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Heritage Commerce Corp Earns $8.8 Million for the Second Quarter of 2021, and $20.0 Million for the First Six Months of 2021
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Rhea-AI Summary
Heritage Commerce Corp (HTBK) reported second quarter 2021 net income of $8.8 million ($0.15 per diluted share), down from $10.6 million ($0.18) a year prior. Year-to-date net income reached $20 million ($0.33), up from $12.5 million ($0.21). The company set aside $4 million for a legal settlement. Core loans rose $65.6 million (3%) year-over-year, with total loans increasing by $138.4 million (5%). Total deposits surged by $444.2 million (11%). Nonperforming assets declined to $6.2 million (32% decrease). The bank continues to manage strong credit quality and a diversified loan portfolio amidst economic recovery.
Positive
Net income for Q2 2021 increased to $8.8 million, compared to $10.6 million in Q2 2020, and $20 million for six months, up from $12.5 million.
Core loans rose by $65.6 million (3%) year-over-year and total loans increased by $138.4 million (5%).
Total deposits climbed by $444.2 million (11%) year-over-year.
Nonperforming assets decreased to $6.2 million, a 32% decrease from Q2 2020.
Negative
Net income per diluted share declined to $0.15 in Q2 2021 from $0.18 in Q2 2020 and $0.19 in Q1 2021.
The company's efficiency ratio worsened to 69.58% in Q2 2021 from 56.76% in Q2 2020, largely due to a $4 million legal reserve.
SAN JOSE, Calif., July 22, 2021 (GLOBE NEWSWIRE) -- Heritage Commerce Corp (Nasdaq: HTBK), the holding company (the “Company”) for Heritage Bank of Commerce (the “Bank”), today announced second quarter 2021 net income of $8.8 million, or $0.15 per average diluted common share, compared to $10.6 million, or $0.18 per average diluted common share, for the second quarter of 2020, and $11.2 million, or $0.19 per average diluted common share, for the first quarter of 2021. For the six months ended June 30, 2021, net income was $20.0 million, or $0.33 per average diluted common share, compared to $12.5 million, or $0.21 per average diluted common share, for the six months ended June 30, 2020. Earnings for the second quarter and first six months of 2021 included a $4.0 million reserve for a legal settlement as noninterest expense, which was previously disclosed in the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 7, 2021. Earnings for the first six months of 2020 were impacted by the effect of $14.4 million in pre-tax current expected credit losses (“CECL”) related provision for credit losses on loans, driven by forecasted effects on economic activity from the Coronavirus pandemic and $2.5 million of pre-tax merger-related costs in the first six months of 2020. All results are unaudited.
“Reflective of an improving local economy, we delivered solid second quarter earnings, supported by higher levels of loans on both a year-over-year and linked quarter basis. Core loans, excluding Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans and residential mortgage loans, increased by $65.6 million, or 3%, from a year ago, and increased by $59.6 million, or 3%, from the first quarter of 2021. Total loans increased by $138.4 million, or 5%, from a year ago, and increased by $120.1 million, or 4%, from the first quarter of 2021, while total deposits were higher by $444.2 million, or 11%, year-over-year, and increased $65.4 million, or 2%, from the first quarter of 2021. Our disciplined approach to managing core operating expenses also contributed to profitability during the second quarter of 2021,” said Mr. Walter Kaczmarek, President and Chief Executive Officer. “In addition, second quarter results benefitted from the recapture of ($493,000) in credit losses on loans, compared to a provision for credit losses on loans of $1.1 million taken in the second quarter of 2020.”
“From the onset of the pandemic, we have been an active participant in the SBA PPP loan program,” said Mr. Kaczmarek. “PPP loans generated interest and fee income of $2.7 million during the second quarter of 2021, and $6.9 million for the first six months of 2021.” As of June 30, 2021, the Company had a total of $286.5 million in PPP loans outstanding and $6.9 million of remaining net deferred fees outstanding.
“Our credit quality remained strong, as nonperforming assets (“NPAs”) declined ($2.9) million, or (32%), at June 30, 2021 to $6.2 million, from $9.1 million at June 30, 2020, and increased $587,000 from $5.6 million at March 31, 2021. In addition, net recoveries totaled $153,000 for the current quarter, compared to $373,000 in net charge-offs for the second quarter of 2020, and net recoveries of $1.4 million for the first quarter of 2021,” said Mr. Kaczmarek. “We believe that with our healthy capital and liquidity positions, strong earnings power, conservative credit culture, and dedicated employees, we remain well positioned for growth as we head into the second half of the year.”
SBA PPP Loan Program:
In response to economic stimulus laws passed by Congress in 2020 and 2021, the Bank has now funded two rounds of PPP loans. At June 30, 2021, after accounting for loan payoffs and SBA loan forgiveness, “Round 1” PPP loans were $91.9 million and “Round 2” PPP loans were $194.6 million. In total the Bank had $286.5 million in outstanding PPP loan balances at June 30, 2021. The following table shows interest income, fee income and deferred origination costs generated by the PPP loans, and the PPP loan outstanding balances and related deferred fees and costs for the periods indicated:
At or For the Quarter Ended:
At or For the Six Months Ended:
PPP LOANS
June 30,
March 31,
June 30,
June 30,
June 30,
(in $000’s, unaudited)
2021
2021
2020
2021
2020
Interest income
$
831
$
784
$
582
$
1,615
$
582
Fee income, net
1,876
3,401
637
5,276
637
Total
$
2,707
$
4,185
$
1,219
$
6,891
$
1,219
Deferred origination costs (contra expense)
$
41
$
766
$
1,240
$
807
$
1,240
PPP loans outstanding at period end:
Round 1
$
91,849
$
170,391
$
324,550
$
91,849
$
324,550
Round 2
194,612
179,353
—
194,612
—
Total
$
286,461
$
349,744
$
324,550
$
286,461
$
324,550
Deferred fees outstanding at period end
$
(7,747
)
$
(8,757
)
$
(10,430
)
$
(7,747
)
$
(10,430
)
Deferred costs outstanding at period end
869
1,099
1,155
869
1,155
Total
$
(6,878
)
$
(7,658
)
$
(9,275
)
$
(6,878
)
$
(9,275
)
On December 27, 2020, the President signed into law the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Act”) which revised rules regarding PPP loans, provided supplemental PPP loan funding for new and existing borrowers and expanded the types of business expenses that are forgivable under the PPP program. On January 6, 2021, Treasury issued new Interim Final Rules (“IFRs”) to address the Act’s creation of PPP Second Draw Loans as well as other changes to the PPP program requirements. The IFRs codified aspects of the PPP program not specifically addressed in the Act:
Extending the application deadline to submit a PPP loan application to May 31, 2021, and the SBA approval deadline to June 30, 2021.
Allowing new PPP borrowers to use either 2019 or 2020 for business records in determining maximum loan amount.
Maintaining a $2 million loan amount necessity certification safe harbor.
Allowing borrowers who returned or did not originally accept PPP loan proceeds to reapply for receipt of those funds.
Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”):
On April 7, 2020, U.S. banking agencies issued the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus. The statement describes accounting for COVID-19-related loan modifications and clarifies the interaction between current accounting rules and the temporary relief provided by the CARES Act. Initially, the Bank made accommodations for payment deferrals for a number of customers with a window of up to 90 days, with the potential of an additional 90 days of payment deferral (180 days maximum) upon application. The Bank also waived all customary applicable fees. Of the loans for which deferrals were originally granted, nearly all have returned to regular payment status. At June 30, 2021, there were three remaining second deferments totaling $1.8 million.
In addition to its portfolio of SBA PPP loans, the Bank also had a portfolio of SBA 7(a) loans totaling $46.5 million as of June 30, 2021. The following table reflects the status of these SBA 7(a) loans as of June 30, 2021:
SBA 7(a) LOANS
Number
(in $000’s, unaudited)
Balance
of Loans
SBA 7(a) loans (monthly payments are made
through the CARES Act)
$
28,075
158
CARES extended SBA payment
17,858
81
Payments Not Made / NSF / Returned
410
2
New loans / No payment due
120
5
Total Portfolio
$
46,463
246
The CARES Act was amended in December 2020 to include $3.5 billion of extended debt relief payments for SBA borrowers. The program was subsequently modified by the SBA to provide two additional monthly payments of principal and interest totaling a maximum of $9,000 per month and an additional three payments to borrowers considered “underserved” as defined in the amended legislation.
Credit Quality and Performance
At June 30, 2021, NPAs declined by ($2.9) million, or (32%), to $6.2 million, compared to $9.1 million at June 30, 2020, and increased by $587,000, or 10% from $5.6 million at March 31, 2021. The change in NPAs at June 30, 2021, compared to June 30, 2020 and March 31, 2021, resulted primarily from the sale of underlying properties and the payoff of related loans and the paydown of other loans, partially offset by additional loans that went on NPA status during the first six months of 2021. Classified assets increased to $32.4 million, or 0.64% of total assets, at June 30, 2021, compared to $31.5 million, or 0.68% of total assets, at June 30, 2020, and decreased from $33.4 million, or 0.67% of total assets, at March 31, 2021.
The Company continues to monitor portfolio loans made to commercial customers with businesses in higher risk sectors due to the COVID-19 pandemic. The following table provides a breakdown of such loans as a percentage of total loans for the periods indicated:
% of Total
% of Total
% of Total
Loans at
Loans at
Loans at
HIGHER RISK SECTORS (unaudited)
June 30, 2021
March 31, 2021
June 30, 2020
Health care and social assistance:
Offices of dentists
1.88
%
2.06
%
1.79
%
Offices of physicians (except mental health specialists)
0.76
%
0.89
%
0.76
%
Other community housing services
0.23
%
0.24
%
0.27
%
All others
2.12
%
1.99
%
2.21
%
Total health care and social assistance
4.99
%
5.18
%
5.03
%
Retail trade:
Gasoline stations with convenience stores
2.42
%
2.54
%
1.90
%
All others
1.91
%
2.16
%
2.44
%
Total retail trade
4.33
%
4.70
%
4.34
%
Accommodation and food services:
Full-service restaurants
1.41
%
1.56
%
1.38
%
Limited-service restaurants
0.56
%
0.64
%
0.79
%
Hotels (except casino hotels) and motels
0.81
%
0.86
%
0.89
%
All others
0.68
%
0.75
%
0.70
%
Total accommodation and food services
3.46
%
3.81
%
3.76
%
Educational services:
Elementary and secondary schools
0.58
%
0.58
%
0.65
%
Education support services
0.44
%
0.46
%
0.40
%
All others
0.20
%
0.24
%
0.24
%
Total educational services
1.22
%
1.28
%
1.29
%
Arts, entertainment, and recreation
1.31
%
1.40
%
1.26
%
Purchased participations in micro loan portfolio
0.39
%
0.50
%
0.80
%
Total higher risk sectors
15.70
%
16.87
%
16.48
%
The decrease in higher risk sector loans at June 30, 2021, compared to June 30, 2020 and March 31, 2021 was primarily due to the forgiveness of PPP loans.
Second Quarter Ended June 30, 2021 Operating Results, Balance Sheet Review, Capital Management, and Credit Quality (as of, or for the periods ended June 30, 2021, compared to June 30, 2020, and March 31, 2021, except as noted):
Operating Results:
Diluted earnings per share were $0.15 for the second quarter of 2021, compared to $0.18 for the second quarter of 2020, and $0.19 for the first quarter of 2021. Diluted earnings per share were $0.33 for the first six months of 2021, compared to $0.21 for the first six months of 2020.
The following table indicates the ratios for the return on average tangible assets and the return on average tangible equity for the periods indicated:
For the Quarter Ended
For the Six Months Ended
June 30,
March 31,
June 30,
June 30,
June 30,
(unaudited)
2021
2021
2020
2021
2020
Return on average tangible assets
0.73
%
0.99
%
1.01
%
0.85
%
0.62
%
Return on average tangible equity
8.84
%
11.50
%
11.06
%
10.16
%
6.45
%
•
The decrease in the return of average tangible assets and the return on average tangible equity for the second quarter of 2021, compared to the second quarter of 2020 and the first quarter of 2021, was primarily due to the $4.0 million reserve for a legal settlement.
Net interest income, before provision for credit losses on loans, remained relatively flat at $34.9 million for the second quarter of 2021, compared to $34.9 million for the second quarter of 2020 and $35.0 million for the first quarter of 2021. Net interest income, before provision for credit losses on loans decreased (5%) to $69.8 million for the first six months of 2021, compared to $73.5 million for the first six months of 2020, primarily due to decreases in the prime rate and decreases in yields on investment securities and overnight funds, which were partially offset by interest income and fees on PPP loans.
The fully tax equivalent (“FTE”) net interest margin contracted 46 basis points to 3.00% for the second quarter of 2021, from 3.46% for the second quarter of 2020, primarily due to declines in the average yields on loans, investment securities, and overnight funds, partially offset by a decline in the cost of interest-bearing liabilities and higher interest income and fees on PPP loans. The FTE net interest margin decreased 22 basis points for the second quarter of 2021 from 3.22% for the first quarter of 2021, primarily due to declines in the average yields on loans, and a decrease in fees on PPP loans.
For the first six months of 2021, the FTE net interest margin contracted 73 basis points to 3.10%, compared to 3.83% for the first six months of 2020, primarily due to the impact of decreases in the yields on loans, investment securities, and overnight funds, partially offset by additional interest and fee income from PPP loans.
The following tables present the average balance of loans outstanding, interest income, and the average yield for the periods indicated:
The average yield on the total loan portfolio decreased to 4.80% for the second quarter of 2021, compared to 4.92% for the second quarter of 2020, primarily due to a decline in the average yield on loans, and an increase in the average balances of lower yielding residential mortgages and PPP loans relative to the average yield on core bank and asset-based lending loans, partially offset by an increase in interest and fees on PPP loans.
For the Quarter Ended
For the Quarter Ended
June 30, 2021
June 30, 2020
Average
Interest
Average
Average
Interest
Average
(in $000’s, unaudited)
Balance
Income
Yield
Balance
Income
Yield
Loans, core bank and asset-based lending
$
2,293,398
$
26,004
4.55
%
$
2,369,004
$
27,694
4.70
%
SBA PPP loans
334,604
831
1.00
%
231,251
582
1.01
%
PPP fees, net
—
1,876
2.25
%
—
637
1.11
%
Bay View Funding factored receivables
48,993
2,772
22.69
%
44,574
2,562
23.12
%
Purchased residential mortgages
113,467
981
3.47
%
31,219
197
2.54
%
Purchased commercial real estate ("CRE") loans
14,602
110
3.02
%
25,542
210
3.31
%
Loan fair value mark / accretion
(10,643
)
865
0.15
%
(14,497
)
963
0.16
%
Total loans (includes loans held-for-sale)
$
2,794,421
$
33,439
4.80
%
$
2,687,093
$
32,845
4.92
%
•
The average yield on the total loan portfolio decreased to 4.80% for the second quarter of 2021, compared to 5.24% for the first quarter of 2021, primarily due to a decline in the average yield on loans, and an increase in the average balance of lower yielding residential mortgages, and a decrease in fees on PPP loans.
For the Quarter Ended
For the Quarter Ended
June 30, 2021
March 31, 2021
Average
Interest
Average
Average
Interest
Average
(in $000’s, unaudited)
Balance
Income
Yield
Balance
Income
Yield
Loans, core bank and asset-based lending
$
2,293,398
$
26,004
4.55
%
$
2,225,342
$
25,581
4.66
%
SBA PPP loans
334,604
831
1.00
%
319,168
784
1.00
%
PPP fees, net
—
1,876
2.25
%
—
3,401
4.32
%
Bay View Funding factored receivables
48,993
2,772
22.69
%
48,094
2,650
22.35
%
Purchased residential mortgages
113,467
981
3.47
%
22,194
119
2.17
%
Purchased CRE loans
14,602
110
3.02
%
17,162
172
4.06
%
Loan fair value mark / accretion
(10,643
)
865
0.15
%
(11,626
)
1,129
0.21
%
Total loans (includes loans held-for-sale)
$
2,794,421
$
33,439
4.80
%
$
2,620,334
$
33,836
5.24
%
•
The average yield on the total loan portfolio decreased to 5.01% for the six months ended June 30, 2021, compared to 5.23% for the six months ended June 30, 2020, primarily due to decreases in the prime rate on loans, and an increase in the average balance of lower yielding PPP loans, partially offset by an increase in fees on PPP loans.
For the Six Months Ended
For the Six Months Ended
June 30, 2021
June 30, 2020
Average
Interest
Average
Average
Interest
Average
(in $000’s, unaudited)
Balance
Income
Yield
Balance
Income
Yield
Loans, core bank and asset-based lending
$
2,259,558
$
51,588
4.60
%
$
2,395,469
$
57,798
4.85
%
SBA PPP loans
326,928
1,615
1.00
%
115,669
582
1.01
%
PPP fees, net
—
5,276
3.25
%
—
637
1.11
%
Bay View Funding factored receivables
48,546
5,422
22.52
%
46,022
5,439
23.77
%
Purchased residential mortgages
68,083
1,099
3.26
%
32,147
427
2.67
%
Purchased CRE loans
15,875
281
3.57
%
26,441
459
3.49
%
Loan fair value mark / accretion
(11,132
)
1,994
0.18
%
(15,339
)
2,285
0.19
%
Total loans (includes loans held-for-sale)
$
2,707,858
$
67,275
5.01
%
$
2,600,409
$
67,627
5.23
%
•
In aggregate, the original total net purchase discount on loans from the Focus Business Bank, Tri-Valley Bank, United American Bank, and Presidio Bank loan portfolios was $25.2 million. In aggregate, the remaining net purchase discount on total loans acquired was $10.1 million at June 30, 2021.
The average cost of total deposits was 0.11% for the second quarter of 2021, compared to 0.17% for the second quarter of 2020 and 0.12% for the first quarter of 2021. The average cost of total deposits was 0.12% for the six months ended June 30, 2021, compared to 0.19% for the six months ended June 30, 2020.
During the second quarter of 2021, there was a recapture of ($493,000) in credit losses on loans, primarily due to recoveries on previously charged-off loans, compared to a $1.1 million provision for credit losses on loans taken in the second quarter of 2020, and the recapture of ($1.5) million in credit losses on loans for the first quarter of 2021. There was a recapture of ($2.0) million in credit losses on loans for the six months ended June 30, 2021, compared to a $14.4 million provision for credit losses on loans for the six months ended June 30, 2020.
The higher provision for credit losses on loans for the first six months of 2020 was driven primarily by a significantly deteriorated economic outlook resulting from the Coronavirus pandemic. Ongoing impacts of the CECL methodology will be dependent upon changes in economic conditions and forecasts, originated and acquired loan portfolio composition, portfolio duration, and other factors.
Total noninterest income was $2.2 million for the second quarter of 2021, compared to $2.1 million for the second quarter of 2020 and $2.3 million for the first quarter of 2021.
For the six months ended June 30, 2021, total noninterest income decreased to $4.5 million, compared to $5.3 million for the six months ended June 30, 2020, primarily as a result of lower service charges and fees on deposits during the first six months of 2021, and a $791,000 gain on disposition of foreclosed assets and a $270,000 gain on the sale of securities during the first six months of 2020.
Total noninterest expense for the second quarter of 2021 increased to $25.8 million, compared to $21.0 million for the second quarter of 2020, primarily due to a $4.0 million reserve for a legal settlement. Noninterest expense for the second quarter of 2021 increased from $23.2 million for the first quarter of 2021, primarily due to the reserve for a legal settlement, partially offset by lower salaries and employee benefits during the second quarter of 2021.
Noninterest expense for the six months ended June 30, 2021 increased to $49.0 million, compared to $46.8 million for the six months ended June 30, 2020, primarily due to a reserve for a legal settlement, partially offset by higher merger-related costs during the first six months of 2020.
The following table reflects pre-tax merger-related costs resulting from the merger with Presidio for the periods indicated:
For the Quarter Ended
For the Six Months Ended
MERGER-RELATED COSTS
June 30,
March 31,
June 30,
June 30,
June 30,
(in $000’s, unaudited)
2021
2021
2020
2021
2020
Salaries and employee benefits
$
—
$
—
$
—
$
—
$
356
Other
(24
)
58
59
34
2,127
Total merger-related costs
$
(24
)
$
58
$
59
$
34
$
2,483
•
Full time equivalent employees were 330 at June 30, 2021, and 340 at June 30, 2020, and 325 at March 31, 2021.
The efficiency ratio was 69.58% for the second quarter of 2021, compared to 56.76% for the second quarter of 2020, and 62.38% for the first quarter of 2021. The efficiency ratio for the six months ended June 30, 2021 was 65.97%, compared to 59.38% for the six months ended June 30, 2020. Excluding the $4.0 million reserve for a legal settlement, the efficiency ratio was 58.78% for the second quarter of 2021, and 60.59% for the first six months of 2021.
Income tax expense was $3.0 million for the second quarter of 2021, compared to $4.3 million for both the second quarter of 2020 and the first quarter of 2021. The effective tax rate for the second quarter of 2021 was 25.1%, compared to 28.7% for the second quarter of 2020, and 27.8% for the first quarter of 2021. Income tax expense for the six months ended June 30, 2021 was $7.3 million, compared to $5.1 million for the six months ended June 30, 2020. The effective tax rate for the six months ended June 30, 2021 was 26.7%, compared to 29.2% for the six months ended June 30, 2020.
The difference in the effective tax rate for the periods reported compared to the combined Federal and state statutory tax rate of 29.6% is primarily the result of the Company’s investment in life insurance policies whose earnings are not subject to taxes, tax credits related to investments in low-income housing limited partnerships (net of low-income housing investment losses), and tax-exempt interest income earned on municipal bonds.
Balance Sheet Review, Capital Management and Credit Quality:
Total assets reached $5.1 billion at June 30, 2021, an increase of 10% from $4.61 billion at June 30, 2020, and increased 1% from $5.00 billion at March 31, 2021.
Securities available-for-sale, at fair value, totaled $146.0 million at June 30, 2021, compared to $323.6 million at June 30, 2020, and $196.7 million at March 31, 2021. At June 30, 2021, the Company’s securities available-for-sale portfolio was comprised of $130.9 million of agency mortgage-backed securities (all issued by U.S. Government sponsored entities), and $15.1 million of U.S. Treasury securities. The pre-tax unrealized gain on securities available-for-sale at June 30, 2021 was $4.3 million, compared to a pre-tax unrealized gain on securities available-for-sale of $8.7 million at June 30, 2020, and a pre-tax unrealized gain on securities available-for-sale of $4.9 million at March 31, 2021. All other factors remaining the same, when market interest rates are decreasing, the Company will experience a higher unrealized gain (or a lower unrealized loss) on the securities portfolio.
At June 30, 2021, securities held-to-maturity, at amortized cost, totaled $421.3 million, compared to $322.7 million at June 30, 2020, and $306.5 million at March 31, 2021. At June 30, 2021, the Company’s securities held-to-maturity portfolio was comprised of $361.1 million of agency mortgage-backed securities, and $60.2 million of tax-exempt municipal bonds. During the second quarter of 2021, the Company purchased $141.6 million of agency mortgage-backed securities (securities held-to-maturity), with a book yield of 1.53% and an average life of 5.84 years. During the first six months of 2021, the Company purchased $182.0 million of agency mortgage-backed securities (securities held-to-maturity), with a book yield of 1.53% and an average life of 5.36 years.
The loan portfolio remains well-diversified as reflected in the following table which summarizes the distribution of loans, excluding loans held-for-sale, and the percentage of distribution in each category for the periods indicated:
LOANS
June 30, 2021
March 31, 2021
June 30, 2020
(in $000’s, unaudited)
Balance
% to Total
Balance
% to Total
Balance
% to Total
Commercial
$
557,686
20
%
$
559,698
20
%
$
553,843
21
%
Paycheck Protection Program Loans
286,461
10
%
349,744
13
%
324,550
12
%
Real estate:
CRE - owner occupied
583,091
21
%
568,637
21
%
553,463
21
%
CRE - non-owner occupied
742,135
26
%
700,117
26
%
725,776
27
%
Land and construction
129,426
4
%
159,504
6
%
138,284
5
%
Home equity
107,873
4
%
104,303
4
%
112,679
4
%
Multifamily
198,771
7
%
168,917
6
%
169,637
6
%
Residential mortgages
205,904
7
%
82,181
3
%
95,033
3
%
Consumer and other
21,519
1
%
19,872
1
%
22,759
1
%
Total Loans
2,832,866
100
%
2,712,973
100
%
2,696,024
100
%
Deferred loan costs (fees), net
(8,070
)
—
(8,266
)
—
(9,635
)
—
Loans, net of deferred costs and fees
$
2,824,796
100
%
$
2,704,707
100
%
$
2,686,389
100
%
•
Loans, excluding loans held-for-sale, increased $138.4 million, or 5%, to $2.82 billion at June 30, 2021, compared to $2.69 billion at June 30, 2020, and increased $120.1 million, or 4% from $2.70 billion at March 31, 2021. Total loans at June 30, 2021 included $286.5 million of PPP loans, compared to $324.6 million of PPP loans at June 30, 2020 and $349.7 million of PPP loans at March 31, 2021.
•
Commercial and industrial line usage remained flat at 27% at June 30, 2021 and June 30, 2020, and 28% at March 31, 2021.
•
At June 30, 2021, 44% of the CRE loan portfolio was secured by owner-occupied real estate.
•
At June 30, 2021, approximately 44% of the Company’s loan portfolio consisted of floating interest rate loans.
The following table summarizes the allowance for credit losses on loans for the periods indicated:
For the Quarter Ended
For the Six Months Ended
ALLOWANCE FOR CREDIT LOSSES ON LOANS
June 30,
March 31,
June 30,
June 30,
June 30,
(in $000’s, unaudited)
2021
2021
2020
2021
2020
Balance at beginning of period
$
44,296
$
44,400
$
44,703
$
44,400
$
23,285
Charge-offs during the period
(105
)
(263
)
(465
)
(368
)
(1,138
)
Recoveries during the period
258
1,671
92
1,929
343
Net recoveries (charge-offs) during the period
153
1,408
(373
)
1,561
(795
)
Impact of adopting Topic 326
—
—
—
8,570
Provision for (recapture of) credit losses on loans during the period
(493
)
(1,512
)
1,114
(2,005
)
14,384
Balance at end of period
$
43,956
$
44,296
$
45,444
$
43,956
$
45,444
Total loans, net of deferred fees
$
2,824,796
$
2,704,707
$
2,686,389
$
2,824,796
$
2,686,389
Total nonperforming loans
$
6,180
$
5,593
$
9,125
$
6,180
$
9,125
Allowance for credit losses on loans ("ACLL") to total loans
1.56
%
1.64
%
1.69
%
1.56
%
1.69
%
ACLL to total nonperforming loans
711.26
%
791.99
%
498.02
%
711.26
%
498.02
%
•
The ACLL was 1.56% of total loans at June 30, 2021 and the ACLL to total nonperforming loans was 711.26% at June 30, 2021. The ACLL was 1.69% of total loans and the ACLL to nonperforming loans was 498.02% at June 30, 2020. The ACLL was 1.64% of total loans at March 31, 2021 and the ACLL to total nonperforming loans was 791.99% at March 31, 2021. The ACLL to total loans, excluding PPP loans, was 1.73% at June 30, 2021, 1.92% at June 30, 2020 and 1.88% at March 31, 2021.
•
The following table shows the drivers of change in ACLL under CECL for each of the first two quarters of 2021:
DRIVERS OF CHANGE IN ACLL UNDER CECL
(in $000’s, unaudited)
ALLL at December 31, 2020
$
44,400
Net recoveries during the first quarter of 2021
1,408
Portfolio changes during the first quarter of 2021
313
Economic and qualitative factor changes during the first quarter of 2021
(1,825
)
ACLL at March 31, 2021
44,296
Net recoveries during the second quarter of 2021
153
Portfolio changes during the second quarter of 2021
2,153
Economic and qualitative factor changes during the second quarter of 2021
(2,646
)
ACLL at June 30, 2021
$
43,956
•
Net recoveries totaled $153,000 for the second quarter of 2021, compared to net charge-offs of $373,000 for the second quarter of 2020, and net recoveries of $1.4 million for the first quarter of 2021.
•
The following is a breakout of NPAs at the periods indicated:
End of Period:
NONPERFORMING ASSETS
June 30, 2021
March 31, 2021
June 30, 2020
(in $000’s, unaudited)
Balance
% of Total
Balance
% of Total
Balance
% of Total
CRE loans
$
2,923
47
%
$
2,973
53
%
$
3,679
40
%
Commercial loans
1,793
29
%
1,985
36
%
2,416
27
%
Restructured and loans over 90 days past due and still accruing
889
14
%
51
1
%
668
7
%
Consumer and other loans
407
7
%
407
7
%
1,464
16
%
Home equity loans
168
3
%
177
3
%
898
10
%
Total nonperforming assets
$
6,180
100
%
$
5,593
100
%
$
9,125
100
%
•
NPAs totaled $6.2 million, or 0.12% of total assets, at June 30, 2021, compared to $9.1 million, or 0.20% of total assets, at June 30, 2020, $5.6 million, or 0.11% of total assets, at March 31, 2021.
•
There were no foreclosed assets on the balance sheet at June 30, 2021, June 30, 2020, or March 31, 2021.
•
Classified assets increased to $32.4 million, or 0.64% of total assets, at June 30, 2021, compared to $31.5 million, or 0.68% of total assets, at June 30, 2020, and decreased from $33.4 million, or 0.67% of total assets, at March 31, 2021.
The following table summarizes the distribution of deposits and the percentage of distribution in each category for the periods indicated:
DEPOSITS
June 30, 2021
March 31, 2021
June 30, 2020
(in $000’s, unaudited)
Balance
% to Total
Balance
% to Total
Balance
% to Total
Demand, noninterest-bearing
$
1,840,516
42
%
$
1,813,962
42
%
$
1,714,058
42
%
Demand, interest-bearing
1,140,867
26
%
1,101,807
26
%
934,780
24
%
Savings and money market
1,174,587
27
%
1,189,566
28
%
1,091,740
28
%
Time deposits — under $250
42,118
1
%
42,596
1
%
49,493
2
%
Time deposits — $250 and over
110,111
3
%
102,508
2
%
93,822
3
%
CDARS — interest-bearing demand,
money market and time deposits
36,273
1
%
28,663
1
%
16,333
1
%
Total deposits
$
4,344,472
100
%
$
4,279,102
100
%
$
3,900,226
100
%
•
Total deposits increased $444.2 million, or 11%, to $4.34 billion at June 30, 2021, compared to $3.90 billion at June 30, 2020. Total deposits increased $65.4 million, or 2%, from $4.28 billion at March 31, 2021.
•
Deposits, excluding all time deposits and CDARS deposits, increased $415.4 million, or 11%, to $4.16 billion at June 30, 2021, compared to $3.74 billion at June 30, 2020. Deposits, excluding all time deposits and CDARS increased $50.6 million, or 1%, to $4.16 billion at June 30, 2021, compared to $4.11 billion at March 31, 2021.
The Company’s consolidated capital ratios exceeded regulatory guidelines and the Bank’s capital ratios exceeded regulatory guidelines under the Basel III prompt corrective action (“PCA”) regulatory guidelines for a well-capitalized financial institution, and the Basel III minimum regulatory requirements at June 30, 2021, as reflected in the following table:
Well-capitalized
Financial
Institution
Basel III
Heritage
Heritage
Basel III PCA
Minimum
Commerce
Bank of
Regulatory
Regulatory
CAPITAL RATIOS (unaudited)
Corp
Commerce
Guidelines
Requirement (1)
Total Capital
15.6
%
15.0
%
10.0
%
10.5
%
Tier 1 Capital
13.3
%
13.9
%
8.0
%
8.5
%
Common Equity Tier 1 Capital
13.3
%
13.9
%
6.5
%
7.0
%
Tier 1 Leverage
8.6
%
9.0
%
5.0
%
4.0
%
(1) Basel III minimum regulatory requirements for both the Company and the Bank include a 2.5% capital conservation buffer, except the leverage ratio.
The following table reflects the components of accumulated other comprehensive loss, net of taxes, for the periods indicated:
ACCUMULATED OTHER COMPREHENSIVE LOSS
June 30,
March 31,
June 30,
(in $000’s, unaudited)
2021
2021
2020
Unrealized gain on securities available-for-sale
$
2,673
$
3,113
$
5,767
Remaining unamortized unrealized gain on securities
available-for-sale transferred to held-to-maturity
243
252
280
Split dollar insurance contracts liability
(6,142
)
(6,148
)
(4,865
)
Supplemental executive retirement plan liability
(8,504
)
(8,699
)
(6,707
)
Unrealized gain on interest-only strip from SBA loans
198
214
345
Total accumulated other comprehensive loss
$
(11,532
)
$
(11,268
)
$
(5,180
)
Tangible equity was $400.6 million at June 30, 2021, compared to $388.6 million at June 30, 2020, and $398.1 million at March 31, 2021. Tangible book value per share was $6.65 at June 30, 2021, compared to $6.49 at June 30, 2020, and $6.64 at March 31, 2021.
Heritage Commerce Corp, a bank holding company established in October 1997, is the parent company of Heritage Bank of Commerce, established in 1994 and headquartered in San Jose, CA with full-service branches in Danville, Fremont, Gilroy, Hollister, Livermore, Los Altos, Los Gatos, Morgan Hill, Palo Alto, Pleasanton, Redwood City, San Francisco, San Jose, San Mateo, San Rafael, Sunnyvale, and Walnut Creek. Heritage Bank of Commerce is an SBA Preferred Lender. Bay View Funding, a subsidiary of Heritage Bank of Commerce, is based in San Jose, CA and provides business-essential working capital factoring financing to various industries throughout the United States. For more information, please visit www.heritagecommercecorp.com.
Forward-Looking Statement Disclaimer
These forward-looking statements are subject to various risks and uncertainties that may be outside our control and our actual results could differ materially from our projected results. Risks and uncertainties that could cause our financial performance to differ materially from our goals, plans, expectations and projections expressed in forward-looking statements include those set forth in our filings with the Securities and Exchange Commission (“SEC”), Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, and the following: (1) current and future economic and market conditions in the United States generally or in the communities we serve, including the effects of declines in property values and overall slowdowns in economic growth should these events occur; (2) effects of and changes in trade, monetary and fiscal policies and laws, including the interest rate policies of the Federal Open Market Committee of the Federal Reserve Board; (3) our ability to anticipate interest rate changes and manage interest rate risk; (4) changes in inflation, interest rates, and market liquidity which may impact interest margins and impact funding sources; (5) volatility in credit and equity markets and its effect on the global economy; (6) our ability to effectively compete with other banks and financial services companies and the effects of competition in the financial services industry on our business; (7) our ability to achieve loan growth and attract deposits; (8) risks associated with concentrations in real estate related loans; (9) the relative strength or weakness of the commercial and real estate markets where our borrowers are located, including related asset and market prices; (10) other than temporary impairment charges to our securities portfolio; (11) changes in the level of NPAs and charge offs and other credit quality measures, and their impact on the adequacy of the Company’s allowance for credit losses and the Company’s provision for credit losses; (12) increased capital requirements for our continual growth or as imposed by banking regulators, which may require us to raise capital at a time when capital is not available on favorable terms or at all; (13) regulatory limits on Heritage Bank of Commerce’s ability to pay dividends to the Company; (14) changes in our capital management policies, including those regarding business combinations, dividends, and share repurchases; (15) operational issues stemming from, and/or capital spending necessitated by, the potential need to adapt to industry changes in information technology systems, on which we are highly dependent; (16) our inability to attract, recruit, and retain qualified officers and other personnel could harm our ability to implement our strategic plan, impair our relationships with customers and adversely affect our business, results of operations and growth prospects; (17) possible adjustment of the valuation of our deferred tax assets; (18) our ability to keep pace with technological changes, including our ability to identify and address cyber-security risks such as data security breaches, “denial of service” attacks, “hacking” and identity theft; (19) inability of our framework to manage risks associated with our business, including operational risk and credit risk; (20) risks of loss of funding of SBA or SBA loan programs, or changes in those programs; (21) compliance with governmental and regulatory requirements, including the Dodd-Frank Act and others relating to banking, consumer protection, securities, accounting and tax matters; (22) significant changes in applicable laws and regulations, including those concerning taxes, banking and securities; (23) effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; (24) costs and effects of legal and regulatory developments, including resolution of regulatory or other governmental inquiries, and the results of regulatory examinations or reviews; (25) the expense and uncertain resolution of litigation matters whether occurring in the ordinary course of business or otherwise; (26) availability of and competition for acquisition opportunities; (27) risks resulting from domestic terrorism; (28) risks of natural disasters (including earthquakes) and other events beyond our control; (29) the effect of the COVID-19 pandemic, and other infectious illness outbreaks that may arise in the future, on the Bank’s customers, employees, businesses, liquidity, financial results and overall condition and which has created significant uncertainties in U.S. and global markets, including our customers' ability to make timely payments on obligations, and operating expense due to alternative approaches to doing business; (30) changes in governmental policy and regulation, including measures taken in response to economic, business, political and social conditions, such as the SBA Paycheck Protection Program (“PPP”), the Federal Reserve Board's efforts to provide liquidity to the financial system and provide credit to private commercial and municipal borrowers, and other programs designed to address the effects of the COVID-19 pandemic; (31) the Bank's participation as a lender in the PPP and similar programs and its effect on the Bank's liquidity, financial results, businesses and customers, including the availability of program funds and the ability of customers to comply with requirements and otherwise perform with respect to loans obtained under such programs; (32) our success in managing the risks involved in the foregoing factors.
Provision for (recapture of) credit losses on loans
(493
)
(1,512
)
1,114
67
%
(144
)
%
(2,005
)
14,384
(114
)
%
Net interest income after provision
for credit losses on loans
35,369
36,470
33,826
(3
)
%
5
%
71,839
59,136
21
%
Noninterest income:
Service charges and fees on deposit accounts
659
601
650
10
%
1
%
1,260
1,619
(22
)
%
Increase in cash surrender value of
life insurance
458
456
458
0
%
0
%
914
916
0
%
Gain on proceeds from company owned life insurance
396
66
—
500
%
N/A
462
—
N/A
Servicing income
104
182
205
(43
)
%
(49
)
%
286
388
(26
)
%
Gain on sales of SBA loans
83
550
—
(85
)
%
N/A
633
67
845
%
Gain on sales of securities
—
—
170
N/A
(100
)
%
—
270
(100
)
%
Gain on the disposition of foreclosed assets
—
—
—
N/A
N/A
—
791
(100
)
%
Other
469
446
595
5
%
(21
)
%
915
1,220
(25
)
%
Total noninterest income
2,169
2,301
2,078
(6
)
%
4
%
4,470
5,271
(15
)
%
Noninterest expense:
Salaries and employee benefits
12,572
13,958
12,300
(10
)
%
2
%
26,530
26,503
0
%
Occupancy and equipment
2,247
2,274
1,766
(1
)
%
27
%
4,521
3,538
28
%
Professional fees
1,771
1,719
1,155
3
%
53
%
3,490
2,590
35
%
Other
9,185
5,293
5,791
74
%
59
%
14,478
14,155
2
%
Total noninterest expense
25,775
23,244
21,012
11
%
23
%
49,019
46,786
5
%
Income before income taxes
11,763
15,527
14,892
(24
)
%
(21
)
%
27,290
17,621
55
%
Income tax expense
2,950
4,323
4,274
(32
)
%
(31
)
%
7,273
5,142
41
%
Net income
$
8,813
$
11,204
$
10,618
(21
)
%
(17
)
%
$
20,017
$
12,479
60
%
PER COMMON SHARE DATA
(unaudited)
Basic earnings per share
$
0.15
$
0.19
$
0.18
(23
)
%
(19
)
%
$
0.33
$
0.21
59
%
Diluted earnings per share
$
0.15
$
0.19
$
0.18
(24
)
%
(19
)
%
$
0.33
$
0.21
57
%
Weighted average shares outstanding - basic
60,089,327
59,926,816
59,420,592
0
%
1
%
60,008,071
59,353,759
1
%
Weighted average shares outstanding - diluted
60,730,141
60,404,213
60,112,423
1
%
1
%
60,572,457
60,152,487
1
%
Common shares outstanding at period-end
60,202,766
59,932,334
59,856,767
0
%
1
%
60,202,766
59,856,767
1
%
Dividend per share
$
0.13
$
0.13
$
0.13
0
%
0
%
$
0.26
$
0.26
0
%
Book value per share
$
9.69
$
9.71
$
9.60
0
%
1
%
$
9.69
$
9.60
1
%
Tangible book value per share
$
6.65
$
6.64
$
6.49
0
%
2
%
$
6.65
$
6.49
2
%
KEY FINANCIAL RATIOS
(unaudited)
Annualized return on average equity
6.06
%
7.85
%
7.45
%
(23
)
%
(19
)
%
6.95
%
4.36
%
59
%
Annualized return on average tangible equity
8.84
%
11.50
%
11.06
%
(23
)
%
(20
)
%
10.16
%
6.45
%
58
%
Annualized return on average assets
0.70
%
0.95
%
0.96
%
(26
)
%
(27
)
%
0.82
%
0.59
%
39
%
Annualized return on average tangible assets
0.73
%
0.99
%
1.01
%
(26
)
%
(28
)
%
0.85
%
0.62
%
37
%
Net interest margin (FTE)
3.00
%
3.22
%
3.46
%
(7
)
%
(13
)
%
3.10
%
3.83
%
(19
)
%
Efficiency ratio
69.58
%
62.38
%
56.76
%
12
%
23
%
65.97
%
59.38
%
11
%
AVERAGE BALANCES
(in $000’s, unaudited)
Average assets
$
5,047,097
$
4,773,878
$
4,434,238
6
%
14
%
$
4,911,242
$
4,233,693
16
%
Average tangible assets
$
4,863,814
$
4,589,861
$
4,247,522
6
%
15
%
$
4,727,594
$
4,046,583
17
%
Average earning assets
$
4,678,084
$
4,419,963
$
4,075,673
6
%
15
%
$
4,549,736
$
3,870,412
18
%
Average loans held-for-sale
$
4,053
$
3,458
$
3,617
17
%
12
%
$
3,757
$
2,941
28
%
Average total loans
$
2,790,368
$
2,616,876
$
2,683,476
7
%
4
%
$
2,704,101
$
2,597,468
4
%
Average deposits
$
4,307,555
$
4,048,953
$
3,720,850
6
%
16
%
$
4,178,968
$
3,524,331
19
%
Average demand deposits - noninterest-bearing
$
1,808,638
$
1,712,903
$
1,660,547
6
%
9
%
$
1,761,035
$
1,549,745
14
%
Average interest-bearing deposits
$
2,498,917
$
2,336,050
$
2,060,303
7
%
21
%
$
2,417,933
$
1,974,586
22
%
Average interest-bearing liabilities
$
2,538,747
$
2,375,851
$
2,099,982
7
%
21
%
$
2,457,749
$
2,014,376
22
%
Average equity
$
583,009
$
579,157
$
572,939
1
%
2
%
$
581,094
$
575,995
1
%
Average tangible equity
$
399,726
$
395,140
$
386,223
1
%
3
%
$
397,446
$
388,886
2
%
For the Quarter Ended:
CONSOLIDATED INCOME STATEMENTS
June 30,
March 31,
December 31,
September 30,
June 30,
(in $000’s, unaudited)
2021
2021
2020
2020
2020
Interest income
$
36,632
$
36,761
$
36,145
$
36,252
$
37,132
Interest expense
1,756
1,803
1,940
2,087
2,192
Net interest income before provision
for credit losses on loans
34,876
34,958
34,205
34,165
34,940
Provision for (recapture of) credit losses on loans
(493
)
(1,512
)
(1,348
)
197
1,114
Net interest income after provision
for credit losses on loans
35,369
36,470
35,553
33,968
33,826
Noninterest income:
Service charges and fees on deposit accounts
659
601
608
632
650
Increase in cash surrender value of
life insurance
458
456
465
464
458
Gain on proceeds from company owned life insurance
396
66
—
—
—
Servicing income
104
182
98
187
205
Gain on sales of SBA loans
83
550
372
400
—
Gain on sales of securities
—
—
7
—
170
Gain on the disposition of foreclosed assets
—
—
—
—
—
Other
469
446
506
912
595
Total noninterest income
2,169
2,301
2,056
2,595
2,078
Noninterest expense:
Salaries and employee benefits
12,572
13,958
12,457
11,967
12,300
Occupancy and equipment
2,247
2,274
2,197
2,283
1,766
Professional fees
1,771
1,719
1,396
1,352
1,155
Other
9,185
5,293
5,507
5,566
5,791
Total noninterest expense
25,775
23,244
21,557
21,168
21,012
Income before income taxes
11,763
15,527
16,052
15,395
14,892
Income tax expense
2,950
4,323
4,429
4,198
4,274
Net income
$
8,813
$
11,204
$
11,623
$
11,197
$
10,618
PER COMMON SHARE DATA
(unaudited)
Basic earnings per share
$
0.15
$
0.19
$
0.19
$
0.19
$
0.18
Diluted earnings per share
$
0.15
$
0.19
$
0.19
$
0.19
$
0.18
Weighted average shares outstanding - basic
60,089,327
59,926,816
59,616,951
59,589,243
59,420,592
Weighted average shares outstanding - diluted
60,730,141
60,404,213
60,247,296
60,141,412
60,112,423
Common shares outstanding at period-end
60,202,766
59,932,334
59,917,457
59,914,987
59,856,767
Dividend per share
$
0.13
$
0.13
$
0.13
$
0.13
$
0.13
Book value per share
$
9.69
$
9.71
$
9.64
$
9.64
$
9.60
Tangible book value per share
$
6.65
$
6.64
$
6.57
$
6.55
$
6.49
KEY FINANCIAL RATIOS
(unaudited)
Annualized return on average equity
6.06
%
7.85
%
7.99
%
7.73
%
7.45
%
Annualized return on average tangible equity
8.84
%
11.50
%
11.75
%
11.41
%
11.06
%
Annualized return on average assets
0.70
%
0.95
%
0.98
%
0.98
%
0.96
%
Annualized return on average tangible assets
0.73
%
0.99
%
1.02
%
1.02
%
1.01
%
Net interest margin (FTE)
3.00
%
3.22
%
3.15
%
3.24
%
3.46
%
Efficiency ratio
69.58
%
62.38
%
59.45
%
57.58
%
56.76
%
AVERAGE BALANCES
(in $000’s, unaudited)
Average assets
$
5,047,097
$
4,773,878
$
4,703,154
$
4,562,412
$
4,434,238
Average tangible assets
$
4,863,814
$
4,589,861
$
4,518,279
$
4,376,533
$
4,247,522
Average earning assets
$
4,678,084
$
4,419,963
$
4,338,117
$
4,203,902
$
4,075,673
Average loans held-for-sale
$
4,053
$
3,458
$
2,772
$
5,169
$
3,617
Average total loans
$
2,790,368
$
2,616,876
$
2,652,019
$
2,664,525
$
2,683,476
Average deposits
$
4,307,555
$
4,048,953
$
3,980,017
$
3,846,652
$
3,720,850
Average demand deposits - noninterest-bearing
$
1,808,638
$
1,712,903
$
1,749,837
$
1,700,972
$
1,660,547
Average interest-bearing deposits
$
2,498,917
$
2,336,050
$
2,230,180
$
2,145,680
$
2,060,303
Average interest-bearing liabilities
$
2,538,747
$
2,375,851
$
2,269,960
$
2,185,439
$
2,099,982
Average equity
$
583,009
$
579,157
$
578,560
$
576,135
$
572,939
Average tangible equity
$
399,726
$
395,140
$
393,685
$
390,256
$
386,223
End of Period:
Percent Change From:
CONSOLIDATED BALANCE SHEETS
June 30,
March 31,
June 30,
March 31,
June 30,
(in $000’s, unaudited)
2021
2021
2020
2021
2020
ASSETS
Cash and due from banks
$
41,904
$
36,534
$
40,108
15
%
4
%
Other investments and interest-bearing deposits
in other financial institutions
1,286,418
1,406,520
885,792
(9
)
%
45
%
Securities available-for-sale, at fair value
145,955
196,718
323,565
(26
)
%
(55
)
%
Securities held-to-maturity, at amortized cost
421,286
306,535
322,677
37
%
31
%
Loans held-for-sale - SBA, including deferred costs
4,344
2,834
4,324
53
%
0
%
Loans:
Commercial
557,686
559,698
553,843
0
%
1
%
SBA PPP loans
286,461
349,744
324,550
(18
)
%
(12
)
%
Real estate:
CRE - owner occupied
583,091
568,637
553,463
3
%
5
%
CRE - non-owner occupied
742,135
700,117
725,776
6
%
2
%
Land and construction
129,426
159,504
138,284
(19
)
%
(6
)
%
Home equity
107,873
104,303
112,679
3
%
(4
)
%
Multifamily
198,771
168,917
169,637
18
%
17
%
Residential mortgages
205,904
82,181
95,033
151
%
117
%
Consumer and other
21,519
19,872
22,759
8
%
(5
)
%
Loans
2,832,866
2,712,973
2,696,024
4
%
5
%
Deferred loan fees, net
(8,070
)
(8,266
)
(9,635
)
(2
)
%
(16
)
%
Total loans, net of deferred costs and fees
2,824,796
2,704,707
2,686,389
4
%
5
%
Allowance for credit losses on loans
(43,956
)
(44,296
)
(45,444
)
(1
)
%
(3
)
%
Loans, net
2,780,840
2,660,411
2,640,945
5
%
5
%
Company-owned life insurance
77,393
77,421
76,944
0
%
1
%
Premises and equipment, net
10,040
10,220
9,500
(2
)
%
6
%
Goodwill
167,631
167,631
167,631
0
%
0
%
Other intangible assets
15,177
15,931
18,593
(5
)
%
(18
)
%
Accrued interest receivable and other assets
121,887
120,635
124,322
1
%
(2
)
%
Total assets
$
5,072,875
$
5,001,390
$
4,614,401
1
%
10
%
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand, noninterest-bearing
$
1,840,516
$
1,813,962
$
1,714,058
1
%
7
%
Demand, interest-bearing
1,140,867
1,101,807
934,780
4
%
22
%
Savings and money market
1,174,587
1,189,566
1,091,740
(1
)
%
8
%
Time deposits-under $250
42,118
42,596
49,493
(1
)
%
(15
)
%
Time deposits-$250 and over
110,111
102,508
93,822
7
%
17
%
CDARS - money market and time deposits
36,273
28,663
16,333
27
%
122
%
Total deposits
4,344,472
4,279,102
3,900,226
2
%
11
%
Subordinated debt, net of issuance costs
39,832
39,786
39,646
0
%
0
%
Accrued interest payable and other liabilities
105,127
100,839
99,722
4
%
5
%
Total liabilities
4,489,431
4,419,727
4,039,594
2
%
11
%
Shareholders’ Equity:
Common stock
495,665
494,617
492,333
0
%
1
%
Retained earnings
99,311
98,314
87,654
1
%
13
%
Accumulated other comprehensive loss
(11,532
)
(11,268
)
(5,180
)
(2
)
%
(123
)
%
Total shareholders' equity
583,444
581,663
574,807
0
%
2
%
Total liabilities and shareholders’ equity
$
5,072,875
$
5,001,390
$
4,614,401
1
%
10
%
End of Period:
CONSOLIDATED BALANCE SHEETS
June 30,
March 31,
December 31,
September 30,
June 30,
(in $000’s, unaudited)
2021
2021
2020
2020
2020
ASSETS
Cash and due from banks
$
41,904
$
36,534
$
30,598
$
33,353
$
40,108
Other investments and interest-bearing deposits
in other financial institutions
1,286,418
1,406,520
1,100,475
926,915
885,792
Securities available-for-sale, at fair value
145,955
196,718
235,774
294,438
323,565
Securities held-to-maturity, at amortized cost
421,286
306,535
297,389
295,609
322,677
Loans held-for-sale - SBA, including deferred costs
4,344
2,834
1,699
3,565
4,324
Loans:
Commercial
557,686
559,698
555,707
574,359
553,843
SBA PPP loans
286,461
349,744
290,679
323,550
324,550
Real estate:
CRE - owner occupied
583,091
568,637
560,362
561,528
553,463
CRE - non-owner occupied
742,135
700,117
693,103
713,563
725,776
Land and construction
129,426
159,504
144,594
142,632
138,284
Home equity
107,873
104,303
111,885
111,468
112,679
Multifamily
198,771
168,917
166,425
169,791
169,637
Residential mortgages
205,904
82,181
85,116
91,077
95,033
Consumer and other
21,519
19,872
18,116
17,511
22,759
Loans
2,832,866
2,712,973
2,625,987
2,705,479
2,696,024
Deferred loan fees, net
(8,070
)
(8,266
)
(6,726
)
(8,463
)
(9,635
)
Total loans, net of deferred fees
2,824,796
2,704,707
2,619,261
2,697,016
2,686,389
Allowance for credit losses on loans
(43,956
)
(44,296
)
(44,400
)
(45,422
)
(45,444
)
Loans, net
2,780,840
2,660,411
2,574,861
2,651,594
2,640,945
Company-owned life insurance
77,393
77,421
77,523
77,059
76,944
Premises and equipment, net
10,040
10,220
10,459
10,412
9,500
Goodwill
167,631
167,631
167,631
167,631
167,631
Other intangible assets
15,177
15,931
16,664
17,628
18,593
Accrued interest receivable and other assets
121,887
120,635
121,041
128,581
124,322
Total assets
$
5,072,875
$
5,001,390
$
4,634,114
$
4,606,785
$
4,614,401
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand, noninterest-bearing
$
1,840,516
$
1,813,962
$
1,661,655
$
1,698,027
$
1,714,058
Demand, interest-bearing
1,140,867
1,101,807
960,179
926,041
934,780
Savings and money market
1,174,587
1,189,566
1,119,968
1,108,252
1,091,740
Time deposits-under $250
42,118
42,596
45,027
46,684
49,493
Time deposits-$250 and over
110,111
102,508
103,746
92,276
93,822
CDARS - money market and time deposits
36,273
28,663
23,911
19,121
16,333
Total deposits
4,344,472
4,279,102
3,914,486
3,890,401
3,900,226
Subordinated debt, net of issuance costs
39,832
39,786
39,740
39,693
39,646
Accrued interest payable and other liabilities
105,127
100,839
101,999
98,884
99,722
Total liabilities
4,489,431
4,419,727
4,056,225
4,028,978
4,039,594
Shareholders’ Equity:
Common stock
495,665
494,617
493,707
493,126
492,333
Retained earnings
99,311
98,314
94,899
91,065
87,654
Accumulated other comprehensive loss
(11,532
)
(11,268
)
(10,717
)
(6,384
)
(5,180
)
Total shareholders' equity
583,444
581,663
577,889
577,807
574,807
Total liabilities and shareholders’ equity
$
5,072,875
$
5,001,390
$
4,634,114
$
4,606,785
$
4,614,401
End of Period:
Percent Change From:
CREDIT QUALITY DATA
June 30,
March 31,
June 30,
March 31,
June 30,
(in $000’s, unaudited)
2021
2021
2020
2021
2020
Nonaccrual loans - held-for-investment
$
5,291
$
5,542
$
8,457
(5
)
%
(37
)
%
Restructured and loans over 90 days past due
and still accruing
889
51
668
1643
%
33
%
Total nonperforming loans
6,180
5,593
9,125
10
%
(32
)
%
Foreclosed assets
—
—
—
N/A
N/A
Total nonperforming assets
$
6,180
$
5,593
$
9,125
10
%
(32
)
%
Other restructured loans still accruing
$
93
$
152
$
64
(39
)
%
45
%
Net charge-offs (recoveries) during the quarter
$
(153
)
$
(1,408
)
$
373
89
%
(141
)
%
Provision for (recapture of) credit losses on loans during the quarter
$
(493
)
$
(1,512
)
$
1,114
67
%
(144
)
%
Allowance for credit losses on loans
$
43,956
$
44,296
$
45,444
(1
)
%
(3
)
%
Classified assets
$
32,402
$
33,420
$
31,452
(3
)
%
3
%
Allowance for credit losses on loans to total loans
1.56
%
1.64
%
1.69
%
(5
)
%
(8
)
%
Allowance for credit losses on loans to total nonperforming loans
711.26
%
791.99
%
498.02
%
(10
)
%
43
%
Nonperforming assets to total assets
0.12
%
0.11
%
0.20
%
9
%
(40
)
%
Nonperforming loans to total loans
0.22
%
0.21
%
0.34
%
5
%
(35
)
%
Classified assets to Heritage Commerce Corp
Tier 1 capital plus allowance for credit losses on loans
7
%
7
%
7
%
0
%
0
%
Classified assets to Heritage Bank of Commerce
Tier 1 capital plus allowance for credit losses on loans
7
%
7
%
7
%
0
%
0
%
OTHER PERIOD-END STATISTICS
(in $000’s, unaudited)
Heritage Commerce Corp:
Tangible common equity (1)
$
400,636
$
398,101
$
388,583
1
%
3
%
Shareholders’ equity / total assets
11.50
%
11.63
%
12.46
%
(1
)
%
(8
)
%
Tangible common equity / tangible assets (2)
8.19
%
8.26
%
8.78
%
(1
)
%
(7
)
%
Loan to deposit ratio
65.02
%
63.21
%
68.88
%
3
%
(6
)
%
Noninterest-bearing deposits / total deposits
42.36
%
42.39
%
43.95
%
0
%
(4
)
%
Total capital ratio
15.6
%
16.5
%
15.9
%
(5
)
%
(2
)
%
Tier 1 capital ratio
13.3
%
14.0
%
13.4
%
(5
)
%
(1
)
%
Common Equity Tier 1 capital ratio
13.3
%
14.0
%
13.4
%
(5
)
%
(1
)
%
Tier 1 leverage ratio
8.6
%
9.1
%
9.4
%
(5
)
%
(9
)
%
Heritage Bank of Commerce:
Total capital ratio
15.0
%
15.8
%
15.1
%
(5
)
%
(1
)
%
Tier 1 capital ratio
13.9
%
14.7
%
14.0
%
(5
)
%
(1
)
%
Common Equity Tier 1 capital ratio
13.9
%
14.7
%
14.0
%
(5
)
%
(1
)
%
Tier 1 leverage ratio
9.0
%
9.5
%
9.9
%
(5
)
%
(9
)
%
(1) Represents shareholders' equity minus goodwill and other intangible assets (2) Represents shareholders' equity minus goodwill and other intangible assets divided by total assets minus goodwill and other intangible assets
End of Period:
CREDIT QUALITY DATA
June 30,
March 31,
December 31,
September 30,
June 30,
(in $000’s, unaudited)
2021
2021
2020
2020
2020
Nonaccrual loans - held-for-investment
$
5,291
$
5,542
$
7,788
$
9,661
$
8,457
Restructured and loans over 90 days past due
and still accruing
889
51
81
601
668
Total nonperforming loans
6,180
5,593
7,869
10,262
9,125
Foreclosed assets
—
—
—
—
—
Total nonperforming assets
$
6,180
$
5,593
$
7,869
$
10,262
$
9,125
Other restructured loans still accruing
$
93
$
152
$
169
$
98
$
64
Net charge-offs (recoveries) during the quarter
$
(153
)
$
(1,408
)
$
(326
)
$
219
$
373
Provision for (recapture of) credit losses on loans during the quarter
$
(493
)
$
(1,512
)
$
(1,348
)
$
197
$
1,114
Allowance for credit losses on loans
$
43,956
$
44,296
$
44,400
$
45,422
$
45,444
Classified assets
$
32,402
$
33,420
$
34,028
$
33,024
$
31,452
Allowance for credit losses on loans to total loans
1.56
%
1.64
%
1.70
%
1.68
%
1.69
%
Allowance for credit losses on loans to total nonperforming loans
711.26
%
791.99
%
564.24
%
442.62
%
498.02
%
Nonperforming assets to total assets
0.12
%
0.11
%
0.17
%
0.22
%
0.20
%
Nonperforming loans to total loans
0.22
%
0.21
%
0.30
%
0.38
%
0.34
%
Classified assets to Heritage Commerce Corp
Tier 1 capital plus allowance for credit losses on loans
7
%
7
%
7
%
7
%
7
%
Classified assets to Heritage Bank of Commerce
Tier 1 capital plus allowance for credit losses on loans
7
%
7
%
7
%
7
%
7
%
OTHER PERIOD-END STATISTICS
(in $000’s, unaudited)
Heritage Commerce Corp:
Tangible common equity (1)
$
400,636
$
398,101
$
393,594
$
392,548
$
388,583
Shareholders’ equity / total assets
11.50
%
11.63
%
12.47
%
12.54
%
12.46
%
Tangible common equity / tangible assets (2)
8.19
%
8.26
%
8.85
%
8.88
%
8.78
%
Loan to deposit ratio
65.02
%
63.21
%
66.91
%
69.32
%
68.88
%
Noninterest-bearing deposits / total deposits
42.36
%
42.39
%
42.45
%
43.65
%
43.95
%
Total capital ratio
15.6
%
16.5
%
16.5
%
16.0
%
15.9
%
Tier 1 capital ratio
13.3
%
14.0
%
14.0
%
13.5
%
13.4
%
Common Equity Tier 1 capital ratio
13.3
%
14.0
%
14.0
%
13.5
%
13.4
%
Tier 1 leverage ratio
8.6
%
9.1
%
9.1
%
9.3
%
9.4
%
Heritage Bank of Commerce:
Total capital ratio
15.0
%
15.8
%
15.8
%
15.2
%
15.1
%
Tier 1 capital ratio
13.9
%
14.7
%
14.6
%
14.1
%
14.0
%
Common Equity Tier 1 capital ratio
13.9
%
14.7
%
14.6
%
14.1
%
14.0
%
Tier 1 leverage ratio
9.0
%
9.5
%
9.5
%
9.7
%
9.9
%
(1) Represents shareholders' equity minus goodwill and other intangible assets (2) Represents shareholders' equity minus goodwill and other intangible assets divided by total assets minus goodwill and other intangible assets
For the Quarter Ended
For the Quarter Ended
June 30, 2021
June 30, 2020
Interest
Average
Interest
Average
NET INTEREST INCOME AND NET INTEREST MARGIN
Average
Income/
Yield/
Average
Income/
Yield/
(in $000’s, unaudited)
Balance
Expense
Rate
Balance
Expense
Rate
Assets:
Loans, gross (1)(2)
$
2,794,421
$
33,439
4.80
%
$
2,687,093
$
32,845
4.92
%
Securities - taxable
479,419
1,944
1.63
%
611,709
3,155
2.07
%
Securities - exempt from Federal tax (3)
62,257
511
3.29
%
76,160
612
3.23
%
Other investments and interest-bearing deposits
in other financial institutions
1,341,987
845
0.25
%
700,711
648
0.37
%
Total interest earning assets (3)
4,678,084
36,739
3.15
%
4,075,673
37,260
3.68
%
Cash and due from banks
42,449
37,716
Premises and equipment, net
10,147
9,096
Goodwill and other intangible assets
183,283
186,716
Other assets
133,134
125,037
Total assets
$
5,047,097
$
4,434,238
Liabilities and shareholders’ equity:
Deposits:
Demand, noninterest-bearing
$
1,808,638
$
1,660,547
Demand, interest-bearing
1,139,090
477
0.17
%
890,158
525
0.24
%
Savings and money market
1,179,321
528
0.18
%
1,009,078
794
0.32
%
Time deposits - under $100
15,335
8
0.21
%
17,825
18
0.41
%
Time deposits - $100 and over
133,935
164
0.49
%
127,877
277
0.87
%
CDARS - money market and time deposits
31,236
2
0.03
%
15,365
1
0.03
%
Total interest-bearing deposits
2,498,917
1,179
0.19
%
2,060,303
1,615
0.32
%
Total deposits
4,307,555
1,179
0.11
%
3,720,850
1,615
0.17
%
Subordinated debt, net of issuance costs
39,802
577
5.81
%
39,617
577
5.86
%
Short-term borrowings
28
—
0.00
%
62
—
0.00
%
Total interest-bearing liabilities
2,538,747
1,756
0.28
%
2,099,982
2,192
0.42
%
Total interest-bearing liabilities and demand,
noninterest-bearing / cost of funds
4,347,385
1,756
0.16
%
3,760,529
2,192
0.23
%
Other liabilities
116,703
100,770
Total liabilities
4,464,088
3,861,299
Shareholders’ equity
583,009
572,939
Total liabilities and shareholders’ equity
$
5,047,097
$
4,434,238
Net interest income (3) / margin
34,983
3.00
%
35,068
3.46
%
Less tax equivalent adjustment (3)
(107
)
(128
)
Net interest income
$
34,876
$
34,940
(1)
Includes loans held-for-sale. Nonaccrual loans are included in average balance.
(2)
Yield amounts earned on loans include fees and costs. The accretion of net deferred loan fees into loan interest income was $2,192,000 for the second quarter of 2021 (of which $1,876,000 was from PPP loans), compared to $773,000 for the second quarter of 2020 (of which $637,000 was from PPP loans).
(3)
Reflects the FTE adjustment for Federal tax-exempt income based on a 21%.
For the Quarter Ended
For the Quarter Ended
June 30, 2021
March 31, 2021
Interest
Average
Interest
Average
NET INTEREST INCOME AND NET INTEREST MARGIN
Average
Income/
Yield/
Average
Income/
Yield/
(in $000’s, unaudited)
Balance
Expense
Rate
Balance
Expense
Rate
Assets:
Loans, gross (1)(2)
$
2,794,421
$
33,439
4.80
%
$
2,620,334
$
33,836
5.24
%
Securities - taxable
479,419
1,944
1.63
%
436,858
1,728
1.60
%
Securities - exempt from Federal tax (3)
62,257
511
3.29
%
66,513
542
3.30
%
Other investments and interest-bearing deposits
in other financial institutions
1,341,987
845
0.25
%
1,296,258
768
0.24
%
Total interest earning assets (3)
4,678,084
36,739
3.15
%
4,419,963
36,874
3.38
%
Cash and due from banks
42,449
40,823
Premises and equipment, net
10,147
10,369
Goodwill and other intangible assets
183,283
184,017
Other assets
133,134
118,706
Total assets
$
5,047,097
$
4,773,878
Liabilities and shareholders’ equity:
Deposits:
Demand, noninterest-bearing
$
1,808,638
$
1,712,903
Demand, interest-bearing
1,139,090
477
0.17
%
1,026,210
479
0.19
%
Savings and money market
1,179,321
528
0.18
%
1,137,837
572
0.20
%
Time deposits - under $100
15,335
8
0.21
%
15,900
9
0.23
%
Time deposits - $100 and over
133,935
164
0.49
%
130,843
171
0.53
%
CDARS - money market and time deposits
31,236
2
0.03
%
25,260
1
0.02
%
Total interest-bearing deposits
2,498,917
1,179
0.19
%
2,336,050
1,232
0.21
%
Total deposits
4,307,555
1,179
0.11
%
4,048,953
1,232
0.12
%
Subordinated debt, net of issuance costs
39,802
577
5.81
%
39,757
571
5.82
%
Short-term borrowings
28
—
0.00
%
44
—
0.00
%
Total interest-bearing liabilities
2,538,747
1,756
0.28
%
2,375,851
1,803
0.31
%
Total interest-bearing liabilities and demand,
noninterest-bearing / cost of funds
4,347,385
1,756
0.16
%
4,088,754
1,803
0.18
%
Other liabilities
116,703
105,967
Total liabilities
4,464,088
4,194,721
Shareholders’ equity
583,009
579,157
Total liabilities and shareholders’ equity
$
5,047,097
$
4,773,878
Net interest income (3) / margin
34,983
3.00
%
35,071
3.22
%
Less tax equivalent adjustment (3)
(107
)
(113
)
Net interest income
$
34,876
$
34,958
(1)
Includes loans held-for-sale. Nonaccrual loans are included in average balance.
(2)
Yield amounts earned on loans include fees and costs. The accretion of net deferred loan fees into loan interest income was $2,192,000 for the second quarter of 2021 (of which $1,876,000 was from PPP loans), compared to $3,689,000 for the first quarter of 2021 (of which $3,401,000 was from PPP loans).
(3)
Reflects the FTE adjustment for Federal tax-exempt income based on a 21%.
For the Six Months Ended
For the Six Months Ended
June 30, 2021
June 30, 2020
Interest
Average
Interest
Average
NET INTEREST INCOME AND NET INTEREST MARGIN
Average
Income/
Yield/
Average
Income/
Yield/
(in $000’s, unaudited)
Balance
Expense
Rate
Balance
Expense
Rate
Assets:
Loans, gross (1)(2)
$
2,707,858
$
67,275
5.01
%
$
2,600,409
$
67,627
5.23
%
Securities - taxable
458,256
3,672
1.62
%
641,004
7,103
2.23
%
Securities - exempt from Federal tax (3)
64,373
1,053
3.30
%
78,265
1,259
3.23
%
Other investments, interest-bearing deposits in other
financial institutions and Federal funds sold
1,319,249
1,613
0.25
%
550,734
2,349
0.86
%
Total interest earning assets (3)
4,549,736
73,613
3.26
%
3,870,412
78,338
4.07
%
Cash and due from banks
41,640
41,128
Premises and equipment, net
10,257
8,851
Goodwill and other intangible assets
183,648
187,110
Other assets
125,961
126,192
Total assets
$
4,911,242
$
4,233,693
Liabilities and shareholders’ equity:
Deposits:
Demand, noninterest-bearing
$
1,761,035
$
1,549,745
Demand, interest-bearing
1,082,962
956
0.18
%
845,479
1,067
0.25
%
Savings and money market
1,158,693
1,100
0.19
%
964,750
1,708
0.36
%
Time deposits - under $100
15,616
17
0.22
%
18,301
40
0.44
%
Time deposits - $100 and over
132,397
335
0.51
%
130,096
582
0.90
%
CDARS - money market and time deposits
28,265
3
0.02
%
15,960
3
0.04
%
Total interest-bearing deposits
2,417,933
2,411
0.20
%
1,974,586
3,400
0.35
%
Total deposits
4,178,968
2,411
0.12
%
3,524,331
3,400
0.19
%
Subordinated debt, net of issuance costs
39,780
1,148
5.82
%
39,594
1,154
5.86
%
Short-term borrowings
36
—
0.00
%
196
—
0.00
%
Total interest-bearing liabilities
2,457,749
3,559
0.29
%
2,014,376
4,554
0.45
%
Total interest-bearing liabilities and demand,
noninterest-bearing / cost of funds
4,218,784
3,559
0.17
%
3,564,121
4,554
0.26
%
Other liabilities
111,364
93,577
Total liabilities
4,330,148
3,657,698
Shareholders’ equity
581,094
575,995
Total liabilities and shareholders’ equity
$
4,911,242
$
4,233,693
Net interest income (3) / margin
70,054
3.10
%
73,784
3.83
%
Less tax equivalent adjustment (3)
(220
)
(264
)
Net interest income
$
69,834
$
73,520
(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 $5,881,000 for the first six months ended June 30, 2021 (of which $5,277,000 was from PPP loans), compared to $912,000 for the first six months ended June 30, 2020 (of which $637,000 was from PPP loans).
(3)
Reflects the FTE adjustment for Federal tax-exempt income based on a 21%.
FAQ
What was Heritage Commerce Corp's (HTBK) net income for the second quarter of 2021?
Heritage Commerce Corp reported a net income of $8.8 million for Q2 2021.
How did HTBK's total loans perform in Q2 2021?
Total loans increased by $138.4 million, or 5%, year-over-year in Q2 2021.
What were the total deposits for HTBK in Q2 2021?
Total deposits for HTBK increased by $444.2 million, or 11%, year-over-year in Q2 2021.
What was HTBK's efficiency ratio for Q2 2021?
HTBK's efficiency ratio was 69.58% for Q2 2021.
Did HTBK see any changes in nonperforming assets in Q2 2021?
Yes, HTBK's nonperforming assets decreased by 32%, totaling $6.2 million as of June 30, 2021.
