Heritage Commerce Corp Reports Earnings of $11.6 Million for the Fourth Quarter of 2020 and $35.3 Million for 2020

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Heritage Commerce Corp
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SAN JOSE, Calif., Jan. 28, 2021 (GLOBE NEWSWIRE) -- Heritage Commerce Corp (Nasdaq: HTBK), the holding company (the “Company”) for Heritage Bank of Commerce (the “Bank”), today announced fourth quarter 2020 net income of $11.6 million, or $0.19 per average diluted common share, compared to $5.7 million, or $0.10 per average diluted common share, for the fourth quarter of 2019, and $11.2 million, or $0.19 per average diluted common share, for the third quarter of 2020. For the year ended December 31, 2020, net income was $35.3 million, or $0.59 per average diluted common share, compared to $40.5 million, or $0.84 per average diluted common share, for the year ended December 31, 2019. All results are unaudited.

“We generated solid earnings, for the full year of 2020, fueled by a year-over-year increase in net interest income, total deposits, and gains on sales of SBA loans,” said Mr. Keith Wilton, President and Chief Executive Officer. “Our results in the midst of this challenging economic environment are a testament to our resilient bankers, our customers and our communities. Our participation in the initial rounds of the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”), helped meet the financial needs of our customers who were significantly impacted by the pandemic and we are actively participating in this newest round of PPP funding.”

“Credit quality improved with nonperforming assets (“NPAs”) declining (20%) year-over-year and (23%) on a linked quarter basis, to $7.9 million at year end,” said Mr. Wilton. “In fact, we released $1.3 million of our provision for credit losses on loans largely due to recoveries of previously charged off accounts and the successful resolution of a nonperforming credit resulting in the release of specific reserves. This brings our allowance for credits losses on loans (“ACLL”) to total loans to 1.70%, and the ACLL to total loans, excluding PPP loans, to 1.91% at December 31, 2020. Further, capital and liquidity positions remain strong with a total risk-based capital ratio and leverage for the Company (consolidated) at 16.5% and 9.1% respectively, and 15.8% and 9.5% respectively, for the Bank, at December 31, 2020,” added Mr. Wilton.

“During the fourth quarter of 2020, we completed the final touches to our new San Jose corporate headquarters at 224 Airport Parkway and finalized the move of our San Mateo branch and administrative offices to newly renovated facilities,” commented Mr. Wilton. “These combined facilities represent over 50% of the Company’s office footprint and include modifications and upgrades to meet enhanced energy saving requirements, further representing our Company’s commitment to lowering our carbon footprint.”

“The past year presented many challenges to members of the communities we serve. During 2020, we were proud of our employees who volunteered their time to many local organizations that assist minority, disenfranchised and underrepresented groups in our community, and we congratulate them for their service. In addition, we are proud of our Company’s continued ability to provide grants and sponsorships to support these community groups,” said Mr. Wilton.

In response to two economic stimulus laws passed by Congress in the first half of the 2020, Heritage Bank of Commerce funded 1,105 PPP loans, with total principal balances of $333.4 million. Through 2020, PPP loan payoffs totaled $9.1 million while SBA loan forgiveness totaled $33.7 million and the Bank ended the fourth quarter of 2020 with $290.7 million in outstanding PPP loan balances. These loans generated $2.2 million in interest income and $3.9 million in net deferred fee revenue during 2020. At December 31, 2020, total loans included remaining deferred fees on PPP loans of ($6.8) million and deferred costs of $783,000.

On April 7, 2020, the U.S. banking agencies issued an Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus. The statement describes accounting for COVID-19-related loan modifications, including clarifying the interaction between current accounting rules and the temporary relief provided by the Coronavirus Aid, Relief, and Economic Security (“CARES Act”). 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. As well, most of the deferrals we originally granted have returned to regular payments. The following table shows the deferments at December 31, 2020 by category:

Underlying Collateral

NON-SBA LOANS

Business

Real

(in $000’s, unaudited)

Assets

Estate

Total

Initial Deferments(1)

$

-

$

1,573

$

1,573

2nd Deferments(2)

295

684

979

Total

$

295

$

2,257

$

2,552

(1) Initial deferments were generally for 3 months

(2) 2nd deferments were for an additional 3 months

In addition to its portfolio of SBA PPP loans, the Bank also has a portfolio of SBA 7(a) loans totaling $48.9 million as of January 15, 2021. 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 January 15, 2021:

SBA 7(a) LOANS

Number

(in $000’s, unaudited)

Balance

of Loans

SBA 7(a) loans that borrowers made payments

by January 15, 2021

$

41,994

234

Payments Not Made / NSF / Returned

1,032

12

Due dates later in January

85

2

New loans / No payment due

3,267

4

CARES Payments

2,062

9

Request for Deferral

448

5

Total Portfolio

$

48,888

266

The CARES Act was recently amended to include $3.5 billion of extended debt relief payments for SBA borrowers. The program will initially provide for 3 payments of principal and interest to a maximum of $9,000 per month under various criteria and then an additional 5 payments for borrowers considered “underserved” as defined in the amended legislation.

Credit Quality and Performance

At December 31, 2020, NPAs declined by $1.9 million, or (20%), to $7.9 million, compared to $9.8 million at December 31, 2019, and decreased by $2.4 million, or (23%) from $10.3 million at September 30, 2020. Classified assets increased to $34.0 million, or 0.73% of total assets, at December 31, 2020, compared to $32.6 million, or 0.79% of total assets, at December 31, 2019, and $33.0 million, or 0.72% of total assets, at September 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 fourth quarter of 2020, the percentage of loans identified as higher risk to total loans increased slightly compared to the third quarter of 2020. The following table provides a breakdown of such loans as a percentage of total loans for the periods indicated:

% of Total

% of Total

% of Total

% of Total

Loans at

Loans at

Loans at

Loans at

HIGHER RISK SECTORS (unaudited)

December 31, 2020

September 30, 2020

June 30, 2020

March 31, 2020

Health care and social assistance:

Offices of dentists

2.01

%

1.86

%

1.79

%

1.63

%

Offices of physicians (except mental health specialists)

0.81

%

0.74

%

0.76

%

0.70

%

Other community housing services

0.28

%

0.27

%

0.27

%

0.11

%

All others

2.15

%

2.15

%

2.21

%

1.84

%

Total health care and social assistance

5.25

%

5.02

%

5.03

%

4.28

%

Retail trade:

Gasoline stations with convenience stores

2.16

%

1.97

%

1.90

%

1.98

%

All others

2.34

%

2.44

%

2.44

%

2.18

%

Total retail trade

4.50

%

4.41

%

4.34

%

4.16

%

Accommodation and food services:

Full-service restaurants

1.30

%

1.40

%

1.38

%

0.86

%

Limited-service restaurants

0.57

%

0.74

%

0.79

%

0.63

%

Hotels (except casino hotels) and motels

0.95

%

0.92

%

0.89

%

0.94

%

All others

0.68

%

0.68

%

0.70

%

0.52

%

Total accommodation and food services

3.50

%

3.74

%

3.76

%

2.95

%

Educational services:

Elementary and secondary schools

0.58

%

0.57

%

0.65

%

0.15

%

Education support services

0.45

%

0.43

%

0.40

%

0.15

%

All others

0.19

%

0.17

%

0.24

%

0.17

%

Total educational services

1.22

%

1.17

%

1.29

%

0.47

%

Arts, entertainment, and recreation

1.34

%

1.27

%

1.26

%

1.09

%

Purchased participations in micro loan portfolio

0.60

%

0.68

%

0.80

%

0.95

%

Total higher risk sectors

16.41

%

16.29

%

16.48

%

13.90

%

The increase in higher risk sector loans in the last three quarters of 2020, compared to the first quarter of 2020, was primarily due to the addition of PPP loans during the second quarter of 2020.

Capital and Liquidity

The Company’s and the Bank’s consolidated capital ratios exceeded regulatory guidelines for a well-capitalized financial institution, and the Basel III minimum regulatory requirements at December 31, 2020.

Our liquidity position refers to our ability to maintain cash flows sufficient to fund operations, meet all of our obligations and commitments, and accommodate unexpected sudden changes in balances of loans and deposits in a timely manner. At various times the Company requires funds to meet short term cash requirements brought about by loan growth or deposit outflows, the purchase of assets, or liability repayments. An integral part of the Company’s ability to manage its liquidity position appropriately is the Company’s large base of core deposits, which are generated by offering traditional banking services in its service area and which have historically been a stable source of funds. To manage liquidity needs properly, cash inflows must be timed to coincide with anticipated outflows or sufficient liquidity resources must be available to meet varying demands. At December 31, 2020, the Company had a strong liquidity position with $1.13 billion in cash and cash equivalents, and $781.6 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 $498.5 million (at fair market value) in unpledged securities available at December 31, 2020. The loan to deposit ratio was 66.91% at December 31, 2020, compared to 74.20% at December 31, 2019, and decreased from 69.32% at September 30, 2020.

Fourth Quarter and Year Ended December 31, 2020
Operating Results, Balance Sheet Review, Capital Management, and Credit Quality
(as of, or for the periods ended December 31, 2020, compared to December 31, 2019, and September 30, 2020, except as noted):

Operating Results:

  • Diluted earnings per share were $0.19 for the fourth quarter of 2020, compared to $0.10 for the fourth quarter of 2019, and $0.19 for the third quarter of 2020. Diluted earnings per share were $0.59 for the year ended December 31, 2020, compared to $0.84 for the year ended December 31, 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:

For the Quarter Ended

For the Year Ended

December 31,

September 30,

December 31,

December 31,

December 31,

(unaudited)

2020

2020

2019

2020

2019

Return on average tangible assets

1.02

%

1.02

%

0.57

%

0.83

%

1.25

%

Return on average tangible equity

11.75

%

11.41

%

5.96

%

9.04

%

13.09

%

  • Net interest income, before provision for credit losses on loans, decreased (13%) to $34.2 million for the fourth quarter of 2020, compared to $39.2 million for the fourth quarter of 2019, primarily due to decreases in the prime rate, and yield on investment securities and overnight funds. Net interest income remained flat for the fourth quarter of 2020, compared to $34.2 million for the third quarter of 2020. Net interest income increased 8% to $141.9 million for the year ended December 31, 2020, compared to $131.8 million for the year ended December 31, 2019, primarily due to an increase in the average balance of loans resulting from 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, 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 100 basis points to 3.15% for the fourth quarter of 2020, from 4.15% for the fourth quarter of 2019, primarily due to a decline in the average yield on loans, investment securities, and overnight funds, partially offset by a decline in the cost of interest-bearing liabilities. The FTE net interest margin contracted 9 basis points for the fourth quarter of 2020 from 3.24% for the third quarter of 2020, primarily due to a decline in the average yield on investment securities, and overnight funds, partially offset by an increase in the average yield on loans and a decline in the cost of interest-bearing liabilities.

    • For the year ended December 31, 2020, the FTE net interest margin contracted 78 basis points to 3.50%, compared to 4.28% for the year ended December 31, 2019, primarily due to a decline in the average yield on loans, investment securities, and overnight funds, partially offset by a decline in the cost of interest-bearing liabilities.

  • 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 4.93% for the fourth quarter of 2020, compared to 5.76% for the fourth quarter of 2019, primarily due to a decline in the average yield in the prime rate, 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.

For the Quarter Ended

For the Quarter Ended

December 31, 2020

December 31, 2019

Average

Interest

Average

Average

Interest

Average

(in $000’s, unaudited)

Balance

Income

Yield

Balance

Income

Yield

Loans, core bank and asset-based lending

$

2,256,944

$

26,348

4.64

%

$

2,353,871

$

30,786

5.19

%

SBA PPP loans

313,335

787

1.00

%

N/A

PPP fees, net

1,935

2.46

%

N/A

Bay View Funding factored receivables

50,720

2,856

22.40

%

45,045

2,888

25.44

%

Purchased residential mortgages

24,955

118

1.88

%

33,867

237

2.78

%

Purchased commercial real estate ("CRE") loans

20,854

176

3.36

%

28,407

238

3.32

%

Loan fair value mark / accretion

(12,017

)

687

0.12

%

(15,089

)

1,338

0.23

%

Total loans (includes loans held-for-sale)

$

2,654,791

$

32,907

4.93

%

$

2,446,101

$

35,487

5.76

%


The average yield on the total loan portfolio increased to 4.93% for the fourth quarter of 2020 compared to 4.86% for the third quarter of 2020, primarily due to higher fees from PPP loans and a higher average balance of Bay View Funding factored receivables, partially offset by a decrease in the accretion of the loan purchase discount into loan interest income from the acquisitions.


For the Quarter Ended

For the Quarter Ended

December 31, 2020

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

$

2,256,944

$

26,348

4.64

%

$

2,266,227

$

26,508

4.65

%

SBA PPP loans

313,335

787

1.00

%

324,518

816

1.00

%

PPP fees, net

1,935

2.46

%

1,305

1.60

%

Bay View Funding factored receivables

50,720

2,856

22.40

%

40,300

2,431

24.00

%

Purchased residential mortgages

24,955

118

1.88

%

29,399

180

2.44

%

Purchased CRE loans

20,854

176

3.36

%

22,603

195

3.43

%

Loan fair value mark / accretion

(12,017

)

687

0.12

%

(13,353

)

1,200

0.21

%

Total loans (includes loans held-for-sale)

$

2,654,791

$

32,907

4.93

%

$

2,669,694

$

32,635

4.86

%


The average yield on the total loan portfolio decreased to 5.06% for the year ended December 31, 2020 compared to 5.86% for the year ended December 31, 2019, primarily due to decreases in the prime rate on loans and new average balances of lower yielding PPP loans, partially offset by higher PPP loan fees and an increase in the accretion of the loan purchase discount into loan interest income from the acquisitions.


For the Year Ended

For the Year Ended

December 31, 2020

December 31, 2019

Average

Interest

Average

Average

Interest

Average

(in $000’s, unaudited)

Balance

Income

Yield

Balance

Income

Yield

Loans, core bank and asset-based lending

$

2,327,624

$

110,652

4.75

%

$

1,890,079

$

100,380

5.31

%

SBA PPP loans

218,391

2,185

1.00

%

N/A

PPP fees, net

3,877

1.78

%

N/A

Bay View Funding factored receivables

45,765

10,727

23.44

%

46,710

11,688

25.02

%

Purchased residential mortgages

29,648

725

2.45

%

35,343

951

2.69

%

Purchased CRE loans

24,072

831

3.45

%

30,936

1,107

3.58

%

Loan fair value mark / accretion

(14,005

)

4,172

0.18

%

(8,151

)

2,682

0.14

%

Total loans (includes loans held-for-sale)

$

2,631,495

$

133,169

5.06

%

$

1,994,917

$

116,808

5.86

%


In aggregate, the original total net purchase discount on loans from the Focus Business Bank, Tri-Valley Bank, United American Bank, and Presidio loan portfolio was $25.2 million. In aggregate, the remaining net purchase discount on total loans acquired was $12.1 million at December 31, 2020.

The average cost of total deposits was 0.14% for the fourth quarter of 2020, compared to 0.26% for the fourth quarter of 2019 and 0.16% for the third quarter of 2020. The average cost of total deposits was 0.17% for the year ended December 31, 2020, compared to 0.29% for the year ended December 31, 2019.

There was a credit of $1.3 million to the provision for credit losses on loans for the fourth quarter of 2020, compared to a $3.2 million provision for loan losses for the fourth quarter of 2019, and a $197,000 provision for credit losses on loans for the third quarter of 2020. There was a $13.2 million provision for credit losses on loans for the year ended December 31, 2020, compared to an $846,000 provision for loan losses for the year ended December 31, 2019.

The increase in the provision for credit losses on loans for the year ended December 31, 2020, compared to the year ended December 31, 2019, was driven primarily by a significantly deteriorated economic outlook resulting from the Coronavirus pandemic. The three loan classes where the largest increases in reserves were recorded under the Current Expected Credit Loss ("CECL") loss rate methodology were investor-owned CRE, land and construction, 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 was $2.1 million for the fourth quarter of 2020, compared to $2.4 million for the fourth quarter of 2019, primarily due to lower service charges and fees on deposit accounts. Total noninterest income decreased to $2.1 million for the fourth quarter of 2020 from $2.6 million for the third quarter of 2020, primarily due to a realized gain on warrants exercised during the third quarter of 2020.

For the year ended December 31, 2020, total noninterest income was $9.9 million, compared to $10.2 million for the year ended December 31, 2019, primarily due to lower service charges and fees on deposit accounts, partially offset by an increase in the cash surrender value of life insurance, a gain realized on a warrant exercised, and a gain on the disposition of foreclosed assets during the first quarter of 2020.

Total noninterest expense for the fourth quarter of 2020 decreased to $21.6 million, compared to $30.6 million for the fourth quarter of 2019, primarily due to lower merger-related costs. Total noninterest expense for the fourth quarter of 2020 modestly increased compared to $21.2 million for the third quarter of 2020.

Noninterest expense for the year ended December 31, 2020 increased to $89.5 million, compared to $84.9 million for the year ended December 31, 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, partially offset by lower merger-related costs.

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 Year Ended

MERGER-RELATED COSTS

December 31,

September 30,

December 31,

December 31,

December 31,

(in $000’s, unaudited)

2020

2020

2019

2020

2019

Salaries and employee benefits

$

$

$

6,580

$

356

$

6,580

Other

101

17

3,299

2,245

4,500

Total merger-related costs

$

101

$

17

$

9,879

$

2,601

$

11,080


Full time equivalent employees were 330 at December 31, 2020, 357 at December 31, 2019, and 342 at September 30, 2020.

  • The efficiency ratio was 59.45% for the fourth quarter of 2020, compared to 73.58% for the fourth quarter of 2019, and 57.58% for the third quarter of 2020. The efficiency ratio for the year ended December 31, 2020 was 58.96%, compared to 59.76% for the year ended December 31, 2019.

  • Income tax expense was $4.4 million for the fourth quarter of 2020, compared to $2.1 million for the fourth quarter of 2019, and $4.2 million for the third quarter of 2020. The effective tax rate for the fourth quarter of 2020 was 27.6%, compared to 26.9% for the fourth quarter of 2019, and 27.3% for the third quarter of 2020. Income tax expense for the year ended December 31, 2020 was $13.8 million, compared to $15.9 million for the year ended December 31, 2019. The effective tax rate was 28.1% for the years ended December 31, 2020 and December 31, 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 13% to $4.63 billion at December 31, 2020, compared to $4.11 billion at December 31, 2019. Total assets increased 1% from $4.61 billion at September 30, 2020.

  • Securities available-for-sale, at fair value, totaled $235.8 million at December 31, 2020, compared to $404.8 million at December 31, 2019, and $294.4 million at September 30, 2020. At December 31, 2020, the Company’s securities available-for-sale portfolio was comprised of $175.3 million of agency mortgage-backed securities (all issued by U.S. Government sponsored entities), and $60.5 million of U.S. Treasury securities. The pre-tax unrealized gain on securities available-for-sale at December 31, 2020 was $5.8 million, compared to a pre-tax unrealized gain on securities available-for-sale of $2.3 million at December 31, 2019, and a pre-tax unrealized gain on securities available-for-sale of $6.9 million at September 30, 2020. 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 December 31, 2020, securities held-to-maturity, at amortized cost, totaled $297.4 million, compared to $366.6 million at December 31, 2019, and $295.6 million at September 30, 2020. At December 31, 2020, the Company’s securities held-to-maturity portfolio was comprised of $228.7 million of agency mortgage-backed securities, and $68.7 million of tax-exempt municipal bonds. During the fourth quarter of 2020, the Company purchased $30.9 million of agency mortgage-backed securities (securities held-to-maturity), with a book yield of 1.15% and an average life of 6.18 years.

    • With the CECL methodology implementation date of January 1, 2020, there was a $58,000 allowance for credit losses recorded on the Company’s held-to-maturity municipal investment securities portfolio. For the year ended December 31, 2020, there was a reduction of $4,000 to the allowance for credit losses on the Company’s held-to-maturity municipal investment securities portfolio, for an allowance for credit losses of $54,000 at December 31, 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:

LOANS

December 31, 2020

September 30, 2020

December 31, 2019

(in $000’s, unaudited)

Balance

% to Total

Balance

% to Total

Balance

% to Total

Commercial

$

555,707

21

$

574,359

21

%

$

603,345

24

%

Paycheck Protection Program Loans

290,679

11

%

323,550

12

%

0

%

Real estate:

CRE - owner occupied

560,362

21

%

561,528

21

%

548,907

22

%

CRE - non-owner occupied

693,103

27

%

713,563

27

%

767,821

30

%

Land and construction

144,594

6

%

142,632

5

%

147,189

6

%

Home equity

111,885

4

%

111,468

4

%

151,775

6

%

Multifamily

166,425

6

%

169,791

6

%

180,623

7

%

Residential mortgages

85,116

3

%

91,077

3

%

100,759

4

%

Consumer and other

18,116

1

%

17,511

1

%

33,744

1

%

Total Loans

2,625,987

100

%

2,705,479

100

%

2,534,163

100

%

Deferred loan costs (fees), net

(6,726

)

(8,463

)

(319

)

Loans, net of deferred costs and fees

$

2,619,261

100

%

$

2,697,016

100

%

$

2,533,844

100

%


Loans, excluding loans held-for-sale, increased $85.4 million, or 3%, to $2.62 billion at December 31, 2020, compared to $2.53 billion at December 31, 2019, and decreased (3%) from $2.70 billion at September 30, 2020. Total loans at December 31, 2020 included $290.7 million of PPP loans.

C&I line usage was 28% at December 31, 2020, compared to 35% at December 31, 2019, and 28% at September 30, 2020.

At December 31, 2020, 45% 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:

For the Quarter Ended

For the Year Ended

ALLOWANCE FOR CREDIT LOSSES ON LOANS

December 31,

September 30,

December 31,

December 31,

December 31,

(in $000’s, unaudited)

2020

2020

2019

2020

2019

Balance at beginning of period

$

45,422

$

45,444

$

25,895

$

23,285

$

27,848

Charge-offs during the period

(144

)

(598

)

(6,003

)

(1,880

)

(6,623

)

Recoveries during the period

470

379

170

1,192

1,214

Net recoveries (charge-offs) during the period

326

(219

)

(5,833

)

(688

)

(5,409

)

Impact of adopting Topic 326

8,570

Provision (recapture) for credit losses on loans during the period(1)

(1,348

)

197

3,223

13,233

846

Balance at end of period

$

44,400

$

45,422

$

23,285

$

44,400

$

23,285

Total loans, net of deferred fees

$

2,619,261

$

2,697,016

$

2,533,844

$

2,619,261

$

2,533,844

Total nonperforming loans

$

7,869

$

10,262

$

9,828

$

7,869

$

9,828

Allowance for credit losses on loans to total loans(2)

1.70

%

1.68

%

0.92

%

1.70

%

0.92

%

Allowance for credit losses on loans to total nonperforming loans(2)

564.24

%

442.62

%

236.93

%

564.24

%

236.93

%


(1)

Provision (recapture) for credit losses on loans for the quarters ended December 31, 2020 and September 30, 2020, and the year ended December 31, 2020,

Provision for loan losses for the quarter and the year ended December 31, 2019

(2)

ACLL at December 31, 2020 and September 30, 2020, Allowance for loan losses ("ALLL") at December 31, 2019

  • The ACLL was 1.70% of total loans at December 31, 2020 and the ACLL to total nonperforming loans was 564.24% at December 31, 2020. The ALLL was 0.92% of total loans and the ALLL to nonperforming loans was 236.93% at December 31, 2019. The ACLL was 1.68% of total loans at September 30, 2020 and the ACLL to total nonperforming loans was 442.62% at September 30, 2020. The ACLL was 1.91% of total loans, excluding PPP loans, at December 31, 2020, and September 30, 2020.

  • The following table shows the results of adopting CECL for the year ended December 31, 2020:

DRIVERS OF CHANGE IN ACLL UNDER CECL

(in $000’s, unaudited)

ALLL at December 31, 2019

$

23,285

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) during the third quarter of 2020

(219

)

Portfolio changes during the third quarter of 2020

488

Qualitative and quantitative changes during the third

quarter of 2020 including changes in economic forecasts

(291

)

ACLL at September 30, 2020

45,422

Net (charge-offs) during the fourth quarter of 2020

326

Portfolio changes during the fourth quarter of 2020

(1,622

)

Qualitative and quantitative changes during the fourth

quarter of 2020 including changes in economic forecasts

274

ACLL at December 31, 2020

$

44,400

  • Net recoveries totaled $326,000 for the fourth quarter of 2020, compared to net charge-offs of $5.8 million for the fourth quarter of 2019, and net charge-offs of $219,000 for the third quarter of 2020.

  • The following is a breakout of NPAs at the periods indicated:

End of Period:

NONPERFORMING ASSETS

December 31, 2020

September 30, 2020

December 31, 2019

(in $000’s, unaudited)

Balance

% of Total

Balance

% of Total

Balance

% of Total

CRE loans

$

3,706

47

%

$

4,328

42

%

$

5,094

52

%

Commercial loans

2,726

35

%

2,908

28

%

3,444

35

%

Consumer and other loans

407

5

%

1,464

14

%

0

%

Home equity loans

949

12

%

961

10

%

137

1

%

Restructured and loans over 90 days past due and still accruing

81

1

%

601

6

%

1,153

12

%

Total nonperforming assets

$

7,869

100

%

$

10,262

100

%

$

9,828

100

%


NPAs totaled $7.9 million, or 0.17% of total assets, at December 31, 2020, compared to $9.8 million, or 0.24% of total assets, at December 31, 2019, and $10.3 million, or 0.22% of total assets, at September 30, 2020.

There were no foreclosed assets on the balance sheet at December 31, 2020, December 31, 2019, or September 30, 2020.

Classified assets increased to $34.0 million, or 0.73% of total assets, at December 31, 2020, compared to $32.6 million, or 0.79% of total assets, at December 31, 2019, and increased from $33.0 million, or 0.72% of total assets, at September 30, 2020.

  • The following table summarizes the distribution of deposits and the percentage of distribution in each category for the periods indicated:

DEPOSITS

December 31, 2020

September 30, 2020

December 31, 2019

(in $000’s, unaudited)

Balance

% to Total

Balance

% to Total

Balance

% to Total

Demand, noninterest-bearing

$

1,661,655

42

%

$

1,698,027

44

%

$

1,450,873

42

%

Demand, interest-bearing

960,179

24

%

926,041

24

%

798,375

23

%

Savings and money market

1,119,968

29

%

1,108,252

28

%

982,430

29

%

Time deposits — under $250

45,027

1

%

46,684

1

%

54,361

2

%

Time deposits — $250 and over

103,746

3

%

92,276

2

%

99,882

3

%

CDARS — interest-bearing demand,

money market and time deposits

23,911

1

%

19,121

1

%

28,847

1

%

Total deposits

$

3,914,486

100

%

$

3,890,401

100

%

$

3,414,768

100

%


Total deposits increased $499.7 million, or 15%, to $3.91 billion at December 31, 2020, compared to $3.41 billion at December 31, 2019. Total deposits increased $24.1 million, or 1%, from $3.89 billion at September 30, 2020.

Deposits, excluding all time deposits and CDARS deposits, increased $510.1 million, or 16%, to $3.74 billion at December 31, 2020, compared to $3.23 billion at December 31, 2019. Deposits, excluding all time deposits and CDARS deposits remained relatively flat from $3.73 billion at September 30, 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 December 31, 2020, 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 Risk-Based

16.5

%

15.8

%

10.0

%

10.5

%

Tier 1 Risk-Based

14.0

%

14.6

%

8.0

%

8.5

%

Common Equity Tier 1 Risk-Based

14.0

%

14.6

%

6.5

%

7.0

%

Leverage

9.1

%

9.5

%

5.0

%

4.0

%


(1)

Basel III minimum regulatory requirements for both the Company and the Bank include a 2.5% capital conservation buffer, except the leverage ratio.


The following table reflects the components of accumulated other comprehensive loss, net of taxes, for the periods indicated:

ACCUMULATED OTHER COMPREHENSIVE LOSS

December 31,

September 30,

December 31,

(in $000’s, unaudited)

2020

2020

2019

Unrealized gain on securities available-for-sale

$

3,709

$

4,495

$

1,242

Remaining unamortized unrealized gain on securities

available-for-sale transferred to held-to-maturity

261

271

297

Split dollar insurance contracts liability

(6,140

)

(4,839

)

(4,835

)

Supplemental executive retirement plan liability

(8,767

)

(6,662

)

(6,842

)

Unrealized gain on interest-only strip from SBA loans

220

351

360

Total accumulated other comprehensive loss

$

(10,717

)

$

(6,384

)

$

(9,778

)

  • Tangible equity was $393.6 million at December 31, 2020, compared to $388.9 million at December 31, 2019, and $392.5 million at September 30, 2020. Tangible book value per share was $6.57 at December 31, 2020, compared to $6.55 at December 31, 2019, and September 30, 2020.

D.C. Solar Litigation

In December 2020, Solar Eclipse Investment Fund III, et al v. Heritage Bank of Commerce, et al., was filed against Heritage, and others, in the Solano County Superior Court (“Solar Eclipse”). Also in December 2020, Solarmore Management Services, Inc. v. Jeff Carpoff et al., (“Solarmore”) filed an amended complaint in the United States District Court for the Eastern District of California against Heritage and others. Both of these cases relate to our former deposit relationships with D.C. Solar and their affiliates (collectively “D.C. Solar”) and its sponsored investment funds. These actions seek unspecified damages and are in an early phase. We believe these actions are without merit and we intend to vigorously defend them.

In re Double Jump, Inc. is pending in the United States Bankruptcy Court of Nevada and was filed by D.C. Solar and some of its affiliated entities. One of the chapter 7 trustees has indicated that it may bring an adversary action against Heritage related to our former deposit relationships with D.C. Solar and its sponsored investment funds. The parties have agreed to attend a pre-filing mediation.

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, 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 NPAs and charge offs and other credit quality measures, and their impact on the adequacy of the Company’s allowance for credit losses and the Company’s provision for credit losses; (12) increased capital requirements for our continual growth or as imposed by banking regulators, which may require us to raise capital at a time when capital is not available on favorable terms or at all; (13) regulatory limits on Heritage Bank of Commerce’s ability to pay dividends to the Company; (14) changes in our capital management policies, including those regarding business combinations, dividends, and share repurchases; (15) operational issues stemming from, and/or capital spending necessitated by, the potential need to adapt to industry changes in information technology systems, on which we are highly dependent; (16) our inability to attract, recruit, and retain qualified officers and other personnel could harm our ability to implement our strategic plan, impair our relationships with customers and adversely affect our business, results of operations and growth prospects; (17) possible adjustment of the valuation of our deferred tax assets; (18) our ability to keep pace with technological changes, including our ability to identify and address cyber-security risks such as data security breaches, “denial of service” attacks, “hacking” and identity theft; (19) inability of our framework to manage risks associated with our business, including operational risk and credit risk; (20) risks of loss of funding of SBA or SBA loan programs, or changes in those programs; (21) compliance with governmental and regulatory requirements, including the Dodd-Frank Act and others relating to banking, consumer protection, securities, accounting and tax matters; (22) significant changes in applicable laws and regulations, including those concerning taxes, banking and securities; (23) effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; (24) costs and effects of legal and regulatory developments, including resolution of regulatory or other governmental inquiries, and the results of regulatory examinations or reviews; (25) the expense and uncertain resolution of litigation matters whether occurring in the ordinary course of business or otherwise; (26) availability of and competition for acquisition opportunities; (27) risks resulting from domestic terrorism; (28) risks of natural disasters (including earthquakes) and other events beyond our control; (29) the effect of the COVID-19 pandemic, and other infectious illness outbreaks that may arise in the future, on the Bank’s customers, employees, businesses, liquidity, financial results and overall condition and which has created significant uncertainties in U.S. and global markets, including our customers' ability to make timely payments on obligations, and operating expense due to alternative approaches to doing business; (30) changes in governmental policy and regulation, including measures taken in response to economic, business, political and social conditions, such as the SBA Paycheck Protection Program (“PPP”), the Federal Reserve Board's efforts to provide liquidity to the financial system and provide credit to private commercial and municipal borrowers, and other programs designed to address the effects of the COVID-19 pandemic; (31) the Bank's participation as a lender in the PPP and similar programs and its effect on the Bank's liquidity, financial results, businesses and customers, including the availability of program funds and the ability of customers to comply with requirements and otherwise perform with respect to loans obtained under such programs; (32) our success in managing the risks involved in the foregoing factors.

Member FDIC


For additional information, contact:
Debbie Reuter
EVP, Corporate Secretary
Direct: (408) 494-4542
Debbie.Reuter@herbank.com


For the Quarter Ended:

Percent Change From:

For the Year Ended:

CONSOLIDATED INCOME STATEMENTS

December 31,

September 30,

December 31,

September 30,

December 31,

December 31,

December 31,

Percent

(in $000’s, unaudited)

2020

2020

2019

2020

2019

2020

2019

Change

Interest income

$

36,145

$

36,252

$

42,471

0

%

(15

)

%

$

150,471

$

142,659

5

%

Interest expense

1,940

2,087

3,242

(7

)

%

(40

)

%

8,581

10,847

(21

)

%

Net interest income before provision

for credit losses on loans(1)

34,205

34,165

39,229

0

%

(13

)

%

141,890

131,812

8

%

Provision (recapture) for credit losses on loans(1)

(1,348

)

197

3,223

(784

)

%

(142

)

%

13,233

846

1464

%

Net interest income after provision

for credit losses on loans(1)

35,553

33,968

36,006

5

%

(1

)

%

128,657

130,966

(2

)

%

Noninterest income:

Service charges and fees on deposit accounts

608

632

1,140

(4

)

%

(47

)

%

2,859

4,510

(37

)

%

Increase in cash surrender value of

life insurance

465

464

405

0

%

15

%

1,845

1,404

31

%

Gain on sales of SBA loans

372

400

358

(7

)

%

4

%

839

689

22

%

Servicing income

98

187

156

(48

)

%

(37

)

%

673

636

6

%

Gain (loss) on sales of securities

7

(217

)

N/A

(103

)

%

277

661

(58

)

%

Gain on the disposition of foreclosed assets

N/A

N/A

791

N/A

Other

506

912

551

(45

)

%

(8

)

%

2,638

2,344

13

%

Total noninterest income

2,056

2,595

2,393

(21

)

%

(14

)

%

9,922

10,244

(3

)

%

Noninterest expense:

Salaries and employee benefits

12,457

11,967

18,819

4

%

(34

)

%

50,927

50,754

0

%

Occupancy and equipment

2,197

2,283

2,013

(4

)

%

9

%

8,018

6,647

21

%

Professional fees

1,396

1,352

899

3

%

55

%

5,338

3,259

64

%

Other

5,507

5,566

8,895

(1

)

%

(38

)

%

25,228

24,238

4

%

Total noninterest expense

21,557

21,168

30,626

2

%

(30

)

%

89,511

84,898

5

%

Income before income taxes

16,052

15,395

7,773

4

%

107

%

49,068

56,312

(13

)

%

Income tax expense

4,429

4,198

2,088

6

%

112

%

13,769

15,851

(13

)

%

Net income

$

11,623

$

11,197

$

5,685

4

%

104

%

$

35,299

$

40,461

(13

)

%

PER COMMON SHARE DATA

(unaudited)

Basic earnings per share

$

0.19

$

0.19

$

0.10

0

%

90

%

$

0.59

$

0.87

(32

)

%

Diluted earnings per share

$

0.19

$

0.19

$

0.10

0

%

90

%

$

0.59

$

0.84

(30

)

%

Weighted average shares outstanding - basic

59,616,951

59,589,243

57,168,605

0

%

4

%

59,478,343

46,684,384

27

%

Weighted average shares outstanding - diluted

60,247,296

60,141,412

58,361,976

0

%

3

%

60,169,139

47,906,229

26

%

Common shares outstanding at period-end

59,917,457

59,914,987

59,368,156

0

%

1

%

59,917,457

59,368,156

1

%

Dividend per share

$

0.13

$

0.13

$

0.12

0

%

8

%

$

0.52

$

0.48

8

%

Book value per share

$

9.64

$

9.64

$

9.71

0

%

(1

)

%

$

9.64

$

9.71

(1

)

%

Tangible book value per share

$

6.57

$

6.55

$

6.55

0

%

0

%

$

6.57

$

6.55

0

%

KEY FINANCIAL RATIOS

(unaudited)

Annualized return on average equity

7.99

%

7.73

%

4.04

%

3

%

98

%

6.12

%

9.51

%

(36

)

%

Annualized return on average tangible equity

11.75

%

11.41

%

5.96

%

3

%

97

%

9.04

%

13.09

%

(31

)

%

Annualized return on average assets

0.98

%

0.98

%

0.55

%

0

%

78

%

0.80

%

1.21

%

(34

)

%

Annualized return on average tangible assets

1.02

%

1.02

%

0.57

%

0

%

79

%

0.83

%

1.25

%

(34

)

%

Net interest margin (FTE)

3.15

%

3.24

%

4.15

%

(3

)

%

(24

)

%

3.50

%

4.28

%

(18

)

%

Efficiency ratio

59.45

%

57.58

%

73.58

%

3

%

(19

)

%

58.96

%

59.76

%

(1

)

%

AVERAGE BALANCES

(in $000’s, unaudited)

Average assets

$

4,703,154

$

4,562,412

$

4,124,018

3

%

14

%

$

4,434,329

$

3,353,770

32

%

Average tangible assets

$

4,518,279

$

4,376,533

$

3,943,725

3

%

15

%

$

4,248,090

$

3,237,289

31

%

Average earning assets

$

4,338,117

$

4,203,902

$

3,762,239

3

%

15

%

$

4,071,805

$

3,094,589

32

%

Average loans held-for-sale

$

2,772

$

5,169

$

3,299

(46

)

%

(16

)

%

$

3,459

$

3,714

(7

)

%

Average total loans

$

2,652,019

$

2,664,525

$

2,442,802

0

%

9

%

$

2,628,036

$

1,991,203

32

%

Average deposits

$

3,980,017

$

3,846,652

$

3,432,771

3

%

16

%

$

3,719,896

$

2,819,932

32

%

Average demand deposits - noninterest-bearing

$

1,749,837

$

1,700,972

$

1,452,893

3

%

20

%

$

1,638,055

$

1,131,098

45

%

Average interest-bearing deposits

$

2,230,180

$

2,145,680

$

1,979,878

4

%

13

%

$

2,081,841

$

1,688,834

23

%

Average interest-bearing liabilities

$

2,269,960

$

2,185,439

$

2,027,106

4

%

12

%

$

2,121,621

$

1,730,320

23

%

Average equity

$

578,560

$

576,135

$

558,478

0

%

4

%

$

576,675

$

425,674

35

%

Average tangible equity

$

393,685

$

390,256

$

378,185

1

%

4

%

$

390,436

$

309,193

26

%


(1)

Provision (recapture) for credit losses on loans for the quarters ended December 31, 2020, September 30, 2020 and the year ended December 31, 2020, Provision for loan losses for quarter and year ended December 31, 2019


For the Quarter Ended:

CONSOLIDATED INCOME STATEMENTS

December 31,

September 30,

June 30,

March 31,

December 31,

(in $000’s, unaudited)

2020

2020

2020

2020

2019

Interest income

$

36,145

$

36,252

$

37,132

$

40,942

$

42,471

Interest expense

1,940

2,087

2,192

2,362

3,242

Net interest income before provision

for credit losses on loans(1)

34,205

34,165

34,940

38,580

39,229

Provision (recapture) for credit losses on loans(1)

(1,348

)

197

1,114

13,270

3,223

Net interest income after provision

for credit losses on loans(1)

35,553

33,968

33,826

25,310

36,006

Noninterest income: