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Heritage Commerce Corp Earns Record $13.7 Million for the Third Quarter of 2021, and $33.7 Million for the First Nine Months of 2021
Source: Nasdaq GlobeNewswire / 28 Oct 2021 16:30:02 America/New_York
SAN JOSE, Calif., Oct. 28, 2021 (GLOBE NEWSWIRE) -- Heritage Commerce Corp (Nasdaq: HTBK), the holding company (the “Company”) for Heritage Bank of Commerce (the “Bank”), today announced third quarter 2021 net income of $13.7 million, or $0.23 per average diluted common share, compared to $11.2 million, or $0.19 per average diluted common share, for the third quarter of 2020, and $8.8 million, or $0.15 per average diluted common share, for the second quarter of 2021. For the nine months ended September 30, 2021, net income was $33.7 million, or $0.56 per average diluted common share, compared to $23.7 million, or $0.39 per average diluted common share, for the nine months ended September 30, 2020. Earnings for the first nine months of 2021 included a $4.0 million reserve for litigation as noninterest expense during the second quarter of 2021. Earnings for the first nine months of 2020 were impacted by the effect of a $14.6 million pre-tax related provision for potential credit losses on loans, incorporating the forecasted effects on economic activity from the Coronavirus pandemic, and $2.5 million of pre-tax merger-related costs. All results are unaudited.
“We generated record earnings for the third quarter of 2021, propelled by higher net interest income, solid loan growth notably in commercial and industrial (“C&I”) and commercial real estate (“CRE”), ongoing strong core deposit growth and an acceleration of Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loan fee income as a result of PPP loan forgiveness,” said Walter Kaczmarek, President and Chief Executive Officer. “Core loans, excluding PPP loans and purchased residential mortgage loans, increased by $170.9 million, or 7%, from a year ago, and increased by $121.9 million, or 5%, from the second quarter of 2021. Total deposits increased $836.0 million, or 21%, to $4.73 billion at September 30, 2021, compared to $3.89 billion at September 30, 2020, and increased $381.9 million, or 9%, from $4.34 billion at June 30, 2021. Total deposits at September 30, 2021 included $336.0 million of temporary deposits from one customer (these deposits are anticipated to leave by the end of the fourth quarter of 2021).” Excluding the $336.0 million in temporary deposits, total deposits increased $500.0 million, or 13%, from a year ago, and increased $45.9 million from the second quarter of 2021.
“As a result of our continued solid operating performance, and steadily improving economic conditions, credit metrics improved substantially during the third quarter of 2021 with nonperforming assets (“NPAs”) declining 54% from the year ago quarter and 23% from the immediate prior quarter,” said Mr. Kaczmarek. “We had a $514,000 negative provision for credit losses on loans during the third quarter of 2021 with net recoveries of $238,000, compared to a provision for credit losses on loans of $197,000 and net charge-offs of $219,000 for the third quarter a year ago. In the second quarter of 2021, we had a $493,000 negative provision for credit losses on loans and booked net recoveries of $153,000.” The allowance for credit losses on loans (“ACLL”) to total loans was strong at 1.54%, and the ACLL to total nonperforming loans was 922.88%, at September 30, 2021.
“With our solid capital ratios and strong balance sheet, we remain well positioned to benefit from improving economic conditions and continue to implement our growth strategy which calls for the profitable deployment of our excess liquidity into new loans and investment securities. During the third quarter of 2021, our excess liquidity was primarily deployed into new C&I and CRE loans and overnight funds,” said Mr. Kaczmarek. “We were pleased and encouraged by the results delivered by the Company this quarter and once again, I would like to offer sincere thanks to all of our dedicated employees for their commitment and effort in supporting our clients, communities and shareholders.”
Third Quarter Ended September 30, 2021
Operating Results, Balance Sheet Review, Capital Management, and Credit Quality(as of, or for the periods ended September 30, 2021, compared to September 30, 2020, and June 30, 2021, except as noted):
Operating Results:
- Diluted earnings per share were $0.23 for the third quarter of 2021, compared to $0.19 for the third quarter of 2020, and $0.15 for the second quarter of 2021. Diluted earnings per share were $0.56 for the first nine months of 2021, compared to $0.39 for the first nine months of 2020.
- The following table indicates the ratios for the return on average tangible assets and the return on average tangible equity for the periods indicated:
For the Quarter Ended For the Nine Months Ended September 30, June 30, September 30, September 30, September 30, (unaudited) 2021 2021 2020 2021 2020 Return on average tangible assets 1.10 % 0.73 % 1.02 % 0.94 % 0.76 % Return on average tangible equity 13.49 % 8.84 % 11.41 % 11.29 % 8.12 % - Net interest income, before provision for credit losses on loans, increased 12% to $38.2 million for the third quarter of 2021, compared to $34.2 million for the third quarter of 2020, and increased 9% from $34.9 million for the second quarter of 2021, primarily due to higher interest and fees on PPP loans and prepayment fees, and an increase in the accretion of the loan purchase discount into interest income from acquired loans.
• For the first nine months of 2021, net interest income, before provision for credit losses on loans, increased to $108.0 million, compared to $107.7 million for the first nine months of 2020, primarily due to higher interest and fees on PPP loans and prepayment fees, and an increase in the accretion of the loan purchase discount into interest income from acquired loans, partially offset by decreases in the prime rate and decreases in yields on investment securities and overnight funds. • The fully tax equivalent (“FTE”) net interest margin contracted 6 basis points to 3.18% for the third quarter of 2021, from 3.24% for the third quarter of 2020, primarily due to declines in the average yields on investment securities and overnight funds, partially offset by an increase in the average yield on loans supported by higher loan prepayment fees and fees on PPP loans, an increase in the accretion of the loan purchase discount into interest income from acquired loans, and a decline in the cost of interest-bearing liabilities. The FTE net interest margin expanded 18 basis points for the third quarter of 2021 from 3.00% for the second quarter of 2021, primarily due to an increase in the average yield on loans resulting primarily from the accretion of the loan purchase discount into interest income from acquired loans, higher fees on PPP loans and higher prepayment fees. • For the first nine months of 2021, the FTE net interest margin contracted 49 basis points to 3.13%, compared to 3.62% for the first nine months of 2020, primarily due to declines in the average yields on loans, investment securities, and overnight funds, partially offset by an increase in the accretion of the loan purchase discount into interest income from acquired loans and higher interest and fee income from PPP loans and prepayment fees. - 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 increased to 5.18% for the third quarter of 2021, compared to 4.86% for the third quarter of 2020, primarily due to higher fees on PPP loans and prepayment fees, and an increase in the accretion of the loan purchase discount into interest income from acquired loans, partially offset by a decline in the core bank and asset-based lending average yield. For the Quarter Ended For the Quarter Ended September 30, 2021 September 30, 2020 Average Interest Average Average Interest Average (in $000’s, unaudited) Balance Income Yield Balance Income Yield Loans, core bank and asset-based lending $ 2,361,442 $ 26,062 4.38 % $ 2,266,227 $ 26,354 4.63 % Prepayment fees — 1,282 0.22 % — 154 0.03 % SBA PPP loans 218,098 548 1.00 % 324,518 816 1.00 % PPP fees, net — 2,508 4.56 % — 1,305 1.60 % Bay View Funding factored receivables 50,674 2,815 22.04 % 40,300 2,431 24.00 % Purchased residential mortgages 141,073 1,019 2.87 % 29,399 180 2.44 % Purchased CRE loans 9,177 91 3.93 % 22,603 195 3.43 % Loan fair value mark / accretion (8,923 ) 1,882 0.32 % (13,353 ) 1,200 0.21 % Total loans (includes loans held-for-sale) $ 2,771,541 $ 36,207 5.18 % $ 2,669,694 $ 32,635 4.86 % • The average yield on the total loan portfolio increased to 5.18% for the third quarter of 2021, compared to 4.80% for the second quarter of 2021, primarily due to higher fees on PPP loans and prepayment fees, and an increase in the accretion of the loan purchase discount into interest income from acquired loans, partially offset by a decline in the core bank and asset-based lending average yield. For the Quarter Ended For the Quarter Ended September 30, 2021 June 30, 2021 Average Interest Average Average Interest Average (in $000’s, unaudited) Balance Income Yield Balance Income Yield Loans, core bank and asset-based lending $ 2,361,442 $ 26,062 4.38 % $ 2,293,398 $ 25,500 4.46 % Prepayment fees — 1,282 0.22 % — 504 0.09 % SBA PPP loans 218,098 548 1.00 % 334,604 831 1.00 % PPP fees, net — 2,508 4.56 % — 1,876 2.25 % Bay View Funding factored receivables 50,674 2,815 22.04 % 48,993 2,772 22.69 % Purchased residential mortgages 141,073 1,019 2.87 % 113,467 981 3.47 % Purchased CRE loans 9,177 91 3.93 % 14,602 110 3.02 % Loan fair value mark / accretion (8,923 ) 1,882 0.32 % (10,643 ) 865 0.15 % Total loans (includes loans held-for-sale) $ 2,771,541 $ 36,207 5.18 % $ 2,794,421 $ 33,439 4.80 % • The average yield on the total loan portfolio decreased to 5.07% for the nine months ended September 30, 2021, compared to 5.10% for the nine months ended September 30, 2020, primarily due to decreases in the prime rate on loans, and increases in the average balances of lower yielding PPP loans and purchased residential mortgages, partially offset by increases in interest and fees on PPP loans and prepayment fees, and in the accretion of the loan purchase discount into interest income from acquired loans. For the Nine Months Ended For the Nine Months Ended September 30, 2021 September 30, 2020 Average Interest Average Average Interest Average (in $000’s, unaudited) Balance Income Yield Balance Income Yield Loans, core bank and asset-based lending $ 2,293,892 $ 76,629 4.47 % $ 2,351,369 $ 83,440 4.74 % Prepayment fees — 2,303 0.13 % — 864 0.05 % SBA PPP loans 290,253 2,163 1.00 % 186,497 1,398 1.00 % PPP fees, net — 7,784 3.59 % — 1,942 1.39 % Bay View Funding factored receivables 49,263 8,237 22.36 % 44,102 7,871 23.84 % Purchased residential mortgages 92,680 2,118 3.06 % 31,224 607 2.60 % Purchased CRE loans 13,618 372 3.65 % 25,152 655 3.48 % Loan fair value mark / accretion (10,387 ) 3,876 0.23 % (14,672 ) 3,485 0.20 % Total loans (includes loans held-for-sale) $ 2,729,319 $ 103,482 5.07 % $ 2,623,672 $ 100,262 5.10 % • In aggregate, the original total net purchase discount on loans from the Focus Business Bank, Tri-Valley Bank, United American Bank, and Presidio Bank loan portfolios was $25.2 million. In aggregate, the remaining net purchase discount on total loans acquired was $8.3 million at September 30, 2021. - The average cost of total deposits was 0.10% for the third quarter of 2021, compared to 0.16% for the third quarter of 2020 and 0.11% for the second quarter of 2021. The average cost of total deposits was 0.11% for the nine months ended September 30, 2021, compared to 0.18% for the nine months ended September 30, 2020.
- During the third quarter of 2021, there was a $514,000 negative provision for credit losses on loans, primarily due to recoveries on previously charged-off loans, compared to a $197,000 provision for credit losses on loans taken in the third quarter of 2020, and a $493,000 negative provision for credit losses on loans for the second quarter of 2021. There was a $2.5 million negative provision for credit losses on loans for the nine months ended September 30, 2021, compared to a $14.6 million provision for credit losses on loans for the nine months ended September 30, 2020.
• The higher provision for credit losses on loans for the first nine months of 2020 was driven primarily by a significantly deteriorating economic outlook resulting from the Coronavirus pandemic. Ongoing impacts of the current expected credit losses (“CECL”) methodology will be dependent upon changes in economic conditions and forecasts, originated and acquired loan portfolio composition, portfolio duration, and other factors. - Total noninterest income was $2.4 million for the third quarter of 2021, compared to $2.6 million for the third quarter of 2020 and $2.2 million for the second quarter of 2021.
• For the nine months ended September 30, 2021, total noninterest income decreased to $6.9 million, compared to $7.9 million for the nine months ended September 30, 2020, primarily as a result of lower service charges and fees on deposits during the first nine months of 2021, and a $791,000 gain on disposition of foreclosed assets, a $335,000 realized gain on warrants exercised, and a $270,000 gain on the sale of securities during the first nine months of 2020. These decreases were partially offset by a higher gain on sales of SBA loans and a $571,000 gain on proceeds for company owned life insurance during the first nine months of 2021. - Total noninterest expense for the third quarter of 2021 increased to $21.8 million, compared to $21.2 million for the third quarter of 2020, primarily due to higher salaries and employee benefits and insurance expense during the third quarter of 2021. Noninterest expense for the third quarter of 2021 decreased from $25.8 million for the second quarter of 2021, primarily due to a $4.0 million reserve for a litigation matter that settled in the second quarter of 2021.
• Noninterest expense for the nine months ended September 30, 2021 increased to $70.9 million, compared to $68.0 million for the nine months ended September 30, 2020, primarily due to a $4.0 million reserve for a litigation matter that settled in the second quarter of 2021, higher severance, professional fees, occupancy and equipment, and insurance expense, partially offset by higher merger-related costs during the first nine months of 2020. • The following table reflects pre-tax merger-related costs resulting from the merger with Presidio for the periods indicated: For the Quarter Ended For the Nine Months Ended MERGER-RELATED COSTS September 30, June 30, September 30, September 30, September 30, (in $000’s, unaudited) 2021 2021 2020 2021 2020 Salaries and employee benefits $ — $ — $ — $ — $ 356 Other (7 ) (24 ) 17 27 2,144 Total merger-related costs $ (7 ) $ (24 ) $ 17 $ 27 $ 2,500 • Full time equivalent employees were 325 at September 30, 2021, and 342 at September 30, 2020, and 330 at June 30, 2021. - The efficiency ratio improved to 53.78% for the third quarter of 2021, compared to 57.58% for the third quarter of 2020, and 69.58% for the second quarter of 2021. The efficiency ratio for the nine months ended September 30, 2021 was 61.67%, compared to 58.81% for the nine months ended September 30, 2020. Excluding the $4.0 million reserve for litigation, the efficiency ratio was 58.18% for the first nine months of 2021.
- Income tax expense was $5.6 million for the third quarter of 2021, compared to $4.2 million for the third quarter of 2020, and $3.0 million the second quarter of 2021. The effective tax rate for the third quarter of 2021 was 28.8 %, compared to 27.3% for the third quarter of 2020, and 25.1% for the second quarter of 2021. Income tax expense for the nine months ended September 30, 2021 was $12.8 million, compared to $9.3 million for the nine months ended September 30, 2020. The effective tax rate for the nine months ended September 30, 2021 was 27.5%, compared to 28.3% for the nine months ended September 30, 2020.
• The difference in the effective tax rate for the periods reported compared to the combined Federal and state statutory tax rate of 29.6% is primarily the result of the Company’s investment in life insurance policies whose earnings are not subject to taxes, tax credits related to investments in low-income housing limited partnerships (net of low-income housing investment losses), and tax-exempt interest income earned on municipal bonds. Balance Sheet Review, Capital Management and Credit Quality:
- Total assets increased 19% to $5.46 billion at September 30, 2021, compared to $4.61 billion at September 30, 2020, and increased 8% from $5.07 billion at June 30, 2021. Total deposits increased 21% to $4.73 billion at September 30, 2021, compared to $3.89 billion at September 30, 2020, and increased 9% from $4.34 billion at June 30, 2021. Total deposits at September 30, 2021 included $336.0 million of temporary deposits from one customer held in a money market account that were received late in the third quarter of 2021, resulting in higher overnight funds.
- Securities available-for-sale, at fair value, totaled $121.0 million at September 30, 2021, compared to $294.4 million at September 30, 2020, and $146.0 million at June 30, 2021. At September 30, 2021, the Company’s securities available-for-sale portfolio was comprised of $116.0 million of agency mortgage-backed securities (all issued by U.S. Government sponsored entities), and $5.0 million of U.S. Treasury securities. The pre-tax unrealized gain on securities available-for-sale at September 30, 2021 was $4.0 million, compared to a pre-tax unrealized gain on securities available-for-sale of $6.9 million at September 30, 2020, and a pre-tax unrealized gain on securities available-for-sale of $4.3 million at June 30, 2021. All other factors remaining the same, when market interest rates are decreasing, the Company will experience a higher unrealized gain (or a lower unrealized loss) on the securities portfolio.
- At September 30, 2021, securities held-to-maturity, at amortized cost, totaled $537.3 million, compared to $295.6 million at September 30, 2020, and $421.3 million at June 30, 2021. At September 30, 2021, the Company’s securities held-to-maturity portfolio was comprised of $480.3 million of agency mortgage-backed securities, and $57.0 million of tax-exempt municipal bonds. During the third quarter of 2021, the Company purchased $140.5 million of agency mortgage-backed securities (securities held-to-maturity), with a book yield of 1.43% and an average life of 5.50 years. During the first nine months of 2021, the Company purchased $322.5 million of agency mortgage-backed securities (securities held-to-maturity), with a book yield of 1.49% and an average life of 5.67 years.
- The loan portfolio remains well-diversified as reflected in the following table which summarizes the distribution of loans, excluding loans held-for-sale, and the percentage of distribution in each category for the periods indicated:
LOANS September 30, 2021 June 30, 2021 September 30, 2020 (in $000’s, unaudited) Balance % to Total Balance % to Total Balance % to Total Commercial $ 578,944 20 % $ 557,686 20 % $ 574,359 21 % Paycheck Protection Program Loans 164,506 6 % 286,461 10 % 323,550 12 % Real estate: CRE - owner occupied 580,624 20 % 583,091 21 % 561,528 21 % CRE - non-owner occupied 829,022 29 % 742,135 26 % 713,563 27 % Land and construction 141,277 5 % 129,426 4 % 142,632 5 % Home equity 106,690 4 % 107,873 4 % 111,468 4 % Multifamily 205,952 7 % 198,771 7 % 169,791 6 % Residential mortgages 211,467 8 % 205,904 7 % 91,077 3 % Consumer and other 20,106 1 % 21,519 1 % 17,511 1 % Total Loans 2,838,588 100 % 2,832,866 100 % 2,705,479 100 % Deferred loan costs (fees), net (5,729 ) — (8,070 ) — (8,463 ) — Loans, net of deferred costs and fees $ 2,832,859 100 % $ 2,824,796 100 % $ 2,697,016 100 % • Loans, excluding loans held-for-sale, increased $135.8 million, or 5%, to $2.83 billion at September 30, 2021, compared to $2.70 billion at September 30, 2020, and increased $8.0 million from $2.82 billion at June 30, 2021. Total loans at September 30, 2021 included $164.5 million of PPP loans, compared to $323.6 million at September 30, 2020 and $286.5 million at June 30, 2021. Total loans at September 30, 2021 included $211.5 million of residential mortgages, compared to $91.1 million at September 30, 2020 and $205.9 million at June 30, 2021. • In response to economic stimulus laws passed by Congress in 2020 and 2021, the Bank funded two rounds of PPP loans. At September 30, 2021, after accounting for loan payoffs and SBA loan forgiveness, “Round 1” PPP loans were $5.8 million and “Round 2” PPP loans were $158.7 million. In total, the Bank had $164.5 million in outstanding PPP loan balances at September 30, 2021. The following table shows interest income, fee income and deferred origination costs generated by the PPP loans, outstanding PPP loan balances and related deferred fees and costs for the periods indicated: At or For the Quarter Ended: At or For the Nine Months Ended: PPP LOANS September 30, June 30, September 30, September 30, September 30, (in $000’s, unaudited) 2021 2021 2020 2021 2020 Interest income $ 548 $ 831 $ 816 $ 2,163 $ 1,398 Fee income, net 2,508 1,876 1,305 7,784 1,942 Total $ 3,056 $ 2,707 $ 2,121 $ 9,947 $ 3,340 Deferred origination costs (contra expense) $ — $ 41 $ — $ 807 $ 1,240 PPP loans outstanding at period end: Round 1 $ 5,795 $ 91,849 $ 323,550 $ 5,795 $ 323,550 Round 2 158,711 194,612 — 158,711 — Total $ 164,506 $ 286,461 $ 323,550 $ 164,506 $ 323,550 Deferred fees outstanding at period end $ (4,831 ) $ (7,747 ) $ (8,966 ) $ (4,831 ) $ (8,966 ) Deferred costs outstanding at period end 461 869 995 461 995 Total $ (4,370 ) $ (6,878 ) $ (7,971 ) $ (4,370 ) $ (7,971 ) • During the third quarter of 2021, the Company purchased a single family residential mortgage loan portfolio totaling $41.9 million, tied to homes all located in California, with average principal balances of $974,000, and a weighted average yield of approximately 2.92% (net of servicing fees). During the second quarter of 2021, the Company purchased two single family residential mortgage loan portfolios totaling $140.0 million, tied to homes all located in California, with average principal balances of $585,000, and a weighted average yield of approximately 3.37% (net of servicing fees). • C&I line usage relatively steady at 27% at September 30, 2021, compared to 28% at September 30, 2020, and 27% at June 30, 2021. • At September 30, 2021, 41% of the CRE loan portfolio was secured by owner-occupied real estate. • At September 30, 2021, approximately 42% of the Company’s loan portfolio consisted of floating interest rate loans. - The following table summarizes the allowance for credit losses on loans for the periods indicated:
For the Quarter Ended For the Nine Months Ended ALLOWANCE FOR CREDIT LOSSES ON LOANS September 30, June 30, September 30, September 30, September 30, (in $000’s, unaudited) 2021 2021 2020 2021 2020 Balance at beginning of period $ 43,956 $ 44,296 $ 45,444 $ 44,400 $ 23,285 Charge-offs during the period (65 ) (105 ) (598 ) (433 ) (1,736 ) Recoveries during the period 303 258 379 2,232 722 Net recoveries (charge-offs) during the period 238 153 (219 ) 1,799 (1,014 ) Impact of adopting Topic 326 — — — 8,570 Provision for (recapture of) credit losses on loans during the period (514 ) (493 ) 197 (2,519 ) 14,581 Balance at end of period $ 43,680 $ 43,956 $ 45,422 $ 43,680 $ 45,422 Total loans, net of deferred fees $ 2,832,859 $ 2,824,796 $ 2,697,016 $ 2,832,859 $ 2,697,016 Total nonperforming loans $ 4,733 $ 6,180 $ 10,262 $ 4,733 $ 10,262 Allowance for credit losses on loans ("ACLL") to total loans 1.54 % 1.56 % 1.68 % 1.54 % 1.68 % ACLL to total nonperforming loans 922.88 % 711.26 % 442.62 % 922.88 % 442.62 % • The ACLL was 1.54% of total loans at September 30, 2021 while the ACLL to total nonperforming loans was 922.88%. The ACLL was 1.68% of total loans and the ACLL to nonperforming loans was 442.62% at September 30, 2020. The ACLL was 1.56% of total loans and the ACLL to total nonperforming loans was 711.26% at June 30, 2021. The ACLL to total loans, excluding PPP loans, was 1.63% at September 30, 2021, 1.91% at September 30, 2020 and 1.73% at June 30, 2021. • The following table shows the drivers of change in ACLL under CECL for each of the first three quarters of 2021: DRIVERS OF CHANGE IN ACLL UNDER CECL (in $000’s, unaudited) ACLL at December 31, 2020 $ 44,400 Net recoveries during the first quarter of 2021 1,408 Portfolio changes during the first quarter of 2021 313 Economic and qualitative factor changes during the first quarter of 2021 (1,825 ) ACLL at March 31, 2021 44,296 Net recoveries during the second quarter of 2021 153 Portfolio changes during the second quarter of 2021 2,153 Economic and qualitative factor changes during the second quarter of 2021 (2,646 ) ACLL at June 30, 2021 43,956 Net recoveries during the third quarter of 2021 238 Portfolio changes during the third quarter of 2021 2,485 Qualitative and quantitative changes during the third quarter of 2021 including changes in economic forecasts (2,999 ) ACLL at September 30, 2021 $ 43,680 • Net recoveries totaled $238,000 for the third quarter of 2021, compared to net charge-offs of $219,000 for the third quarter of 2020, and net recoveries of $153,000 for the second quarter of 2021. • The following is a breakout of NPAs at the periods indicated: End of Period: NONPERFORMING ASSETS September 30, 2021 June 30, 2021 September 30, 2020 (in $000’s, unaudited) Balance % of Total Balance % of Total Balance % of Total CRE loans $ 2,260 48 % $ 2,923 47 % $ 4,328 42 % Commercial loans 1,330 28 % 1,793 29 % 2,908 28 % Restructured and loans over 90 days past due and still accruing 642 13 % 889 14 % 601 6 % Consumer and other loans 407 9 % 407 7 % 1,464 14 % Home equity loans 94 2 % 168 3 % 961 10 % Total nonperforming assets $ 4,733 100 % $ 6,180 100 % $ 10,262 100 % • NPAs totaled $4.7 million, or 0.09% of total assets, at September 30, 2021, compared to $10.3 million, or 0.22% of total assets, at September 30, 2020, $6.2 million, or 0.12% of total assets, at June 30, 2021. • There were no foreclosed assets on the balance sheet at September 30, 2021, September 30, 2020, or June 30, 2021. • Classified assets decreased to $31.9 million, or 0.58% of total assets, at September 30, 2021, compared to $33.0 million, or 0.72% of total assets, at September 30, 2020, and decreased from $32.4 million, or 0.64% of total assets, at June 30, 2021. - The following table summarizes the distribution of deposits and the percentage of distribution in each category for the periods indicated:
DEPOSITS September 30, 2021 June 30, 2021 September 30, 2020 (in $000’s, unaudited) Balance % to Total Balance % to Total Balance % to Total Demand, noninterest-bearing $ 1,804,965 38 % $ 1,840,516 42 % $ 1,698,027 44 % Demand, interest-bearing 1,141,944 24 % 1,140,867 26 % 926,041 24 % Savings and money market 1,600,754 34 % 1,174,587 27 % 1,108,252 28 % Time deposits — under $250 39,628 1 % 42,118 1 % 46,684 1 % Time deposits — $250 and over 103,046 2 % 110,111 3 % 92,276 2 % CDARS — interest-bearing demand, money market and time deposits 36,044 1 % 36,273 1 % 19,121 1 % Total deposits $ 4,726,381 100 % $ 4,344,472 100 % $ 3,890,401 100 % • Total deposits increased $836.0 million, or 21%, to $4.73 billion at September 30, 2021, compared to $3.89 billion at September 30, 2020, and increased $381.9 million, or 9%, from $4.34 billion at June 30, 2021. • Deposits, excluding all time deposits and CDARS deposits, increased $815.3 million, or 22%, to $4.55 billion at September 30, 2021, compared to $3.73 billion at September 30, 2020, and increased $391.7 million, or 9%, compared to $4.16 billion at June 30, 2021. • Total deposits at September 30, 2021 included $336.0 million of temporary deposits of one customer held in a money market account. Excluding the $336.0 million temporary deposits, total deposits increased $500.0 million, or 13%, to $4.39 billion at September 30, 2021, compared to $3.89 billion at September 30, 2020, and increased $45.9 million from $4.34 billion at June 30, 2021. Deposits, excluding the $336.0 million in temporary deposits as well as all time deposits and CDARS deposits, increased $479.3 million, or 13%, to $4.21 billion at September 30, 2021, compared to $3.73 billion at September 30, 2020, and increased $55.7 million, compared to $4.16 billion at June 30, 2021. - The Company’s consolidated capital ratios exceeded regulatory guidelines and the Bank’s capital ratios exceeded regulatory guidelines under the Basel III prompt corrective action (“PCA”) regulatory guidelines for a well-capitalized financial institution, and the Basel III minimum regulatory requirements at September 30, 2021, as reflected in the following table:
Well-capitalized Financial Institution Basel III Heritage Heritage Basel III PCA Minimum Commerce Bank of Regulatory Regulatory CAPITAL RATIOS (unaudited) Corp Commerce Guidelines Requirement (1) Total Capital 15.1 % 14.5 % 10.0 % 10.5 % Tier 1 Capital 12.9 % 13.5 % 8.0 % 8.5 % Common Equity Tier 1 Capital 12.9 % 13.5 % 6.5 % 7.0 % Tier 1 Leverage 8.6 % 9.0 % 5.0 % 4.0 % _______________
(1) Basel III minimum regulatory requirements for both the Company and the Bank include a 2.5% capital conservation buffer, except the leverage ratio. _______________
- The following table reflects the components of accumulated other comprehensive loss, net of taxes, for the periods indicated:
ACCUMULATED OTHER COMPREHENSIVE LOSS September 30, June 30, September 30, (in $000’s, unaudited) 2021 2021 2020 Unrealized gain on securities available-for-sale $ 2,434 $ 2,674 $ 4,495 Remaining unamortized unrealized gain on securities available-for-sale transferred to held-to-maturity 234 243 271 Split dollar insurance contracts liability (6,143 ) (6,142 ) (4,839 ) Supplemental executive retirement plan liability (8,409 ) (8,506 ) (6,662 ) Unrealized gain on interest-only strip from SBA loans 178 199 351 Total accumulated other comprehensive loss $ (11,706 ) $ (11,532 ) $ (6,384 ) - Tangible equity was $408.1 million at September 30, 2021, compared to $392.5 million at September 30, 2020, and $400.6 million at June 30, 2021. Tangible book value per share was $6.77 at September 30, 2021, compared to $6.55 at September 30, 2020, and $6.65 at June 30, 2021.
Heritage Commerce Corp, a bank holding company established in October 1997, is the parent company of Heritage Bank of Commerce, established in 1994 and headquartered in San Jose, CA with full-service branches in Danville, Fremont, Gilroy, Hollister, Livermore, Los Altos, Los Gatos, Morgan Hill, Palo Alto, Pleasanton, Redwood City, San Francisco, San Jose, San Mateo, San Rafael, Sunnyvale, and Walnut Creek. Heritage Bank of Commerce is an SBA Preferred Lender. Bay View Funding, a subsidiary of Heritage Bank of Commerce, is based in San Jose, CA and provides business-essential working capital factoring financing to various industries throughout the United States. For more information, please visit www.heritagecommercecorp.com.
Forward-Looking Statement Disclaimer
These forward-looking statements are subject to various risks and uncertainties that may be outside our control and our actual results could differ materially from our projected results. Risks and uncertainties that could cause our financial performance to differ materially from our goals, plans, expectations and projections expressed in forward-looking statements include those set forth in our filings with the Securities and Exchange Commission (“SEC”), Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, and the following: (1) the effect of the COVID-19 pandemic, and other infectious illness outbreaks that may arise in the future, on our customers, employees, businesses, liquidity, and financial results; (2) current and future economic and market conditions in the United States generally or in the communities we serve, including the effects of declines in property values and overall slowdowns in economic growth should these events occur; (3) effects of and changes in trade, monetary and fiscal policies and laws, including the interest rate policies of the Federal Open Market Committee of the Federal Reserve Board; (4) our ability to anticipate interest rate changes and manage interest rate risk; (5) changes in inflation, interest rates, and market liquidity which may impact interest margins and impact funding sources; (6) volatility in credit and equity markets and its effect on the global economy; (7) our ability to effectively compete with other banks and financial services companies and the effects of competition in the financial services industry on our business; (8) our ability to achieve loan growth and attract deposits; (9) risks associated with concentrations in real estate related loans; (10) the relative strength or weakness of the commercial and real estate markets where our borrowers are located, including related asset and market prices; (11) credit related impairment charges to our securities portfolio; (12) changes in the level of nonperforming assets and charge offs and other credit quality measures, and their impact on the adequacy of our allowance for credit losses and our provision for credit losses; (13) increased capital requirements for our continual growth or as imposed by banking regulators, which may require us to raise capital at a time when capital is not available on favorable terms or at all; (14) regulatory limits on Heritage Bank of Commerce’s ability to pay dividends to the Company; (15) changes in our capital management policies, including those regarding business combinations, dividends, and share repurchases; (16) operational issues stemming from, and/or capital spending necessitated by, the potential need to adapt to industry changes in information technology systems, on which we are highly dependent; (17) our inability to attract, recruit, and retain qualified officers and other personnel could harm our ability to implement our strategic plan, impair our relationships with customers and adversely affect our business, results of operations and growth prospects; (18) possible adjustment of the valuation of our deferred tax assets; (19) our ability to keep pace with technological changes, including our ability to identify and address cyber-security risks such as data security breaches, “denial of service” attacks, “hacking” and identity theft; (20) inability of our framework to manage risks associated with our business, including operational risk and credit risk; (21) risks of loss of funding of Small Business Administration (“SBA”) or SBA loan programs, or changes in those programs; (22) compliance with governmental and regulatory requirements, including the Dodd-Frank Act and others relating to banking, consumer protection, securities, accounting and tax matters; (23) significant changes in applicable laws and regulations, including those concerning taxes, banking and securities; (24) effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; (25) costs and effects of legal and regulatory developments, including resolution of regulatory or other governmental inquiries, and the results of regulatory examinations or reviews; (26) the expense and uncertain resolution of litigation matters whether occurring in the ordinary course of business or otherwise; (27) availability of and competition for acquisition opportunities; (28) risks resulting from domestic terrorism; (29) risks resulting from social unrest and protests: (30) risks of natural disasters (including earthquakes) and other events beyond our control; (31) changes in governmental policy and regulation, the Federal Reserve Board's efforts to provide liquidity to the financial system and provide credit to private commercial and municipal borrowers, and other programs designed to address the effects of the COVID-19 pandemic; (32) the Bank's participation as a lender in the PPP and similar programs and its effect on the Bank's liquidity, financial results, businesses and customers, including the ability of customers to comply with requirements and otherwise perform with respect to loans obtained under such programs; (33) our success in managing the risks involved in the foregoing factors.
Member FDIC
For additional information, contact:
Debbie Reuter
EVP, Corporate Secretary
Direct: (408) 494-4542
Debbie.Reuter@herbank.comFor the Quarter Ended: Percent Change From: For the Nine Months Ended: CONSOLIDATED INCOME STATEMENTS September 30, June 30, September 30, June 30, September 30, September 30, September 30, Percent (in $000’s, unaudited) 2021 2021 2020 2021 2020 2021 2020 Change Interest income $ 39,907 $ 36,632 $ 36,252 9 % 10 % $ 113,300 $ 114,326 (1 ) % Interest expense 1,725 1,756 2,087 (2 ) % (17 ) % 5,284 6,641 (20 ) % Net interest income before provision for credit losses on loans 38,182 34,876 34,165 9 % 12 % 108,016 107,685 0 % Provision for (recapture of) credit losses on loans (514 ) (493 ) 197 (4 ) % (361 ) % (2,519 ) 14,581 (117 ) % Net interest income after provision for credit losses on loans 38,696 35,369 33,968 9 % 14 % 110,535 93,104 19 % Noninterest income: Gain on sales of SBA loans 594 83 400 616 % 49 % 1,227 467 163 % Service charges and fees on deposit accounts 584 659 632 (11 ) % (8 ) % 1,844 2,251 (18 ) % Increase in cash surrender value of life insurance 470 458 464 3 % 1 % 1,384 1,380 0 % Servicing income 129 104 187 24 % (31 ) % 415 575 (28 ) % Gain on proceeds from company owned life insurance 109 396 — (72 ) % N/A 571 — N/A Gain on the disposition of foreclosed assets — — — N/A N/A — 791 (100 ) % Gain on sales of securities — — — N/A N/A — 270 (100 ) % Other 522 469 912 11 % (43 ) % 1,437 2,132 (33 ) % Total noninterest income 2,408 2,169 2,595 11 % (7 ) % 6,878 7,866 (13 ) % Noninterest expense: Salaries and employee benefits 12,461 12,572 11,967 (1 ) % 4 % 38,991 38,470 1 % Occupancy and equipment 2,151 2,247 2,283 (4 ) % (6 ) % 6,672 5,821 15 % Professional fees 1,211 1,771 1,352 (32 ) % (10 ) % 4,701 3,942 19 % Other 6,008 9,185 5,566 (35 ) % 8 % 20,486 19,721 4 % Total noninterest expense 21,831 25,775 21,168 (15 ) % 3 % 70,850 67,954 4 % Income before income taxes 19,273 11,763 15,395 64 % 25 % 46,563 33,016 41 % Income tax expense 5,555 2,950 4,198 88 % 32 % 12,828 9,340 37 % Net income $ 13,718 $ 8,813 $ 11,197 56 % 23 % $ 33,735 $ 23,676 42 % PER COMMON SHARE DATA (unaudited) Basic earnings per share $ 0.23 $ 0.15 $ 0.19 53 % 21 % $ 0.56 $ 0.40 40 % Diluted earnings per share $ 0.23 $ 0.15 $ 0.19 53 % 21 % $ 0.56 $ 0.39 44 % Weighted average shares outstanding - basic 60,220,717 60,089,327 59,589,243 0 % 1 % 60,078,953 59,432,178 1 % Weighted average shares outstanding - diluted 60,760,189 60,730,141 60,141,412 0 % 1 % 60,635,304 60,143,763 1 % Common shares outstanding at period-end 60,266,316 60,202,766 59,914,987 0 % 1 % 60,266,316 59,914,987 1 % Dividend per share $ 0.13 $ 0.13 $ 0.13 0 % 0 % $ 0.39 $ 0.39 0 % Book value per share $ 9.79 $ 9.69 $ 9.64 1 % 2 % $ 9.79 $ 9.64 2 % Tangible book value per share $ 6.77 $ 6.65 $ 6.55 2 % 3 % $ 6.77 $ 6.55 3 % KEY FINANCIAL RATIOS (unaudited) Annualized return on average equity 9.29 % 6.06 % 7.73 % 53 % 20 % 7.74 % 5.49 % 41 % Annualized return on average tangible equity 13.49 % 8.84 % 11.41 % 53 % 18 % 11.29 % 8.12 % 39 % Annualized return on average assets 1.06 % 0.70 % 0.98 % 51 % 8 % 0.90 % 0.73 % 23 % Annualized return on average tangible assets 1.10 % 0.73 % 1.02 % 51 % 8 % 0.94 % 0.76 % 24 % Net interest margin (FTE) 3.18 % 3.00 % 3.24 % 6 % (2 ) % 3.13 % 3.62 % (14 ) % Efficiency ratio 53.78 % 69.58 % 57.58 % (23 ) % (7 ) % 61.67 % 58.81 % 5 % AVERAGE BALANCES (in $000’s, unaudited) Average assets $ 5,139,239 $ 5,047,097 $ 4,562,412 2 % 13 % $ 4,988,076 $ 4,344,067 15 % Average tangible assets $ 4,956,738 $ 4,863,814 $ 4,376,533 2 % 13 % $ 4,804,814 $ 4,157,370 16 % Average earning assets $ 4,778,574 $ 4,678,084 $ 4,203,902 2 % 14 % $ 4,626,853 $ 3,982,386 16 % Average loans held-for-sale $ 4,810 $ 4,053 $ 5,169 19 % (7 ) % $ 4,112 $ 3,689 11 % Average total loans $ 2,766,731 $ 2,790,368 $ 2,664,525 (1 ) % 4 % $ 2,725,207 $ 2,619,983 4 % Average deposits $ 4,396,315 $ 4,307,555 $ 3,846,652 2 % 14 % $ 4,252,214 $ 3,632,556 17 % Average demand deposits - noninterest-bearing $ 1,835,219 $ 1,808,638 $ 1,700,972 1 % 8 % $ 1,786,035 $ 1,600,522 12 % Average interest-bearing deposits $ 2,561,096 $ 2,498,917 $ 2,145,680 2 % 19 % $ 2,466,179 $ 2,032,034 21 % Average interest-bearing liabilities $ 2,601,002 $ 2,538,747 $ 2,185,439 2 % 19 % $ 2,506,025 $ 2,071,813 21 % Average equity $ 586,012 $ 583,009 $ 576,135 1 % 2 % $ 582,751 $ 576,042 1 % Average tangible equity $ 403,511 $ 399,726 $ 390,256 1 % 3 % $ 399,489 $ 389,345 3 % For the Quarter Ended: CONSOLIDATED INCOME STATEMENTS September 30, June 30, March 31, December 31, September 30, (in $000’s, unaudited) 2021 2021 2021 2020 2020 Interest income $ 39,907 $ 36,632 $ 36,761 $ 36,145 $ 36,252 Interest expense 1,725 1,756 1,803 1,940 2,087 Net interest income before provision for credit losses on loans 38,182 34,876 34,958 34,205 34,165 Provision for (recapture of) credit losses on loans (514 ) (493 ) (1,512 ) (1,348 ) 197 Net interest income after provision for credit losses on loans 38,696 35,369 36,470 35,553 33,968 Noninterest income: Gain on sales of SBA loans 594 83 550 372 400 Service charges and fees on deposit accounts 584 659 601 608 632 Increase in cash surrender value of life insurance 470 458 456 465 464 Servicing income 129 104 182 98 187 Gain on proceeds from company owned life insurance 109 396 66 — — Gain on sales of securities — — — 7 — Other 522 469 446 506 912 Total noninterest income 2,408 2,169 2,301 2,056 2,595 Noninterest expense: Salaries and employee benefits 12,461 12,572 13,958 12,457 11,967 Occupancy and equipment 2,151 2,247 2,274 2,197 2,283 Professional fees 1,211 1,771 1,719 1,396 1,352 Other 6,008 9,185 5,293 5,507 5,566 Total noninterest expense 21,831 25,775 23,244 21,557 21,168 Income before income taxes 19,273 11,763 15,527 16,052 15,395 Income tax expense 5,555 2,950 4,323 4,429 4,198 Net income $ 13,718 $ 8,813 $ 11,204 $ 11,623 $ 11,197 PER COMMON SHARE DATA (unaudited) Basic earnings per share $ 0.23 $ 0.15 $ 0.19 $ 0.19 $ 0.19 Diluted earnings per share $ 0.23 $ 0.15 $ 0.19 $ 0.19 $ 0.19 Weighted average shares outstanding - basic 60,220,717 60,089,327 59,926,816 59,616,951 59,589,243 Weighted average shares outstanding - diluted 60,760,189 60,730,141 60,404,213 60,247,296 60,141,412 Common shares outstanding at period-end 60,266,316 60,202,766 59,932,334 59,917,457 59,914,987 Dividend per share $ 0.13 $ 0.13 $ 0.13 $ 0.13 $ 0.13 Book value per share $ 9.79 $ 9.69 $ 9.71 $ 9.64 $ 9.64 Tangible book value per share $ 6.77 $ 6.65 $ 6.64 $ 6.57 $ 6.55 KEY FINANCIAL RATIOS (unaudited) Annualized return on average equity 9.29 % 6.06 % 7.85 % 7.99 % 7.73 % Annualized return on average tangible equity 13.49 % 8.84 % 11.50 % 11.75 % 11.41 % Annualized return on average assets 1.06 % 0.70 % 0.95 % 0.98 % 0.98 % Annualized return on average tangible assets 1.10 % 0.73 % 0.99 % 1.02 % 1.02 % Net interest margin (FTE) 3.18 % 3.00 % 3.22 % 3.15 % 3.24 % Efficiency ratio 53.78 % 69.58 % 62.38 % 59.45 % 57.58 % AVERAGE BALANCES (in $000’s, unaudited) Average assets $ 5,139,239 $ 5,047,097 $ 4,773,878 $ 4,703,154 $ 4,562,412 Average tangible assets $ 4,956,738 $ 4,863,814 $ 4,589,861 $ 4,518,279 $ 4,376,533 Average earning assets $ 4,778,574 $ 4,678,084 $ 4,419,963 $ 4,338,117 $ 4,203,902 Average loans held-for-sale $ 4,810 $ 4,053 $ 3,458 $ 2,772 $ 5,169 Average total loans $ 2,766,731 $ 2,790,368 $ 2,616,876 $ 2,652,019 $ 2,664,525 Average deposits $ 4,396,315 $ 4,307,555 $ 4,048,953 $ 3,980,017 $ 3,846,652 Average demand deposits - noninterest-bearing $ 1,835,219 $ 1,808,638 $ 1,712,903 $ 1,749,837 $ 1,700,972 Average interest-bearing deposits $ 2,561,096 $ 2,498,917 $ 2,336,050 $ 2,230,180 $ 2,145,680 Average interest-bearing liabilities $ 2,601,002 $ 2,538,747 $ 2,375,851 $ 2,269,960 $ 2,185,439 Average equity $ 586,012 $ 583,009 $ 579,157 $ 578,560 $ 576,135 Average tangible equity $ 403,511 $ 399,726 $ 395,140 $ 393,685 $ 390,256 End of Period: Percent Change From: CONSOLIDATED BALANCE SHEETS September 30, June 30, September 30, June 30, September 30, (in $000’s, unaudited) 2021 2021 2020 2021 2020 ASSETS Cash and due from banks $ 33,013 $ 41,904 $ 33,353 (21 ) % (1 ) % Other investments and interest-bearing deposits in other financial institutions 1,588,334 1,286,418 926,915 23 % 71 % Securities available-for-sale, at fair value 121,000 145,955 294,438 (17 ) % (59 ) % Securities held-to-maturity, at amortized cost 537,285 421,286 295,609 28 % 82 % Loans held-for-sale - SBA, including deferred costs 3,678 4,344 3,565 (15 ) % 3 % Loans: Commercial 578,944 557,686 574,359 4 % 1 % SBA PPP loans 164,506 286,461 323,550 (43 ) % (49 ) % Real estate: CRE - owner occupied 580,624 583,091 561,528 0 % 3 % CRE - non-owner occupied 829,022 742,135 713,563 12 % 16 % Land and construction 141,277 129,426 142,632 9 % (1 ) % Home equity 106,690 107,873 111,468 (1 ) % (4 ) % Multifamily 205,952 198,771 169,791 4 % 21 % Residential mortgages 211,467 205,904 91,077 3 % 132 % Consumer and other 20,106 21,519 17,511 (7 ) % 15 % Loans 2,838,588 2,832,866 2,705,479 0 % 5 % Deferred loan fees, net (5,729 ) (8,070 ) (8,463 ) (29 ) % (32 ) % Total loans, net of deferred costs and fees 2,832,859 2,824,796 2,697,016 0 % 5 % Allowance for credit losses on loans (43,680 ) (43,956 ) (45,422 ) (1 ) % (4 ) % Loans, net 2,789,179 2,780,840 2,651,594 0 % 5 % Company-owned life insurance 77,509 77,393 77,059 0 % 1 % Premises and equipment, net 9,821 10,040 10,412 (2 ) % (6 ) % Goodwill 167,631 167,631 167,631 0 % 0 % Other intangible assets 14,423 15,177 17,628 (5 ) % (18 ) % Accrued interest receivable and other assets 121,129 121,887 128,581 (1 ) % (6 ) % Total assets $ 5,463,002 $ 5,072,875 $ 4,606,785 8 % 19 % LIABILITIES AND SHAREHOLDERS’ EQUITY Liabilities: Deposits: Demand, noninterest-bearing $ 1,804,965 $ 1,840,516 $ 1,698,027 (2 ) % 6 % Demand, interest-bearing 1,141,944 1,140,867 926,041 0 % 23 % Savings and money market 1,600,754 1,174,587 1,108,252 36 % 44 % Time deposits-under $250 39,628 42,118 46,684 (6 ) % (15 ) % Time deposits-$250 and over 103,046 110,111 92,276 (6 ) % 12 % CDARS - money market and time deposits 36,044 36,273 19,121 (1 ) % 89 % Total deposits 4,726,381 4,344,472 3,890,401 9 % 21 % Subordinated debt, net of issuance costs 39,878 39,832 39,693 0 % 0 % Accrued interest payable and other liabilities 106,625 105,127 98,884 1 % 8 % Total liabilities 4,872,884 4,489,431 4,028,978 9 % 21 % Shareholders’ Equity: Common stock 496,622 495,665 493,126 0 % 1 % Retained earnings 105,202 99,311 91,065 6 % 16 % Accumulated other comprehensive loss (11,706 ) (11,532 ) (6,384 ) (2 ) % (83 ) % Total shareholders' equity 590,118 583,444 577,807 1 % 2 % Total liabilities and shareholders’ equity $ 5,463,002 $ 5,072,875 $ 4,606,785 8 % 19 % End of Period: CONSOLIDATED BALANCE SHEETS September 30, June 30, March 31, December 31, September 30, (in $000’s, unaudited) 2021 2021 2021 2020 2020 ASSETS Cash and due from banks $ 33,013 $ 41,904 $ 36,534 $ 30,598 $ 33,353 Other investments and interest-bearing deposits in other financial institutions 1,588,334 1,286,418 1,406,520 1,100,475 926,915 Securities available-for-sale, at fair value 121,000 145,955 196,718 235,774 294,438 Securities held-to-maturity, at amortized cost 537,285 421,286 306,535 297,389 295,609 Loans held-for-sale - SBA, including deferred costs 3,678 4,344 2,834 1,699 3,565 Loans: Commercial 578,944 557,686 559,698 555,707 574,359 SBA PPP loans 164,506 286,461 349,744 290,679 323,550 Real estate: CRE - owner occupied 580,624 583,091 568,637 560,362 561,528 CRE - non-owner occupied 829,022 742,135 700,117 693,103 713,563 Land and construction 141,277 129,426 159,504 144,594 142,632 Home equity 106,690 107,873 104,303 111,885 111,468 Multifamily 205,952 198,771 168,917 166,425 169,791 Residential mortgages 211,467 205,904 82,181 85,116 91,077 Consumer and other 20,106 21,519 19,872 18,116 17,511 Loans 2,838,588 2,832,866 2,712,973 2,625,987 2,705,479 Deferred loan fees, net (5,729 ) (8,070 ) (8,266 ) (6,726 ) (8,463 ) Total loans, net of deferred fees 2,832,859 2,824,796 2,704,707 2,619,261 2,697,016 Allowance for credit losses on loans (43,680 ) (43,956 ) (44,296 ) (44,400 ) (45,422 ) Loans, net 2,789,179 2,780,840 2,660,411 2,574,861 2,651,594 Company-owned life insurance 77,509 77,393 77,421 77,523 77,059 Premises and equipment, net 9,821 10,040 10,220 10,459 10,412 Goodwill 167,631 167,631 167,631 167,631 167,631 Other intangible assets 14,423 15,177 15,931 16,664 17,628 Accrued interest receivable and other assets 121,129 121,887 120,635 121,041 128,581 Total assets $ 5,463,002 $ 5,072,875 $ 5,001,390 $ 4,634,114 $ 4,606,785 LIABILITIES AND SHAREHOLDERS’ EQUITY Liabilities: Deposits: Demand, noninterest-bearing $ 1,804,965 $ 1,840,516 $ 1,813,962 $ 1,661,655 $ 1,698,027 Demand, interest-bearing 1,141,944 1,140,867 1,101,807 960,179 926,041 Savings and money market 1,600,754 1,174,587 1,189,566 1,119,968 1,108,252 Time deposits-under $250 39,628 42,118 42,596 45,027 46,684 Time deposits-$250 and over 103,046 110,111 102,508 103,746 92,276 CDARS - money market and time deposits 36,044 36,273 28,663 23,911 19,121 Total deposits 4,726,381 4,344,472 4,279,102 3,914,486 3,890,401 Subordinated debt, net of issuance costs 39,878 39,832 39,786 39,740 39,693 Accrued interest payable and other liabilities 106,625 105,127 100,839 101,999 98,884 Total liabilities 4,872,884 4,489,431 4,419,727 4,056,225 4,028,978 Shareholders’ Equity: Common stock 496,622 495,665 494,617 493,707 493,126 Retained earnings 105,202 99,311 98,314 94,899 91,065 Accumulated other comprehensive loss (11,706 ) (11,532 ) (11,268 ) (10,717 ) (6,384 ) Total shareholders' equity 590,118 583,444 581,663 577,889 577,807 Total liabilities and shareholders’ equity $ 5,463,002 $ 5,072,875 $ 5,001,390 $ 4,634,114 $ 4,606,785 End of Period: Percent Change From: CREDIT QUALITY DATA September 30, June 30, September 30, June 30, September 30, (in $000’s, unaudited) 2021 2021 2020 2021 2020 Nonaccrual loans - held-for-investment $ 4,091 $ 5,291 $ 9,661 (23 ) % (58 ) % Restructured and loans over 90 days past due and still accruing 642 889 601 (28 ) % 7 % Total nonperforming loans 4,733 6,180 10,262 (23 ) % (54 ) % Foreclosed assets — — — N/A N/A Total nonperforming assets $ 4,733 $ 6,180 $ 10,262 (23 ) % (54 ) % Other restructured loans still accruing $ 90 $ 93 $ 98 (3 ) % (8 ) % Net charge-offs (recoveries) during the quarter $ (238 ) $ (153 ) $ 219 (56 ) % (209 ) % Provision for (recapture of) credit losses on loans during the quarter $ (514 ) $ (493 ) $ 197 (4 ) % (361 ) % Allowance for credit losses on loans $ 43,680 $ 43,956 $ 45,422 (1 ) % (4 ) % Classified assets $ 31,937 $ 32,402 $ 33,024 (1 ) % (3 ) % Allowance for credit losses on loans to total loans 1.54 % 1.56 % 1.68 % (1 ) % (8 ) % Allowance for credit losses on loans to total nonperforming loans 922.88 % 711.26 % 442.62 % 30 % 109 % Nonperforming assets to total assets 0.09 % 0.12 % 0.22 % (25 ) % (59 ) % Nonperforming loans to total loans 0.17 % 0.22 % 0.38 % (23 ) % (55 ) % Classified assets to Heritage Commerce Corp Tier 1 capital plus allowance for credit losses on loans 7 % 7 % 7 % 0 % 0 % Classified assets to Heritage Bank of Commerce Tier 1 capital plus allowance for credit losses on loans 7 % 7 % 7 % 0 % 0 % OTHER PERIOD-END STATISTICS (in $000’s, unaudited) Heritage Commerce Corp: Tangible common equity (1) $ 408,064 $ 400,636 $ 392,548 2 % 4 % Shareholders’ equity / total assets 10.80 % 11.50 % 12.54 % (6 ) % (14 ) % Tangible common equity / tangible assets (2) 7.73 % 8.19 % 8.88 % (6 ) % (13 ) % Loan to deposit ratio 59.94 % 65.02 % 69.32 % (8 ) % (14 ) % Noninterest-bearing deposits / total deposits 38.19 % 42.36 % 43.65 % (10 ) % (13 ) % Total capital ratio 15.1 % 15.6 % 16.0 % (3 ) % (6 ) % Tier 1 capital ratio 12.9 % 13.3 % 13.5 % (3 ) % (4 ) % Common Equity Tier 1 capital ratio 12.9 % 13.3 % 13.5 % (3 ) % (4 ) % Tier 1 leverage ratio 8.6 % 8.6 % 9.3 % 0 % (8 ) % Heritage Bank of Commerce: Total capital ratio 14.5 % 15.0 % 15.2 % (3 ) % (5 ) % Tier 1 capital ratio 13.5 % 13.9 % 14.1 % (3 ) % (4 ) % Common Equity Tier 1 capital ratio 13.5 % 13.9 % 14.1 % (3 ) % (4 ) % Tier 1 leverage ratio 9.0 % 9.0 % 9.7 % 0 % (7 ) % _______________
(1) Represents shareholders' equity minus goodwill and other intangible assets (2) Represents shareholders' equity minus goodwill and other intangible assets divided by total assets minus goodwill and other intangible assets End of Period: CREDIT QUALITY DATA September 30, June 30, March 31, December 31, September 30, (in $000’s, unaudited) 2021 2021 2021 2021 2020 Nonaccrual loans - held-for-investment $ 4,091 $ 5,291 $ 5,542 $ 7,788 $ 9,661 Restructured and loans over 90 days past due and still accruing 642 889 51 81 601 Total nonperforming loans 4,733 6,180 5,593 7,869 10,262 Foreclosed assets — — — — — Total nonperforming assets $ 4,733 $ 6,180 $ 5,593 $ 7,869 $ 10,262 Other restructured loans still accruing $ 90 $ 93 $ 152 $ 169 $ 98 Net charge-offs (recoveries) during the quarter $ (238 ) $ (153 ) $ (1,408 ) $ (326 ) $ 219 Provision for (recapture of) credit losses on loans during the quarter $ (514 ) $ (493 ) $ (1,512 ) $ (1,348 ) $ 197 Allowance for credit losses on loans $ 43,680 $ 43,956 $ 44,296 $ 44,400 $ 45,422 Classified assets $ 31,937 $ 32,402 $ 33,420 $ 34,028 $ 33,024 Allowance for credit losses on loans to total loans 1.54 % 1.56 % 1.64 % 1.70 % 1.68 % Allowance for credit losses on loans to total nonperforming loans 922.88 % 711.26 % 791.99 % 564.24 % 442.62 % Nonperforming assets to total assets 0.09 % 0.12 % 0.11 % 0.17 % 0.22 % Nonperforming loans to total loans 0.17 % 0.22 % 0.21 % 0.30 % 0.38 % Classified assets to Heritage Commerce Corp Tier 1 capital plus allowance for credit losses on loans 7 % 7 % 7 % 7 % 7 % Classified assets to Heritage Bank of Commerce Tier 1 capital plus allowance for credit losses on loans 7 % 7 % 7 % 7 % 7 % OTHER PERIOD-END STATISTICS (in $000’s, unaudited) Heritage Commerce Corp: Tangible common equity (1) $ 408,064 $ 400,636 $ 398,101 $ 393,594 $ 392,548 Shareholders’ equity / total assets 10.80 % 11.50 % 11.63 % 12.47 % 12.54 % Tangible common equity / tangible assets (2) 7.73 % 8.19 % 8.26 % 8.85 % 8.88 % Loan to deposit ratio 59.94 % 65.02 % 63.21 % 66.91 % 69.32 % Noninterest-bearing deposits / total deposits 38.19 % 42.36 % 42.39 % 42.45 % 43.65 % Total capital ratio 15.1 % 15.6 % 16.5 % 16.5 % 16.0 % Tier 1 capital ratio 12.9 % 13.3 % 14.0 % 14.0 % 13.5 % Common Equity Tier 1 capital ratio 12.9 % 13.3 % 14.0 % 14.0 % 13.5 % Tier 1 leverage ratio 8.6 % 8.6 % 9.1 % 9.1 % 9.3 % Heritage Bank of Commerce: Total capital ratio 14.5 % 15.0 % 15.8 % 15.8 % 15.2 % Tier 1 capital ratio 13.5 % 13.9 % 14.7 % 14.6 % 14.1 % Common Equity Tier 1 capital ratio 13.5 % 13.9 % 14.7 % 14.6 % 14.1 % Tier 1 leverage ratio 9.0 % 9.0 % 9.5 % 9.5 % 9.7 % _______________
(1) Represents shareholders' equity minus goodwill and other intangible assets (2) Represents shareholders' equity minus goodwill and other intangible assets divided by total assets minus goodwill and other intangible assets For the Quarter Ended For the Quarter Ended September 30, 2021 September 30, 2020 Interest Average Interest Average NET INTEREST INCOME AND NET INTEREST MARGIN Average Income/ Yield/ Average Income/ Yield/ (in $000’s, unaudited) Balance Expense Rate Balance Expense Rate Assets: Loans, gross (1)(2) $ 2,771,541 $ 36,207 5.18 % $ 2,669,694 $ 32,635 4.86 % Securities - taxable 557,890 2,320 1.65 % 550,423 2,481 1.79 % Securities - exempt from Federal tax (3) 58,679 485 3.28 % 72,625 586 3.21 % Other investments and interest-bearing deposits in other financial institutions 1,390,464 998 0.28 % 911,160 673 0.29 % Total interest earning assets (3) 4,778,574 40,010 3.32 % 4,203,902 36,375 3.44 % Cash and due from banks 37,963 36,505 Premises and equipment, net 9,962 9,884 Goodwill and other intangible assets 182,501 185,879 Other assets 130,239 126,242 Total assets $ 5,139,239 $ 4,562,412 Liabilities and shareholders’ equity: Deposits: Demand, noninterest-bearing $ 1,835,219 $ 1,700,972 Demand, interest-bearing 1,142,762 473 0.16 % 934,892 506 0.22 % Savings and money market 1,234,109 513 0.16 % 1,052,800 762 0.29 % Time deposits - under $100 14,721 7 0.19 % 17,298 16 0.37 % Time deposits - $100 and over 132,247 147 0.44 % 121,949 219 0.71 % CDARS - money market and time deposits 37,257 1 0.01 % 18,741 1 0.02 % Total interest-bearing deposits 2,561,096 1,141 0.18 % 2,145,680 1,504 0.28 % Total deposits 4,396,315 1,141 0.10 % 3,846,652 1,504 0.16 % Subordinated debt, net of issuance costs 39,851 583 5.80 % 39,663 583 5.85 % Short-term borrowings 55 1 7.21 % 96 — 0.00 % Total interest-bearing liabilities 2,601,002 1,725 0.26 % 2,185,439 2,087 0.38 % Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds 4,436,221 1,725 0.15 % 3,886,411 2,087 0.21 % Other liabilities 117,006 99,866 Total liabilities 4,553,227 3,986,277 Shareholders’ equity 586,012 576,135 Total liabilities and shareholders’ equity $ 5,139,239 $ 4,562,412 Net interest income (3) / margin 38,285 3.18 % 34,288 3.24 % Less tax equivalent adjustment (3) (103 ) (123 ) Net interest income $ 38,182 $ 34,165 _______________
(1) Includes loans held-for-sale. Nonaccrual loans are included in average balances. (2) Yield amounts earned on loans include fees and costs. The accretion of net deferred loan fees into loan interest income was $2,809,000 for the third quarter of 2021 (of which $2,508,000 was from PPP loans), compared to $1,441,000 for the third quarter of 2020 (of which $1,305,000 was from PPP loans). Prepayment fees totaled $1,282,000 for the third quarter of 2021, compared to $154,000 for the third quarter of 2020. (3) Reflects the FTE adjustment for Federal tax-exempt income based on a 21% tax rate. For the Quarter Ended For the Quarter Ended September 30, 2021 June 30, 2021 Interest Average Interest Average NET INTEREST INCOME AND NET INTEREST MARGIN Average Income/ Yield/ Average Income/ Yield/ (in $000’s, unaudited) Balance Expense Rate Balance Expense Rate Assets: Loans, gross (1)(2) $ 2,771,541 $ 36,207 5.18 % $ 2,794,421 $ 33,439 4.80 % Securities - taxable 557,890 2,320 1.65 % 479,419 1,944 1.63 % Securities - exempt from Federal tax (3) 58,679 485 3.28 % 62,257 511 3.29 % Other investments and interest-bearing deposits in other financial institutions 1,390,464 998 0.28 % 1,341,987 845 0.25 % Total interest earning assets (3) 4,778,574 40,010 3.32 % 4,678,084 36,739 3.15 % Cash and due from banks 37,963 42,449 Premises and equipment, net 9,962 10,147 Goodwill and other intangible assets 182,501 183,283 Other assets 130,239 133,134 Total assets $ 5,139,239 $ 5,047,097 Liabilities and shareholders’ equity: Deposits: Demand, noninterest-bearing $ 1,835,219 $ 1,808,638 Demand, interest-bearing 1,142,762 473 0.16 % 1,139,090 477 0.17 % Savings and money market 1,234,109 513 0.16 % 1,179,321 528 0.18 % Time deposits - under $100 14,721 7 0.19 % 15,335 8 0.21 % Time deposits - $100 and over 132,247 147 0.44 % 133,935 164 0.49 % CDARS - money market and time deposits 37,257 1 0.01 % 31,236 2 0.03 % Total interest-bearing deposits 2,561,096 1,141 0.18 % 2,498,917 1,179 0.19 % Total deposits 4,396,315 1,141 0.10 % 4,307,555 1,179 0.11 % Subordinated debt, net of issuance costs 39,851 583 5.80 % 39,802 577 5.81 % Short-term borrowings 55 1 7.21 % 28 — 0.00 % Total interest-bearing liabilities 2,601,002 1,725 0.26 % 2,538,747 1,756 0.28 % Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds 4,436,221 1,725 0.15 % 4,347,385 1,756 0.16 % Other liabilities 117,006 116,703 Total liabilities 4,553,227 4,464,088 Shareholders’ equity 586,012 583,009 Total liabilities and shareholders’ equity $ 5,139,239 $ 5,047,097 Net interest income (3) / margin 38,285 3.18 % 34,983 3.00 % Less tax equivalent adjustment (3) (103 ) (107 ) Net interest income $ 38,182 $ 34,876 _______________
(1) Includes loans held-for-sale. Nonaccrual loans are included in average balances. (2) Yield amounts earned on loans include fees and costs. The accretion of net deferred loan fees into loan interest income was $2,809,000 for the third quarter of 2021 (of which $2,508,000 was from PPP loans), compared to $2,192,000 for the second quarter of 2021 (of which $1,876,000 was from PPP loans). Prepayment fees totaled $504,000 for the second quarter of 2021, compared to $154,000 for the third quarter of 2020. (3) Reflects the FTE adjustment for Federal tax-exempt income based on a 21% tax rate. For the Nine Months Ended For the Nine Months Ended September 30, 2021 September 30, 2020 Interest Average Interest Average NET INTEREST INCOME AND NET INTEREST MARGIN Average Income/ Yield/ Average Income/ Yield/ (in $000’s, unaudited) Balance Expense Rate Balance Expense Rate Assets: Loans, gross (1)(2) $ 2,729,319 $ 103,482 5.07 % $ 2,623,672 $ 100,262 5.10 % Securities - taxable 491,832 5,992 1.63 % 610,590 9,584 2.10 % Securities - exempt from Federal tax (3) 62,454 1,538 3.29 % 76,371 1,845 3.23 % Other investments, interest-bearing deposits in other financial institutions and Federal funds sold 1,343,248 2,611 0.26 % 671,753 3,022 0.60 % Total interest earning assets (3) 4,626,853 113,623 3.28 % 3,982,386 114,713 3.85 % Cash and due from banks 40,401 39,575 Premises and equipment, net 10,158 9,198 Goodwill and other intangible assets 183,262 186,697 Other assets 127,402 126,211 Total assets $ 4,988,076 $ 4,344,067 Liabilities and shareholders’ equity: Deposits: Demand, noninterest-bearing $ 1,786,035 $ 1,600,522 Demand, interest-bearing 1,103,114 1,429 0.17 % 875,501 1,573 0.24 % Savings and money market 1,184,108 1,613 0.18 % 994,314 2,470 0.33 % Time deposits - under $100 15,315 24 0.21 % 17,964 56 0.42 % Time deposits - $100 and over 132,347 482 0.49 % 127,360 801 0.84 % CDARS - money market and time deposits 31,295 4 0.02 % 16,894 4 0.03 % Total interest-bearing deposits 2,466,179 3,552 0.19 % 2,032,034 4,904 0.32 % Total deposits 4,252,214 3,552 0.11 % 3,632,556 4,904 0.18 % Subordinated debt, net of issuance costs 39,804 1,731 5.81 % 39,617 1,737 5.86 % Short-term borrowings 42 1 3.18 % 162 — 0.00 % Total interest-bearing liabilities 2,506,025 5,284 0.28 % 2,071,813 6,641 0.43 % Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds 4,292,060 5,284 0.16 % 3,672,335 6,641 0.24 % Other liabilities 113,265 95,690 Total liabilities 4,405,325 3,768,025 Shareholders’ equity 582,751 576,042 Total liabilities and shareholders’ equity $ 4,988,076 $ 4,344,067 Net interest income (3) / margin 108,339 3.13 % 108,072 3.62 % Less tax equivalent adjustment (3) (323 ) (387 ) Net interest income $ 108,016 $ 107,685 _______________
(1) Includes loans held-for-sale. Nonaccrual loans are included in average balances. (2) Yield amounts earned on loans include fees and costs. The accretion of net deferred loan fees into loan interest income was $8,690,000 for the first nine months of 2021 (of which $7,784,000 was from PPP loans), compared to $2,353,000 for the first nine months of 2020 (of which $1,942,000 was from PPP loans). Prepayment fees totaled $2,303,000 for the first nine months of 2021, compared to $864,000 for the first nine months of 2020. (3) Reflects the FTE adjustment for Federal tax-exempt income based on a 21% tax rate. 
- Diluted earnings per share were $0.23 for the third quarter of 2021, compared to $0.19 for the third quarter of 2020, and $0.15 for the second quarter of 2021. Diluted earnings per share were $0.56 for the first nine months of 2021, compared to $0.39 for the first nine months of 2020.