Heritage Commerce Corp Reports Earnings of $11.2 Million for the Third Quarter of 2020

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Heritage Commerce Corp (Nasdaq: HTBK) reported third quarter 2020 net income of $11.2 million, translating to $0.19 per diluted share, a decrease from $11.3 million or $0.26 per share year-over-year. For the nine months ended September 30, 2020, net income was $23.7 million compared to $34.8 million in 2019. Loan quality remained stable with a 1.68% allowance for credit losses. Noninterest income rose by 25% due to gains from SBA loans. The capital position is robust, with a total risk-based capital ratio of 16.0%.

Positive

Net income for Q3 2020 was $11.2 million, showing strong earnings amid economic challenges.
Noninterest income increased by 25% compared to the previous quarter.
Credit quality metrics remained stable, with $145.3 million of COVID-19 related loan deferrals resuming payments.

Negative

Net income decreased from $34.8 million in 2019 to $23.7 million for the nine months ended September 30, 2020.
Net interest margin contracted due to a 150 basis point rate reduction.

10/22/2020 - 05:53 PM

SAN JOSE, Calif., Oct. 22, 2020 (GLOBE NEWSWIRE) -- Heritage Commerce Corp (Nasdaq: HTBK), the holding company (the “Company”) for Heritage Bank of Commerce (the “Bank”), today announced third quarter 2020 net income of $11.2 million, or $0.19 per average diluted common share, compared to $11.3 million, or $0.26 per average diluted common share, for the third quarter of 2019, and $10.6 million, or $0.18 per average diluted common share, for the second quarter of 2020. For the nine months ended September 30, 2020, net income was $23.7 million, or $0.39 per average diluted common share, compared to $34.8 million, or $0.80 per average diluted common share, for the nine months ended September 30, 2019. All results are unaudited.

“We delivered solid earnings in the third quarter of 2020 against the backdrop of an economy affected by the Coronavirus pandemic,” said Keith A. Wilton, President and Chief Executive Officer. “In the face of these challenges, we continued to work diligently to support our customers, communities and employees while prudently managing risk. Our participation in the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) in the prior quarters helped us in this capacity. Loan and deposit trends remained steady and our noninterest income increased by 25% from the preceding quarter, primarily due to a $400,000 gain on sale of SBA loans and a $310,000 gain realized on a warrant that we exercised. As anticipated, our net interest margin contracted during the quarter following the 150 basis point rate reduction by the Federal Reserve Bank earlier in the year and the low interest rates on recently funded SBA PPP loans.”

“Credit quality metrics remained stable, and we are particularly encouraged by the fact that of the $186.6 million of initial COVID-19 related loan deferrals, $145.3 million have resumed payments as of September 30, 2020,” said Mr. Wilton. “Of the loans remaining in deferment, most are backed by some form of real estate or personal guarantees. As well, the provision for credit losses was a modest $197,000 for the third quarter of 2020. The allowance for credit losses on loans (“ACLL”) to total loans was 1.68%, and the ACLL to total loans, excluding PPP loans, was 1.91% at September 30, 2020.”

“Our regulatory capital position held relatively steady and remained healthy at the end of the third quarter of 2020. Our capital base serves as the foundation of the Bank’s financial condition and the basis of security for our banking customers,” stated Mr. Wilton. “Total risk-based capital ratio and leverage ratio for the Company (consolidated) was 16.0% and 9.3%, respectively, and 15.2% and 9.7%, respectively, for the Bank, at September 30, 2020.”

“As previously announced, in the third quarter of 2020, we relocated our corporate headquarters, San Jose Branch and factoring subsidiary, Bay View Funding, to 224 Airport Parkway, San Jose, CA,” commented Mr. Wilton. “This new facility allows us to cost effectively consolidate many of the Bank’s dispersed operating units into a single location to better support our customers, community partners and the entire Heritage organization.”

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

The overall impact of the pandemic on our local economy and communities continues to be felt. In our seven county Bay Area market, 331,000 jobs (9.2%) have been lost since the end of February 2020. The unemployment rate in the seven Bay Area counties we serve fell to 8.1% in September, down from 12.8% in April, but still higher than the 2.7% in February 2020.

“We continue to monitor all state and local developments and have taken a number of steps to protect our employees and support our customers impacted by COVID-19,” added Mr. Wilton. “Based on our strong capital position, diversified loan portfolio, conservative underwriting standards, liquidity position, and our dedicated team of outstanding employees, we believe we will be able to continue to successfully navigate through these uncertain times and emerge stronger from the current crisis.”

In response to two economic stimulus laws passed by Congress in the first half of the year, Heritage Bank of Commerce funded 1,105 PPP loans, with total principal balances of $333.4 million. During the second and third quarters of 2020, PPP loan pay offs totaled $9.8 million and the Bank ended the third quarter of 2020 with $323.6 million in outstanding PPP loan balances. These loans generated $1.4 million in interest income and $2.2 million in deferred fee income, which were partially offset by ($245,000) in deferred costs expensed during the second and third quarters of 2020. At September 30, 2020, total loans included deferred fees on PPP loans of $9.0 million and deferred costs of $995,000.

In accordance with new accounting guidance issued earlier this year by federal bank regulators, the Bank made accommodations for initial payment deferrals for a number of customers of up to 90 days, generally, with the potential, upon application, of an additional 90 days of payment deferral (180 days maximum). The Bank also waived all normal applicable fees. The following table shows the deferments at September 30, 2020 by category:

									% of
		Underlying Collateral							Total
									Non-PPP
NON-SBA LOANS				Business		Real			Related
(in $000’s, unaudited)		Unsecured		Assets		Estate		Total	Loans⁽³⁾

Regular Payments Resumed	$	55	$	35,694	$	109,557	$	145,306	6%
Initial Deferments⁽¹⁾		-		962		17,334		18,296	1%
2nd Deferments⁽²⁾		-		3,503		19,553		23,056	1%
Total	$	55	$	40,159	$	146,444	$	186,658	8%

⁽¹⁾Initial deferments were generally for 3 months
⁽²⁾ 2nd deferments were for an additional 3 months
⁽³⁾ Total Non-PPP Loans as of September 30, 2020

The Bank had elected to initially downgrade the risk grades of these loans to “Special Mention” status and upon return to regular monthly payment status, most have now been upgraded back to “Pass.” At the end of the third 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 $2.0 million in loan deferments to the healthcare industry and $7.8 million in loan deferments to the accommodation and food services industries (mostly hotels and restaurants). Of the $41.4 million of loans remaining in deferral, 89% are supported by some form of commercial or residential real estate. Commercial real estate (“CRE”) deferments of $24.2 million included $19.6 million of investor CRE and $4.6 million of owner-occupied CRE. Deferred loans secured by CRE had an average loan-to-value (“LTV”) ratio of 44.5% at the end of the third quarter of 2020. There was also $12.6 million of deferments on residential real estate, primarily home equity lines, as of September 30, 2020. The majority of deferred loans are also supported by personal guarantees.

In addition to its portfolio of SBA PPP loans, the Bank also has a portfolio of SBA 7(a) loans totaling $49.6 million as of October 16, 2020. As part of the SBA’s Coronavirus debt relief efforts, beginning in April of 2020, the SBA commenced a six-month program to cover payments of principal, interest and any associated fees for these borrowers, which largely ended with the September payment. The following table reflects the status of these SBA 7(a) loans as of October 16, 2020:

SBA 7(a) LOANS			Number
(in $000's, unaudited)		Balance	of Loans

SBA 7(a) loans that borrowers made payments
by October 16, 2020	$	40,506	238
Payments Not Made / NSF / Returned		2,360	16
Due dates later in October		88	2
New loans / No payment due		435	1
C.A.R.E.S Payments		4,746	11
Request for Deferral		1,444	13	⁽¹⁾
Total Portfolio	$	49,579	281

⁽¹⁾Of the 13 loan requests for deferral, 5 have made their October 2020 payments.

Credit Quality and Performance

At September 30, 2020, nonperforming assets (“NPAs”) declined by $3.9 million, or (28%), to $10.3 million, compared to $14.2 million at September 30, 2019, and increased by $1.2 million, or 12% from $9.1 million at June 30, 2020. Classified assets increased to $33.0 million, or 0.72% of total assets, at September 30, 2020, compared to $20.2 million, or 0.64% of total assets, at September 30, 2019, and $31.5 million, or 0.68% of total assets, at June 30, 2020.

The Company continues to monitor portfolio loans made to commercial customers with businesses in higher risk sectors due to the COVID-19 pandemic. During the third quarter of 2020, the percentage of loans identified as higher risk to total loans declined slightly compared to the second quarter of 2020. The following table provides a breakdown of such loans as a percentage of total loans at September 30, 2020, June 30, 2020, and March 31, 2020:

% of Total

Loans at

HIGHER RISK SECTORS (unaudited)

September 30, 2020

June 30, 2020

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