $2,790,368  $2,616,876  $2,652,019  
Average deposits $4,945,204  $4,396,315  $4,307,555  $4,048,953  $3,980,017  
Average demand deposits - noninterest-bearing $1,979,940  $1,835,219  $1,808,638  $1,712,903  $1,749,837  
Average interest-bearing deposits $2,965,264  $2,561,096  $2,498,917  $2,336,050  $2,230,180  
Average interest-bearing liabilities $3,005,212  $2,601,002  $2,538,747  $2,375,851  $2,269,960  
Average equity $592,291  $586,012  $583,009  $579,157  $578,560  
Average tangible equity $410,514  $403,511  $399,726  $395,140  $393,685  


  End of Period: Percent Change From: 
CONSOLIDATED BALANCE SHEETS    December 31,     September 30,     December 31,     September 30,     December 31,  
(in $000’s, unaudited) 2021 2021 2020 2021 2020 
ASSETS                   
Cash and due from banks $15,703  $33,013  $30,598  (52)%  (49)%
Other investments and interest-bearing deposits              
in other financial institutions  1,290,513   1,588,334   1,100,475  (19)%  17 %
Securities available-for-sale, at fair value  102,252   121,000   235,774  (15)%  (57)%
Securities held-to-maturity, at amortized cost  658,397   537,285   297,389  23 %  121 %
Loans held-for-sale - SBA, including deferred costs  2,367   3,678   1,699  (36)%  39 %
Loans:               
Commercial  594,108   578,944   555,707  3 %  7 %
SBA PPP loans  88,726   164,506   290,679  (46)%  (69)%
Real estate:               
CRE - owner occupied  595,934   580,624   560,362  3 %  6 %
CRE - non-owner occupied  902,326   829,022   693,103  9 %  30 %
Land and construction  147,855   141,277   144,594  5 %  2 %
Home equity  109,579   106,690   111,885  3 %  (2)%
Multifamily  218,856   205,952   166,425  6 %  32 %
Residential mortgages  416,660   211,467   85,116  97 %  390 %
Consumer and other  16,744   20,106   18,116  (17)%  (8)%
Loans  3,090,788   2,838,588   2,625,987  9 %  18 %
Deferred loan fees, net  (3,462)  (5,729)  (6,726) (40)%  (49)%
Total loans, net of deferred costs and fees  3,087,326   2,832,859   2,619,261  9 %  18 %
Allowance for credit losses on loans  (43,290)  (43,680)  (44,400) (1)%  (3)%
Loans, net  3,044,036   2,789,179   2,574,861  9 %  18 %
Company-owned life insurance  77,589   77,509   77,523  0 %  0 %
Premises and equipment, net  9,639   9,821   10,459  (2)%  (8)%
Goodwill  167,631   167,631   167,631  0 %  0 %
Other intangible assets  13,668   14,423   16,664  (5)%  (18)%
Accrued interest receivable and other assets  117,614   121,129   121,041  (3)%  (3)%
Total assets $ 5,499,409  $ 5,463,002  $ 4,634,114  1 %  19 %
               
LIABILITIES AND SHAREHOLDERS’ EQUITY                
Liabilities:                
Deposits:               
Demand, noninterest-bearing $1,903,768  $1,804,965  $1,661,655  5 %  15 %
Demand, interest-bearing  1,308,114   1,141,944   960,179  15 %  36 %
Savings and money market  1,375,825   1,600,754   1,119,968  (14)%  23 %
Time deposits-under $250  38,734   39,628   45,027  (2)%  (14)%
Time deposits-$250 and over  94,700   103,046   103,746  (8)%  (9)%
CDARS - money market and time deposits  38,271   36,044   23,911  6 %  60 %
Total deposits  4,759,412   4,726,381   3,914,486  1 %  22 %
Subordinated debt, net of issuance costs  39,925   39,878   39,740  0 %  0 %
Accrued interest payable and other liabilities  102,044   106,625   101,999  (4)%  0 %
Total liabilities  4,901,381   4,872,884   4,056,225  1 %  21 %
               
Shareholders’ Equity:                   
Common stock  497,695   496,622   493,707  0 %  1 %
Retained earnings  111,329   105,202   94,899  6 %  17 %
Accumulated other comprehensive loss  (10,996)  (11,706)  (10,717) 6 %  (3)%
Total shareholders' equity  598,028   590,118   577,889  1 %  3 %
Total liabilities and shareholders’ equity $ 5,499,409  $ 5,463,002  $ 4,634,114  1 %  19 %


  End of Period:
CONSOLIDATED BALANCE SHEETS    December 31,     September 30,     June 30,    March 31,    December 31,
(in $000’s, unaudited) 2021 2021 2021 2021 2020
ASSETS                    
Cash and due from banks $15,703  $33,013  $41,904  $36,534  $30,598 
Other investments and interest-bearing deposits               
in other financial institutions  1,290,513   1,588,334   1,286,418   1,406,520   1,100,475 
Securities available-for-sale, at fair value  102,252   121,000   145,955   196,718   235,774 
Securities held-to-maturity, at amortized cost  658,397   537,285   421,286   306,535   297,389 
Loans held-for-sale - SBA, including deferred costs  2,367   3,678   4,344   2,834   1,699 
Loans:               
Commercial  594,108   578,944   557,686   559,698   555,707 
SBA PPP loans  88,726   164,506   286,461   349,744   290,679 
Real estate:               
CRE - owner occupied  595,934   580,624   583,091   568,637   560,362 
CRE - non-owner occupied  902,326   829,022   742,135   700,117   693,103 
Land and construction  147,855   141,277   129,426   159,504   144,594 
Home equity  109,579   106,690   107,873   104,303   111,885 
Multifamily  218,856   205,952   198,771   168,917   166,425 
Residential mortgages  416,660   211,467   205,904   82,181   85,116 
Consumer and other  16,744   20,106   21,519   19,872   18,116 
Loans  3,090,788   2,838,588   2,832,866   2,712,973   2,625,987 
Deferred loan fees, net  (3,462)  (5,729)  (8,070)  (8,266)  (6,726)
Total loans, net of deferred fees  3,087,326   2,832,859   2,824,796   2,704,707   2,619,261 
Allowance for credit losses on loans  (43,290)  (43,680)  (43,956)  (44,296)  (44,400)
Loans, net  3,044,036   2,789,179   2,780,840   2,660,411   2,574,861 
Company-owned life insurance  77,589   77,509   77,393   77,421   77,523 
Premises and equipment, net  9,639   9,821   10,040   10,220   10,459 
Goodwill  167,631   167,631   167,631   167,631   167,631 
Other intangible assets  13,668   14,423   15,177   15,931   16,664 
Accrued interest receivable and other assets  117,614   121,129   121,887   120,635   121,041 
Total assets $ 5,499,409  $ 5,463,002  $ 5,072,875  $ 5,001,390  $ 4,634,114 
                
LIABILITIES AND SHAREHOLDERS’ EQUITY               
Liabilities:                    
Deposits:                    
Demand, noninterest-bearing $1,903,768  $1,804,965  $1,840,516  $1,813,962  $1,661,655 
Demand, interest-bearing  1,308,114   1,141,944   1,140,867   1,101,807   960,179 
Savings and money market  1,375,825   1,600,754   1,174,587   1,189,566   1,119,968 
Time deposits-under $250  38,734   39,628   42,118   42,596   45,027 
Time deposits-$250 and over  94,700   103,046   110,111   102,508   103,746 
CDARS - money market and time deposits  38,271   36,044   36,273   28,663   23,911 
Total deposits  4,759,412   4,726,381   4,344,472   4,279,102   3,914,486 
Subordinated debt, net of issuance costs  39,925   39,878   39,832   39,786   39,740 
Accrued interest payable and other liabilities  102,044   106,625   105,127   100,839   101,999 
Total liabilities  4,901,381   4,872,884   4,489,431   4,419,727   4,056,225 
                
Shareholders’ Equity:                    
Common stock  497,695   496,622   495,665   494,617   493,707 
Retained earnings  111,329   105,202   99,311   98,314   94,899 
Accumulated other comprehensive loss  (10,996)  (11,706)  (11,532)  (11,268)  (10,717)
Total shareholders' equity  598,028   590,118   583,444   581,663   577,889 
Total liabilities and shareholders’ equity $ 5,499,409  $ 5,463,002  $ 5,072,875  $ 5,001,390  $ 4,634,114 


  End of Period: Percent Change From: 
CREDIT QUALITY DATA    December 31,     September 30,     December 31,     September 30,
    December 31,
 
(in $000’s, unaudited) 2021 2021 2020 2021
 2020
 
Nonaccrual loans - held-for-investment $3,460  $4,091  $7,788  (15)%  (56)%
Restructured and loans over 90 days past due                
and still accruing  278   642   81  (57)%  243 %
Total nonperforming loans  3,738   4,733   7,869  (21)%  (52)%
Foreclosed assets          N/A  N/A  
Total nonperforming assets $3,738  $4,733  $7,869  (21)%  (52)%
Other restructured loans still accruing $125  $90  $169  39 %  (26)%
Net charge-offs (recoveries) during the quarter $(225) $(238) $(326) 5 %  31 %
Provision for (recapture of) credit losses on loans during the quarter $(615) $(514) $(1,348) (20)%  54 %
Allowance for credit losses on loans $43,290  $43,680  $44,400  (1)%  (3)%
Classified assets $33,846  $31,937  $34,028  6 %  (1)%
Allowance for credit losses on loans to total loans  1.40 %   1.54 %   1.70 %  (9)%  (18)%
Allowance for credit losses on loans to total nonperforming loans  1,158.11 %   922.88 %   564.24 %  25 %  105 %
Nonperforming assets to total assets  0.07 %   0.09 %   0.17 %  (22)%  (59)%
Nonperforming loans to total loans  0.12 %   0.17 %   0.30 %  (29)%  (60)%
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) $416,729  $408,064  $393,594  2 %  6 %
Shareholders’ equity / total assets  10.87 %   10.80 %   12.47 %  1 %  (13)%
Tangible common equity / tangible assets (2)  7.84 %   7.73 %   8.85 %  1 %  (11)%
Loan to deposit ratio  64.87 %   59.94 %   66.91 %  8 %  (3)%
Noninterest-bearing deposits / total deposits  40.00 %   38.19 %   42.45 %  5 %  (6)%
Total capital ratio  14.3 %   15.1 %   16.5 %  (5)%  (13)%
Tier 1 capital ratio  12.3 %   12.9 %   14.0 %  (5)%  (12)%
Common Equity Tier 1 capital ratio  12.3 %   12.9 %   14.0 %  (5)%  (12)%
Tier 1 leverage ratio  7.9 %   8.6 %   9.1 %  (8)%  (13)%
Heritage Bank of Commerce:                
Total capital ratio  13.7 %   14.5 %   15.8 %  (6)%  (13)%
Tier 1 capital ratio  12.8 %   13.5 %   14.6 %  (5)%  (12)%
Common Equity Tier 1 capital ratio  12.8 %   13.5 %   14.6 %  (5)%  (12)%
Tier 1 leverage ratio  8.2 %   9.0 %   9.5 %  (9)%  (14)%


____________________
 (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    December 31,     September 30,     June 30,    March 31,    December 31,  
(in $000’s, unaudited) 2021 2021 2021 2021 2020 
Nonaccrual loans - held-for-investment $3,460  $4,091  $5,291  $5,542  $7,788  
Restructured and loans over 90 days past due                
and still accruing  278   642   889   51   81  
Total nonperforming loans  3,738   4,733   6,180   5,593   7,869  
Foreclosed assets                
Total nonperforming assets $3,738  $4,733  $6,180  $5,593  $7,869  
Other restructured loans still accruing $125  $90  $93  $152  $169  
Net charge-offs (recoveries) during the quarter $(225) $(238) $(153) $(1,408) $(326) 
Provision for (recapture of) credit losses on loans during the quarter $(615) $(514) $(493) $(1,512) $(1,348) 
Allowance for credit losses on loans $43,290  $43,680  $43,956  $44,296  $44,400  
Classified assets $33,846  $31,937  $32,402  $33,420  $34,028  
Allowance for credit losses on loans to total loans  1.40 %   1.54 %   1.56 %   1.64 %   1.70 %  
Allowance for credit losses on loans to total nonperforming loans  1,158.11 %   922.88 %   711.26 %   791.99 %   564.24 %  
Nonperforming assets to total assets  0.07 %   0.09 %   0.12 %   0.11 %   0.17 %  
Nonperforming loans to total loans  0.12 %   0.17 %   0.22 %   0.21 %   0.30 %  
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) $416,729  $408,064  $400,636  $398,101  $393,594  
Shareholders’ equity / total assets  10.87 %   10.80 %   11.50 %   11.63 %   12.47 %  
Tangible common equity / tangible assets (2)  7.84 %   7.73 %   8.19 %   8.26 %   8.85 %  
Loan to deposit ratio  64.87 %   59.94 %   65.02 %   63.21 %   66.91 %  
Noninterest-bearing deposits / total deposits  40.00 %   38.19 %   42.36 %   42.39 %   42.45 %  
Total capital ratio  14.3 %   15.1 %   15.6 %   16.5 %   16.5 %  
Tier 1 capital ratio  12.3 %   12.9 %   13.3 %   14.0 %   14.0 %  
Common Equity Tier 1 capital ratio  12.3 %   12.9 %   13.3 %   14.0 %   14.0 %  
Tier 1 leverage ratio  7.9 %   8.6 %   8.6 %   9.1 %   9.1 %  
Heritage Bank of Commerce:                
Total capital ratio  13.7 %   14.5 %   15.0 %   15.8 %   15.8 %  
Tier 1 capital ratio  12.8 %   13.5 %   13.9 %   14.7 %   14.6 %  
Common Equity Tier 1 capital ratio  12.8 %   13.5 %   13.9 %   14.7 %   14.6 %  
Tier 1 leverage ratio  8.2 %   9.0 %   9.0 %   9.5 %   9.5 %  

 

____________________
 (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 
  December 31, 2021 December 31, 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) $2,876,121  $35,762  4.93%  $2,654,791  $32,907  4.93%  
Securities - taxable  660,663   2,686  1.61%   482,951   2,053  1.69%  
Securities - exempt from Federal tax (3)  54,965   457  3.30%   70,318   570  3.22%  
Other investments and interest-bearing deposits                   
in other financial institutions  1,744,380   1,147  0.26%   1,130,057   735  0.26%  
Total interest earning assets (3)  5,336,129   40,052  2.98%   4,338,117   36,265  3.33%  
Cash and due from banks  38,178         42,861        
Premises and equipment, net  9,755         10,387        
Goodwill and other intangible assets  181,777         184,875        
Other assets  129,297         126,914        
Total assets $5,695,136        $4,703,154        
                    
Liabilities and shareholders’ equity:                     
Deposits:                     
Demand, noninterest-bearing $1,979,940        $1,749,837        
                    
Demand, interest-bearing  1,346,878   559  0.16%   939,203   462  0.20%  
Savings and money market  1,451,230   582  0.16%   1,121,636   674  0.24%  
Time deposits - under $100  13,766   5  0.14%   16,748   11  0.26%  
Time deposits - $100 and over  118,089   116  0.39%   131,740   208  0.63%  
CDARS - money market and time deposits  35,301   2  0.02%   20,853   1  0.02%  
Total interest-bearing deposits  2,965,264   1,264  0.17%   2,230,180   1,356  0.24%  
Total deposits  4,945,204   1,264  0.10%   3,980,017   1,356  0.14%  
                    
Subordinated debt, net of issuance costs  39,896   583  5.80%   39,710   583  5.84%  
Short-term borrowings  52     0.00%   70   1  5.68%  
Total interest-bearing liabilities  3,005,212   1,847  0.24%   2,269,960   1,940  0.34%  
Total interest-bearing liabilities and demand,                   
noninterest-bearing / cost of funds  4,985,152   1,847  0.15%   4,019,797   1,940  0.19%  
Other liabilities  117,693         104,797        
Total liabilities  5,102,845         4,124,594        
Shareholders’ equity  592,291         578,560        
Total liabilities and shareholders’ equity $5,695,136        $4,703,154        
                    
Net interest income (3) / margin       38,205  2.84%        34,325  3.15%  
Less tax equivalent adjustment (3)       (96)          (120)    
Net interest income      $38,109          $34,205     

 

____________________
 (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 $2,567,000 for the fourth quarter of 2021 (of which $2,211,000 was from PPP loans), compared to $2,120,000 for the fourth quarter of 2020 (of which $1,935,000 was from PPP loans). Prepayment fees totaled $397,000 for the fourth quarter of 2021, compared to $257,000 for the fourth 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 
  December 31, 2021 September 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) $2,876,121  $35,762  4.93%  $2,771,541  $36,207  5.18%  
Securities - taxable  660,663   2,686  1.61%   557,890   2,320  1.65%  
Securities - exempt from Federal tax (3)  54,965   457  3.30%   58,679   485  3.28%  
Other investments and interest-bearing deposits                   
in other financial institutions  1,744,380   1,147  0.26%   1,390,464   998  0.28%  
Total interest earning assets (3)  5,336,129   40,052  2.98%   4,778,574   40,010  3.32%  
Cash and due from banks  38,178         37,963        
Premises and equipment, net  9,755         9,962        
Goodwill and other intangible assets  181,777         182,501        
Other assets  129,297         130,239        
Total assets $5,695,136        $5,139,239        
                    
Liabilities and shareholders’ equity:                     
Deposits:                     
Demand, noninterest-bearing $1,979,940        $1,835,219        
                    
Demand, interest-bearing  1,346,878   559  0.16%   1,142,762   473  0.16%  
Savings and money market  1,451,230   582  0.16%   1,234,109   513  0.16%  
Time deposits - under $100  13,766   5  0.14%   14,721   7  0.19%  
Time deposits - $100 and over  118,089   116  0.39%   132,247   147  0.44%  
CDARS - money market and time deposits  35,301   2  0.02%   37,257   1  0.01%  
Total interest-bearing deposits  2,965,264   1,264  0.17%   2,561,096   1,141  0.18%  
Total deposits  4,945,204   1,264  0.10%   4,396,315   1,141  0.10%  
                    
Subordinated debt, net of issuance costs  39,896   583  5.80%   39,851   583  5.80%  
Short-term borrowings  52     0.00%   55   1  7.21%  
Total interest-bearing liabilities  3,005,212   1,847  0.24%   2,601,002   1,725  0.26%  
Total interest-bearing liabilities and demand,                   
noninterest-bearing / cost of funds  4,985,152   1,847  0.15%   4,436,221   1,725  0.15%  
Other liabilities  117,693         117,006        
Total liabilities  5,102,845         4,553,227        
Shareholders’ equity  592,291         586,012        
Total liabilities and shareholders’ equity $5,695,136        $5,139,239        
                    
Net interest income (3) / margin       38,205  2.84%        38,285  3.18%  
Less tax equivalent adjustment (3)       (96)          (103)    
Net interest income      $38,109          $38,182     

 

____________________
 (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 $2,567,000 for the fourth quarter of 2021 (of which $2,211,000 was from PPP loans), compared to $2,809,000 for the third quarter of 2021 (of which $2,508,000 was from PPP loans). Prepayment fees totaled $397,000 for the fourth quarter of 2021, compared to $1,282,000 for the third quarter of 2021.
 (3)Reflects the FTE adjustment for Federal tax-exempt income based on a 21% tax rate.


  For the Year Ended  For the Year Ended  
  December 31, 2021 December 31, 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) $2,766,321  $139,244  5.03%  $2,631,495  $133,169  5.06%  
Securities - taxable  534,387   8,678  1.62%   578,506   11,637  2.01%  
Securities - exempt from Federal tax (3)  60,566   1,995  3.29%   74,849   2,415  3.23%  
Other investments, interest-bearing deposits in other                   
financial institutions and Federal funds sold  1,444,356   3,758  0.26%   786,955   3,757  0.48%  
Total interest earning assets (3)  4,805,630   153,675  3.20%   4,071,805   150,978  3.71%  
Cash and due from banks  39,841         40,401        
Premises and equipment, net  10,056         9,497