Heritage Commerce Corp Earns Record $13.7 Million for the Third Quarter of 2021, and $33.7 Million for the First Nine Months of 2021

SAN JOSE, Calif., Oct. 28, 2021 (GLOBE NEWSWIRE) — Heritage Commerce Corp (Nasdaq: HTBK), the holding company (the “Company”) for Heritage Bank of Commerce (the “Bank”), today announced third quarter 2021 net income of $13.7 million, or $0.23 per average diluted common share, compared to $11.2 million, or $0.19 per average diluted common share, for the third quarter of 2020, and $8.8 million, or $0.15 per average diluted common share, for the second quarter of 2021. For the nine months ended September 30, 2021, net income was $33.7 million, or $0.56 per average diluted common share, compared to $23.7 million, or $0.39 per average diluted common share, for the nine months ended September 30, 2020. Earnings for the first nine months of 2021 included a $4.0 million reserve for litigation as noninterest expense during the second quarter of 2021. Earnings for the first nine months of 2020 were impacted by the effect of a $14.6 million pre-tax related provision for potential credit losses on loans, incorporating the forecasted effects on economic activity from the Coronavirus pandemic, and $2.5 million of pre-tax merger-related costs. All results are unaudited.

“We generated record earnings for the third quarter of 2021, propelled by higher net interest income, solid loan growth notably in commercial and industrial (“C&I”) and commercial real estate (“CRE”), ongoing strong core deposit growth and an acceleration of Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loan fee income as a result of PPP loan forgiveness,” said Walter Kaczmarek, President and Chief Executive Officer. “Core loans, excluding PPP loans and purchased residential mortgage loans, increased by $170.9 million, or 7%, from a year ago, and increased by $121.9 million, or 5%, from the second quarter of 2021. Total deposits increased $836.0 million, or 21%, to $4.73 billion at September 30, 2021, compared to $3.89 billion at September 30, 2020, and increased $381.9 million, or 9%, from $4.34 billion at June 30, 2021. Total deposits at September 30, 2021 included $336.0 million of temporary deposits from one customer (these deposits are anticipated to leave by the end of the fourth quarter of 2021).” Excluding the $336.0 million in temporary deposits, total deposits increased $500.0 million, or 13%, from a year ago, and increased $45.9 million from the second quarter of 2021.

“As a result of our continued solid operating performance, and steadily improving economic conditions, credit metrics improved substantially during the third quarter of 2021 with nonperforming assets (“NPAs”) declining 54% from the year ago quarter and 23% from the immediate prior quarter,” said Mr. Kaczmarek. “We had a $514,000 negative provision for credit losses on loans during the third quarter of 2021 with net recoveries of $238,000, compared to a provision for credit losses on loans of $197,000 and net charge-offs of $219,000 for the third quarter a year ago. In the second quarter of 2021, we had a $493,000 negative provision for credit losses on loans and booked net recoveries of $153,000.” The allowance for credit losses on loans (“ACLL”) to total loans was strong at 1.54%, and the ACLL to total nonperforming loans was 922.88%, at September 30, 2021.

“With our solid capital ratios and strong balance sheet, we remain well positioned to benefit from improving economic conditions and continue to implement our growth strategy which calls for the profitable deployment of our excess liquidity into new loans and investment securities. During the third quarter of 2021, our excess liquidity was primarily deployed into new C&I and CRE loans and overnight funds,” said Mr. Kaczmarek. “We were pleased and encouraged by the results delivered by the Company this quarter and once again, I would like to offer sincere thanks to all of our dedicated employees for their commitment and effort in supporting our clients, communities and shareholders.”

Third Quarter Ended September 30, 2021
Operating Results, Balance Sheet Review, Capital Management, and Credit Quality

(as of, or for the periods ended September 30, 2021, compared to September 30, 2020, and June 30, 2021, except as noted):

Operating Results:

• Diluted earnings per share were $0.23 for the third quarter of 2021, compared to $0.19 for the third quarter of 2020, and $0.15 for the second quarter of 2021. Diluted earnings per share were $0.56 for the first nine months of 2021, compared to $0.39 for the first nine months of 2020.
• The following table indicates the ratios for the return on average tangible assets and the return on average tangible equity for the periods indicated:

• Net interest income, before provision for credit losses on loans, increased 12% to $38.2 million for the third quarter of 2021, compared to $34.2 million for the third quarter of 2020, and increased 9% from $34.9 million for the second quarter of 2021, primarily due to higher interest and fees on PPP loans and prepayment fees, and an increase in the accretion of the loan purchase discount into interest income from acquired loans.

• The following tables present the average balance of loans outstanding, interest income, and the average yield for the periods indicated:

• The average cost of total deposits was 0.10% for the third quarter of 2021, compared to 0.16% for the third quarter of 2020 and 0.11% for the second quarter of 2021. The average cost of total deposits was 0.11% for the nine months ended September 30, 2021, compared to 0.18% for the nine months ended September 30, 2020.
• During the third quarter of 2021, there was a $514,000 negative provision for credit losses on loans, primarily due to recoveries on previously charged-off loans, compared to a $197,000 provision for credit losses on loans taken in the third quarter of 2020, and a $493,000 negative provision for credit losses on loans for the second quarter of 2021. There was a $2.5 million negative provision for credit losses on loans for the nine months ended September 30, 2021, compared to a $14.6 million provision for credit losses on loans for the nine months ended September 30, 2020.

• Total noninterest income was $2.4 million for the third quarter of 2021, compared to $2.6 million for the third quarter of 2020 and $2.2 million for the second quarter of 2021.

• Total noninterest expense for the third quarter of 2021 increased to $21.8 million, compared to $21.2 million for the third quarter of 2020, primarily due to higher salaries and employee benefits and insurance expense during the third quarter of 2021. Noninterest expense for the third quarter of 2021 decreased from $25.8 million for the second quarter of 2021, primarily due to a $4.0 million reserve for a litigation matter that settled in the second quarter of 2021.

• The efficiency ratio improved to 53.78% for the third quarter of 2021, compared to 57.58% for the third quarter of 2020, and 69.58% for the second quarter of 2021. The efficiency ratio for the nine months ended September 30, 2021 was 61.67%, compared to 58.81% for the nine months ended September 30, 2020. Excluding the $4.0 million reserve for litigation, the efficiency ratio was 58.18% for the first nine months of 2021.
• Income tax expense was $5.6 million for the third quarter of 2021, compared to $4.2 million for the third quarter of 2020, and $3.0 million the second quarter of 2021. The effective tax rate for the third quarter of 2021 was 28.8 %, compared to 27.3% for the third quarter of 2020, and 25.1% for the second quarter of 2021. Income tax expense for the nine months ended September 30, 2021 was $12.8 million, compared to $9.3 million for the nine months ended September 30, 2020. The effective tax rate for the nine months ended September 30, 2021 was 27.5%, compared to 28.3% for the nine months ended September 30, 2020.

Balance Sheet Review, Capital Management and Credit Quality:

• Total assets increased 19% to $5.46 billion at September 30, 2021, compared to $4.61 billion at September 30, 2020, and increased 8% from $5.07 billion at June 30, 2021. Total deposits increased 21% to $4.73 billion at September 30, 2021, compared to $3.89 billion at September 30, 2020, and increased 9% from $4.34 billion at June 30, 2021. Total deposits at September 30, 2021 included $336.0 million of temporary deposits from one customer held in a money market account that were received late in the third quarter of 2021, resulting in higher overnight funds.
• Securities available-for-sale, at fair value, totaled $121.0 million at September 30, 2021, compared to $294.4 million at September 30, 2020, and $146.0 million at June 30, 2021. At September 30, 2021, the Company’s securities available-for-sale portfolio was comprised of $116.0 million of agency mortgage-backed securities (all issued by U.S. Government sponsored entities), and $5.0 million of U.S. Treasury securities. The pre-tax unrealized gain on securities available-for-sale at September 30, 2021 was $4.0 million, compared to a pre-tax unrealized gain on securities available-for-sale of $6.9 million at September 30, 2020, and a pre-tax unrealized gain on securities available-for-sale of $4.3 million at June 30, 2021. All other factors remaining the same, when market interest rates are decreasing, the Company will experience a higher unrealized gain (or a lower unrealized loss) on the securities portfolio.
• At September 30, 2021, securities held-to-maturity, at amortized cost, totaled $537.3 million, compared to $295.6 million at September 30, 2020, and $421.3 million at June 30, 2021. At September 30, 2021, the Company’s securities held-to-maturity portfolio was comprised of $480.3 million of agency mortgage-backed securities, and $57.0 million of tax-exempt municipal bonds. During the third quarter of 2021, the Company purchased $140.5 million of agency mortgage-backed securities (securities held-to-maturity), with a book yield of 1.43% and an average life of 5.50 years. During the first nine months of 2021, the Company purchased $322.5 million of agency mortgage-backed securities (securities held-to-maturity), with a book yield of 1.49% and an average life of 5.67 years.
• The loan portfolio remains well-diversified as reflected in the following table which summarizes the distribution of loans, excluding loans held-for-sale, and the percentage of distribution in each category for the periods indicated:

• The following table summarizes the allowance for credit losses on loans for the periods indicated:

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

• The Company’s consolidated capital ratios exceeded regulatory guidelines and the Bank’s capital ratios exceeded regulatory guidelines under the Basel III prompt corrective action (“PCA”) regulatory guidelines for a well-capitalized financial institution, and the Basel III minimum regulatory requirements at September 30, 2021, as reflected in the following table:

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

• Tangible equity was $408.1 million at September 30, 2021, compared to $392.5 million at September 30, 2020, and $400.6 million at June 30, 2021. Tangible book value per share was $6.77 at September 30, 2021, compared to $6.55 at September 30, 2020, and $6.65 at June 30, 2021.

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

Forward-Looking Statement Disclaimer

These forward-looking statements are subject to various risks and uncertainties that may be outside our control and our actual results could differ materially from our projected results. Risks and uncertainties that could cause our financial performance to differ materially from our goals, plans, expectations and projections expressed in forward-looking statements include those set forth in our filings with the Securities and Exchange Commission (“SEC”), Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, and the following: (1) the effect of the COVID-19 pandemic, and other infectious illness outbreaks that may arise in the future, on our customers, employees, businesses, liquidity, and financial results; (2) current and future economic and market conditions in the United States generally or in the communities we serve, including the effects of declines in property values and overall slowdowns in economic growth should these events occur; (3) effects of and changes in trade, monetary and fiscal policies and laws, including the interest rate policies of the Federal Open Market Committee of the Federal Reserve Board; (4) our ability to anticipate interest rate changes and manage interest rate risk; (5) changes in inflation, interest rates, and market liquidity which may impact interest margins and impact funding sources; (6) volatility in credit and equity markets and its effect on the global economy; (7) our ability to effectively compete with other banks and financial services companies and the effects of competition in the financial services industry on our business; (8) our ability to achieve loan growth and attract deposits; (9) risks associated with concentrations in real estate related loans; (10) the relative strength or weakness of the commercial and real estate markets where our borrowers are located, including related asset and market prices; (11) credit related impairment charges to our securities portfolio; (12) changes in the level of nonperforming assets and charge offs and other credit quality measures, and their impact on the adequacy of our allowance for credit losses and our provision for credit losses; (13) increased capital requirements for our continual growth or as imposed by banking regulators, which may require us to raise capital at a time when capital is not available on favorable terms or at all; (14) regulatory limits on Heritage Bank of Commerce’s ability to pay dividends to the Company; (15) changes in our capital management policies, including those regarding business combinations, dividends, and share repurchases; (16) operational issues stemming from, and/or capital spending necessitated by, the potential need to adapt to industry changes in information technology systems, on which we are highly dependent; (17) our inability to attract, recruit, and retain qualified officers and other personnel could harm our ability to implement our strategic plan, impair our relationships with customers and adversely affect our business, results of operations and growth prospects; (18) possible adjustment of the valuation of our deferred tax assets; (19) our ability to keep pace with technological changes, including our ability to identify and address cyber-security risks such as data security breaches, “denial of service” attacks, “hacking” and identity theft; (20) inability of our framework to manage risks associated with our business, including operational risk and credit risk; (21) risks of loss of funding of Small Business Administration (“SBA”) or SBA loan programs, or changes in those programs; (22) compliance with governmental and regulatory requirements, including the Dodd-Frank Act and others relating to banking, consumer protection, securities, accounting and tax matters; (23) significant changes in applicable laws and regulations, including those concerning taxes, banking and securities; (24) effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; (25) costs and effects of legal and regulatory developments, including resolution of regulatory or other governmental inquiries, and the results of regulatory examinations or reviews; (26) the expense and uncertain resolution of litigation matters whether occurring in the ordinary course of business or otherwise; (27) availability of and competition for acquisition opportunities; (28) risks resulting from domestic terrorism; (29) risks resulting from social unrest and protests: (30) risks of natural disasters (including earthquakes) and other events beyond our control; (31) changes in governmental policy and regulation, the Federal Reserve Board’s efforts to provide liquidity to the financial system and provide credit to private commercial and municipal borrowers, and other programs designed to address the effects of the COVID-19 pandemic; (32) the Bank’s participation as a lender in the PPP and similar programs and its effect on the Bank’s liquidity, financial results, businesses and customers, including the ability of customers to comply with requirements and otherwise perform with respect to loans obtained under such programs; (33) our success in managing the risks involved in the foregoing factors.

Member FDIC

For additional information, contact:
Debbie Reuter
EVP, Corporate Secretary
Direct: (408) 494-4542
[email protected]