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Heritage Commerce Corp Reports Earnings of $10.6 Million for the Second Quarter of 2020

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Heritage Commerce Corp (Nasdaq: HTBK) reported a second quarter 2020 net income of $10.6 million ($0.18 per share), down from $11.4 million ($0.26) in Q2 2019. Year-to-date net income was $12.5 million, significantly lower than $23.5 million in 2019. Loan growth was 5% sequentially, attributed to $324.6 million in SBA PPP loans, while total deposits surged by 16%. Nonperforming assets declined 25% to $9.1 million. Despite challenges from COVID-19, the bank maintains a strong capital and liquidity position.

Positive
  • 5% sequential growth in loan balances.
  • 16% increase in total deposits.
  • 25% reduction in nonperforming assets, from $12.1 million to $9.1 million.
Negative
  • Net income decreased by 7% year-over-year.
  • Diluted earnings per share fell from $0.26 to $0.18.
  • Total loans include deferred fees of $10.4 million.

SAN JOSE, Calif., July 23, 2020 (GLOBE NEWSWIRE) -- Heritage Commerce Corp (Nasdaq: HTBK), the holding company (the “Company”) for Heritage Bank of Commerce (the “Bank”), today announced second quarter 2020 net income of $10.6 million, or $0.18 per average diluted common share, compared to $11.4 million, or $0.26 per average diluted common share, for the second quarter of 2019, and $1.9 million, or $0.03 per average diluted common share, for the first quarter of 2020.  For the six months ended June 30, 2020, net income was $12.5 million, or $0.21 per average diluted common share, compared to $23.5 million, or $0.54 per average diluted common share, for the six months ended June 30, 2019. All results are unaudited.

“Our results improved in the second quarter of 2020; however, the ongoing impact of the Coronavirus pandemic continues to weigh heavily on our communities and market,” said Keith A. Wilton, President and Chief Executive Officer. “We benefitted from a 5% sequential quarter growth in loan balances during the second quarter of 2020, which primarily resulted from the addition of $324.6 million in Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans that funded during the quarter. These loans are fully guaranteed by the SBA. In addition, total deposits increased 16% in the second quarter of 2020 from the first quarter 2020 as a result of $533.6 million growth in deposits, primarily tied to deposits from customers that took out PPP loans.  As expected, our net interest margin came under pressure from two Federal Reserve rate cuts in March of this year, but also from lower yields on newly funded PPP loans. Credit quality improved on a sequential quarter basis, as nonperforming assets (“NPAs”) declined ($3.0) million, or (25%) at June 30, 2020 to $9.1 million, from $12.1 million at March 31, 2020, and classified assets decreased to $31.5 million from $39.6 million.”

“Notwithstanding the ongoing impact of the pandemic, we believe that our healthy capital and liquidity positions, strong earnings power, and conservative credit culture will serve us well through these challenging times,” said Mr. Wilton.  “I also would like to thank our employees across the Company for their ongoing hard work and dedication to our customers.”

Coronavirus (COVID-19) Weighs on Local Communities and Our Economy

In mid-March, public health departments in the six largest counties in the San Francisco Bay Area, which account for most of the bank’s market footprint, imposed strict “Shelter-in-Place” orders for all residents.  A few days later, the State of California issued a similar statewide order.  Bay Area Counties and the state extended these orders through April, before easing restrictions in May and June. Following a resurgence in cases, on June 19, 2020, the state announced new health guidelines requiring the use of face coverings  when in public or common spaces. On July 13, 2020, California expanded statewide indoor closures for businesses, encouraged the wearing of face masks and discouraged the gathering of individuals beyond immediate households.  The Company has closely monitored the toll from the pandemic, including its economic impact. While the local response to COVID-19 appeared to have initially helped limit its spread, case numbers are once again increasing and the overall impact on our local economy may not be fully known.  Since February, new jobless claims in California, through the week of July 11,  totaled over 8.2 million, while the state has lost a net 2.6 million jobs (14.0%). In the seven Bay Area counties we serve, 423,000 jobs (11.8%) have been lost. The State’s unemployment rate at the end of June stood at 15.1%, up from 5.3% at the end of March, while the unemployment rate in the seven Bay Area counties we serve increased to 12.0% from 3.4%. 

At the end of March, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) which included $349 billion in funding for the SBA PPP Loan Program.  By mid-April, the Bank had processed 597 PPP loan applications with potential outstanding balances of $225.3 million.  On April 23, 2020, Congress passed separate economic stimulus legislation, which provided an additional $310 billion in funding for the PPP Loan Program that the Company was also able to utilize to further support our small business clients.  In all, the Bank processed a total of 1,105 PPP loan applications, with total principal balances of $333.4 million.  PPP loan pay offs totaled $8.8 million during the second quarter of 2020, and the Company ended the quarter with $324.6 million in outstanding PPP loan balances.  These generated $582,000 in interest income and $722,000 in deferred fees, which was partially offset by ($54,000) in deferred costs expensed during the quarter.  At June 30, 2020, total loans included deferred fees on PPP loans of $10.4 million and deferred costs of $1.2 million.  PPP borrowers who can demonstrate that the funding received has been used for certain purposes such as to cover payroll and rent costs and meet certain other requirements, can qualify for partial or full federal relief on loan principal and interest.  At present, the qualifying process for PPP borrowers to receive approval for loan forgiveness has yet to be finalized by the SBA.  Nonqualifying borrowers or borrowers who have not applied for forgiveness, who received loans under the CARES Act, are contractually obligated to begin making monthly repayments on principal and interest six months after their loans have funded.

Also in March 2020, in conjunction with the passage of the CARES Act, federal bank regulators announced new accounting guidance for loan modifications by banks, which is intended to provide temporary credit accommodation through loan payment deferrals for customers whose businesses have experienced economic hardship due to the impact of the Coronavirus.  The guidance also allows for the temporary suspension of requirements for such loans to be classified as troubled debt restructurings ("TDR") for accounting purposes. In response to customers’ needs, the Company made accommodations for initial payment deferrals of up to 90 days, generally, with the potential, upon application, for up to an additional 90 days of payment deferral (180 days maximum). The Company also waived all normal applicable fees. The following table shows the deferments at June 30, 2020 by category:

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77%; width:77%; min-width:77%;"> 3%; width:3%; min-width:3%;"> 2%; width:2%; min-width:2%;"> 18%; width:18%; min-width:18%;"> 
DEFERMENTS BY CATEGORY  
(in $000’s, unaudited)  
Pass and Watch $31,369
Special Mention  145,930
Classified  5,563
Total $182,862

Through June 30, 2020, the Company had approved 235 initial requests for payment deferrals on loans with balances totaling approximately $183 million, or 7%, of our loan portfolio.  The Bank has elected to initially downgrade the risk grades of these loans to “Special Mention” status.  At the end of the second quarter of 2020, the pool of deferred loans in our portfolio were mostly tied to business borrowers from a broad range of industries and included $34 million in loan deferments to the healthcare industry (mostly dentists) and $23 million in loan deferments to the accommodation and food services industries (mostly hotels and restaurants).   Of the $183 million in deferred loans, 71% are supported by some form of real estate. Commercial real estate (“CRE”) deferments of $113 million included $75 million of investor CRE and $38 million of owner-occupied CRE. Deferred loans secured by CRE had an average loan-to-value (“LTV”) ratio of 41% at the end of the second quarter of 2020.  The majority of deferred loans are also supported by personal guarantees.  Between July 1 to July 15, 2020, $32 million in deferred loans returned to regular payment status and have been upgraded from Special Mention status.   In addition to these previously mentioned deferred loans, we have purchased participations in a micro loan portfolio that had $3.3 million in deferments as of the end of the second quarter of 2020. 

The Bank had a portfolio of SBA 7(a) loans totaling $48.6 million, or 1.8% of its total loans, as of the end of the second quarter of 2020.  As part of the SBA’s Coronavirus debt relief efforts, beginning in the April 2020, the SBA commenced a six-month program to cover payments of principal, interest and any associated fees for these borrowers.

In regard to our new lease agreement for 54,910 square feet of office space in San Jose, California, which was entered into in 2019 and commenced on February 1, 2020, with recent easing of California’s and Santa Clara County’s Coronavirus related Shelter-in-Place restrictions, the Company now anticipates completing the move of its main office and San Jose branch to this new location by the end of the third quarter of 2020. 

Credit Quality and Performance

At June 30, 2020, NPAs decreased by ($7.9) million, or 46%, to $9.1 million, compared to $17.0 million at the end of the second quarter of 2019, and decreased by ($3.0) million, or 25% from $12.1 million at the end of the first quarter of 2020.  Classified assets increased to $31.5 million, or 0.68% of total assets, at June 30, 2020, compared to $31.2 million, or 1.00% of total assets, at June 30, 2019, and decreased from $39.6 million, or 0.97% of total assets, at March 31, 2020.  The linked quarter decrease in classified assets for the second quarter of 2020, compared to the first quarter of 2020, resulted from multiple loan payoffs and paydowns that were partially offset by loan downgrades.  Classified deferments totaled $5.6 million at the end of the second quarter of 2020.  Special Mention loans increased to $164 million, or by $115 million, in the second quarter of 2020, compared to $49 million in the first quarter of 2020.  Special Mention included $146 million in deferments and $18 million in other Special Mention loans at June 30, 2020, compared to $24 million in deferments and $25 million in other Special Mention loans at March 31, 2020. As previously noted, the Bank has opted to initially grade loan deferments as Special Mention and these grades will remain until loan payment performance resumes and/or information gained is sufficient to warrant a grade change.  Also as mentioned above, between July 1 to July 15, 2020, $32 million in deferred loans had returned to regular payment status and have been upgraded from Special Mention status.  Exclusive of deferred loans at June 30, 2020, the $7 million decrease in other Special Mention loans from the linked quarter resulted from movement of numerous loans between grades with upgrade totals outweighing downgrades totals, some of which included loans that had been provided a deferment and have since been upgraded.  Notably, many of our borrowers paid down their operating lines of credit during the second quarter of 2020.  Consequently, the line utilization rate on commercial lines of credit declined to 27% at the end of the second quarter from 36% at the end of the first quarter of 2020 and 40% at the end of the second quarter of 2019.

The provision for credit losses on loans was $1.1 million for the second quarter of 2020, compared to a credit to the provision for loan losses of ($740,000) for the second quarter of 2019, and a provision for credit losses on loans of $13.3 million for the first quarter of 2020. The provision for credit losses on loans was $14.4 million for the six months ended June 30, 2020, compared to a ($1.8) million credit to the provision for loan losses for the six months ended June 30, 2019. At June 30, 2020, the allowance for credit losses on loans (“ACLL”) was $45.4 million, representing 1.69% of total loans, and 498.0% of nonperforming loans.  The allowance for loan losses ("ALLL") was $26.6 million at June 30, 2019, representing 1.42% of total loans and 156.5%, of nonperforming loans. The ACLL was $44.7 million at March 31, 2020, representing 1.75% of total loans, and 369.8% of nonperforming loans.  The six basis points linked-quarter decline of the ACLL to total loans was largely due to the 5% increase in total loans for the second quarter of 2020, which primarily resulted from $324.6 million in new PPP loans with 100% SBA guarantees that do not require reserves.  The pro forma ACLL to loans excluding PPP loans was 1.92% at June 30, 2020. The increase in the provision for credit losses on loans for the six months ended June 30, 2020, compared to the six months ended June 30, 2019, was driven primarily by the deteriorating economic outlook resulting from the Coronavirus pandemic. 

The Company continues to monitor portfolio loans made to commercial customers with businesses in higher risk sectors as defined by the Company. The following table provides a breakdown of such loans as a percentage of total loans at June 30, 2020 and March 31, 2020:

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55%; width:55%; min-width:55%;"> 3%; width:3%; min-width:3%;"> 18%; width:18%; min-width:18%;">% of Total2%; width:2%; min-width:2%;"> 2%; width:2%; min-width:2%;"> 18%; width:18%; min-width:18%;">% of Total2%; width:2%; min-width:2%;"> 
  Loans at  Loans at 
HIGHER RISK SECTORS June 30, 2020  March 31, 2020 
Health care and social assistance:      
Offices of dentists 1.79% 1.63%
Offices of physicians (except mental health specialists) 0.76% 0.70%
Other community housing services 0.27% 0.11%
All others 2.21% 1.84%
Total health care and social assistance 5.03% 4.28%
Retail trade:      
Gasoline stations with convenience stores 1.90% 1.98%
All others 2.44% 2.18%
Total retail trade 4.34% 4.16%
Accommodation and food services:      
Full-service restaurants 1.38% 0.86%
Limited-service restaurants 0.79% 0.63%
Hotels (except casino hotels) and motels 0.89% 0.94%
All others 0.70% 0.52%
Total accommodation and food services 3.76% 2.95%
Educational services:      
Elementary and secondary schools 0.65% 0.15%
Education support services 0.40% 0.15%
All others 0.24% 0.17%
Total educational services 1.29% 0.47%
Arts, entertainment, and recreation 1.26% 1.09%
Purchased participations in micro loan portfolio 0.80% 0.95%
Total higher risk sectors 16.48% 13.90%

During the second quarter, the Company added education-related loans to those it had previously identified as at higher risk of credit loss.  During the quarter, the percentage of loans to higher risk sectors increased linked quarter to 16.5% from 13.9% as a result of $91 million, or 3.4%, in new SBA PPP loan fundings to commercial clients in higher risk sectors.     

“In our initial response to the challenges posed by the Coronavirus pandemic last quarter, we implemented extensive business resumption plans, procedures and redundant systems which enabled 75% of our employees to work remotely, but still have access to the resources needed to fully assist our clients with their banking needs,” added Mr. Wilton. “We cannot fully express our pride and gratitude for the efforts and accomplishments of our employees this quarter. The effort and resolve shown by our banking and credit teams was critical in enabling so many of our customers to address their banking needs and access PPP loan fundings.  In addition, our branch teams have been thorough and meticulous in implementing the public safety protocols required to safely meet the needs of visiting customers. All branches remain open to serve our customers and communities in accordance with the Coronavirus safety guidance provided by the Centers for Disease Control and Prevention (“CDC”) and the California Department of Public Health (“CDPH”).”

Capital and Liquidity

“Our regulatory capital position serves as the foundation of our bank’s financial condition and the basis of security for our banking customers. At June 30, 2020, the regulatory capital positions of both the Company and Bank remained healthy,” stated Mr. Wilton.  “Our Total Risk-Based capital ratio and Leverage ratio for the Company was 15.9% and 9.4%, respectively, and 15.1% and 9.8%, respectively, for the Bank.” 

Our liquidity position refers to our ability to maintain cash flows sufficient to fund operations, to meet all of our obligations and commitments, and unexpected sudden changes in levels of its loans and deposits in a timely manner. At June 30, 2020, the Company had a strong liquidity position with $925.9 million in cash and cash equivalents, and approximately $664.7 million in available borrowing capacity from sources including the Federal Home Loan Bank (“FHLB”), the Federal Reserve Bank of San Francisco (“FRB”), Federal funds facilities with several financial institutions, and a line of credit with a correspondent bank. The Company also had $610.6 million (at fair market value) in unpledged securities available at June 30, 2020. Our loan to deposit ratio decreased to 68.88% at June 30, 2020, compared to 71.60% at June 30, 2019, and 75.86% at March 31, 2020.  Mr. Wilton remarked in closing, “We believe that our robust capital base, historically elevated liquidity position, diversified loan portfolio, and reserve for credit losses positions us to react quickly and decisively in addressing challenges related to the economic impact of the Coronavirus pandemic that may arise in future quarters.”

Second Quarter 2020 Highlights (as of, or for the periods ended June 30, 2020, compared to June 30, 2019, and March 31, 2020, except as noted):

Operating Results:

  • Diluted earnings per share were $0.18 for the second quarter of 2020, compared to $0.26 for the second quarter of 2019, and $0.03 for the first quarter of 2020. Diluted earnings per share were $0.21 for the first six months of 2020, compared to $0.54 for the six months of 2019.

  • The following table indicates the ratios for the return on average tangible assets and the return on average tangible equity for the periods indicated:
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  For the Quarter Ended For the Six Months Ended
  June 30,  March 31,  June 30,  June 30,  June 30, 
  2020 2020 2019 2020 2019
36%; width:36%; min-width:36%;">Return on average tangible assets1%; width:1%; min-width:1%;"> 7%; width:7%; min-width:7%;">1.014%; width:4%; min-width:4%;">%2%; width:2%; min-width:2%;"> 7%; width:7%; min-width:7%;">0.194%; width:4%; min-width:4%;">%2%; width:2%; min-width:2%;"> 7%; width:7%; min-width:7%;">1.534%; width:4%; min-width:4%;">%2%; width:2%; min-width:2%;"> 7%; width:7%; min-width:7%;">0.624%; width:4%; min-width:4%;">%2%; width:2%; min-width:2%;"> 7%; width:7%; min-width:7%;">1.584%; width:4%; min-width:4%;">%
Return on average tangible equity 11.06% 1.91% 15.94% 6.45% 16.89%
  • Net interest income, before provision for credit losses on loans, increased 13% to $34.9 million for the second quarter of 2020, compared to $30.9 million for the second quarter of 2019, primarily due to an increase in the average balance of loans due to the Presidio Bank (“Presidio”) merger, additional interest and fee income from PPP loans, and an increase in the accretion of the loan discount into loan interest income from our merger with Presidio during the fourth quarter of 2019, partially offset by decreases in the prime interest rate and decreases in the yield on investment securities and overnight funds.  Net interest income for the second quarter of 2020 decreased (9%) from $38.6 million for the first quarter of 2020, primarily due to decreases in the prime rate and declines in the yields on investment securities and overnight funds, partially offset by additional interest and fee income from PPP loans. Net interest income increased 19% to $73.5 million for the first six months of 2020, compared to $62.0 million for the first six months of 2019, primarily due to an increase in the average balance of loans due to the Presidio merger, additional interest and fee income from PPP loans, and an increase in the accretion of the loan discount into loan interest income from our merger with Presidio, partially offset by decreases in the prime rate, and decreases in the yield on investment securities and overnight funds.

    • The fully tax equivalent (“FTE”) net interest margin contracted 92 basis points to 3.46% for the second quarter of 2020, from 4.38% for the second quarter of 2019, primarily due to a decline in the average yield of loans, investment securities, and overnight funds, partially offset by an increase in the average balance of loans, additional interest and fee income from PPP loans, and an increase in the accretion of the loan discount into loan interest income from our merger with Presidio.  The FTE net interest margin contracted 79 basis points for the second quarter of 2020 from 4.25% for the first quarter of 2020, primarily due to a decline in the average yield on loans, investment securities, and overnight funds, and a decrease in the accretion of the loan discount into loan interest income from our merger with Presidio, partially offset by additional interest and fee income from PPP loans.

    • For the first six months of 2020, the FTE net interest margin contracted 55 basis points to 3.83%, compared to 4.38% for the first six months of 2019, primarily due to the impact of decreases in the yields on loans, investment securities, and overnight funds, partially offset by an increase in the average balance of loans, additional interest and fee income from PPP loans, and an increase in the accretion of the loan discount into loan interest income from our merger with Presidio.
  • 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 4.92% for the second quarter of 2020, compared to 5.96% for the second quarter of 2019, primarily due to a decline in the average yield on loans and new average balances of lower yielding PPP loans, partially offset by an increase in the accretion of the loan purchase discount into loan interest income from the acquisitions.
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  For the Quarter Ended For the Quarter Ended 
  June 30, 2020 June 30, 2019 
  Average Interest Average Average Interest Average 
(in $000’s, unaudited) Balance Income Yield Balance Income Yield 
33%; width:33%; min-width:33%;">Loans, core bank and asset-based lending2%; width:2%; min-width:2%;"> 1%; width:1%; min-width:1%;">$9%; width:9%; min-width:9%;"> 2,369,0041%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;">$7%; width:7%; min-width:7%;"> 27,6941%; width:1%; min-width:1%;"> 8%; width:8%; min-width:8%;"> 4.702%; width:2%; min-width:2%;">% 1%; width:1%; min-width:1%;">$10%; width:10%; min-width:10%;"> 1,727,9881%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;">$7%; width:7%; min-width:7%;"> 23,3421%; width:1%; min-width:1%;"> 9%; width:9%; min-width:9%;"> 5.423%; width:3%; min-width:3%;">% 
SBA PPP loans   231,251    582  1.01%   —    —  — 
PPP fees, net   —    637  1.11%   —    —  — 
Bay View Funding factored receivables   44,574    2,562  23.12%   45,708    2,967  26.04% 
Residential mortgages   31,219    197  2.54%   36,136    234  2.60% 
Purchased CRE loans   25,542    210  3.31%   31,484    290  3.69% 
Loan fair value mark / accretion   (14,497)   963  0.16%   (5,842)   418  0.10% 
Total loans $ 2,687,093  $ 32,845  4.92% $ 1,835,474  $ 27,251  5.96% 
  • The average yield on the total loan portfolio decreased to 4.92% for the second quarter of 2020 compared to 5.57% for the first quarter of 2020, primarily due to decreases in the prime rate on loans, new average balances of lower yielding PPP loans, and a decrease in the accretion of the loan purchase discount into loan interest income from the acquisitions.
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  For the Quarter Ended For the Quarter Ended 
  June 30, 2020 March 31, 2020 
  Average Interest Average Average Interest Average 
(in $000’s, unaudited) Balance Income Yield Balance Income Yield 
33%; width:33%; min-width:33%;">Loans, core bank and asset-based lending2%; width:2%; min-width:2%;"> 1%; width:1%; min-width:1%;">$9%; width:9%; min-width:9%;"> 2,369,0041%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;">$7%; width:7%; min-width:7%;"> 27,6941%; width:1%; min-width:1%;"> 8%; width:8%; min-width:8%;"> 4.702%; width:2%; min-width:2%;">% 1%; width:1%; min-width:1%;">$10%; width:10%; min-width:10%;"> 2,422,0201%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;">$7%; width:7%; min-width:7%;"> 30,1041%; width:1%; min-width:1%;"> 9%; width:9%; min-width:9%;"> 5.003%; width:3%; min-width:3%;">% 
SBA PPP loans   231,251    582  1.01%   —    —  — 
PPP fees, net   —    637  1.11%   —    —  — 
Bay View Funding factored receivables   44,574    2,562  23.12%   47,470    2,877  24.38% 
Residential mortgages   31,219    197  2.54%   33,075    230  2.80% 
Purchased CRE loans   25,542    210  3.31%   27,340    249  3.66% 
Loan fair value mark / accretion   (14,497)   963  0.16%   (16,180)   1,322  0.22% 
Total loans $ 2,687,093  $ 32,845  4.92% $ 2,513,725  $ 34,782  5.57% 
  • The average yield on the total loan portfolio decreased to 5.23% for the six month ended June 30, 2020 compared to 5.94% for the six months ended June 30, 2019, primarily due to decreases in the prime rate on loans and new average balances of lower yielding PPP loans, partially offset an increase in the accretion of the loan purchase discount into loan interest income from the acquisitions.
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  For the Six Months Ended  For the Six Months Ended  
  June 30, 2020 June 30, 2019 
  Average Interest Average Average Interest Average 
(in $000’s, unaudited) Balance Income Yield Balance Income Yield 
33%; width:33%; min-width:33%;">Loans, core bank and asset-based lending2%; width:2%; min-width:2%;"> 1%; width:1%; min-width:1%;">$9%; width:9%; min-width:9%;"> 2,395,4691%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;">$7%; width:7%; min-width:7%;"> 57,7981%; width:1%; min-width:1%;"> 8%; width:8%; min-width:8%;"> 4.852%; width:2%; min-width:2%;">% 1%; width:1%; min-width:1%;">$10%; width:10%; min-width:10%;"> 1,726,3641%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;">$7%; width:7%; min-width:7%;"> 46,1951%; width:1%; min-width:1%;"> 9%; width:9%; min-width:9%;"> 5.403%; width:3%; min-width:3%;">%
SBA PPP loans   115,669    582  1.01%   —    —  — 
PPP fees, net   —    637  1.11%   —    —  — 
Bay View Funding factored receivables   46,022    5,439  23.77%   47,097    5,921  25.35%
Residential mortgages   32,147    427  2.67%   36,451    485  2.68%
Purchased CRE loans   26,441    459  3.49%   32,409    584  3.63% 
Loan fair value mark / accretion   (15,339)   2,285  0.19%   (6,044)   873  0.10%
Total loans $ 2,600,409  $ 67,627  5.23% $ 1,836,277  $ 54,058  5.94%
  • The total net purchase discount on loans from the Focus Business Bank loan portfolio was $5.4 million on the acquisition date of August 20, 2015, of which $366,000 remains outstanding as of June 30, 2020.  The total net purchase discount on loans from the Tri-Valley Bank loan portfolio was $2.6 million on the acquisition date of April 6, 2018, of which $1.2 million remains outstanding as of June 30, 2020.  The total net purchase discount on loans from the United American Bank loan portfolio was $4.7 million on the acquisition date of May 4, 2018, of which $2.3 million remains outstanding as of June 30, 2020.  The total net purchase discount on loans from the Presidio loan portfolio was $12.5 million on the Presidio merger date of October 11, 2019 (the “merger date”), of which $10.1 million remains outstanding as of June 30, 2020.  In aggregate, the remaining net purchase discount on total loans acquired was $14.0 million at June 30, 2020.
  • The average cost of total deposits was 0.17% for the second of 2020, compared to 0.31% for the second quarter of 2019 and 0.22% for the first quarter of 2020. The average cost of total deposits was 0.19% for the six months ended June 30, 2020, compared to 0.30% for the six months ended June 30, 2019.

  • There was a $1.1 million provision for credit losses on loans for the second quarter of 2020, compared to a credit to the provision for loan losses of ($740,000) for the second quarter of 2019, and a $13.3 million provision for credit losses on loans for the first quarter of 2020.  There was a $14.4 million provision for credit losses on loans for the six months ended June 30, 2020, compared to a ($1.8) million credit to the provision for loan losses for the six months ended June 30, 2019.

    • The increase in the provision for credit losses on loans for the six months ended June 30, 2020, compared to the six months ended June 30, 2019, was driven primarily by a significantly deteriorated economic outlook resulting from the Coronavirus pandemic. Most major economic forecasts, including the California Economic Forecast (“CEF”) show a significant decline in California GDP and a substantial rise in unemployment for 2020.  At January 1, 2020, the forecast for California GDP for 2020 was an annual increase in the low single digits and the forecasted California unemployment rate for 2020 was in the mid-single digits.   In June 2020, the CEF forecast was revised for GDP in the negative low single digits and peak unemployment in the low double digits.  The three loan classes where the largest increases in reserves were recorded under the CECL loss rate methodology were investor-owned commercial real estate (“CRE”), construction & land, and commercial and industrial (“C&I”).  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 decreased to $2.1 million for the second quarter of 2020, compared to $2.8 million for the second quarter of 2019, primarily due to lower service charges and fees on deposit accounts, and lower gains on sales of securities.  Total noninterest income decreased for the second quarter of 2020 from $3.2 million for the first quarter of 2020, primarily due to a $791,000 gain on the disposition of foreclosed assets during the first quarter of 2020, and lower service charges and fees on deposit accounts during the second quarter of 2020.

    • For the six months ended June 30, 2020, total noninterest income increased to $5.3 million, compared to $5.2 million for the six months ended June 30, 2019, primarily as a result of a gain on disposition of foreclosed assets, partially offset by lower service charges and fees on loans during the six months ended June 30, 2020.

  • Total noninterest expense for the second quarter of 2020 increased to $21.0 million, compared to $18.4 million for the second quarter of 2019, primarily due to additional employees and operating costs added as a result of the Presidio merger, and higher salaries and employee benefits as a result of annual salary increases. Total noninterest expense for the second quarter of 2020 declined by ($4.8) million from $25.8 million for the first quarter of 2020, due to reduced merger-related costs for the Presidio merger compared to the first quarter of 2020, higher than usual deferred cost resulting from the PPP loans, and the impact of cost savings for the full second quarter of 2020 following the Presidio systems conversion during the first quarter of 2020.

    • Noninterest expense for the six months ended June 30, 2020 increased to $46.8 million, compared to $36.4 million for the six months ended June 30, 2019, primarily due to higher salaries and employee benefits as a result of annual salary increases, and additional employees and operating costs added as a result of the Presidio merger.

    • Earnings were reduced by pre-tax merger-related costs related to the merger with Presidio for the periods indicated as follows: 
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  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) 2020 2020 2019 2020 2019
36%; width:36%; min-width:36%;">Salaries and employee benefits2%; width:2%; min-width:2%;"> 1%; width:1%; min-width:1%;">$10%; width:10%; min-width:10%;"> —2%; width:2%; min-width:2%;"> 1%; width:1%; min-width:1%;">$10%; width:10%; min-width:10%;"> 3562%; width:2%; min-width:2%;"> 1%; width:1%; min-width:1%;">$10%; width:10%; min-width:10%;"> —1%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;">$10%; width:10%; min-width:10%;"> 3562%; width:2%; min-width:2%;"> 1%; width:1%; min-width:1%;">$10%; width:10%; min-width:10%;"> —
Other   59   2,068   540   2,127   540
  Total merger-related costs $ 59 $ 2,424 $ 540 $ 2,483 $ 540
  • Full time equivalent employees were 340 at June 30, 2020, 309 at June 30, 2019, and 337 at March 31, 2020.
  • The efficiency ratio was 56.76% for the second quarter of 2020, compared to 54.76% for the second quarter of 2019, and 61.70% for the first quarter of 2020. The efficiency ratio for the six months ended June 30, 2020 was 59.38%, compared to 54.12% for the six months ended June 30, 2019. 

  • Income tax expense was $4.3 million for the second quarter of 2020, compared to $4.6 million for the second quarter of 2019, and $868,000 for the first quarter of 2020. The effective tax rate for the second quarter of 2020 was 28.7%, compared to 28.9% for the second quarter of 2019, and 31.8% for the first quarter of 2020.  The higher effective tax rate for the first quarter of 2020 was primarily due to an increase in tax expense for forfeited stock options and merger-related stock options.  The effective tax rate for the first quarter of 2020 would have been 26.8% without these items. Income tax expense for the six months ended June 30, 2020 was $5.1 million, compared to $9.1 million for the six months ended June 30, 2019. The effective tax rate for the six months ended June 30, 2020 was 29.2%, compared to 28.0% for the six months ended June 30, 2019. 

    • 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 48% to $4.61 billion at June 30, 2020, compared to $3.11 billion at June 30, 2019, primarily due to the Presidio merger and the addition of PPP loans. Total assets increased 13% from $4.08 billion at March 31, 2020, primarily due to the addition of PPP loans and the related deposits.

  • Securities available-for-sale, at fair value, totaled $323.6 million at June 30, 2020, compared to $383.2 million at June 30, 2019, and $373.6 million at March 31, 2020.  At June 30, 2020, the Company’s securities available-for-sale portfolio was comprised of $232.4 million of agency mortgage-backed securities (all issued by U.S. Government sponsored entities), and $91.2 million of U.S. Treasury securities. The pre-tax unrealized gain on securities available-for-sale at June 30, 2020 was $8.7 million, compared to a pre-tax unrealized gain on securities available-for-sale of $915,000 at June 30, 2019, and a pre-tax unrealized gain on securities available-for-sale of $9.4 million at March 31, 2020.  All other factors remaining the same, when market interest rates are rising, the Company will experience a lower unrealized gain (or a higher unrealized loss) on the securities portfolio.

    • During the second quarter of 2020, the Company sold $29.9 million of US Treasury securities available-for-sale, at a gain of $159,000.

  • At June 30, 2020, securities held-to-maturity, at amortized cost, totaled $322.7 million, compared to $351.4 million at June 30, 2019, and $348.0 million at March 31, 2020.  At June 30, 2020, the Company’s securities held-to-maturity portfolio was comprised of $249.1 million of agency mortgage-backed securities, and $73.6 million of tax-exempt municipal bonds.

    • During the second quarter of 2020, $7.0 million of municipal bonds held-to-maturity were called, with a gain on sale of securities of $11,000.

    • As of the current expected credit losses (“CECL”) methodology implementation date of January 1, 2020, there was a $58,000 allowance for losses recorded on the Company’s held-to-maturity municipal investment securities portfolio.  For the six months ended June 30, 2020, there was a reduction of $3,000 to the allowance for losses on the Company’s held-to-maturity municipal investment securities portfolio, for an allowance for losses of $55,000 at June 30, 2020.

  • 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:
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LOANS  June 30, 2020 March 31, 2020 June 30, 2019 
(in $000’s, unaudited) Balance  % to Total Balance  % to Total Balance  % to Total 
32%; width:32%; min-width:32%;">Commercial2%; width:2%; min-width:2%;"> 1%; width:1%; min-width:1%;">$8%; width:8%; min-width:8%;">553,843
1%; width:1%; min-width:1%;"> 2%; width:2%; min-width:2%;"> 8%; width:8%; min-width:8%;">212%; width:2%; min-width:2%;">%1%; width:1%; min-width:1%;">$8%; width:8%; min-width:8%;">696,1681%; width:1%; min-width:1%;"> 2%; width:2%; min-width:2%;"> 9%; width:9%; min-width:9%;">272%; width:2%; min-width:2%;">%1%; width:1%; min-width:1%;">$8%; width:8%; min-width:8%;">545,0921%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;"> 8%; width:8%; min-width:8%;">292%; width:2%; min-width:2%;">%
SBA Payroll Protection Program Loans  324,550  12% —  0% —  0%
Real estate:                
CRE - owner occupied  553,463
  21% 539,465  21% 421,970  23%
CRE - non-owner occupied  725,776  27% 748,245
  29% 517,604  28%
Land and construction  138,284  5% 153,321  6% 97,753  5%
Home equity  112,679  4% 117,544  5% 95,886  5%
Multifamily  169,637  6% 170,292  7% 82,293  4%
Residential mortgages  95,033  3
% 95,808  4% 97,530  5%
Consumer and other  22,759  1% 33,326  1% 19,863  1%
Total Loans  2,696,024  100% 2,554,169  100% 1,877,991  100%
Deferred loan costs (fees), net  (9,635) —  (258) —  (224) — 
Loans, net of deferred costs and fees $2,686,389  100%$2,553,911  100%$1,877,767  100%
  • Loans, excluding loans held-for-sale, increased $808.6 million or 43%, to $2.69 billion at June 30, 2020, compared to $1.88 billion at June 30, 2019, and increased $132.5 million or 5%, to $2.69 billion at June 30, 2020, compared to $2.55 billion at March 31, 2020.  Total loans at June 30, 2020 included $324.6 million of PPP loans.

  • Commercial and Industrial (“C&I”) line usage was 27% at June 30, 2020, compared to 40% at June 30, 2019, and 36% at March 31, 2020.

  • At June 30, 2020, 43% of the CRE loan portfolio was secured by owner-occupied real estate.
  • The following table summarizes the allowance for credit losses on loans(1) for the periods indicated:
           
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  For the Quarter
Ended		 For the Six Months
Ended 		 
ALLOWANCE FOR CREDIT LOSSES ON LOANS(1) June 30,  March 31,  June 30,  June 30,  June 30,  
(in $000’s, unaudited) 2020  2020  2019  2020  2019  
42%; width:42%; min-width:42%;">Balance at beginning of period2%; width:2%; min-width:2%;"> 1%; width:1%; min-width:1%;">$8%; width:8%; min-width:8%;">44,7031%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;">$8%; width:8%; min-width:8%;">23,2851%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;">$8%; width:8%; min-width:8%;">27,3181%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;">$8%; width:8%; min-width:8%;">23,2851%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;">$8%; width:8%; min-width:8%;">27,8481%; width:1%; min-width:1%;"> 2%; width:2%; min-width:2%;"> 
Charge-offs during the period  (465)  (673)  (76)  (1,138)  (302) 
Recoveries during the period  92   251   129   343   886  
Net recoveries (charge-offs) during the period  (373)  (422)  53   (795)  584  
Impact of adopting Topic 326  —   8,570   —   8,570   —  
Provision for credit losses on loans during the period(2)  1,114   13,270   (740)  14,384   (1,801) 
Balance at end of period $45,444  $44,703  $26,631  $45,444  $26,631  
                 
Total loans, net of deferred fees $2,686,389  $2,553,911  $1,877,767  $2,686,388  $1,877,767  
Total nonperforming loans $9,125  $12,088  $17,018  $9,125  $17,018  
Allowance for credit losses on loans to total loans(1)  1.69 % 1.75 % 1.42 % 1.69 % 1.42 %
Allowance for credit losses on loans to total nonperforming loans(1)  498.02 % 369.81 % 156.49 % 498.02 % 156.49 %
                 
(1) ACLL at  June 30, 2020 and March 31, 2020, Allowance for loan losses ("ALLL") at June 30, 2019 
(2) Provision for credit losses on loans for the quarters ended June 30, 2020 and March 31, 2020, and the six months ended June 30, 2020, Provision (credit) for loan losses for the quarter and six months ended June 30, 2019 
  • The ACLL was 1.69% of total loans at June 30, 2020 and the ACLL to total nonperforming loans was 498.02% at June 30, 2020. The ALLL was 1.42% of total loans and the ALLL to nonperforming loans was 156.49% at June 30, 2019. The ACLL was 1.75% of total loans at March 31, 2020 and the ACLL to total nonperforming loans was 369.81% at March 31, 2020.  The six basis points linked-quarter decline of the ACLL to total loans was largely due to the 5% increase in total loans for the second quarter of 2020, which primarily resulted from new PPP loans which are government supported.

  • The following table shows the results of adopting CECL for the first six months of 2020:
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DRIVERS OF CHANGE IN ACLL UNDER CECL  
(in $000’s, unaudited)  
77%; width:77%; min-width:77%;">ALLL at December 31, 20193%; width:3%; min-width:3%;"> 2%; width:2%; min-width:2%;">$17%; width:17%; min-width:17%;">23,2851%; width:1%; min-width:1%;"> 
Day 1 adjustment impact of adopting Topic 326  8,570 
ACLL at January 1, 2020  31,855 
Net (charge-offs) during the first quarter of 2020  (422)
Portfolio changes during the first quarter of 2020  1,216 
Economic factors during the first quarter of 2020  12,054 
ACLL at March 31, 2020  44,703 
Net (charge-offs) during the second quarter of 2020  (373)
Portfolio changes during the second quarter of 2020  (4,282)
Qualitative and quantitative changes during the second   
quarter of 2020 including changes in economic forecasts  5,396 
ACLL at June 30, 2020 $45,444 
  • Net charge-offs totaled $373,000 for the second quarter of 2020, compared to net recoveries of $53,000 for the second quarter of 2019, and net charge-offs of $422,000 for the first quarter of 2020.
  • The following is a breakout of NPAs at the periods indicated:
100%; border-collapse:collapse !important;">
32%; width:32%; min-width:32%;"> 2%; width:2%; min-width:2%;"> 1%; width:1%; min-width:1%;"> 8%; width:8%; min-width:8%;"> 1%; width:1%; min-width:1%;"> 2%; width:2%; min-width:2%;"> 8%; width:8%; min-width:8%;"> 2%; width:2%; min-width:2%;"> 1%; width:1%; min-width:1%;"> 8%; width:8%; min-width:8%;"> 1%; width:1%; min-width:1%;"> 2%; width:2%; min-width:2%;"> 8%; width:8%; min-width:8%;"> 2%; width:2%; min-width:2%;"> 1%; width:1%; min-width:1%;"> 8%; width:8%; min-width:8%;"> 1%; width:1%; min-width:1%;"> 2%; width:2%; min-width:2%;"> 8%; width:8%; min-width:8%;"> 2%; width:2%; min-width:2%;"> 
  End of Period: 
NONPERFORMING ASSETS June 30, 2020 March 31, 2020 June 30, 2019 
(in $000’s, unaudited) Balance % of Total Balance % of Total Balance % of Total 
CRE loans $3,394  37%$7,346  61%$8,442  49%
Commercial loans  3,244  36% 3,403  28% 6,583  39%
SBA loans  921  10% 771  6% 513  3%
Home equity and consumer loans  898  10% 126  1% 157  1%
Restructured and loans over 90 days past due and still accruing  668  7% 442  4% 1,323  8%
Total nonperforming assets $9,125  100%$12,088  100%$17,018  100%
  • NPAs totaled $9.1 million, or 0.20% of total assets, at June 30, 2020, compared to $17.0 million, or 0.55% of total assets, at June 30, 2019, and $12.1 million, or 0.30% of total assets, at March 31, 2020.

  • There were no foreclosed assets on the balance sheet at June 30, 2020, June 30, 2019, or March 31, 2020. 

  • Classified assets increased to $31.5 million, or 0.68% of total assets, at June 30, 2020, compared to $31.2 million, or 1.00% of total assets, at June 30, 2019, and decreased from $39.6 million, or 0.97% of total assets, at March 31, 2020.  Deferrals included in classified assets totaled $5.6 million at June 30, 2020.  These reclassifications are in keeping with internal credit policy as well as long-standing policy of the Office of the Comptroller of the Currency.  The increase in classified assets for the second quarter of 2020, compared to the second quarter of 2019 was due to two CRE secured and one commercial lending relationships that were moved to classified assets during the first quarter of 2020.  At July 15, 2020, 16 initially deferred loans with $5.3 million in outstanding balances have resumed making regularly scheduled monthly payments but remain classified by the Bank as “Special Mention”.
  • The following table summarizes the distribution of deposits and the percentage of distribution in each category for the periods indicated:       
100%; border-collapse:collapse !important;">
32%; width:32%; min-width:32%;"> 2%; width:2%; min-width:2%;"> 1%; width:1%; min-width:1%;"> 8%; width:8%; min-width:8%;"> 1%; width:1%; min-width:1%;"> 2%; width:2%; min-width:2%;"> 8%; width:8%; min-width:8%;"> 2%; width:2%; min-width:2%;"> 1%; width:1%; min-width:1%;"> 8%; width:8%; min-width:8%;"> 1%; width:1%; min-width:1%;"> 2%; width:2%; min-width:2%;"> 8%; width:8%; min-width:8%;"> 2%; width:2%; min-width:2%;"> 1%; width:1%; min-width:1%;"> 8%; width:8%; min-width:8%;"> 1%; width:1%; min-width:1%;"> 2%; width:2%; min-width:2%;"> 8%; width:8%; min-width:8%;"> 2%; width:2%; min-width:2%;"> 
DEPOSITS June 30, 2020 March 31, 2020 June 30, 2019 
(in $000’s, unaudited) Balance % to Total Balance % to Total Balance % to Total 
Demand, noninterest-bearing $1,714,058  44%$1,444,534  42%$994,082  38%
Demand, interest-bearing  934,780  24% 810,425  24% 682,114  26%
Savings and money market  1,091,740  28% 949,076  28% 788,832  30%
Time deposits — under $250  49,493  1% 51,009  2% 53,351  2%
Time deposits — $250 and over  93,822  2% 96,540  3% 88,519  3%
CDARS — interest-bearing demand,                   
money market and time deposits  16,333  1% 15,055  1% 15,575  1%
Total deposits $3,900,226  100%$3,366,639  100%$2,622,473  100%
                    
  • Total deposits increased $1.3 billion, or 49%, to $3.90 billion at June 30, 2020, compared to $2.62 billion at June 30, 2019, which included $787.7 million in deposits from Presidio, at fair value, and an increase of $490.0 million in the Company’s legacy deposits.  Total deposits increased $533.6 million or 16% from $3.37 billion at March 31, 2020. The large increase in the Company’s legacy deposits in the second quarter of 2020 was primarily tied to deposits by customers who had taken out PPP loans.

  • Deposits, excluding all time deposits and CDARS deposits, increased $1.3 billion, or 52%, to $3.74 billion at June 30, 2020, compared to $2.47 billion at June 30, 2019, which included $772.4 million in deposits from Presidio, at fair value, and an increase of $503.2 million in the Company’s legacy deposits.  Deposits, excluding all time deposits and CDARS deposits increased $536.5 million or 17%, compared to $3.20 billion at March 31, 2020.
  • The Company’s consolidated capital ratios exceeded regulatory guidelines and the Bank’s capital ratios exceeded the regulatory guidelines under the Basel III prompt corrective action (“PCA”) regulatory guidelines for a well-capitalized financial institution, and the Basel III minimum regulatory requirements at June 30, 2020, as reflected in the following table:
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        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)
41%; width:41%; min-width:41%;">Total Risk-Based2%; width:2%; min-width:2%;"> 7%; width:7%; min-width:7%;">15.94%; width:4%; min-width:4%;">%2%; width:2%; min-width:2%;"> 7%; width:7%; min-width:7%;">15.14%; width:4%; min-width:4%;">%2%; width:2%; min-width:2%;"> 8%; width:8%; min-width:8%;">10.05%; width:5%; min-width:5%;">%2%; width:2%; min-width:2%;"> 10%; width:10%; min-width:10%;">10.56%; width:6%; min-width:6%;">%
Tier 1 Risk-Based 13.3% 13.9% 8.0% 8.5%
Common Equity Tier 1 Risk-Based 13.3% 13.9% 6.5% 7.0%
Leverage 9.4% 9.8% 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:
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ACCUMULATED OTHER COMPREHENSIVE LOSS June 30,  March 31, June 30, 
(in $000’s, unaudited) 2020
 2020
 2019
55%; width:55%; min-width:55%;">Unrealized gain on securities available-for-sale2%; width:2%; min-width:2%;"> 1%; width:1%; min-width:1%;">$11%; width:11%; min-width:11%;">5,7671%; width:1%; min-width:1%;"> 2%; width:2%; min-width:2%;"> 1%; width:1%; min-width:1%;">$11%; width:11%; min-width:11%;">6,2991%; width:1%; min-width:1%;"> 2%; width:2%; min-width:2%;"> 1%; width:1%; min-width:1%;">$11%; width:11%; min-width:11%;">6751%; width:1%; min-width:1%;"> 
Remaining unamortized unrealized gain on securities         
available-for-sale transferred to held-to-maturity  279   288   316 
Split dollar insurance contracts liability  (4,865)  (4,850)  (3,770)
Supplemental executive retirement plan liability  (6,706)  (6,774)  (3,931)
Unrealized gain on interest-only strip from SBA loans  345   328   408 
Total accumulated other comprehensive loss $(5,180) $(4,709) $(6,302)
          
  • Tangible equity was $388.6 million at June 30, 2020, compared to $293.5 million at June 30, 2019, and $384.5 million at March 31, 2020.  Tangible book value per share was $6.49 at June 30, 2020, compared to $6.75 at June 30, 2019, and $6.46 at March 31, 2020.

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

Forward-Looking Statement Disclaimer

These forward-looking statements are subject to various risks and uncertainties that may be outside our control and our actual results could differ materially from our projected results.  Risks and uncertainties that could cause our financial performance to differ materially from our goals, plans, expectations and projections expressed in forward-looking statements include those set forth in our filings with the Securities and Exchange Commission (“SEC”), Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, and the following: (1) current and future economic and market conditions in the United States generally or in the communities we serve, including the effects of declines in property values and overall slowdowns in economic growth should these events occur; (2) effects of and changes in trade, monetary and fiscal policies and laws, including the interest rate policies of the Federal Open Market Committee of the Federal Reserve Board; (3) our ability to anticipate interest rate changes and manage interest rate risk; (4) changes in inflation, interest rates, and market liquidity which may impact interest margins and impact funding sources; (5) volatility in credit and equity markets and its effect on the global economy; (6) our ability to effectively compete with other banks and financial services companies and the effects of competition in the financial services industry on our business; (7) our ability to achieve loan growth and attract deposits; (8) risks associated with concentrations in real estate related loans; (9) the relative strength or weakness of the commercial and real estate markets where our borrowers are located, including related asset and market prices; (10) other than temporary impairment charges to our securities portfolio; (11) changes in the level of nonperforming assets 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 Small Business Administration 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 legal proceedings or regulatory or other governmental inquiries, and the results of regulatory examinations or reviews; (25) availability of and competition for acquisition opportunities; (26) risks resulting from domestic terrorism; (27) risks of natural disasters (including earthquakes) and other events beyond our control; (28) the expected cost savings, synergies and other financial benefits from the Presidio Bank merger might not be realized within the expected time frames or at all; (29) the rapidly changing uncertainties related to the Coronavirus pandemic including, but not limited to, the potential adverse effect of the pandemic on the economy, our employees and customers, and our financial performance; (30) the impact of the federal CARES Act and the significant additional lending activities undertaken by the Company in connection with the Small Business Administration’s Paycheck Protection Program enacted thereunder, including risks to the Company with respect to the uncertain application by the Small Business Administration of new borrower and loan eligibility, forgiveness and audit criteria; and (31) 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 


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  For the Quarter Ended: Percent Change From: For the Six Months Ended:
CONSOLIDATED INCOME STATEMENTS June 30,  March 31, June 30,  March 31, June 30,  June 30,   June 30,  Percent
(in $000’s, unaudited) 2020 2020 2019 2020 2019 2020  2019  Change
Interest income $37,132  $40,942  $33,489  (9)% 11% $78,074  $66,938  17%
Interest expense  2,192   2,362   2,573  (7)% (15)%  4,554   4,980  (9)%
Net interest income before provision for credit losses on loans(1)  34,940   38,580   30,916  (9)% 13%  73,520   61,958  19%
Provision (credit) for credit losses on loans(1)  1,114   13,270   (740) (92)% 251%  14,384   (1,801) 899%
Net interest income after provision for credit losses on loans(1)  33,826   25,310   31,656  34% 7%  59,136   63,759  (7)%
Noninterest income:                        
Service charges and fees on deposit accounts  650   969   1,177  (33)% (45)%  1,619   2,338  (31)%
Increase in cash surrender value of life insurance  458   458   333  0% 38%  916   663  38%
Servicing income  205   183   150  12% 37%  388   341  14%
Gain (loss) on sales of securities  170   100   548  70% (69)%  270   548  (51)%
Gain on the disposition of foreclosed assets  —   791   —  (100)% N/A   791   —  N/A 
Gain on sales of SBA loans  —   67   36  (100)% (100)%  67   175  (62)%
Other  595   625   521  (5)% 14%  1,220   1,168  4%
Total noninterest income  2,078   3,193   2,765  (35)% (25)%  5,271   5,233  1%
Noninterest expense:                        
Salaries and employee benefits  12,300   14,203   10,698  (13)% 15%  26,503   21,468  23%
Occupancy and equipment  1,766   1,772   1,578  0% 12%  3,538   3,084  15%
Professional fees  1,155   1,435   753  (20)% 53%  2,590   1,571  65%
Other  5,791   8,364   5,416  (31)% 7%  14,155   10,240  38%
Total noninterest expense  21,012   25,774   18,445  (18)% 14%  46,786   36,363  29%
Income before income taxes  14,892   2,729   15,976  446% (7)%  17,621   32,629  (46)%
Income tax expense  4,274   868   4,623  392% (8)%  5,142   9,130  (44)%
Net income $ 10,618  $ 1,861  $ 11,353  471% (6)% $ 12,479  $ 23,499  (47)%
                         
PER COMMON SHARE DATA                        
(unaudited)                        
Basic earnings per share $0.18  $0.03  $0.26  500% (31)% $0.21  $0.54  (61)%
Diluted earnings per share $0.18  $0.03  $0.26  500% (31)% $0.21  $0.54  (61)%
Weighted average shares outstanding - basic  59,420,592   59,286,927   43,202,562  0% 38%  59,353,759   43,155,360  38%
Weighted average shares outstanding - diluted  60,112,423   60,194,025   43,721,451  0% 37%  60,152,487   43,695,117  38%
Common shares outstanding at period-end  59,856,767   59,568,219   43,498,406  0% 38%  59,856,767   43,498,406  38%
Dividend per share $0.13  $0.13  $0.12  0% 8% $0.26  $0.24  8%
Book value per share $9.60  $9.59  $8.92  0% 8% $9.60  $8.92  8%
Tangible book value per share $6.49  $6.46  $6.75  0% (4)% $6.49  $6.75  (4)%
                         
KEY FINANCIAL RATIOS                        
(unaudited)                        
Annualized return on average equity  7.45%  1.29%  11.96% 478% (38)%  4.36%  12.61% (65)%
Annualized return on average tangible equity  11.06%  1.91%  15.94% 479% (31)%  6.45%  16.89% (62)%
Annualized return on average assets  0.96%  0.19%  1.48% 405% (35)%  0.59%  1.53% (61)%
Annualized return on average tangible assets  1.01%  0.19%  1.53% 432% (34)%  0.62%  1.58% (61)%
Net interest margin (fully tax equivalent)  3.46%  4.25%  4.38% (19)% (21)%  3.83%  4.38% (13)%
Efficiency ratio  56.76%  61.70%  54.76% (8)% 4%  59.38%  54.12% 10%
                         
AVERAGE BALANCES                        
(in $000’s, unaudited)                        
Average assets $4,434,238  $4,033,151  $3,070,043  10% 44% $4,233,693  $3,089,704  37%
Average tangible assets $4,247,522  $3,845,646  $2,975,096  10% 43% $4,046,583  $2,994,455  35%
Average earning assets $4,075,673  $3,665,151  $2,844,677  11% 43% $3,870,412  $2,865,021  35%
Average loans held-for-sale $3,617  $2,265  $4,256  60% (15)% $2,941  $3,693  (20)%
Average total loans $2,683,476  $2,511,460  $1,831,218  7% 47% $2,597,468  $1,836,277  41%
Average deposits $3,720,850  $3,327,812  $2,590,933  12% 44% $3,524,331  $2,613,993  35%
Average demand deposits - noninterest-bearing $1,660,547  $1,438,944  $1,001,914  15% 66% $1,549,745  $1,012,967  53%
Average interest-bearing deposits $2,060,303  $1,888,868  $1,589,019  9% 30% $1,974,586  $1,601,026  23%
Average interest-bearing liabilities $2,099,982  $1,928,770  $1,628,554  9% 29% $2,014,376  $1,640,539  23%
Average equity $572,939  $579,051  $380,605  (1)% 51% $575,995  $375,751  53%
Average tangible equity $386,223  $391,546  $285,658  (1)% 35% $388,886  $280,502  39%

(1)  Provision for credit losses on loans for the quarters ended June 30, 2020 and March 31, 2020 and the six months ended June 30, 2020, Provision for loan losses for quarter and six months ended June 30, 2019


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  For the Quarter Ended: 
CONSOLIDATED INCOME STATEMENTS June 30,  March 31, December 31, September 30, June 30,  
(in $000’s, unaudited) 2020 2020 2019 2019 2019 
32%; width:32%; min-width:32%;">Interest income2%; width:2%; min-width:2%;"> 1%; width:1%; min-width:1%;">$8%; width:8%; min-width:8%;">37,1321%; width:1%; min-width:1%;"> 2%; width:2%; min-width:2%;"> 1%; width:1%; min-width:1%;">$9%; width:9%; min-width:9%;">40,9421%; width:1%; min-width:1%;"> 2%; width:2%; min-width:2%;"> 1%; width:1%; min-width:1%;">$11%; width:11%; min-width:11%;">42,4711%; width:1%; min-width:1%;"> 2%; width:2%; min-width:2%;"> 1%; width:1%; min-width:1%;">$11%; width:11%; min-width:11%;">33,2501%; width:1%; min-width:1%;"> 2%; width:2%; min-width:2%;"> 1%; width:1%; min-width:1%;">$8%; width:8%; min-width:8%;">33,4891%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;"> 
Interest expense  2,192   2,362   3,242   2,625   2,573  
Net interest income before provision for credit losses on loans(1)  34,940   38,580   39,229   30,625   30,916  
Provision (credit) for credit losses on loans(1)  1,114   13,270   3,223   (576)  (740) 
Net interest income after provision for credit losses on loans(1)  33,826   25,310   36,006   31,201   31,656  
Noninterest income:                  
Service charges and fees on deposit accounts  650   969   1,140   1,032   1,177  
Increase in cash surrender value of life insurance  458   458   405   336   333  
Servicing income  205   183   156   139   150  
Gain (loss) on sales of securities  170   100   (217)  330   548  
Gain on the disposition of foreclosed assets  —   791   —   —   —  
Gain on sales of SBA loans  —   67   358   156   36  
Other  595   625   551   625   521  
Total noninterest income  2,078   3,193   2,393   2,618   2,765  
Noninterest expense:                  
Salaries and employee benefits  12,300   14,203   18,819   10,467   10,698  
Occupancy and equipment  1,766   1,772   2,013   1,550   1,578  
Professional fees  1,155   1,435   899   789   753  
Other  5,791   8,364   8,895   5,103   5,416  
Total noninterest expense  21,012   25,774   30,626   17,909   18,445  
Income before income taxes  14,892   2,729   7,773   15,910   15,976  
Income tax expense  4,274   868   2,088   4,633   4,623  
  Net income $ 10,618  $ 1,861  $ 5,685  $ 11,277  $ 11,353  
                   
PER COMMON SHARE DATA                  
(unaudited)                  
Basic earnings per share $0.18  $0.03  $0.10  $0.26  $0.26  
Diluted earnings per share $0.18  $0.03  $0.10  $0.26  $0.26  
Weighted average shares outstanding - basic  59,420,592   59,286,927   57,168,605   43,258,983   43,202,562  
Weighted average shares outstanding - diluted  60,112,423   60,194,025   58,361,976   43,796,904   43,721,451  
Common shares outstanding at period-end  59,856,767   59,568,219   59,368,156   43,509,406   43,498,406  
Dividend per share $0.13  $0.13  $0.12  $0.12  $0.12  
Book value per share $9.60  $9.59  $9.71  $9.09  $8.92  
Tangible book value per share $6.49  $6.46  $6.55  $6.92  $6.75  
                   
KEY FINANCIAL RATIOS                  
(unaudited)                  
Annualized return on average equity  7.45 % 1.29 % 4.04 % 11.44 % 11.96 %
Annualized return on average tangible equity  11.06 % 1.91 % 5.96 % 15.08 % 15.94 %
Annualized return on average assets  0.96 % 0.19 % 0.55 % 1.44 % 1.48 %
Annualized return on average tangible assets  1.01 % 0.19 % 0.57 % 1.49 % 1.53 %
Net interest margin (fully tax equivalent)  3.46 % 4.25 % 4.15 % 4.24 % 4.38 %
Efficiency ratio  56.76 % 61.70 % 73.58 % 53.87 % 54.76 %
                   
AVERAGE BALANCES                  
(in $000’s, unaudited)                  
Average assets $4,434,238  $4,033,151  $4,124,018  $3,103,043  $3,070,043  
Average tangible assets $4,247,522  $3,845,646  $3,943,725  $3,008,602  $2,975,096  
Average earning assets $4,075,673  $3,665,151  $3,762,239  $2,878,590  $2,844,677  
Average loans held-for-sale $3,617  $2,265  $3,299  $4,171  $4,256  
Average total loans $2,683,476  $2,511,460  $2,442,802  $1,851,669  $1,831,218  
Average deposits $3,720,850  $3,327,812  $3,432,771  $2,612,252  $2,590,933  
Average demand deposits - noninterest-bearing $1,660,547  $1,438,944  $1,452,893  $1,041,712  $1,001,914  
Average interest-bearing deposits $2,060,303  $1,888,868  $1,979,878  $1,570,540  $1,589,019  
Average interest-bearing liabilities $2,099,982  $1,928,770  $2,027,106  $1,610,168  $1,628,554  
Average equity $572,939  $579,051  $558,478  $391,086  $380,605  
Average tangible equity $386,223  $391,546  $378,185  $296,645  $285,658  

(1)  Provision for credit losses on loans for the quarters ended June 30 and March 31, 2020, Provision for loan losses for the prior periods


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  End of Period: Percent Change From:
CONSOLIDATED BALANCE SHEETS June 30,  March 31, June 30,  March 31, June 30, 
(in $000’s, unaudited) 2020 2020 2019 2020 2019
ASSETS               
42%; width:42%; min-width:42%;">Cash and due from banks2%; width:2%; min-width:2%;"> 1%; width:1%; min-width:1%;">$8%; width:8%; min-width:8%;">40,1081%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;">$9%; width:9%; min-width:9%;">36,9981%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;">$8%; width:8%; min-width:8%;">36,3021%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;"> 9%; width:9%; min-width:9%;">82%; width:2%; min-width:2%;">%1%; width:1%; min-width:1%;"> 8%; width:8%; min-width:8%;">102%; width:2%; min-width:2%;">%
Other investments and interest-bearing deposits               
in other financial institutions  885,792   406,399   239,710  118% 270%
Securities available-for-sale, at fair value  323,565   373,570   383,156  (13)% (16)%
Securities held-to-maturity, at amortized cost  322,677   348,044   351,399  (7)% (8)%
Loans held-for-sale - SBA, including deferred costs  4,324   2,415   5,202  79% (17)%
Loans:               
Commercial  553,843
   696,168   545,092  (20)% 2%
SBA PPP loans  324,550   —   —  N/A  N/A 
Real estate:               
CRE - owner occupied  553,463
   539,465   421,970  3% 31%
CRE - non-owner occupied  725,776   748,245   517,604  (3)% 40%
Land and construction  138,284   153,321   97,753  (10)% 41%
Home equity  112,679   117,544   95,886  (4)% 18%
Multifamily  169,637
   170,292
   82,293  0% 106%
Residential mortgages  95,033   95,808
   97,530  (1)% (3)%
Consumer and other  22,759   33,326   19,863  (32)% 15%
Loans  2,696,024   2,554,169   1,877,991  6% 44%
Deferred loan fees, net  (9,635)  (258)  (224) 3634% 4201%
Total loans, net of deferred costs and fees  2,686,389   2,553,911   1,877,767  5% 43%
Allowance for credit losses on loans(1)  (45,444)  (44,703)  (26,631) 2% 71%
Loans, net  2,640,945   2,509,208   1,851,136  5% 43%
Company-owned life insurance  76,944   76,485   62,522  1% 23%
Premises and equipment, net  9,500   9,025   6,975  5% 36%
Goodwill  167,631   167,371   83,753  0% 100%
Other intangible assets  18,593   19,557   10,900  (5)% 71%
Accrued interest receivable and other assets  124,322   129,090   76,976  (4)% 62%
Total assets $ 4,614,401  $ 4,078,162  $ 3,108,031  13% 48%
                
LIABILITIES AND SHAREHOLDERS’ EQUITY               
Liabilities:               
Deposits:               
Demand, noninterest-bearing $1,714,058  $1,444,534  $994,082  19% 72%
Demand, interest-bearing  934,780   810,425   682,114  15% 37%
Savings and money market  1,091,740   949,076   788,832  15% 38%
Time deposits-under $250  49,493   51,009   53,351  (3)% (7)%
Time deposits-$250 and over  93,822   96,540   88,519  (3)% 6%
CDARS - money market and time deposits  16,333   15,055   15,575  8% 5%
Total deposits  3,900,226   3,366,639   2,622,473  16% 49%
Subordinated debt, net of issuance costs  39,646   39,600   39,461  0% 0%
Accrued interest payable and other liabilities  99,722   100,482   57,989  (1)% 72%
Total liabilities  4,039,594   3,506,721   2,719,923  15% 49%
                
Shareholders’ Equity:               
Common stock  492,333   491,347   302,305  0% 63%
Retained earnings  87,654   84,803   92,105  3% (5)%
Accumulated other comprehensive loss  (5,180)  (4,709)  (6,302) (10)% 18%
Total shareholders' equity  574,807   571,441   388,108  1% 48%
  Total liabilities and shareholders’ equity $ 4,614,401  $ 4,078,162  $ 3,108,031  13% 48%

(1)  Allowance for credit losses on loans at June 30, 2020 and March 31, 2020, Allowance for loan losses June 30, 2019


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  End of Period:
CONSOLIDATED BALANCE SHEETS June 30,  March 31, December 31, September 30, June 30, 
(in $000’s, unaudited) 2020 2020 2019 2019 2019
ASSETS               
38%; width:38%; min-width:38%;">Cash and due from banks2%; width:2%; min-width:2%;"> 1%; width:1%; min-width:1%;">$8%; width:8%; min-width:8%;"> 40,1081%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;">$8%; width:8%; min-width:8%;"> 36,9981%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;">$11%; width:11%; min-width:11%;"> 49,4471%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;">$11%; width:11%; min-width:11%;"> 48,1211%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;">$8%; width:8%; min-width:8%;"> 36,3021%; width:1%; min-width:1%;"> 
Other investments and interest-bearing deposits in other financial institutions   885,792    406,399    407,923    367,662    239,710 
Securities available-for-sale, at fair value   323,565    373,570    404,825    333,101    383,156 
Securities held-to-maturity, at amortized cost   322,677    348,044    366,560    342,033    351,399 
Loans held-for-sale - SBA, including deferred costs   4,324    2,415    1,052    3,571    5,202 
Loans:               
Commercial   553,843    696,168    603,345    503,075    545,092 
SBA PPP loans   324,550    —    —    —    — 
Real estate:               
CRE - owner occupied   553,463    539,465    548,907    437,527    421,970 
CRE - non-owner occupied   725,776    748,245    767,821    542,761    517,604 
Land and construction   138,284    153,321    147,189    96,679    97,753 
Home equity   112,679    117,544    151,775    94,476    95,886 
Multifamily   169,637    170,292    180,623    86,275    82,293 
Residential mortgages  95,033   95,808
    100,759    93,099    97,530 
Consumer and other   22,759    33,326    33,744    21,600    19,863 
Loans   2,696,024    2,554,169    2,534,163    1,875,492    1,877,991 
Deferred loan fees, net   (9,635)   (258)   (319)   (105)   (224)
Total loans, net of deferred fees   2,686,389    2,553,911    2,533,844    1,875,387    1,877,767 
Allowance for credit losses on loans(1)   (45,444)   (44,703)   (23,285)   (25,895)   (26,631)
Loans, net   2,640,945    2,509,208    2,510,559    1,849,492    1,851,136 
Company-owned life insurance   76,944    76,485    76,027    62,858    62,522 
Premises and equipment, net   9,500    9,025    8,250    6,849    6,975 
Goodwill   167,631    167,371    167,420    83,753    83,753 
Other intangible assets   18,593    19,557    20,415    10,346    10,900 
Accrued interest receivable and other assets   124,322    129,090    96,985    74,685    76,976 
Total assets $ 4,614,401  $ 4,078,162  $ 4,109,463  $ 3,182,471  $ 3,108,031 
                
LIABILITIES AND SHAREHOLDERS’ EQUITY               
Liabilities:               
Deposits:               
Demand, noninterest-bearing $ 1,714,058  $ 1,444,534  $ 1,450,873  $ 1,094,953  $ 994,082 
Demand, interest-bearing   934,780    810,425    798,375    666,054    682,114 
Savings and money market   1,091,740    949,076    982,430    761,471    788,832 
Time deposits-under $250   49,493    51,009    54,361    53,560    53,351 
Time deposits-$250 and over   93,822    96,540    99,882    95,543    88,519 
CDARS - money market and time deposits   16,333    15,055    28,847    17,409    15,575 
Total deposits   3,900,226    3,366,639    3,414,768    2,688,990    2,622,473 
Subordinated debt, net of issuance costs   39,646    39,600    39,554    39,507    39,461 
Other short-term borrowings   —    —    328    —    — 
Accrued interest payable and other liabilities   99,722    100,482    78,105    58,628    57,989 
Total liabilities   4,039,594    3,506,721    3,532,755    2,787,125    2,719,923 
                
Shareholders’ Equity:               
Common stock   492,333    491,347    489,745    302,983    302,305 
Retained earnings   87,654    84,803    96,741    98,161    92,105 
Accumulated other comprehensive loss   (5,180)   (4,709)   (9,778)   (5,798)   (6,302)
Total shareholders' equity   574,807    571,441    576,708    395,346    388,108 
Total liabilities and shareholders’ equity $ 4,614,401  $ 4,078,162  $ 4,109,463  $ 3,182,471  $ 3,108,031 

(1)  Allowance for credit losses on loans at June 30, 2020 and March 31, 2020, Allowance for loan losses for the prior periods


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  End of Period: Percent Change From: 
CREDIT QUALITY DATA June 30,  March 31, June 30,  March 31, June 30,  
(in $000’s, unaudited) 2020 2020 2019 2020 2019 
40%; width:40%; min-width:40%;">Nonaccrual loans - held-for-investment2%; width:2%; min-width:2%;"> 1%; width:1%; min-width:1%;">$8%; width:8%; min-width:8%;">8,4571%; width:1%; min-width:1%;"> 2%; width:2%; min-width:2%;"> 1%; width:1%; min-width:1%;">$8%; width:8%; min-width:8%;">11,6461%; width:1%; min-width:1%;"> 2%; width:2%; min-width:2%;"> 1%; width:1%; min-width:1%;">$8%; width:8%; min-width:8%;">15,6951%; width:1%; min-width:1%;"> 2%; width:2%; min-width:2%;"> 8%; width:8%; min-width:8%;">(271%; width:1%; min-width:1%;">)2%; width:2%; min-width:2%;">%8%; width:8%; min-width:8%;">(461%; width:1%; min-width:1%;">)2%; width:2%; min-width:2%;">%
Restructured and loans over 90 days past due and still accruing  668   442   1,323  51 %(50)%
Total nonperforming loans  9,125   12,088   17,018  (25)%(46)%
Foreclosed assets  —   —   —  N/A  N/A  
Total nonperforming assets $9,125  $12,088  $17,018  (25)%(46)%
Other restructured loans still accruing $64  $103  $175  (38)%(63)%
Net charge-offs (recoveries) during the quarter $373  $422  $(53) (12)%804 %
Provision for credit losses on loans during the quarter(1) $1,114  $13,270  $(740) (92)%251 %
Adoption of Topic 326 $—  $8,570  $—  (100)%N/A 
Allowance for credit losses on loans(2) $45,444  $44,703  $26,631  2 %71 %
Classified assets $31,452  $39,603  $31,176  (21)%1 %
Allowance for credit losses on loans to total loans(2)  1.69 % 1.75 % 1.42 %(3)%19 %
Allowance for credit losses on loans to total nonperforming loans(2)  498.02 % 369.81 % 156.49 %35 %218 %
Nonperforming assets to total assets  0.20 % 0.30 % 0.55 %(33)%(64)%
Nonperforming loans to total loans  0.34 % 0.47 % 0.91 %(28)%(63)%
Classified assets to Heritage Commerce Corp                
Tier 1 capital plus allowance for credit losses on loans(2)  7 % 9 % 10 %(22)%(30)%
Classified assets to Heritage Bank of Commerce                
Tier 1 capital plus allowance for credit losses on loans(2)  7 % 9 % 9 %(22)%(22)%
                 
OTHER PERIOD-END STATISTICS                
(in $000’s, unaudited)                
Heritage Commerce Corp:                
Tangible common equity (3) $388,583  $384,513  $293,455  1 %32 %
Shareholders’ equity / total assets  12.46 % 14.01 % 12.49 %(11)%0 %
Tangible common equity / tangible assets (4)  8.78 % 9.88 % 9.74 %(11)%(10)%
Loan to deposit ratio  68.88 % 75.86 % 71.60 %(9)%(4)%
Noninterest-bearing deposits / total deposits  43.95 % 42.91 % 37.91 %2 %16 %
Total risk-based capital ratio  15.9 % 14.8 % 15.9 %7 %0 %
Tier 1 risk-based capital ratio  13.3 % 12.4 % 13.0 %7 %2 %
Common Equity Tier 1 risk-based capital ratio  13.3 % 12.4 % 13.0 %7 %2 %
Leverage ratio  9.4 % 10.2 % 9.9 %(8)%(5)%
Heritage Bank of Commerce:                
Total risk-based capital ratio  15.1 % 14.1 % 14.9 %7 %1 %
Tier 1 risk-based capital ratio  13.9 % 12.9 % 13.7 %8
 %1 %
Common Equity Tier 1 risk-based capital ratio  13.9 % 12.9 % 13.7 %8
 %1 %
Leverage ratio  9.8 % 10.6 % 10.5 %(8)%(7)%

____________
(1)  Provision (credit) for credit losses on loans for the quarters ended June 30, 2020 and March 31, 2020, Provision (credit) for loan losses for the quarter ended June 30, 2019
(2)  Allowance for credit losses on loans at June 30, 2020 and March 31, 2020, Allowance for loan losses for the quarter ended June 30, 2019
(3)  Represents shareholders' equity minus goodwill and other intangible assets
(4)  Represents shareholders' equity minus goodwill and other intangible assets divided by total assets minus goodwill and other intangible assets

            

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  End of Period: 
CREDIT QUALITY DATA June 30,  March 31, December 31, September 30, June 30,  
(in $000’s, unaudited) 2020 2020 2019 2019 2019 
32%; width:32%; min-width:32%;">Nonaccrual loans - held-for-investment2%; width:2%; min-width:2%;"> 1%; width:1%; min-width:1%;">$8%; width:8%; min-width:8%;">8,4571%; width:1%; min-width:1%;"> 2%; width:2%; min-width:2%;"> 1%; width:1%; min-width:1%;">$9%; width:9%; min-width:9%;">11,6461%; width:1%; min-width:1%;"> 2%; width:2%; min-width:2%;"> 1%; width:1%; min-width:1%;">$11%; width:11%; min-width:11%;">8,6751%; width:1%; min-width:1%;"> 2%; width:2%; min-width:2%;"> 1%; width:1%; min-width:1%;">$11%; width:11%; min-width:11%;">13,6381%; width:1%; min-width:1%;"> 2%; width:2%; min-width:2%;"> 1%; width:1%; min-width:1%;">$8%; width:8%; min-width:8%;">15,6951%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;"> 
Restructured and loans over 90 days past due and still accruing  668   442   1,153   609   1,323  
Total nonperforming loans  9,125   12,088   9,828   14,247   17,018  
Foreclosed assets  —   —   —   —   —  
Total nonperforming assets $9,125  $12,088  $9,828  $14,247  $17,018  
Other restructured loans still accruing $64  $103  $436  $247  $175  
Net charge-offs (recoveries) during the quarter $373  $422  $5,833  $160  $(53) 
Provision for credit losses on loans during the quarter(1) $1,114  $13,270  $3,223  $(576) $(740) 
Adoption of Topic 326 $—  $8,570  $—  $—  $—  
Allowance for credit losses on loans(2) $45,444  $44,703  $23,285  $25,895  $26,631  
Classified assets $31,452  $39,603  $32,579  $20,225  $31,176  
Allowance for credit losses on loans to total loans(2)  1.69 % 1.75 % 0.92 % 1.38 % 1.42 %
Allowance for credit losses on loans to total nonperforming loans(2)  498.02 % 369.81 % 236.93 % 181.76 % 156.49 %
Nonperforming assets to total assets  0.20 % 0.30 % 0.24 % 0.45 % 0.55 %
Nonperforming loans to total loans  0.34 % 0.47 % 0.39 % 0.76 % 0.91 %
Classified assets to Heritage Commerce Corp                   
Tier 1 capital plus allowance for credit losses on loans(2)  7 % 9 % 8 % 6 % 10 %
Classified assets to Heritage Bank of Commerce                   
Tier 1 capital plus allowance for credit losses on loans(2)  7 % 9 % 7 % 6 % 9 %
                    
OTHER PERIOD-END STATISTICS                   
(in $000’s, unaudited)                   
Heritage Commerce Corp:                   
Tangible common equity (3) $388,583  $384,513  $388,873  $301,247  $293,455  
Shareholders’ equity / total assets  12.46 % 14.01 % 14.03 % 12.42 % 12.49 %
Tangible common equity / tangible assets (4)  8.78 % 9.88 % 9.92 % 9.75 % 9.74 %
Loan to deposit ratio  68.88 % 75.86 % 74.20 % 69.74 % 71.60 %
Noninterest-bearing deposits / total deposits  43.95 % 42.91 % 42.49 % 40.72 % 37.91 %
Total risk-based capital ratio  15.9 % 14.8 % 14.6 % 16.2 % 15.9 %
Tier 1 risk-based capital ratio  13.3 % 12.4 % 12.5 % 13.3 % 13.0 %
Common Equity Tier 1 risk-based capital ratio  13.3 % 12.4 % 12.5 % 13.3 % 13.0 %
Leverage ratio  9.4 % 10.2 % 9.8 % 10.0 % 9.9 %
Heritage Bank of Commerce:                   
Total risk-based capital ratio  15.1 % 14.1 % 13.9 % 15.2 % 14.9 %
Tier 1 risk-based capital ratio  13.9 % 12.9 % 13.1 % 14.1 % 13.7 %
Common Equity Tier 1 risk-based capital ratio  13.9 % 12.9 % 13.1 % 14.1 % 13.7 %
Leverage ratio  9.8 % 10.6 % 10.2 % 10.6 % 10.5 %

____________
(1)  Provision for credit losses on loans for the quarters ended June 30, 2020 and March 31, 2020, Provision (credit) for loan losses for the prior periods
(2)  Allowance for credit losses on loans at June 30, 2020 and March 31, 2020, Allowance for loan losses for the prior periods
(3)  Represents shareholders' equity minus goodwill and other intangible assets
(4)  Represents shareholders' equity minus goodwill and other intangible assets divided by total assets minus goodwill and other intangible assets


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  For the Quarter Ended For the Quarter Ended 
  June 30, 2020 June 30, 2019 
NET INTEREST INCOME AND      Interest Average
     Interest Average
 
NET INTEREST MARGIN Average Income/ Yield/
 Average Income/ Yield/
 
(in $000’s, unaudited) Balance Expense Rate
 Balance Expense Rate
 
Assets:                     
39%; width:39%; min-width:39%;">Loans, gross (1)(2)2%; width:2%; min-width:2%;"> 1%; width:1%; min-width:1%;">$8%; width:8%; min-width:8%;">2,687,0931%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;">$7%; width:7%; min-width:7%;">32,8451%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;"> 6%; width:6%; min-width:6%;">4.921%; width:1%; min-width:1%;"> 2%; width:2%; min-width:2%;">%1%; width:1%; min-width:1%;">$8%; width:8%; min-width:8%;">1,835,4741%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;">$7%; width:7%; min-width:7%;">27,2511%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;"> 6%; width:6%; min-width:6%;">5.961%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;">%
Securities - taxable  611,709   3,155  2.07 % 707,710   4,136  2.34 %
Securities - exempt from Federal tax (3)  76,160   612  3.23 % 85,329   692  3.25 %
Other investments and interest-bearing deposits in other financial institutions  700,711   648  0.37 % 216,164   1,556  2.89 %
Total interest earning assets (3)  4,075,673   37,260  3.68 % 2,844,677   33,635  4.74 %
Cash and due from banks  37,716         37,051        
Premises and equipment, net  9,096         7,050        
Goodwill and other intangible assets  186,716         94,947        
Other assets  125,037         86,318        
Total assets $4,434,238        $3,070,043        
                      
Liabilities and shareholders’ equity:                     
Deposits:                     
Demand, noninterest-bearing $1,660,547        $1,001,914        
                      
Demand, interest-bearing  890,158   525  0.24 % 686,872   612  0.36 %
Savings and money market  1,009,078   794  0.32 % 744,475   1,034  0.56 %
Time deposits - under $100  17,825   18  0.41 % 19,267   22  0.46 %
Time deposits - $100 and over  127,877   277  0.87 % 126,303   326  1.04 %
CDARS - money market and time deposits  15,365   1  0.03 % 12,102   1  0.03 %
Total interest-bearing deposits  2,060,303   1,615  0.32 % 1,589,019   1,995  0.50 %
Total deposits  3,720,850   1,615  0.17 % 2,590,933   1,995  0.31 %
                      
Subordinated debt, net of issuance costs  39,617   577  5.86 % 39,431   577  5.87 %
Short-term borrowings  62   —  0.00 % 104   1  3.86 %
Total interest-bearing liabilities  2,099,982   2,192  0.42 % 1,628,554   2,573  0.63 %
Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds  3,760,529   2,192  0.23 % 2,630,468   2,573  0.39 %
Other liabilities  100,770         58,970        
Total liabilities  3,861,299         2,689,438        
Shareholders’ equity  572,939         380,605        
Total liabilities and shareholders’ equity $4,434,238        $3,070,043        
                      
Net interest income (3) / margin      35,068  3.46 %     31,062  4.38 %
Less tax equivalent adjustment (3)      (128)         (146)    
Net interest income     $34,940         $30,916     

____________
(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 $773,000 for the second quarter of 2020 (of which $637,000 was from PPP loans), compared to $210,000 for the second quarter of 2019.
(3)  Reflects the fully tax equivalent adjustment for Federal tax-exempt income based on a 21%.


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  For the Quarter Ended For the Quarter Ended 
  June 30, 2020 March 31, 2020 
NET INTEREST INCOME AND      Interest Average
     Interest Average
 
NET INTEREST MARGIN Average Income/ Yield/
 Average Income/ Yield/
 
(in $000’s, unaudited) Balance Expense Rate
 Balance Expense Rate
 
Assets:                     
39%; width:39%; min-width:39%;">Loans, gross (1)(2)2%; width:2%; min-width:2%;"> 1%; width:1%; min-width:1%;">$8%; width:8%; min-width:8%;">2,687,0931%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;">$7%; width:7%; min-width:7%;">32,8451%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;"> 6%; width:6%; min-width:6%;">4.921%; width:1%; min-width:1%;"> 2%; width:2%; min-width:2%;">%1%; width:1%; min-width:1%;">$8%; width:8%; min-width:8%;">2,513,7251%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;">$7%; width:7%; min-width:7%;">34,7821%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;"> 6%; width:6%; min-width:6%;">5.571%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;">%
Securities - taxable  611,709   3,155  2.07 % 670,299   3,948  2.37 %
Securities - exempt from Federal tax (3)  76,160   612  3.23 % 80,369   647  3.24 %
Other investments and interest-bearing deposits in other financial institutions  700,711   648  0.37 % 400,758   1,701  1.71 %
Total interest earning assets (3)  4,075,673   37,260  3.68 % 3,665,151   41,078  4.51 %
Cash and due from banks  37,716         44,539        
Premises and equipment, net  9,096         8,607        
Goodwill and other intangible assets  186,716         187,505        
Other assets  125,037         127,349        
Total assets $4,434,238        $4,033,151        
                      
Liabilities and shareholders’ equity:                     
Deposits:                     
Demand, noninterest-bearing $1,660,547        $1,438,944        
                      
Demand, interest-bearing  890,158   525  0.24 % 800,800   542  0.27 %
Savings and money market  1,009,078   794  0.32 % 920,422   914  0.40 %
Time deposits - under $100  17,825   18  0.41 % 18,777   22  0.47 %
Time deposits - $100 and over  127,877   277  0.87 % 132,314   305  0.93 %
CDARS - money market and time deposits  15,365   1  0.03 % 16,555   2  0.05 %
Total interest-bearing deposits  2,060,303   1,615  0.32 % 1,888,868   1,785  0.38 %
Total deposits  3,720,850   1,615  0.17 % 3,327,812   1,785  0.22 %
                      
Subordinated debt, net of issuance costs  39,617   577  5.86 % 39,571   577  5.86 %
Short-term borrowings  62   —  0.00 % 331   —  0.00 %
Total interest-bearing liabilities  2,099,982   2,192  0.42 % 1,928,770   2,362  0.49 %
Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds  3,760,529   2,192  0.23 % 3,367,714   2,362  0.28 %
Other liabilities  100,770         86,386        
Total liabilities  3,861,299         3,454,100        
Shareholders’ equity  572,939         579,051        
Total liabilities and shareholders’ equity $4,434,238        $4,033,151        
                      
Net interest income (3) / margin      35,068  3.46 %     38,716  4.25 %
Less tax equivalent adjustment (3)      (128)         (136)    
Net interest income     $34,940         $38,580     

____________
(1) Includes loans held-for-sale.  Nonaccrual loans are included in average balance.
(2) Yield amounts earned on loans include fees and costs. The accretion of net deferred loan fees into loan interest income was $773,000 for the second quarter of 2020 (of which 637,000 was from PPP loans), compared to $139,000 for the first quarter of 2020.
(3) Reflects the fully tax equivalent adjustment for Federal tax-exempt income based on a 21%.


100%; border-collapse:collapse !important;">
                      
                      
  For the Six Months Ended  For the Six Months Ended  
  June 30, 2020 June 30, 2019 
NET INTEREST INCOME AND      Interest Average
     Interest Average
 
NET INTEREST MARGIN Average Income/ Yield/
 Average Income/ Yield/
 
(in $000’s, unaudited) Balance Expense Rate
 Balance Expense Rate
 
Assets:                     
39%; width:39%; min-width:39%;">Loans, gross (1)(2)2%; width:2%; min-width:2%;"> 1%; width:1%; min-width:1%;">$8%; width:8%; min-width:8%;">2,600,4091%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;">$7%; width:7%; min-width:7%;">67,6271%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;"> 6%; width:6%; min-width:6%;">5.231%; width:1%; min-width:1%;"> 2%; width:2%; min-width:2%;">%1%; width:1%; min-width:1%;">$8%; width:8%; min-width:8%;">1,836,2771%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;">$7%; width:7%; min-width:7%;">54,0581%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;"> 6%; width:6%; min-width:6%;">5.941%; width:1%; min-width:1%;"> 1%; width:1%; min-width:1%;">%
Securities - taxable  641,004   7,103  2.23 % 724,406   8,645  2.41 %
Securities - exempt from Federal tax (3)  78,265   1,259  3.23 % 85,634   1,386  3.26 %
Other investments, interest-bearing deposits in other financial institutions and Federal funds sold  550,734   2,349  0.86 % 218,704   3,141  2.90 %
Total interest earning assets (3)  3,870,412   78,338  4.07 % 2,865,021   67,230  4.73 %
Cash and due from banks  41,128         37,129        
Premises and equipment, net  8,851         7,070        
Goodwill and other intangible assets  187,110         95,249        
Other assets  126,192         85,235        
Total assets $4,233,693        $3,089,704        
                      
Liabilities and shareholders’ equity:                     
Deposits:                     
Demand, noninterest-bearing $1,549,745        $1,012,967        
                      
Demand, interest-bearing  845,479   1,067  0.25 % 694,246   1,230  0.36 %
Savings and money market  964,750   1,708  0.36 % 747,815   1,941  0.52 %
Time deposits - under $100  18,301   40  0.44 % 19,820   44  0.45 %
Time deposits - $100 and over  130,096   582  0.90 % 126,436   613  0.98 %
CDARS - money market and time deposits  15,960   3  0.04 % 12,709   3  0.05 %
Total interest-bearing deposits  1,974,586   3,400  0.35 % 1,601,026   3,831  0.48 %
Total deposits  3,524,331   3,400  0.19 % 2,613,993   3,831  0.30 %
                      
Subordinated debt, net of issuance costs  39,594   1,154  5.86 % 39,408   1,148  5.87 %
Short-term borrowings  196   —  0.00 % 105   1  1.92 %
Total interest-bearing liabilities  2,014,376   4,554  0.45 % 1,640,539   4,980  0.61 %
Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds  3,564,121   4,554  0.26 % 2,653,506   4,980  0.38 %
Other liabilities  93,577         60,447        
Total liabilities  3,657,698         2,713,953        
Shareholders’ equity  575,995         375,751        
Total liabilities and shareholders’ equity $4,233,693        $3,089,704        
                      
Net interest income (3) / margin      73,784  3.83 %     62,250  4.38 %
Less tax equivalent adjustment (3)      (264)         (292)    
Net interest income     $73,520         $61,958     

____________
(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 $912,000 for the first six months ended June 30, 2020 (of which $637,000 was from PPP loans), compared to $301,000 for the first six months ended June 30, 2019.
(3)  Reflects the fully tax equivalent adjustment for Federal tax-exempt income based on a 21%.

 


FAQ

What was Heritage Commerce Corp's net income for Q2 2020?

Heritage Commerce Corp reported a net income of $10.6 million for Q2 2020.

How did the diluted earnings per share for HTBK change in Q2 2020?

Diluted earnings per share for HTBK decreased from $0.26 in Q2 2019 to $0.18 in Q2 2020.

What factors contributed to the deposit growth reported by HTBK?

The 16% increase in total deposits was primarily driven by customer deposits linked to the PPP loans.

What was the status of nonperforming assets at Heritage Commerce Corp in Q2 2020?

Nonperforming assets decreased by 25% to $9.1 million in Q2 2020.

What impact did COVID-19 have on Heritage Commerce Corp's financial results?

The ongoing impact of COVID-19 affected loan performance, resulting in deferred loans totaling approximately $183 million.

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Heritage Commerce Corp

NASDAQ:HTBK

HTBK Rankings

#2882 Ranked by Market Cap
#583 Ranked by Dividends

HTBK Latest News

Nov 13, 2024
Heritage Commerce Corp Announces Chief Financial Officer Succession
Oct 24, 2024
Heritage Commerce Corp Declares Regular Quarterly Cash Dividend of $0.13 Per Share
Oct 24, 2024
Heritage Commerce Corp Reports Client Deposit Growth of 6% in the Third Quarter of 2024
Oct 2, 2024
Heritage Commerce Corp and Heritage Bank of Commerce Announce Appointment of New Chief Operating Officer Thomas A. Sa
Aug 15, 2024
Ranson W. Webster to Retire from Heritage Commerce Corp Board of Directors and Julianne M. Biagini-Komas to be named Vice Chair of Board

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