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

Nachrichtenquelle: globenewswire
24.07.2020, 00:17  |  131   |   |   

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:

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

  • The following table indicates the ratios for the return on average tangible assets and the return on average tangible equity for the periods indicated:
    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 %
  • Net interest income, before provision for credit losses on loans, increased 13% to $34.9 million for the second quarter of 2020, compared to $30.9 million for the second quarter of 2019, primarily due to an increase in the average balance of loans due to the Presidio Bank (“Presidio”) merger, additional interest and fee income from PPP loans, and an increase in the accretion of the loan discount into loan interest income from our merger with Presidio during the fourth quarter of 2019, partially offset by decreases in the prime interest rate and decreases in the yield on investment securities and overnight funds.  Net interest income for the second quarter of 2020 decreased (9%) from $38.6 million for the first quarter of 2020, primarily due to decreases in the prime rate and declines in the yields on investment securities and overnight funds, partially offset by additional interest and fee income from PPP loans. Net interest income increased 19% to $73.5 million for the first six months of 2020, compared to $62.0 million for the first six months of 2019, primarily due to an increase in the average balance of loans due to the Presidio merger, additional interest and fee income from PPP loans, and an increase in the accretion of the loan discount into loan interest income from our merger with Presidio, partially offset by decreases in the prime rate, and decreases in the yield on investment securities and overnight funds.

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

    • For the first six months of 2020, the FTE net interest margin contracted 55 basis points to 3.83%, compared to 4.38% for the first six months of 2019, primarily due to the impact of decreases in the yields on loans, investment securities, and overnight funds, partially offset by an increase in the average balance of loans, additional interest and fee income from PPP loans, and an increase in the accretion of the loan discount into loan interest income from our merger with Presidio.
  • The following tables present the average balance of loans outstanding, interest income, and the average yield for the periods indicated:

    • The average yield on the total loan portfolio decreased to 4.92% for the second quarter of 2020, compared to 5.96% for the second quarter of 2019, primarily due to a decline in the average yield on loans and new average balances of lower yielding PPP loans, partially offset by an increase in the accretion of the loan purchase discount into loan interest income from the acquisitions.
    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
  • The average yield on the total loan portfolio decreased to 4.92% for the second quarter of 2020 compared to 5.57% for the first quarter of 2020, primarily due to decreases in the prime rate on loans, new average balances of lower yielding PPP loans, and a decrease in the accretion of the loan purchase discount into loan interest income from the acquisitions.
    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
  • The average yield on the total loan portfolio decreased to 5.23% for the six month ended June 30, 2020 compared to 5.94% for the six months ended June 30, 2019, primarily due to decreases in the prime rate on loans and new average balances of lower yielding PPP loans, partially offset an increase in the accretion of the loan purchase discount into loan interest income from the acquisitions.
    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 %
  • The total net purchase discount on loans from the Focus Business Bank loan portfolio was $5.4 million on the acquisition date of August 20, 2015, of which $366,000 remains outstanding as of June 30, 2020.  The total net purchase discount on loans from the Tri-Valley Bank loan portfolio was $2.6 million on the acquisition date of April 6, 2018, of which $1.2 million remains outstanding as of June 30, 2020.  The total net purchase discount on loans from the United American Bank loan portfolio was $4.7 million on the acquisition date of May 4, 2018, of which $2.3 million remains outstanding as of June 30, 2020.  The total net purchase discount on loans from the Presidio loan portfolio was $12.5 million on the Presidio merger date of October 11, 2019 (the “merger date”), of which $10.1 million remains outstanding as of June 30, 2020.  In aggregate, the remaining net purchase discount on total loans acquired was $14.0 million at June 30, 2020.
  • The average cost of total deposits was 0.17% for the second of 2020, compared to 0.31% for the second quarter of 2019 and 0.22% for the first quarter of 2020. The average cost of total deposits was 0.19% for the six months ended June 30, 2020, compared to 0.30% for the six months ended June 30, 2019.

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

    • The increase in the provision for credit losses on loans for the six months ended June 30, 2020, compared to the six months ended June 30, 2019, was driven primarily by a significantly deteriorated economic outlook resulting from the Coronavirus pandemic. Most major economic forecasts, including the California Economic Forecast (“CEF”) show a significant decline in California GDP and a substantial rise in unemployment for 2020.  At January 1, 2020, the forecast for California GDP for 2020 was an annual increase in the low single digits and the forecasted California unemployment rate for 2020 was in the mid-single digits.   In June 2020, the CEF forecast was revised for GDP in the negative low single digits and peak unemployment in the low double digits.  The three loan classes where the largest increases in reserves were recorded under the CECL loss rate methodology were investor-owned commercial real estate (“CRE”), construction & land, and commercial and industrial (“C&I”).  Ongoing impacts of the CECL methodology will be dependent upon changes in economic conditions and forecasts, originated and acquired loan portfolio composition, portfolio duration, and other factors.

  • Total noninterest income decreased to $2.1 million for the second quarter of 2020, compared to $2.8 million for the second quarter of 2019, primarily due to lower service charges and fees on deposit accounts, and lower gains on sales of securities.  Total noninterest income decreased for the second quarter of 2020 from $3.2 million for the first quarter of 2020, primarily due to a $791,000 gain on the disposition of foreclosed assets during the first quarter of 2020, and lower service charges and fees on deposit accounts during the second quarter of 2020.

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

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

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

    • Earnings were reduced by pre-tax merger-related costs related to the merger with Presidio for the periods indicated as follows: 
    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
  • Full time equivalent employees were 340 at June 30, 2020, 309 at June 30, 2019, and 337 at March 31, 2020.
  • The efficiency ratio was 56.76% for the second quarter of 2020, compared to 54.76% for the second quarter of 2019, and 61.70% for the first quarter of 2020. The efficiency ratio for the six months ended June 30, 2020 was 59.38%, compared to 54.12% for the six months ended June 30, 2019. 

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

    • The difference in the effective tax rate for the periods reported compared to the combined Federal and state statutory tax rate of 29.6% is primarily the result of the Company’s investment in life insurance policies whose earnings are not subject to taxes, tax credits related to investments in low income housing limited partnerships (net of low income housing investment losses), and tax-exempt interest income earned on municipal bonds.

Balance Sheet Review, Capital Management and Credit Quality:

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

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

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

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

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

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

  • The loan portfolio remains well-diversified as reflected in the following table which summarizes the distribution of loans, excluding loans held-for-sale, and the percentage of distribution in each category for the periods indicated:
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 %
  • Loans, excluding loans held-for-sale, increased $808.6 million or 43%, to $2.69 billion at June 30, 2020, compared to $1.88 billion at June 30, 2019, and increased $132.5 million or 5%, to $2.69 billion at June 30, 2020, compared to $2.55 billion at March 31, 2020.  Total loans at June 30, 2020 included $324.6 million of PPP loans.

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

  • At June 30, 2020, 43% of the CRE loan portfolio was secured by owner-occupied real estate.
  • The following table summarizes the allowance for credit losses on loans(1) for the periods indicated:
           
    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  
  • The ACLL was 1.69% of total loans at June 30, 2020 and the ACLL to total nonperforming loans was 498.02% at June 30, 2020. The ALLL was 1.42% of total loans and the ALLL to nonperforming loans was 156.49% at June 30, 2019. The ACLL was 1.75% of total loans at March 31, 2020 and the ACLL to total nonperforming loans was 369.81% at March 31, 2020.  The six basis points linked-quarter decline of the ACLL to total loans was largely due to the 5% increase in total loans for the second quarter of 2020, which primarily resulted from new PPP loans which are government supported.

  • The following table shows the results of adopting CECL for the first six months of 2020:
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 totaled $373,000 for the second quarter of 2020, compared to net recoveries of $53,000 for the second quarter of 2019, and net charge-offs of $422,000 for the first quarter of 2020.
  • The following is a breakout of NPAs at the periods indicated:
                                       
    End of Period:  
NONPERFORMING ASSETS   June 30, 2020   March 31, 2020   June 30, 2019  
(in $000’s, unaudited)   Balance   % of Total   Balance   % of Total   Balance   % of Total  
CRE loans   $ 3,394     37 % $ 7,346     61 % $ 8,442     49 %
Commercial loans     3,244     36 %   3,403     28 %   6,583     39 %
SBA loans     921     10 %   771     6 %   513     3 %
Home equity and consumer loans     898     10 %   126     1 %   157     1 %
Restructured and loans over 90 days past due and still accruing     668     7 %   442     4 %   1,323     8 %
Total nonperforming assets   $ 9,125     100 % $ 12,088     100 % $ 17,018     100 %
  • NPAs totaled $9.1 million, or 0.20% of total assets, at June 30, 2020, compared to $17.0 million, or 0.55% of total assets, at June 30, 2019, and $12.1 million, or 0.30% of total assets, at March 31, 2020.

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

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

  • Deposits, excluding all time deposits and CDARS deposits, increased $1.3 billion, or 52%, to $3.74 billion at June 30, 2020, compared to $2.47 billion at June 30, 2019, which included $772.4 million in deposits from Presidio, at fair value, and an increase of $503.2 million in the Company’s legacy deposits.  Deposits, excluding all time deposits and CDARS deposits increased $536.5 million or 17%, compared to $3.20 billion at March 31, 2020.
  • The Company’s consolidated capital ratios exceeded regulatory guidelines and the Bank’s capital ratios exceeded the regulatory guidelines under the Basel III prompt corrective action (“PCA”) regulatory guidelines for a well-capitalized financial institution, and the Basel III minimum regulatory requirements at June 30, 2020, as reflected in the following table:
                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.
____________

  • The following table reflects the components of accumulated other comprehensive loss, net of taxes, for the periods indicated:
                   
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 )
                   
  • Tangible equity was $388.6 million at June 30, 2020, compared to $293.5 million at June 30, 2019, and $384.5 million at March 31, 2020.  Tangible book value per share was $6.49 at June 30, 2020, compared to $6.75 at June 30, 2019, and $6.46 at March 31, 2020.

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

Forward-Looking Statement Disclaimer

These forward-looking statements are subject to various risks and uncertainties that may be outside our control and our actual results could differ materially from our projected results.  Risks and uncertainties that could cause our financial performance to differ materially from our goals, plans, expectations and projections expressed in forward-looking statements include those set forth in our filings with the Securities and Exchange Commission (“SEC”), Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, and the following: (1) current and future economic and market conditions in the United States generally or in the communities we serve, including the effects of declines in property values and overall slowdowns in economic growth should these events occur; (2) effects of and changes in trade, monetary and fiscal policies and laws, including the interest rate policies of the Federal Open Market Committee of the Federal Reserve Board; (3) our ability to anticipate interest rate changes and manage interest rate risk; (4) changes in inflation, interest rates, and market liquidity which may impact interest margins and impact funding sources; (5) volatility in credit and equity markets and its effect on the global economy; (6) our ability to effectively compete with other banks and financial services companies and the effects of competition in the financial services industry on our business; (7) our ability to achieve loan growth and attract deposits; (8) risks associated with concentrations in real estate related loans; (9) the relative strength or weakness of the commercial and real estate markets where our borrowers are located, including related asset and market prices; (10) other than temporary impairment charges to our securities portfolio; (11) changes in the level of nonperforming assets and charge offs and other credit quality measures, and their impact on the adequacy of the Company’s allowance for credit losses and the Company’s provision for credit losses; (12) increased capital requirements  for our continual growth or as imposed by banking regulators, which may require us to raise capital at a time when capital is not available on favorable terms or at all; (13) regulatory limits on Heritage Bank of Commerce’s ability to pay dividends to the Company; (14) changes in our capital management policies, including those regarding business combinations, dividends, and share repurchases; (15) operational issues stemming from, and/or capital spending necessitated by, the potential need to adapt to industry changes in information technology systems, on which we are highly dependent; (16) our inability to attract, recruit,  and retain qualified officers and other personnel could harm our ability to implement our strategic plan, impair our relationships with customers and adversely affect our business, results of operations and growth prospects; (17) possible  adjustment of the valuation of our deferred tax assets; (18) our ability to keep pace with technological changes, including our ability to identify and address cyber-security risks such as data security breaches, “denial of service” attacks, “hacking” and identity theft; (19) inability of our framework to manage risks associated with our business, including operational risk and credit risk; (20) risks of loss of funding of Small Business Administration or SBA loan programs, or changes in those programs; (21) compliance with governmental and regulatory requirements, including the Dodd-Frank Act and others relating to banking, consumer protection, securities , accounting and tax matters; (22) significant changes in applicable laws and regulations, including those concerning taxes, banking and securities; (23) effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; (24) costs and effects of legal and regulatory developments, including resolution of legal proceedings or regulatory or other governmental inquiries, and the results of regulatory examinations or reviews; (25) availability of and competition for acquisition opportunities; (26) risks resulting from domestic terrorism; (27) risks of natural disasters (including earthquakes) and other events beyond our control; (28) the expected cost savings, synergies and other financial benefits from the Presidio Bank merger might not be realized within the expected time frames or at all; (29) the rapidly changing uncertainties related to the Coronavirus pandemic including, but not limited to, the potential adverse effect of the pandemic on the economy, our employees and customers, and our financial performance; (30) the impact of the federal CARES Act and the significant additional lending activities undertaken by the Company in connection with the Small Business Administration’s Paycheck Protection Program enacted thereunder, including risks to the Company with respect to the uncertain application by the Small Business Administration of new borrower and loan eligibility, forgiveness and audit criteria; and (31) our success in managing the risks involved in the foregoing factors.

Member FDIC

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


                                                           
                                                           
    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