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/EIN News/ -- SAN JOSE, Calif., July 23, 2020 (GLOBE NEWSWIRE) -- Heritage Commerce Corp (Nasdaq: HTBK), the holding company (the “Company”) for Heritage Bank of Commerce (the “Bank”), today announced second quarter 2020 net income of $10.6 million, or $0.18 per average diluted common share, compared to $11.4 million, or $0.26 per average diluted common share, for the second quarter of 2019, and $1.9 million, or $0.03 per average diluted common share, for the first quarter of 2020. For the six months ended June 30, 2020, net income was $12.5 million, or $0.21 per average diluted common share, compared to $23.5 million, or $0.54 per average diluted common share, for the six months ended June 30, 2019. All results are unaudited.
“Our results improved in the second quarter of 2020; however, the ongoing impact of the Coronavirus pandemic continues to weigh heavily on our communities and market,” said Keith A. Wilton, President and Chief Executive Officer. “We benefitted from a 5% sequential quarter growth in loan balances during the second quarter of 2020, which primarily resulted from the addition of $324.6 million in Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans that funded during the quarter. These loans are fully guaranteed by the SBA. In addition, total deposits increased 16% in the second quarter of 2020 from the first quarter 2020 as a result of $533.6 million growth in deposits, primarily tied to deposits from customers that took out PPP loans. As expected, our net interest margin came under pressure from two Federal Reserve rate cuts in March of this year, but also from lower yields on newly funded PPP loans. Credit quality improved on a sequential quarter basis, as nonperforming assets (“NPAs”) declined ($3.0) million, or (25%) at June 30, 2020 to $9.1 million, from $12.1 million at March 31, 2020, and classified assets decreased to $31.5 million from $39.6 million.”
“Notwithstanding the ongoing impact of the pandemic, we believe that our healthy capital and liquidity positions, strong earnings power, and conservative credit culture will serve us well through these challenging times,” said Mr. Wilton. “I also would like to thank our employees across the Company for their ongoing hard work and dedication to our customers.”
Coronavirus (COVID-19) Weighs on Local Communities and Our Economy
In mid-March, public health departments in the six largest counties in the San Francisco Bay Area, which account for most of the bank’s market footprint, imposed strict “Shelter-in-Place” orders for all residents. A few days later, the State of California issued a similar statewide order. Bay Area Counties and the state extended these orders through April, before easing restrictions in May and June. Following a resurgence in cases, on June 19, 2020, the state announced new health guidelines requiring the use of face coverings when in public or common spaces. On July 13, 2020, California expanded statewide indoor closures for businesses, encouraged the wearing of face masks and discouraged the gathering of individuals beyond immediate households. The Company has closely monitored the toll from the pandemic, including its economic impact. While the local response to COVID-19 appeared to have initially helped limit its spread, case numbers are once again increasing and the overall impact on our local economy may not be fully known. Since February, new jobless claims in California, through the week of July 11, totaled over 8.2 million, while the state has lost a net 2.6 million jobs (14.0%). In the seven Bay Area counties we serve, 423,000 jobs (11.8%) have been lost. The State’s unemployment rate at the end of June stood at 15.1%, up from 5.3% at the end of March, while the unemployment rate in the seven Bay Area counties we serve increased to 12.0% from 3.4%.
At the end of March, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) which included $349 billion in funding for the SBA PPP Loan Program. By mid-April, the Bank had processed 597 PPP loan applications with potential outstanding balances of $225.3 million. On April 23, 2020, Congress passed separate economic stimulus legislation, which provided an additional $310 billion in funding for the PPP Loan Program that the Company was also able to utilize to further support our small business clients. In all, the Bank processed a total of 1,105 PPP loan applications, with total principal balances of $333.4 million. PPP loan pay offs totaled $8.8 million during the second quarter of 2020, and the Company ended the quarter with $324.6 million in outstanding PPP loan balances. These generated $582,000 in interest income and $722,000 in deferred fees, which was partially offset by ($54,000) in deferred costs expensed during the quarter. At June 30, 2020, total loans included deferred fees on PPP loans of $10.4 million and deferred costs of $1.2 million. PPP borrowers who can demonstrate that the funding received has been used for certain purposes such as to cover payroll and rent costs and meet certain other requirements, can qualify for partial or full federal relief on loan principal and interest. At present, the qualifying process for PPP borrowers to receive approval for loan forgiveness has yet to be finalized by the SBA. Nonqualifying borrowers or borrowers who have not applied for forgiveness, who received loans under the CARES Act, are contractually obligated to begin making monthly repayments on principal and interest six months after their loans have funded.
Also in March 2020, in conjunction with the passage of the CARES Act, federal bank regulators announced new accounting guidance for loan modifications by banks, which is intended to provide temporary credit accommodation through loan payment deferrals for customers whose businesses have experienced economic hardship due to the impact of the Coronavirus. The guidance also allows for the temporary suspension of requirements for such loans to be classified as troubled debt restructurings ("TDR") for accounting purposes. In response to customers’ needs, the Company made accommodations for initial payment deferrals of up to 90 days, generally, with the potential, upon application, for up to an additional 90 days of payment deferral (180 days maximum). The Company also waived all normal applicable fees. The following table shows the deferments at June 30, 2020 by category:
| DEFERMENTS BY CATEGORY | |||
| (in $000’s, unaudited) | |||
| Pass and Watch | $ | 31,369 | |
| Special Mention | 145,930 | ||
| Classified | 5,563 | ||
| Total | $ | 182,862 | |
Through June 30, 2020, the Company had approved 235 initial requests for payment deferrals on loans with balances totaling approximately $183 million, or 7%, of our loan portfolio. The Bank has elected to initially downgrade the risk grades of these loans to “Special Mention” status. At the end of the second quarter of 2020, the pool of deferred loans in our portfolio were mostly tied to business borrowers from a broad range of industries and included $34 million in loan deferments to the healthcare industry (mostly dentists) and $23 million in loan deferments to the accommodation and food services industries (mostly hotels and restaurants). Of the $183 million in deferred loans, 71% are supported by some form of real estate. Commercial real estate (“CRE”) deferments of $113 million included $75 million of investor CRE and $38 million of owner-occupied CRE. Deferred loans secured by CRE had an average loan-to-value (“LTV”) ratio of 41% at the end of the second quarter of 2020. The majority of deferred loans are also supported by personal guarantees. Between July 1 to July 15, 2020, $32 million in deferred loans returned to regular payment status and have been upgraded from Special Mention status. In addition to these previously mentioned deferred loans, we have purchased participations in a micro loan portfolio that had $3.3 million in deferments as of the end of the second quarter of 2020.
The Bank had a portfolio of SBA 7(a) loans totaling $48.6 million, or 1.8% of its total loans, as of the end of the second quarter of 2020. As part of the SBA’s Coronavirus debt relief efforts, beginning in the April 2020, the SBA commenced a six-month program to cover payments of principal, interest and any associated fees for these borrowers.
In regard to our new lease agreement for 54,910 square feet of office space in San Jose, California, which was entered into in 2019 and commenced on February 1, 2020, with recent easing of California’s and Santa Clara County’s Coronavirus related Shelter-in-Place restrictions, the Company now anticipates completing the move of its main office and San Jose branch to this new location by the end of the third quarter of 2020.
Credit Quality and Performance
At June 30, 2020, NPAs decreased by ($7.9) million, or 46%, to $9.1 million, compared to $17.0 million at the end of the second quarter of 2019, and decreased by ($3.0) million, or 25% from $12.1 million at the end of the first quarter of 2020. Classified assets increased to $31.5 million, or 0.68% of total assets, at June 30, 2020, compared to $31.2 million, or 1.00% of total assets, at June 30, 2019, and decreased from $39.6 million, or 0.97% of total assets, at March 31, 2020. The linked quarter decrease in classified assets for the second quarter of 2020, compared to the first quarter of 2020, resulted from multiple loan payoffs and paydowns that were partially offset by loan downgrades. Classified deferments totaled $5.6 million at the end of the second quarter of 2020. Special Mention loans increased to $164 million, or by $115 million, in the second quarter of 2020, compared to $49 million in the first quarter of 2020. Special Mention included $146 million in deferments and $18 million in other Special Mention loans at June 30, 2020, compared to $24 million in deferments and $25 million in other Special Mention loans at March 31, 2020. As previously noted, the Bank has opted to initially grade loan deferments as Special Mention and these grades will remain until loan payment performance resumes and/or information gained is sufficient to warrant a grade change. Also as mentioned above, between July 1 to July 15, 2020, $32 million in deferred loans had returned to regular payment status and have been upgraded from Special Mention status. Exclusive of deferred loans at June 30, 2020, the $7 million decrease in other Special Mention loans from the linked quarter resulted from movement of numerous loans between grades with upgrade totals outweighing downgrades totals, some of which included loans that had been provided a deferment and have since been upgraded. Notably, many of our borrowers paid down their operating lines of credit during the second quarter of 2020. Consequently, the line utilization rate on commercial lines of credit declined to 27% at the end of the second quarter from 36% at the end of the first quarter of 2020 and 40% at the end of the second quarter of 2019.
The provision for credit losses on loans was $1.1 million for the second quarter of 2020, compared to a credit to the provision for loan losses of ($740,000) for the second quarter of 2019, and a provision for credit losses on loans of $13.3 million for the first quarter of 2020. The provision for credit losses on loans was $14.4 million for the six months ended June 30, 2020, compared to a ($1.8) million credit to the provision for loan losses for the six months ended June 30, 2019. At June 30, 2020, the allowance for credit losses on loans (“ACLL”) was $45.4 million, representing 1.69% of total loans, and 498.0% of nonperforming loans. The allowance for loan losses ("ALLL") was $26.6 million at June 30, 2019, representing 1.42% of total loans and 156.5%, of nonperforming loans. The ACLL was $44.7 million at March 31, 2020, representing 1.75% of total loans, and 369.8% of nonperforming loans. The six basis points linked-quarter decline of the ACLL to total loans was largely due to the 5% increase in total loans for the second quarter of 2020, which primarily resulted from $324.6 million in new PPP loans with 100% SBA guarantees that do not require reserves. The pro forma ACLL to loans excluding PPP loans was 1.92% at June 30, 2020. The increase in the provision for credit losses on loans for the six months ended June 30, 2020, compared to the six months ended June 30, 2019, was driven primarily by the deteriorating economic outlook resulting from the Coronavirus pandemic.
The Company continues to monitor portfolio loans made to commercial customers with businesses in higher risk sectors as defined by the Company. The following table provides a breakdown of such loans as a percentage of total loans at June 30, 2020 and March 31, 2020:
| % of Total | % of Total | |||||
| Loans at | Loans at | |||||
| HIGHER RISK SECTORS | June 30, 2020 | March 31, 2020 | ||||
| Health care and social assistance: | ||||||
| Offices of dentists | 1.79 | % | 1.63 | % | ||
| Offices of physicians (except mental health specialists) | 0.76 | % | 0.70 | % | ||
| Other community housing services | 0.27 | % | 0.11 | % | ||
| All others | 2.21 | % | 1.84 | % | ||
| Total health care and social assistance | 5.03 | % | 4.28 | % | ||
| Retail trade: | ||||||
| Gasoline stations with convenience stores | 1.90 | % | 1.98 | % | ||
| All others | 2.44 | % | 2.18 | % | ||
| Total retail trade | 4.34 | % | 4.16 | % | ||
| Accommodation and food services: | ||||||
| Full-service restaurants | 1.38 | % | 0.86 | % | ||
| Limited-service restaurants | 0.79 | % | 0.63 | % | ||
| Hotels (except casino hotels) and motels | 0.89 | % | 0.94 | % | ||
| All others | 0.70 | % | 0.52 | % | ||
| Total accommodation and food services | 3.76 | % | 2.95 | % | ||
| Educational services: | ||||||
| Elementary and secondary schools | 0.65 | % | 0.15 | % | ||
| Education support services | 0.40 | % | 0.15 | % | ||
| All others | 0.24 | % | 0.17 | % | ||
| Total educational services | 1.29 | % | 0.47 | % | ||
| Arts, entertainment, and recreation | 1.26 | % | 1.09 | % | ||
| Purchased participations in micro loan portfolio | 0.80 | % | 0.95 | % | ||
| Total higher risk sectors | 16.48 | % | 13.90 | % |
During the second quarter, the Company added education-related loans to those it had previously identified as at higher risk of credit loss. During the quarter, the percentage of loans to higher risk sectors increased linked quarter to 16.5% from 13.9% as a result of $91 million, or 3.4%, in new SBA PPP loan fundings to commercial clients in higher risk sectors.
“In our initial response to the challenges posed by the Coronavirus pandemic last quarter, we implemented extensive business resumption plans, procedures and redundant systems which enabled 75% of our employees to work remotely, but still have access to the resources needed to fully assist our clients with their banking needs,” added Mr. Wilton. “We cannot fully express our pride and gratitude for the efforts and accomplishments of our employees this quarter. The effort and resolve shown by our banking and credit teams was critical in enabling so many of our customers to address their banking needs and access PPP loan fundings. In addition, our branch teams have been thorough and meticulous in implementing the public safety protocols required to safely meet the needs of visiting customers. All branches remain open to serve our customers and communities in accordance with the Coronavirus safety guidance provided by the Centers for Disease Control and Prevention (“CDC”) and the California Department of Public Health (“CDPH”).”
Capital and Liquidity
“Our regulatory capital position serves as the foundation of our bank’s financial condition and the basis of security for our banking customers. At June 30, 2020, the regulatory capital positions of both the Company and Bank remained healthy,” stated Mr. Wilton. “Our Total Risk-Based capital ratio and Leverage ratio for the Company was 15.9% and 9.4%, respectively, and 15.1% and 9.8%, respectively, for the Bank.”
Our liquidity position refers to our ability to maintain cash flows sufficient to fund operations, to meet all of our obligations and commitments, and unexpected sudden changes in levels of its loans and deposits in a timely manner. At June 30, 2020, the Company had a strong liquidity position with $925.9 million in cash and cash equivalents, and approximately $664.7 million in available borrowing capacity from sources including the Federal Home Loan Bank (“FHLB”), the Federal Reserve Bank of San Francisco (“FRB”), Federal funds facilities with several financial institutions, and a line of credit with a correspondent bank. The Company also had $610.6 million (at fair market value) in unpledged securities available at June 30, 2020. Our loan to deposit ratio decreased to 68.88% at June 30, 2020, compared to 71.60% at June 30, 2019, and 75.86% at March 31, 2020. Mr. Wilton remarked in closing, “We believe that our robust capital base, historically elevated liquidity position, diversified loan portfolio, and reserve for credit losses positions us to react quickly and decisively in addressing challenges related to the economic impact of the Coronavirus pandemic that may arise in future quarters.”
Second Quarter 2020 Highlights (as of, or for the periods ended June 30, 2020, compared to June 30, 2019, and March 31, 2020, except as noted):
Operating Results:
| For the Quarter Ended | For the Six Months Ended | ||||||||||||||
| June 30, | March 31, | June 30, | June 30, | June 30, | |||||||||||
| 2020 | 2020 | 2019 | 2020 | 2019 | |||||||||||
| Return on average tangible assets | 1.01 | % | 0.19 | % | 1.53 | % | 0.62 | % | 1.58 | % | |||||
| Return on average tangible equity | 11.06 | % | 1.91 | % | 15.94 | % | 6.45 | % | 16.89 | % | |||||
| For the Quarter Ended | For the Quarter Ended | ||||||||||||||||||
| June 30, 2020 | June 30, 2019 | ||||||||||||||||||
| Average | Interest | Average | Average | Interest | Average | ||||||||||||||
| (in $000’s, unaudited) | Balance | Income | Yield | Balance | Income | Yield | |||||||||||||
| Loans, core bank and asset-based lending | $ | 2,369,004 | $ | 27,694 | 4.70 | % | $ | 1,727,988 | $ | 23,342 | 5.42 | % | |||||||
| SBA PPP loans | 231,251 | 582 | 1.01 | % | — | — | — | ||||||||||||
| PPP fees, net | — | 637 | 1.11 | % | — | — | — | ||||||||||||
| Bay View Funding factored receivables | 44,574 | 2,562 | 23.12 | % | 45,708 | 2,967 | 26.04 | % | |||||||||||
| Residential mortgages | 31,219 | 197 | 2.54 | % | 36,136 | 234 | 2.60 | % | |||||||||||
| Purchased CRE loans | 25,542 | 210 | 3.31 | % | 31,484 | 290 | 3.69 | % | |||||||||||
| Loan fair value mark / accretion | (14,497 | ) | 963 | 0.16 | % | (5,842 | ) | 418 | 0.10 | % | |||||||||
| Total loans | $ | 2,687,093 | $ | 32,845 | 4.92 | % | $ | 1,835,474 | $ | 27,251 | 5.96 | % | |||||||
| For the Quarter Ended | For the Quarter Ended | ||||||||||||||||||
| June 30, 2020 | March 31, 2020 | ||||||||||||||||||
| Average | Interest | Average | Average | Interest | Average | ||||||||||||||
| (in $000’s, unaudited) | Balance | Income | Yield | Balance | Income | Yield | |||||||||||||
| Loans, core bank and asset-based lending | $ | 2,369,004 | $ | 27,694 | 4.70 | % | $ | 2,422,020 | $ | 30,104 | 5.00 | % | |||||||
| SBA PPP loans | 231,251 | 582 | 1.01 | % | — | — | — | ||||||||||||
| PPP fees, net | — | 637 | 1.11 | % | — | — | — | ||||||||||||
| Bay View Funding factored receivables | 44,574 | 2,562 | 23.12 | % | 47,470 | 2,877 | 24.38 | % | |||||||||||
| Residential mortgages | 31,219 | 197 | 2.54 | % | 33,075 | 230 | 2.80 | % | |||||||||||
| Purchased CRE loans | 25,542 | 210 | 3.31 | % | 27,340 | 249 | 3.66 | % | |||||||||||
| Loan fair value mark / accretion | (14,497 | ) | 963 | 0.16 | % | (16,180 | ) | 1,322 | 0.22 | % | |||||||||
| Total loans | $ | 2,687,093 | $ | 32,845 | 4.92 | % | $ | 2,513,725 | $ | 34,782 | 5.57 | % | |||||||
| For the Six Months Ended | For the Six Months Ended | ||||||||||||||||||
| June 30, 2020 | June 30, 2019 | ||||||||||||||||||
| Average | Interest | Average | Average | Interest | Average | ||||||||||||||
| (in $000’s, unaudited) | Balance | Income | Yield | Balance | Income | Yield | |||||||||||||
| Loans, core bank and asset-based lending | $ | 2,395,469 | $ | 57,798 | 4.85 | % | $ | 1,726,364 | $ | 46,195 | 5.40 | % | |||||||
| SBA PPP loans | 115,669 | 582 | 1.01 | % | — | — | — | ||||||||||||
| PPP fees, net | — | 637 | 1.11 | % | — | — | — | ||||||||||||
| Bay View Funding factored receivables | 46,022 | 5,439 | 23.77 | % | 47,097 | 5,921 | 25.35 | % | |||||||||||
| Residential mortgages | 32,147 | 427 | 2.67 | % | 36,451 | 485 | 2.68 | % | |||||||||||
| Purchased CRE loans | 26,441 | 459 | 3.49 | % | 32,409 | 584 | 3.63 | % | |||||||||||
| Loan fair value mark / accretion | (15,339 | ) | 2,285 | 0.19 | % | (6,044 | ) | 873 | 0.10 | % | |||||||||
| Total loans | $ | 2,600,409 | $ | 67,627 | 5.23 | % | $ | 1,836,277 | $ | 54,058 | 5.94 | % | |||||||
| For the Quarter Ended | For the Six Months Ended | ||||||||||||||
| MERGER-RELATED COSTS | June 30, | March 31, | June 30, | June 30, | June 30, | ||||||||||
| (in $000’s, unaudited) | 2020 | 2020 | 2019 | 2020 | 2019 | ||||||||||
| Salaries and employee benefits | $ | — | $ | 356 | $ | — | $ | 356 | $ | — | |||||
| Other | 59 | 2,068 | 540 | 2,127 | 540 | ||||||||||
| Total merger-related costs | $ | 59 | $ | 2,424 | $ | 540 | $ | 2,483 | $ | 540 | |||||
Balance Sheet Review, Capital Management and Credit Quality:
| LOANS | June 30, 2020 | March 31, 2020 | June 30, 2019 | ||||||||||||||||
| (in $000’s, unaudited) | Balance | % to Total | Balance | % to Total | Balance | % to Total | |||||||||||||
| Commercial | $ | 553,843 |
21 | % | $ | 696,168 | 27 | % | $ | 545,092 | 29 | % | |||||||
| SBA Payroll Protection Program Loans | 324,550 | 12 | % | — | 0 | % | — | 0 | % | ||||||||||
| Real estate: | |||||||||||||||||||
| CRE - owner occupied | 553,463 |
21 | % | 539,465 | 21 | % | 421,970 | 23 | % | ||||||||||
| CRE - non-owner occupied | 725,776 | 27 | % | 748,245 |
29 | % | 517,604 | 28 | % | ||||||||||
| Land and construction | 138,284 | 5 | % | 153,321 | 6 | % | 97,753 | 5 | % | ||||||||||
| Home equity | 112,679 | 4 | % | 117,544 | 5 | % | 95,886 | 5 | % | ||||||||||
| Multifamily | 169,637 | 6 | % | 170,292 | 7 | % | 82,293 | 4 | % | ||||||||||
| Residential mortgages | 95,033 | 3 |
% | 95,808 | 4 | % | 97,530 | 5 | % | ||||||||||
| Consumer and other | 22,759 | 1 | % | 33,326 | 1 | % | 19,863 | 1 | % | ||||||||||
| Total Loans | 2,696,024 | 100 | % | 2,554,169 | 100 | % | 1,877,991 | 100 | % | ||||||||||
| Deferred loan costs (fees), net | (9,635 | ) | — | (258 | ) | — | (224 | ) | — | ||||||||||
| Loans, net of deferred costs and fees | $ | 2,686,389 | 100 | % | $ | 2,553,911 | 100 | % | $ | 1,877,767 | 100 | % | |||||||
| For the Quarter Ended |
For the Six Months Ended |
||||||||||||||||||||
| ALLOWANCE FOR CREDIT LOSSES ON LOANS(1) | June 30, | March 31, | June 30, | June 30, | June 30, | ||||||||||||||||
| (in $000’s, unaudited) | 2020 | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||
| Balance at beginning of period | $ | 44,703 | $ | 23,285 | $ | 27,318 | $ | 23,285 | $ | 27,848 | |||||||||||
| Charge-offs during the period | (465 | ) | (673 | ) | (76 | ) | (1,138 | ) | (302 | ) | |||||||||||
| Recoveries during the period | 92 | 251 | 129 | 343 | 886 | ||||||||||||||||
| Net recoveries (charge-offs) during the period | (373 | ) | (422 | ) | 53 | (795 | ) | 584 | |||||||||||||
| Impact of adopting Topic 326 | — | 8,570 | — | 8,570 | — | ||||||||||||||||
| Provision for credit losses on loans during the period(2) | 1,114 | 13,270 | (740 | ) | 14,384 | (1,801 | ) | ||||||||||||||
| Balance at end of period | $ | 45,444 | $ | 44,703 | $ | 26,631 | $ | 45,444 | $ | 26,631 | |||||||||||
| Total loans, net of deferred fees | $ | 2,686,389 | $ | 2,553,911 | $ | 1,877,767 | $ | 2,686,388 | $ | 1,877,767 | |||||||||||
| Total nonperforming loans | $ | 9,125 | $ | 12,088 | $ | 17,018 | $ | 9,125 | $ | 17,018 | |||||||||||
| Allowance for credit losses on loans to total loans(1) | 1.69 | % | 1.75 | % | 1.42 | % | 1.69 | % | 1.42 | % | |||||||||||
| Allowance for credit losses on loans to total nonperforming loans(1) | 498.02 | % | 369.81 | % | 156.49 | % | 498.02 | % | 156.49 | % | |||||||||||
| (1) ACLL at June 30, 2020 and March 31, 2020, Allowance for loan losses ("ALLL") at June 30, 2019 | |||||||||||||||||||||
| (2) Provision for credit losses on loans for the quarters ended June 30, 2020 and March 31, 2020, and the six months ended June 30, 2020, Provision (credit) for loan losses for the quarter and six months ended June 30, 2019 | |||||||||||||||||||||
| 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 | ||
| End of Period: | |||||||||||||||||||
| NONPERFORMING ASSETS | June 30, 2020 | March 31, 2020 | June 30, 2019 | ||||||||||||||||
| (in $000’s, unaudited) | Balance | % of Total | Balance | % of Total | Balance | % of Total | |||||||||||||
| CRE loans | $ | 3,394 | 37 | % | $ | 7,346 | 61 | % | $ | 8,442 | 49 | % | |||||||
| Commercial loans | 3,244 | 36 | % | 3,403 | 28 | % | 6,583 | 39 | % | ||||||||||
| SBA loans | 921 | 10 | % | 771 | 6 | % | 513 | 3 | % | ||||||||||
| Home equity and consumer loans | 898 | 10 | % | 126 | 1 | % | 157 | 1 | % | ||||||||||
| Restructured and loans over 90 days past due and still accruing | 668 | 7 | % | 442 | 4 | % | 1,323 | 8 | % | ||||||||||
| Total nonperforming assets | $ | 9,125 | 100 | % | $ | 12,088 | 100 | % | $ | 17,018 | 100 | % | |||||||
| DEPOSITS | June 30, 2020 | March 31, 2020 | June 30, 2019 | ||||||||||||||||
| (in $000’s, unaudited) | Balance | % to Total | Balance | % to Total | Balance | % to Total | |||||||||||||
| Demand, noninterest-bearing | $ | 1,714,058 | 44 | % | $ | 1,444,534 | 42 | % | $ | 994,082 | 38 | % | |||||||
| Demand, interest-bearing | 934,780 | 24 | % | 810,425 | 24 | % | 682,114 | 26 | % | ||||||||||
| Savings and money market | 1,091,740 | 28 | % | 949,076 | 28 | % | 788,832 | 30 | % | ||||||||||
| Time deposits — under $250 | 49,493 | 1 | % | 51,009 | 2 | % | 53,351 | 2 | % | ||||||||||
| Time deposits — $250 and over | 93,822 | 2 | % | 96,540 | 3 | % | 88,519 | 3 | % | ||||||||||
| CDARS — interest-bearing demand, | |||||||||||||||||||
| money market and time deposits | 16,333 | 1 | % | 15,055 | 1 | % | 15,575 | 1 | % | ||||||||||
| Total deposits | $ | 3,900,226 | 100 | % | $ | 3,366,639 | 100 | % | $ | 2,622,473 | 100 | % | |||||||
| 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 | 15.9 | % | 15.1 | % | 10.0 | % | 10.5 | % | ||||
| Tier 1 Risk-Based | 13.3 | % | 13.9 | % | 8.0 | % | 8.5 | % | ||||
| Common Equity Tier 1 Risk-Based | 13.3 | % | 13.9 | % | 6.5 | % | 7.0 | % | ||||
| Leverage | 9.4 | % | 9.8 | % | 5.0 | % | 4.0 | % | ||||
____________
(1) Basel III minimum regulatory requirements for both the Company and the Bank include a 2.5% capital conservation buffer, except the leverage ratio.
____________
| ACCUMULATED OTHER COMPREHENSIVE LOSS | June 30, | March 31, | June 30, | |||||||||
| (in $000’s, unaudited) |
2020 |
2020 |
2019 |
|||||||||
| Unrealized gain on securities available-for-sale | $ | 5,767 | $ | 6,299 | $ | 675 | ||||||
| Remaining unamortized unrealized gain on securities | ||||||||||||
| available-for-sale transferred to held-to-maturity | 279 | 288 | 316 | |||||||||
| Split dollar insurance contracts liability | (4,865 | ) | (4,850 | ) | (3,770 | ) | ||||||
| Supplemental executive retirement plan liability | (6,706 | ) | (6,774 | ) | (3,931 | ) | ||||||
| Unrealized gain on interest-only strip from SBA loans | 345 | 328 | 408 | |||||||||
| Total accumulated other comprehensive loss | $ | (5,180 | ) | $ | (4,709 | ) | $ | (6,302 | ) | |||
Heritage Commerce Corp, a bank holding company established in October 1997, is the parent company of Heritage Bank of Commerce, established in 1994 and headquartered in San Jose, CA with full-service branches in Danville, Fremont, Gilroy, Hollister, Livermore, Los Altos, Los Gatos, Morgan Hill, Palo Alto, Pleasanton, Redwood City, San Francisco, San Jose, San Mateo, San Rafael, Sunnyvale, and Walnut Creek. Heritage Bank of Commerce is an SBA Preferred Lender. Bay View Funding, a subsidiary of Heritage Bank of Commerce, is based in San Jose, CA and provides business-essential working capital factoring financing to various industries throughout the United States. For more information, please visit.
Forward-Looking Statement Disclaimer
These forward-looking statements are subject to various risks and uncertainties that may be outside our control and our actual results could differ materially from our projected results. Risks and uncertainties that could cause our financial performance to differ materially from our goals, plans, expectations and projections expressed in forward-looking statements include those set forth in our filings with the Securities and Exchange Commission (“SEC”), Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, and the following: (1) current and future economic and market conditions in the United States generally or in the communities we serve, including the effects of declines in property values and overall slowdowns in economic growth should these events occur; (2) effects of and changes in trade, monetary and fiscal policies and laws, including the interest rate policies of the Federal Open Market Committee of the Federal Reserve Board; (3) our ability to anticipate interest rate changes and manage interest rate risk; (4) changes in inflation, interest rates, and market liquidity which may impact interest margins and impact funding sources; (5) volatility in credit and equity markets and its effect on the global economy; (6) our ability to effectively compete with other banks and financial services companies and the effects of competition in the financial services industry on our business; (7) our ability to achieve loan growth and attract deposits; (8) risks associated with concentrations in real estate related loans; (9) the relative strength or weakness of the commercial and real estate markets where our borrowers are located, including related asset and market prices; (10) other than temporary impairment charges to our securities portfolio; (11) changes in the level of nonperforming assets and charge offs and other credit quality measures, and their impact on the adequacy of the Company’s allowance for credit losses and the Company’s provision for credit losses; (12) increased capital requirements for our continual growth or as imposed by banking regulators, which may require us to raise capital at a time when capital is not available on favorable terms or at all; (13) regulatory limits on Heritage Bank of Commerce’s ability to pay dividends to the Company; (14) changes in our capital management policies, including those regarding business combinations, dividends, and share repurchases; (15) operational issues stemming from, and/or capital spending necessitated by, the potential need to adapt to industry changes in information technology systems, on which we are highly dependent; (16) our inability to attract, recruit, and retain qualified officers and other personnel could harm our ability to implement our strategic plan, impair our relationships with customers and adversely affect our business, results of operations and growth prospects; (17) possible adjustment of the valuation of our deferred tax assets; (18) our ability to keep pace with technological changes, including our ability to identify and address cyber-security risks such as data security breaches, “denial of service” attacks, “hacking” and identity theft; (19) inability of our framework to manage risks associated with our business, including operational risk and credit risk; (20) risks of loss of funding of Small Business Administration or SBA loan programs, or changes in those programs; (21) compliance with governmental and regulatory requirements, including the Dodd-Frank Act and others relating to banking, consumer protection, securities , accounting and tax matters; (22) significant changes in applicable laws and regulations, including those concerning taxes, banking and securities; (23) effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; (24) costs and effects of legal and regulatory developments, including resolution of legal proceedings or regulatory or other governmental inquiries, and the results of regulatory examinations or reviews; (25) availability of and competition for acquisition opportunities; (26) risks resulting from domestic terrorism; (27) risks of natural disasters (including earthquakes) and other events beyond our control; (28) the expected cost savings, synergies and other financial benefits from the Presidio Bank merger might not be realized within the expected time frames or at all; (29) the rapidly changing uncertainties related to the Coronavirus pandemic including, but not limited to, the potential adverse effect of the pandemic on the economy, our employees and customers, and our financial performance; (30) the impact of the federal CARES Act and the significant additional lending activities undertaken by the Company in connection with the Small Business Administration’s Paycheck Protection Program enacted thereunder, including risks to the Company with respect to the uncertain application by the Small Business Administration of new borrower and loan eligibility, forgiveness and audit criteria; and (31) our success in managing the risks involved in the foregoing factors.
Member FDIC
For additional information, contact:
Debbie Reuter
EVP, Corporate Secretary
Direct: (408) 494-4542
Debbie.Reuter@herbank.com
| For the Quarter Ended: | Percent Change From: | For the Six Months Ended: | |||||||||||||||||||||||||||
| CONSOLIDATED INCOME STATEMENTS | June 30, | March 31, | June 30, | March 31, | June 30, | June 30, | June 30, | Percent | |||||||||||||||||||||
| (in $000’s, unaudited) | 2020 | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | Change | |||||||||||||||||||||
| Interest income | $ | 37,132 | $ | 40,942 | $ | 33,489 | (9 | )% | 11 | % | $ | 78,074 | $ | 66,938 | 17 | % | |||||||||||||
| Interest expense | 2,192 | 2,362 | 2,573 | (7 | )% | (15 | )% | 4,554 | 4,980 | (9 | )% | ||||||||||||||||||
| Net interest income before provision for credit losses on loans(1) | 34,940 | 38,580 | 30,916 | (9 | )% | 13 | % | 73,520 | 61,958 | 19 | % | ||||||||||||||||||
| Provision (credit) for credit losses on loans(1) | 1,114 | 13,270 | (740 | ) | (92 | )% | 251 | % | 14,384 | (1,801 | ) | 899 | % | ||||||||||||||||
| Net interest income after provision for credit losses on loans(1) | 33,826 | 25,310 | 31,656 | 34 | % | 7 | % | 59,136 | 63,759 | (7 | )% | ||||||||||||||||||
| Noninterest income: | |||||||||||||||||||||||||||||
| Service charges and fees on deposit accounts | 650 | 969 | 1,177 | (33 | )% | (45 | )% | 1,619 | 2,338 | (31 | )% | ||||||||||||||||||
| Increase in cash surrender value of life insurance | 458 | 458 | 333 | 0 | % | 38 | % | 916 | 663 | 38 | % | ||||||||||||||||||
| Servicing income | 205 | 183 | 150 | 12 | % | 37 | % | 388 | 341 | 14 | % | ||||||||||||||||||
| Gain (loss) on sales of securities | 170 | 100 | 548 | 70 | % | (69 | )% | 270 | 548 | (51 | )% | ||||||||||||||||||
| Gain on the disposition of foreclosed assets | — | 791 | — | (100 | )% | N/A | 791 | — | N/A | ||||||||||||||||||||
| Gain on sales of SBA loans | — | 67 | 36 | (100 | )% | (100 | )% | 67 | 175 | (62 | )% | ||||||||||||||||||
| Other | 595 | 625 | 521 | (5 | )% | 14 | % | 1,220 | 1,168 | 4 | % | ||||||||||||||||||
| Total noninterest income | 2,078 | 3,193 | 2,765 | (35 | )% | (25 | )% | 5,271 | 5,233 | 1 | % | ||||||||||||||||||
| Noninterest expense: | |||||||||||||||||||||||||||||
| Salaries and employee benefits | 12,300 | 14,203 | 10,698 | (13 | )% | 15 | % | 26,503 | 21,468 | 23 | % | ||||||||||||||||||
| Occupancy and equipment | 1,766 | 1,772 | 1,578 | 0 | % | 12 | % | 3,538 | 3,084 | 15 | % | ||||||||||||||||||
| Professional fees | 1,155 | 1,435 | 753 | (20 | )% | 53 | % | 2,590 | 1,571 | 65 | % | ||||||||||||||||||
| Other | 5,791 | 8,364 | 5,416 | (31 | )% | 7 | % | 14,155 | 10,240 | 38 | % | ||||||||||||||||||
| Total noninterest expense | 21,012 | 25,774 | 18,445 | (18 | )% | 14 | % | 46,786 | 36,363 | 29 | % | ||||||||||||||||||
| Income before income taxes | 14,892 | 2,729 | 15,976 | 446 | % | (7 | )% | 17,621 | 32,629 | (46 | )% | ||||||||||||||||||
| Income tax expense | 4,274 | 868 | 4,623 | 392 | % | (8 | )% | 5,142 | 9,130 | (44 | )% | ||||||||||||||||||
| Net income | $ | 10,618 | $ | 1,861 | $ | 11,353 | 471 | % | (6 | )% | $ | 12,479 | $ | 23,499 | (47 | )% | |||||||||||||
| PER COMMON SHARE DATA | |||||||||||||||||||||||||||||
| (unaudited) | |||||||||||||||||||||||||||||
| Basic earnings per share | $ | 0.18 | $ | 0.03 | $ | 0.26 | 500 | % | (31 | )% | $ | 0.21 | $ | 0.54 | (61 | )% | |||||||||||||
| Diluted earnings per share | $ | 0.18 | $ | 0.03 | $ | 0.26 | 500 | % | (31 | )% | $ | 0.21 | $ | 0.54 | (61 | )% | |||||||||||||
| Weighted average shares outstanding - basic | 59,420,592 | 59,286,927 | 43,202,562 | 0 | % | 38 | % | 59,353,759 | 43,155,360 | 38 | % | ||||||||||||||||||
| Weighted average shares outstanding - diluted | 60,112,423 | 60,194,025 | 43,721,451 | 0 | % | 37 | % | 60,152,487 | 43,695,117 | 38 | % | ||||||||||||||||||
| Common shares outstanding at period-end | 59,856,767 | 59,568,219 | 43,498,406 | 0 | % | 38 | % | 59,856,767 | 43,498,406 | 38 | % | ||||||||||||||||||
| Dividend per share | $ | 0.13 | $ | 0.13 | $ | 0.12 | 0 | % | 8 | % | $ | 0.26 | $ | 0.24 | 8 | % | |||||||||||||
| Book value per share | $ | 9.60 | $ | 9.59 | $ | 8.92 | 0 | % | 8 | % | $ | 9.60 | $ | 8.92 | 8 | % | |||||||||||||
| Tangible book value per share | $ | 6.49 | $ | 6.46 | $ | 6.75 | 0 | % | (4 | )% | $ | 6.49 | $ | 6.75 | (4 | )% | |||||||||||||
| KEY FINANCIAL RATIOS | |||||||||||||||||||||||||||||
| (unaudited) | |||||||||||||||||||||||||||||
| Annualized return on average equity | 7.45 | % | 1.29 | % | 11.96 | % | 478 | % | (38 | )% | 4.36 | % | 12.61 | % | (65 | )% | |||||||||||||
| Annualized return on average tangible equity | 11.06 | % | 1.91 | % | 15.94 | % | 479 | % | (31 | )% | 6.45 | % | 16.89 | % | (62 | )% | |||||||||||||
| Annualized return on average assets | 0.96 | % | 0.19 | % | 1.48 | % | 405 | % | (35 | )% | 0.59 | % | 1.53 | % | (61 | )% | |||||||||||||
| Annualized return on average tangible assets | 1.01 | % | 0.19 | % | 1.53 | % | 432 | % | (34 | )% | 0.62 | % | 1.58 | % | (61 | )% | |||||||||||||
| Net interest margin (fully tax equivalent) | 3.46 | % | 4.25 | % | 4.38 | % | (19 | )% | (21 | )% | 3.83 | % | 4.38 | % | (13 | )% | |||||||||||||
| Efficiency ratio | 56.76 | % | 61.70 | % | 54.76 | % | (8 | )% | 4 | % | 59.38 | % | 54.12 | % | 10 | % | |||||||||||||
| AVERAGE BALANCES | |||||||||||||||||||||||||||||
| (in $000’s, unaudited) | |||||||||||||||||||||||||||||
| Average assets | $ | 4,434,238 | $ | 4,033,151 | $ | 3,070,043 | 10 | % | 44 | % | $ | 4,233,693 | $ | 3,089,704 | 37 | % | |||||||||||||
| Average tangible assets | $ | 4,247,522 | $ | 3,845,646 | $ | 2,975,096 | 10 | % | 43 | % | $ | 4,046,583 | $ | 2,994,455 | 35 | % | |||||||||||||
| Average earning assets | $ | 4,075,673 | $ | 3,665,151 | $ | 2,844,677 | 11 | % | 43 | % | $ | 3,870,412 | $ | 2,865,021 | 35 | % | |||||||||||||
| Average loans held-for-sale | $ | 3,617 | $ | 2,265 | $ | 4,256 | 60 | % | (15 | )% | $ | 2,941 | $ | 3,693 | (20 | )% | |||||||||||||
| Average total loans | $ | 2,683,476 | $ | 2,511,460 | $ | 1,831,218 | 7 | % | 47 | % | $ | 2,597,468 | $ | 1,836,277 | 41 | % | |||||||||||||
| Average deposits | $ | 3,720,850 | $ | 3,327,812 | $ | 2,590,933 | 12 | % | 44 | % | $ | 3,524,331 | $ | 2,613,993 | 35 | % | |||||||||||||
| Average demand deposits - noninterest-bearing | $ | 1,660,547 | $ | 1,438,944 | $ | 1,001,914 | 15 | % | 66 | % | $ | 1,549,745 | $ | 1,012,967 | 53 | % | |||||||||||||
| Average interest-bearing deposits | $ | 2,060,303 | $ | 1,888,868 | $ | 1,589,019 | 9 | % | 30 | % | $ | 1,974,586 | $ | 1,601,026 | 23 | % | |||||||||||||
| Average interest-bearing liabilities | $ | 2,099,982 | $ | 1,928,770 | $ | 1,628,554 | 9 | % | 29 | % | $ | 2,014,376 | $ | 1,640,539 | 23 | % | |||||||||||||
| Average equity | $ | 572,939 | $ | 579,051 | $ | 380,605 | (1 | )% | 51 | % | $ | 575,995 | $ | 375,751 | 53 | % | |||||||||||||
| Average tangible equity | $ | 386,223 | $ | 391,546 | $ | 285,658 | (1 | )% | 35 | % | $ | 388,886 | $ | 280,502 | 39 | % | |||||||||||||
(1) Provision for credit losses on loans for the quarters ended June 30, 2020 and March 31, 2020 and the six months ended June 30, 2020, Provision for loan losses for quarter and six months ended June 30, 2019
| For the Quarter Ended: | |||||||||||||||||||||
| CONSOLIDATED INCOME STATEMENTS | June 30, | March 31, | December 31, | September 30, | June 30, | ||||||||||||||||
| (in $000’s, unaudited) | 2020 | 2020 | 2019 | 2019 | 2019 | ||||||||||||||||
| Interest income | $ | 37,132 | $ | 40,942 | $ | 42,471 | $ | 33,250 | $ | 33,489 | |||||||||||
| Interest expense | 2,192 | 2,362 | 3,242 | 2,625 | 2,573 | ||||||||||||||||
| Net interest income before provision for credit losses on loans(1) | 34,940 | 38,580 | 39,229 | 30,625 | 30,916 | ||||||||||||||||
| Provision (credit) for credit losses on loans(1) | 1,114 | 13,270 | 3,223 | (576 | ) | (740 | ) | ||||||||||||||
| Net interest income after provision for credit losses on loans(1) | 33,826 | 25,310 | 36,006 | 31,201 | 31,656 | ||||||||||||||||
| Noninterest income: | |||||||||||||||||||||
| Service charges and fees on deposit accounts | 650 | 969 | 1,140 | 1,032 | 1,177 | ||||||||||||||||
| Increase in cash surrender value of life insurance | 458 | 458 | 405 | 336 | 333 | ||||||||||||||||
| Servicing income | 205 | 183 | 156 | 139 | 150 | ||||||||||||||||
| Gain (loss) on sales of securities | 170 | 100 | (217 | ) | 330 | 548 | |||||||||||||||
| Gain on the disposition of foreclosed assets | — | 791 | — | — | — | ||||||||||||||||
| Gain on sales of SBA loans | — | 67 | 358 | 156 | 36 | ||||||||||||||||
| Other | 595 | 625 | 551 | 625 | 521 | ||||||||||||||||
| Total noninterest income | 2,078 | 3,193 | 2,393 | 2,618 | 2,765 | ||||||||||||||||
| Noninterest expense: | |||||||||||||||||||||
| Salaries and employee benefits | 12,300 | 14,203 | 18,819 | 10,467 | 10,698 | ||||||||||||||||
| Occupancy and equipment | 1,766 | 1,772 | 2,013 | 1,550 | 1,578 | ||||||||||||||||
| Professional fees | 1,155 | 1,435 | 899 | 789 | 753 | ||||||||||||||||
| Other | 5,791 | 8,364 | 8,895 | 5,103 | 5,416 | ||||||||||||||||
| Total noninterest expense | 21,012 | 25,774 | 30,626 | 17,909 | 18,445 | ||||||||||||||||
| Income before income taxes | 14,892 | 2,729 | 7,773 | 15,910 | 15,976 | ||||||||||||||||
| Income tax expense | 4,274 | 868 | 2,088 | 4,633 | 4,623 | ||||||||||||||||
| Net income | $ | 10,618 | $ | 1,861 | $ | 5,685 | $ | 11,277 | $ | 11,353 | |||||||||||
| PER COMMON SHARE DATA | |||||||||||||||||||||
| (unaudited) | |||||||||||||||||||||
| Basic earnings per share | $ | 0.18 | $ | 0.03 | $ | 0.10 | $ | 0.26 | $ | 0.26 | |||||||||||
| Diluted earnings per share | $ | 0.18 | $ | 0.03 | $ | 0.10 | $ | 0.26 | $ | 0.26 | |||||||||||
| Weighted average shares outstanding - basic | 59,420,592 | 59,286,927 | 57,168,605 | 43,258,983 | 43,202,562 | ||||||||||||||||
| Weighted average shares outstanding - diluted | 60,112,423 | 60,194,025 | 58,361,976 | 43,796,904 | 43,721,451 | ||||||||||||||||
| Common shares outstanding at period-end | 59,856,767 | 59,568,219 | 59,368,156 | 43,509,406 | 43,498,406 | ||||||||||||||||
| Dividend per share | $ | 0.13 | $ | 0.13 | $ | 0.12 | $ | 0.12 | $ | 0.12 | |||||||||||
| Book value per share | $ | 9.60 | $ | 9.59 | $ | 9.71 | $ | 9.09 | $ | 8.92 | |||||||||||
| Tangible book value per share | $ | 6.49 | $ | 6.46 | $ | 6.55 | $ | 6.92 | $ | 6.75 | |||||||||||
| KEY FINANCIAL RATIOS | |||||||||||||||||||||
| (unaudited) | |||||||||||||||||||||
| Annualized return on average equity | 7.45 | % | 1.29 | % | 4.04 | % | 11.44 | % | 11.96 | % | |||||||||||
| Annualized return on average tangible equity | 11.06 | % | 1.91 | % | 5.96 | % | 15.08 | % | 15.94 | % | |||||||||||
| Annualized return on average assets | 0.96 | % | 0.19 | % | 0.55 | % | 1.44 | % | 1.48 | % | |||||||||||
| Annualized return on average tangible assets | 1.01 | % | 0.19 | % | 0.57 | % | 1.49 | % | 1.53 | % | |||||||||||
| Net interest margin (fully tax equivalent) | 3.46 | % | 4.25 | % | 4.15 | % | 4.24 | % | 4.38 | % | |||||||||||
| Efficiency ratio | 56.76 | % | 61.70 | % | 73.58 | % | 53.87 | % | 54.76 | % | |||||||||||
| AVERAGE BALANCES | |||||||||||||||||||||
| (in $000’s, unaudited) | |||||||||||||||||||||
| Average assets | $ | 4,434,238 | $ | 4,033,151 | $ | 4,124,018 | $ | 3,103,043 | $ | 3,070,043 | |||||||||||
| Average tangible assets | $ | 4,247,522 | $ | 3,845,646 | $ | 3,943,725 | $ | 3,008,602 | $ | 2,975,096 | |||||||||||
| Average earning assets | $ | 4,075,673 | $ | 3,665,151 | $ | 3,762,239 | $ | 2,878,590 | $ | 2,844,677 | |||||||||||
| Average loans held-for-sale | $ | 3,617 | $ | 2,265 | $ | 3,299 | $ | 4,171 | $ | 4,256 | |||||||||||
| Average total loans | $ | 2,683,476 | $ | 2,511,460 | $ | 2,442,802 | $ | 1,851,669 | $ | 1,831,218 | |||||||||||
| Average deposits | $ | 3,720,850 | $ | 3,327,812 | $ | 3,432,771 | $ | 2,612,252 | $ | 2,590,933 | |||||||||||
| Average demand deposits - noninterest-bearing | $ | 1,660,547 | $ | 1,438,944 | $ | 1,452,893 | $ | 1,041,712 | $ | 1,001,914 | |||||||||||
| Average interest-bearing deposits | $ | 2,060,303 | $ | 1,888,868 | $ | 1,979,878 | $ | 1,570,540 | $ | 1,589,019 | |||||||||||
| Average interest-bearing liabilities | $ | 2,099,982 | $ | 1,928,770 | $ | 2,027,106 | $ | 1,610,168 | $ | 1,628,554 | |||||||||||
| Average equity | $ | 572,939 | $ | 579,051 | $ | 558,478 | $ | 391,086 | $ | 380,605 | |||||||||||
| Average tangible equity | $ | 386,223 | $ | 391,546 | $ | 378,185 | $ | 296,645 | $ | 285,658 | |||||||||||
(1) Provision for credit losses on loans for the quarters ended June 30 and March 31, 2020, Provision for loan losses for the prior periods
| End of Period: | Percent Change From: | |||||||||||||||||
| CONSOLIDATED BALANCE SHEETS | June 30, | March 31, | June 30, | March 31, | June 30, | |||||||||||||
| (in $000’s, unaudited) | 2020 | 2020 | 2019 | 2020 | 2019 | |||||||||||||
| ASSETS | ||||||||||||||||||
| Cash and due from banks | $ | 40,108 | $ | 36,998 | $ | 36,302 | 8 | % | 10 | % | ||||||||
| Other investments and interest-bearing deposits | ||||||||||||||||||
| in other financial institutions | 885,792 | 406,399 | 239,710 | 118 | % | 270 | % | |||||||||||
| Securities available-for-sale, at fair value | 323,565 | 373,570 | 383,156 | (13 | )% | (16 | )% | |||||||||||
| Securities held-to-maturity, at amortized cost | 322,677 | 348,044 | 351,399 | (7 | )% | (8 | )% | |||||||||||
| Loans held-for-sale - SBA, including deferred costs | 4,324 | 2,415 | 5,202 | 79 | % | (17 | )% | |||||||||||
| Loans: | ||||||||||||||||||
| Commercial | 553,843 |
696,168 | 545,092 | (20 | )% | 2 | % | |||||||||||
| SBA PPP loans | 324,550 | — | — | N/A | N/A | |||||||||||||
| Real estate: | ||||||||||||||||||
| CRE - owner occupied | 553,463 |
539,465 | 421,970 | 3 | % | 31 | % | |||||||||||
| CRE - non-owner occupied | 725,776 | 748,245 | 517,604 | (3 | )% | 40 | % | |||||||||||
| Land and construction | 138,284 | 153,321 | 97,753 | (10 | )% | 41 | % | |||||||||||
| Home equity | 112,679 | 117,544 | 95,886 | (4 | )% | 18 | % | |||||||||||
| Multifamily | 169,637 |
170,292 |
82,293 | 0 | % | 106 | % | |||||||||||
| Residential mortgages | 95,033 | 95,808 |
97,530 | (1 | )% | (3 | )% | |||||||||||
| Consumer and other | 22,759 | 33,326 | 19,863 | (32 | )% | 15 | % | |||||||||||
| Loans | 2,696,024 | 2,554,169 | 1,877,991 | 6 | % | 44 | % | |||||||||||
| Deferred loan fees, net | (9,635 | ) | (258 | ) | (224 | ) | 3634 | % | 4201 | % | ||||||||
| Total loans, net of deferred costs and fees | 2,686,389 | 2,553,911 | 1,877,767 | 5 | % | 43 | % | |||||||||||
| Allowance for credit losses on loans(1) | (45,444 | ) | (44,703 | ) | (26,631 | ) | 2 | % | 71 | % | ||||||||
| Loans, net | 2,640,945 | 2,509,208 | 1,851,136 | 5 | % | 43 | % | |||||||||||
| Company-owned life insurance | 76,944 | 76,485 | 62,522 | 1 | % | 23 | % | |||||||||||
| Premises and equipment, net | 9,500 | 9,025 | 6,975 | 5 | % | 36 | % | |||||||||||
| Goodwill | 167,631 | 167,371 | 83,753 | 0 | % | 100 | % | |||||||||||
| Other intangible assets | 18,593 | 19,557 | 10,900 | (5 | )% | 71 | % | |||||||||||
| Accrued interest receivable and other assets | 124,322 | 129,090 | 76,976 | (4 | )% | 62 | % | |||||||||||
| Total assets | $ | 4,614,401 | $ | 4,078,162 | $ | 3,108,031 | 13 | % | 48 | % | ||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||
| Liabilities: | ||||||||||||||||||
| Deposits: | ||||||||||||||||||
| Demand, noninterest-bearing | $ | 1,714,058 | $ | 1,444,534 | $ | 994,082 | 19 | % | 72 | % | ||||||||
| Demand, interest-bearing | 934,780 | 810,425 | 682,114 | 15 | % | 37 | % | |||||||||||
| Savings and money market | 1,091,740 | 949,076 | 788,832 | 15 | % | 38 | % | |||||||||||
| Time deposits-under $250 | 49,493 | 51,009 | 53,351 | (3 | )% | (7 | )% | |||||||||||
| Time deposits-$250 and over | 93,822 | 96,540 | 88,519 | (3 | )% | 6 | % | |||||||||||
| CDARS - money market and time deposits | 16,333 | 15,055 | 15,575 | 8 | % | 5 | % | |||||||||||
| Total deposits | 3,900,226 | 3,366,639 | 2,622,473 | 16 | % | 49 | % | |||||||||||
| Subordinated debt, net of issuance costs | 39,646 | 39,600 | 39,461 | 0 | % | 0 | % | |||||||||||
| Accrued interest payable and other liabilities | 99,722 | 100,482 | 57,989 | (1 | )% | 72 | % | |||||||||||
| Total liabilities | 4,039,594 | 3,506,721 | 2,719,923 | 15 | % | 49 | % | |||||||||||
| Shareholders’ Equity: | ||||||||||||||||||
| Common stock | 492,333 | 491,347 | 302,305 | 0 | % | 63 | % | |||||||||||
| Retained earnings | 87,654 | 84,803 | 92,105 | 3 | % | (5 | )% | |||||||||||
| Accumulated other comprehensive loss | (5,180 | ) | (4,709 | ) | (6,302 | ) | (10 | )% | 18 | % | ||||||||
| Total shareholders' equity | 574,807 | 571,441 | 388,108 | 1 | % | 48 | % | |||||||||||
| Total liabilities and shareholders’ equity | $ | 4,614,401 | $ | 4,078,162 | $ | 3,108,031 | 13 | % | 48 | % | ||||||||
(1) Allowance for credit losses on loans at June 30, 2020 and March 31, 2020, Allowance for loan losses June 30, 2019
| End of Period: | ||||||||||||||||||||
| CONSOLIDATED BALANCE SHEETS | June 30, | March 31, | December 31, | September 30, | June 30, | |||||||||||||||
| (in $000’s, unaudited) | 2020 | 2020 | 2019 | 2019 | 2019 | |||||||||||||||
| ASSETS | ||||||||||||||||||||
| Cash and due from banks | $ | 40,108 | $ | 36,998 | $ | 49,447 | $ | 48,121 | $ | 36,302 | ||||||||||
| Other investments and interest-bearing deposits in other financial institutions | 885,792 | 406,399 | 407,923 | 367,662 | 239,710 | |||||||||||||||
| Securities available-for-sale, at fair value | 323,565 | 373,570 | 404,825 | 333,101 | 383,156 | |||||||||||||||
| Securities held-to-maturity, at amortized cost | 322,677 | 348,044 | 366,560 | 342,033 | 351,399 | |||||||||||||||
| Loans held-for-sale - SBA, including deferred costs | 4,324 | 2,415 | 1,052 | 3,571 | 5,202 | |||||||||||||||
| Loans: | ||||||||||||||||||||
| Commercial | 553,843 | 696,168 | 603,345 | 503,075 | 545,092 | |||||||||||||||
| SBA PPP loans | 324,550 | — | — | — | — | |||||||||||||||
| Real estate: | ||||||||||||||||||||
| CRE - owner occupied | 553,463 | 539,465 | 548,907 | 437,527 | 421,970 | |||||||||||||||
| CRE - non-owner occupied | 725,776 | 748,245 | 767,821 | 542,761 | 517,604 | |||||||||||||||
| Land and construction | 138,284 | 153,321 | 147,189 | 96,679 | 97,753 | |||||||||||||||
| Home equity | 112,679 | 117,544 | 151,775 | 94,476 | 95,886 | |||||||||||||||
| Multifamily | 169,637 | 170,292 | 180,623 | 86,275 | 82,293 | |||||||||||||||
| Residential mortgages | 95,033 | 95,808 |
100,759 | 93,099 | 97,530 | |||||||||||||||
| Consumer and other | 22,759 | 33,326 | 33,744 | 21,600 | 19,863 | |||||||||||||||
| Loans | 2,696,024 | 2,554,169 | 2,534,163 | 1,875,492 | 1,877,991 | |||||||||||||||
| Deferred loan fees, net | (9,635 | ) | (258 | ) | (319 | ) | (105 | ) | (224 | ) | ||||||||||
| Total loans, net of deferred fees | 2,686,389 | 2,553,911 | 2,533,844 | 1,875,387 | 1,877,767 | |||||||||||||||
| Allowance for credit losses on loans(1) | (45,444 | ) | (44,703 | ) | (23,285 | ) | (25,895 | ) | (26,631 | ) | ||||||||||
| Loans, net | 2,640,945 | 2,509,208 | 2,510,559 | 1,849,492 | 1,851,136 | |||||||||||||||
| Company-owned life insurance | 76,944 | 76,485 | 76,027 | 62,858 | 62,522 | |||||||||||||||
| Premises and equipment, net | 9,500 | 9,025 | 8,250 | 6,849 | 6,975 | |||||||||||||||
| Goodwill | 167,631 | 167,371 | 167,420 | 83,753 | 83,753 | |||||||||||||||
| Other intangible assets | 18,593 | 19,557 | 20,415 | 10,346 | 10,900 | |||||||||||||||
| Accrued interest receivable and other assets | 124,322 | 129,090 | 96,985 | 74,685 | 76,976 | |||||||||||||||
| Total assets | $ | 4,614,401 | $ | 4,078,162 | $ | 4,109,463 | $ | 3,182,471 | $ | 3,108,031 | ||||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||
| Deposits: | ||||||||||||||||||||
| Demand, noninterest-bearing | $ | 1,714,058 | $ | 1,444,534 | $ | 1,450,873 | $ | 1,094,953 | $ | 994,082 | ||||||||||
| Demand, interest-bearing | 934,780 | 810,425 | 798,375 | 666,054 | 682,114 | |||||||||||||||
| Savings and money market | 1,091,740 | 949,076 | 982,430 | 761,471 | 788,832 | |||||||||||||||
| Time deposits-under $250 | 49,493 | 51,009 | 54,361 | 53,560 | 53,351 | |||||||||||||||
| Time deposits-$250 and over | 93,822 | 96,540 | 99,882 | 95,543 | 88,519 | |||||||||||||||
| CDARS - money market and time deposits | 16,333 | 15,055 | 28,847 | 17,409 | 15,575 | |||||||||||||||
| Total deposits | 3,900,226 | 3,366,639 | 3,414,768 | 2,688,990 | 2,622,473 | |||||||||||||||
| Subordinated debt, net of issuance costs | 39,646 | 39,600 | 39,554 | 39,507 | 39,461 | |||||||||||||||
| Other short-term borrowings | — | — | 328 | — | — | |||||||||||||||
| Accrued interest payable and other liabilities | 99,722 | 100,482 | 78,105 | 58,628 | 57,989 | |||||||||||||||
| Total liabilities | 4,039,594 | 3,506,721 | 3,532,755 | 2,787,125 | 2,719,923 | |||||||||||||||
| Shareholders’ Equity: | ||||||||||||||||||||
| Common stock | 492,333 | 491,347 | 489,745 | 302,983 | 302,305 | |||||||||||||||
| Retained earnings | 87,654 | 84,803 | 96,741 | 98,161 | 92,105 | |||||||||||||||
| Accumulated other comprehensive loss | (5,180 | ) | (4,709 | ) | (9,778 | ) | (5,798 | ) | (6,302 | ) | ||||||||||
| Total shareholders' equity | 574,807 | 571,441 | 576,708 | 395,346 | 388,108 | |||||||||||||||
| Total liabilities and shareholders’ equity | $ | 4,614,401 | $ | 4,078,162 | $ | 4,109,463 | $ | 3,182,471 | $ | 3,108,031 | ||||||||||
(1) Allowance for credit losses on loans at June 30, 2020 and March 31, 2020, Allowance for loan losses for the prior periods
| End of Period: | Percent Change From: | ||||||||||||||||||
| CREDIT QUALITY DATA | June 30, | March 31, | June 30, | March 31, | June 30, | ||||||||||||||
| (in $000’s, unaudited) | 2020 | 2020 | 2019 | 2020 | 2019 | ||||||||||||||
| Nonaccrual loans - held-for-investment | $ | 8,457 | $ | 11,646 | $ | 15,695 | (27 | ) | % | (46 | ) | % | |||||||
| Restructured and loans over 90 days past due and still accruing | 668 | 442 | 1,323 | 51 | % | (50 | ) | % | |||||||||||
| Total nonperforming loans | 9,125 | 12,088 | 17,018 | (25 | ) | % | (46 | ) | % | ||||||||||
| Foreclosed assets | — | — | — | N/A | N/A | ||||||||||||||
| Total nonperforming assets | $ | 9,125 | $ | 12,088 | $ | 17,018 | (25 | ) | % | (46 | ) | % | |||||||
| Other restructured loans still accruing | $ | 64 | $ | 103 | $ | 175 | (38 | ) | % | (63 | ) | % | |||||||
| Net charge-offs (recoveries) during the quarter | $ | 373 | $ | 422 | $ | (53 | ) | (12 | ) | % | 804 | % | |||||||
| Provision for credit losses on loans during the quarter(1) | $ | 1,114 | $ | 13,270 | $ | (740 | ) | (92 | ) | % | 251 | % | |||||||
| Adoption of Topic 326 | $ | — | $ | 8,570 | $ | — | (100 | ) | % | N/A | |||||||||
| Allowance for credit losses on loans(2) | $ | 45,444 | $ | 44,703 | $ | 26,631 | 2 | % | 71 | % | |||||||||
| Classified assets | $ | 31,452 | $ | 39,603 | $ | 31,176 | (21 | ) | % | 1 | % | ||||||||
| Allowance for credit losses on loans to total loans(2) | 1.69 | % | 1.75 | % | 1.42 | % | (3 | ) | % | 19 | % | ||||||||
| Allowance for credit losses on loans to total nonperforming loans(2) | 498.02 | % | 369.81 | % | 156.49 | % | 35 | % | 218 | % | |||||||||
| Nonperforming assets to total assets | 0.20 | % | 0.30 | % | 0.55 | % | (33 | ) | % | (64 | ) | % | |||||||
| Nonperforming loans to total loans | 0.34 | % | 0.47 | % | 0.91 | % | (28 | ) | % | (63 | ) | % | |||||||
| Classified assets to Heritage Commerce Corp | |||||||||||||||||||
| Tier 1 capital plus allowance for credit losses on loans(2) | 7 | % | 9 | % | 10 | % | (22 | ) | % | (30 | ) | % | |||||||
| Classified assets to Heritage Bank of Commerce | |||||||||||||||||||
| Tier 1 capital plus allowance for credit losses on loans(2) | 7 | % | 9 | % | 9 | % | (22 | ) | % | (22 | ) | % | |||||||
| OTHER PERIOD-END STATISTICS | |||||||||||||||||||
| (in $000’s, unaudited) | |||||||||||||||||||
| Heritage Commerce Corp: | |||||||||||||||||||
| Tangible common equity (3) | $ | 388,583 | $ | 384,513 | $ | 293,455 | 1 | % | 32 | % | |||||||||
| Shareholders’ equity / total assets | 12.46 | % | 14.01 | % | 12.49 | % | (11 | ) | % | 0 | % | ||||||||
| Tangible common equity / tangible assets (4) | 8.78 | % | 9.88 | % | 9.74 | % | (11 | ) | % | (10 | ) | % | |||||||
| Loan to deposit ratio | 68.88 | % | 75.86 | % | 71.60 | % | (9 | ) | % | (4 | ) | % | |||||||
| Noninterest-bearing deposits / total deposits | 43.95 | % | 42.91 | % | 37.91 | % | 2 | % | 16 | % | |||||||||
| Total risk-based capital ratio | 15.9 | % | 14.8 | % | 15.9 | % | 7 | % | 0 | % | |||||||||
| Tier 1 risk-based capital ratio | 13.3 | % | 12.4 | % | 13.0 | % | 7 | % | 2 | % | |||||||||
| Common Equity Tier 1 risk-based capital ratio | 13.3 | % | 12.4 | % | 13.0 | % | 7 | % | 2 | % | |||||||||
| Leverage ratio | 9.4 | % | 10.2 | % | 9.9 | % | (8 | ) | % | (5 | ) | % | |||||||
| Heritage Bank of Commerce: | |||||||||||||||||||
| Total risk-based capital ratio | 15.1 | % | 14.1 | % | 14.9 | % | 7 | % | 1 | % | |||||||||
| Tier 1 risk-based capital ratio | 13.9 | % | 12.9 | % | 13.7 | % | 8 |
% | 1 | % | |||||||||
| Common Equity Tier 1 risk-based capital ratio | 13.9 | % | 12.9 | % | 13.7 | % | 8 |
% | 1 | % | |||||||||
| Leverage ratio | 9.8 | % | 10.6 | % | 10.5 | % | (8 | ) | % | (7 | ) | % | |||||||
____________
(1) Provision (credit) for credit losses on loans for the quarters ended June 30, 2020 and March 31, 2020, Provision (credit) for loan losses for the quarter ended June 30, 2019
(2) Allowance for credit losses on loans at June 30, 2020 and March 31, 2020, Allowance for loan losses for the quarter ended June 30, 2019
(3) Represents shareholders' equity minus goodwill and other intangible assets
(4) Represents shareholders' equity minus goodwill and other intangible assets divided by total assets minus goodwill and other intangible assets
| End of Period: | |||||||||||||||||||||
| CREDIT QUALITY DATA | June 30, | March 31, | December 31, | September 30, | June 30, | ||||||||||||||||
| (in $000’s, unaudited) | 2020 | 2020 | 2019 | 2019 | 2019 | ||||||||||||||||
| Nonaccrual loans - held-for-investment | $ | 8,457 | $ | 11,646 | $ | 8,675 | $ | 13,638 | $ | 15,695 | |||||||||||
| Restructured and loans over 90 days past due and still accruing | 668 | 442 | 1,153 | 609 | 1,323 | ||||||||||||||||
| Total nonperforming loans | 9,125 | 12,088 | 9,828 | 14,247 | 17,018 | ||||||||||||||||
| Foreclosed assets | — | — | — | — | — | ||||||||||||||||
| Total nonperforming assets | $ | 9,125 | $ | 12,088 | $ | 9,828 | $ | 14,247 | $ | 17,018 | |||||||||||
| Other restructured loans still accruing | $ | 64 | $ | 103 | $ | 436 | $ | 247 | $ | 175 | |||||||||||
| Net charge-offs (recoveries) during the quarter | $ | 373 | $ | 422 | $ | 5,833 | $ | 160 | $ | (53 | ) | ||||||||||
| Provision for credit losses on loans during the quarter(1) | $ | 1,114 | $ | 13,270 | $ | 3,223 | $ | (576 | ) | $ | (740 | ) | |||||||||
| Adoption of Topic 326 | $ | — | $ | 8,570 | $ | — | $ | — | $ | — | |||||||||||
| Allowance for credit losses on loans(2) | $ | 45,444 | $ | 44,703 | $ | 23,285 | $ | 25,895 | $ | 26,631 | |||||||||||
| Classified assets | $ | 31,452 | $ | 39,603 | $ | 32,579 | $ | 20,225 | $ | 31,176 | |||||||||||
| Allowance for credit losses on loans to total loans(2) | 1.69 | % | 1.75 | % | 0.92 | % | 1.38 | % | 1.42 | % | |||||||||||
| Allowance for credit losses on loans to total nonperforming loans(2) | 498.02 | % | 369.81 | % | 236.93 | % | 181.76 | % | 156.49 | % | |||||||||||
| Nonperforming assets to total assets | 0.20 | % | 0.30 | % | 0.24 | % | 0.45 | % | 0.55 | % | |||||||||||
| Nonperforming loans to total loans | 0.34 | % | 0.47 | % | 0.39 | % | 0.76 | % | 0.91 | % | |||||||||||
| Classified assets to Heritage Commerce Corp | |||||||||||||||||||||
| Tier 1 capital plus allowance for credit losses on loans(2) | 7 | % | 9 | % | 8 | % | 6 | % | 10 | % | |||||||||||
| Classified assets to Heritage Bank of Commerce | |||||||||||||||||||||
| Tier 1 capital plus allowance for credit losses on loans(2) | 7 | % | 9 | % | 7 | % | 6 | % | 9 | % | |||||||||||
| OTHER PERIOD-END STATISTICS | |||||||||||||||||||||
| (in $000’s, unaudited) | |||||||||||||||||||||
| Heritage Commerce Corp: | |||||||||||||||||||||
| Tangible common equity (3) | $ | 388,583 | $ | 384,513 | $ | 388,873 | $ | 301,247 | $ | 293,455 | |||||||||||
| Shareholders’ equity / total assets | 12.46 | % | 14.01 | % | 14.03 | % | 12.42 | % | 12.49 | % | |||||||||||
| Tangible common equity / tangible assets (4) | 8.78 | % | 9.88 | % | 9.92 | % | 9.75 | % | 9.74 | % | |||||||||||
| Loan to deposit ratio | 68.88 | % | 75.86 | % | 74.20 | % | 69.74 | % | 71.60 | % | |||||||||||
| Noninterest-bearing deposits / total deposits | 43.95 | % | 42.91 | % | 42.49 | % | 40.72 | % | 37.91 | % | |||||||||||
| Total risk-based capital ratio | 15.9 | % | 14.8 | % | 14.6 | % | 16.2 | % | 15.9 | % | |||||||||||
| Tier 1 risk-based capital ratio | 13.3 | % | 12.4 | % | 12.5 | % | 13.3 | % | 13.0 | % | |||||||||||
| Common Equity Tier 1 risk-based capital ratio | 13.3 | % | 12.4 | % | 12.5 | % | 13.3 | % | 13.0 | % | |||||||||||
| Leverage ratio | 9.4 | % | 10.2 | % | 9.8 | % | 10.0 | % | 9.9 | % | |||||||||||
| Heritage Bank of Commerce: | |||||||||||||||||||||
| Total risk-based capital ratio | 15.1 | % | 14.1 | % | 13.9 | % | 15.2 | % | 14.9 | % | |||||||||||
| Tier 1 risk-based capital ratio | 13.9 | % | 12.9 | % | 13.1 | % | 14.1 | ||||||||||||||
