GlobeNewswire
Heritage Commerce Corp Earns $11.2 Million for the First Quarter of 2021
SAN JOSE, Calif., April 22, 2021 (GLOBE NEWSWIRE) -- Heritage Commerce Corp (Nasdaq: HTBK), the holding company (the “Company”) for Heritage Bank of Commerce (the “Bank”), today announced first quarter 2021 net income of $11.2 million, or $0.19 per average diluted common share, compared to $1.9 million, or $0.03 per average diluted common share, for the first quarter of 2020, and $11.6 million, or $0.19 per average diluted common share, for the fourth quarter of 2020. First quarter 2021 results included the recapture of $1.5 million of provision for credit losses on loans, compared to a provision for credit losses on loans of $13.3 million for the first quarter of 2020. All results are unaudited. “While facing prolonged challenges posed by the COVID-19 crisis, and the related economic uncertainty, the Company has continued to generate solid financial results, and the first quarter 2021 earnings were no exception,” said Walter Kaczmarek, President and Chief Executive Officer. “Total deposits grew by 27%, year-over-year, fueled by successful deposit gathering efforts that attracted over $900 million. Gross loans also increased 6%, year-over-year, and by 3% on a linked quarter basis. Our return on assets improved to 0.99% in the first quarter compared to 0.19% a year ago. Our year-over-year improvement in first quarter results benefited from our higher than usual provision for credit losses in the first quarter of 2020 taken in light of a downturn in the economy caused by the COVID-19 pandemic, and from our decision to adopt the Current Expected Credit Loss (“CECL”) rate methodology early in 2020,” said Mr. Kaczmarek. Mr. Kaczmarek continued, “Our positive credit trends continue with nonperforming assets (“NPAs”) decreasing (54%) to $5.6 million at March 31, 2021, versus $12.1 million a year earlier, and declining (29%) from $7.9 million on a linked quarter basis. We had net loan recoveries of $1.4 million from previously charged-off accounts, compared to net charge-offs of $422,000 for the first quarter a year ago.” The allowance for credit losses on loans (“ACLL”) to total loans declined slightly to 1.64%, and the ratio of ACLL to total loans, excluding PPP loans, was 1.88%, at March 31, 2021, compared to 1.70% and 1.91%, respectively, at December 31, 2020. “Our local markets and customers have been negatively impacted by government actions necessary to contain the health crisis, and we are closely tracking our loan portfolio and responding to the needs of our customers,” said Mr. Kaczmarek. “In the meantime, our capital, ACLL, and excess liquidity positions all remain strong. The total capital ratio was 16.5% and leverage ratio was 9.1% for the Company, and 15.8% and 9.5%, respectively, for the Bank, at March 31, 2021. Notably, despite the adverse impact to the economy brought on by the pandemic, the Company’s total assets increased 23% from a year ago and surpassed the milestone of $5 billion at quarter-end. With a solid earnings performance, a large core deposit base, and excellent credit quality, we believe we have a solid foundation on which to grow as the economy recovers from the COVID-19 pandemic.” In response to economic stimulus laws passed by Congress in 2020 and 2021, Heritage Bank of Commerce has now funded two rounds of Small Business Administration (“SBA”) Payment Protection Program (“PPP”) loans. At March 31, 2021, after accounting for loan payoffs and SBA loan forgiveness, Round 1 PPP loans were $170.4 million and Round 2 PPP loans were $179.3 million. In total the Bank had $349.7 million in outstanding PPP loan balances at quarter-end. These loans generated $784,000 in interest income, $3.4 million in net deferred fee revenue ($2.4 million from loans forgiven or paid off and $969,000 from net deferred fees), and $766,000 in deferred origination costs on Round 2 PPP loans during the first quarter of 2021. At March 31, 2021, the PPP loan portfolio had remaining deferred fees of ($8.8) million and deferred costs of $1.1 million. On April 7, 2020, the U.S. banking agencies issued the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus. The statement describes accounting for COVID-19-related loan modifications, including clarifying the interaction between current accounting rules and the temporary relief provided by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The Bank made accommodations for initial payment deferrals for a number of customers with a window of up to 90 days, with the potential of an additional 90 days of payment deferral (180 days maximum) upon application. The Bank also waived all customary applicable fees. Of the loans for which deferrals were originally granted, nearly all have returned to regular payment status. The following table shows the remaining deferments at March 31, 2021 by category: Underlying Collateral NON-SBA LOANS Business Real (in $000’s, unaudited) Assets Estate Total Initial Deferments(1) $- $4,102 $4,1022nd Deferments(2) 3,146 724 3,870Total $3,146 $4,826 $7,972 (1) Initial deferments were generally for 3 months(2) 2nd deferments were for an additional 3 months On December 27, 2020, the President signed into law the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Act”) which revised rules regarding PPP loans, provided supplemental PPP loan funding for new and existing borrowers and expanded the types of business expenses that are forgivable under the PPP program. On January 6, 2021, Treasury issued new Interim Final Rules (“IFRs”) to address the Act’s creation of PPP Second Draw Loans as well as other changes to the PPP program requirements. The IFRs codified aspects of the PPP program not specifically addressed in the Act: Extending the application deadline to submit a PPP loan application to May 31, 2021, and the SBA approval deadline to June 30, 2021.Allowing new PPP borrowers to use either 2019 or 2020 for business records in determining maximum loan amount.Maintaining a $2 million loan amount necessity certification safe harbor.Allowing borrowers who returned or did not originally accept PPP loan proceeds to reapply for receipt of those funds. In addition to its portfolio of SBA PPP loans, the Bank also has a portfolio of SBA 7(a) loans totaling $45.9 million as of April 12, 2021 (the most recent available data). The following table reflects the status of these SBA 7(a) loans as of April 12, 2021: SBA 7(a) LOANS Number (in $000’s, unaudited) Balance of LoansSBA 7(a) loans (monthly payments are made through the Economic Aid Act ) $25,265 150Payments Not Made / NSF / Returned 1,547 17Due dates later in the month 12 2New loans / No payment due 330 3CARES 18,774 85Total Portfolio $45,928 257 The CARES Act was amended in December 2020 to include $3.5 billion of extended debt relief payments for SBA borrowers. The program was subsequently modified by the SBA to provide two additional monthly payments of principal and interest totaling a maximum of $9,000 per month and an additional three payments to borrowers considered “underserved” as defined in the amended legislation. Credit Quality and Performance At March 31, 2021, NPAs declined by ($6.5) million, or (54%), to $5.6 million, compared to $12.1 million at March 31, 2020, and decreased by ($2.3) million, or (29%) from $7.9 million at December 31, 2020. The decrease in NPAs at March 31, 2021, compared to March 31, 2020 and December 31, 2020, was primarily from the sale of properties that resulted in the payoff of loans and other paid down loans, which were partially offset by additional loans that went on NPA status during the first quarter of 2021. Classified assets decreased to $33.4 million, or 0.67% of total assets, at March 31, 2021, compared to $39.6 million, or 0.97% of total assets, at March 31, 2020, and $34.0 million, or 0.73% of total assets, at December 31, 2020. The Company continues to monitor portfolio loans made to commercial customers with businesses in higher risk sectors due to the COVID-19 pandemic. The following table provides a breakdown of such loans as a percentage of total loans for the periods indicated: % of Total % of Total % of Total Loans at Loans at Loans at HIGHER RISK SECTORS (unaudited) March 31, 2021 December 31, 2020 March 31, 2020 Health care and social assistance: Offices of dentists 2.06% 2.01% 1.63%Offices of physicians (except mental health specialists) 0.89% 0.81% 0.70%Other community housing services 0.24% 0.28% 0.11%All others 1.99% 2.15% 1.84%Total health care and social assistance 5.18% 5.25% 4.28%Retail trade: Gasoline stations with convenience stores 2.54% 2.16% 1.98%All others 2.16% 2.34% 2.18%Total retail trade 4.70% 4.50% 4.16%Accommodation and food services: Full-service restaurants 1.56% 1.30% 0.86%Limited-service restaurants 0.64% 0.57% 0.63%Hotels (except casino hotels) and motels 0.86% 0.95% 0.94%All others 0.75% 0.68% 0.52%Total accommodation and food services 3.81% 3.50% 2.95%Educational services: Elementary and secondary schools 0.58% 0.58% 0.15%Education support services 0.46% 0.45% 0.15%All others 0.24% 0.19% 0.17%Total educational services 1.28% 1.22% 0.47%Arts, entertainment, and recreation 1.40% 1.34% 1.09%Purchased participations in micro loan portfolio 0.50% 0.60% 0.95%Total higher risk sectors 16.87% 16.41% 13.90% The increase in higher risk sector loans at March 31, 2021 and December 31, 2020, compared to March 31, 2020, was primarily due to the addition of PPP loans after the first quarter of 2020. Capital and Liquidity The Company’s and the Bank’s consolidated capital ratios exceeded regulatory guidelines for a well-capitalized financial institution, and the Basel III minimum regulatory requirements at March 31, 2021. Our liquidity position supports our ability to maintain cash flows sufficient to fund operations, meet all of our financial obligations and commitments, and accommodate unexpected sudden changes in balances of loans and deposits in a timely manner. At various times the Company requires funds to meet short term cash requirements brought about by loan growth or deposit outflows, the purchase of assets, or repayment of liabilities. An integral part of the Company’s ability to manage its liquidity position appropriately is derived from its large base of core deposits, which are generated by offering traditional banking services in its service area and which have historically been a stable source of funds. At March 31, 2021, the Company had a strong liquidity position with $1.44 billion in cash and cash equivalents, and $783.7 million in available borrowing capacity from sources including the Federal Home Loan Bank, the Federal Reserve Bank of San Francisco, Federal funds facilities with several financial institutions, and a line of credit with a correspondent bank. The Company also had $465.6 million (at fair market value) in unpledged securities available at March 31, 2021. The loan to deposit ratio was 63.21% at March 31, 2021, compared to 75.86% at March 31, 2020, and 66.91% at December 31, 2020. First Quarter Ended March 31, 2021 Operating Results, Balance Sheet Review, Capital Management, and Credit Quality(as of, or for the periods ended March 31, 2021, compared to March 31, 2020, and December 31, 2020, except as noted): Operating Results: Diluted earnings per share were $0.19 for the first quarter of 2021, compared to $0.03 for the first quarter of 2020, and $0.19 for the fourth quarter of 2020.The following table indicates the ratios for the return on average tangible assets and the return on average tangible equity for the periods indicated: For the Quarter Ended March 31, December 31, March 31, (unaudited) 2021 2020 2020Return on average tangible assets 0.99% 1.02% 0.19% Return on average tangible equity 11.50% 11.75% 1.91% Net interest income, before provision for credit losses on loans, decreased (9%) to $35.0 million for the first quarter of 2021, compared to $38.6 million for the first quarter of 2020, primarily due to decreases in the prime rate and decreases in yields on investment securities and overnight funds, which were partially offset by interest income and fees on PPP loans. Net interest income increased 2% to $35.0 million for the first quarter of 2021, compared to $34.2 million for the fourth quarter of 2020, primarily due to higher fees on PPP loans and an increase in the accretion of the loan purchase discount into interest income from acquired loans. The fully tax equivalent (“FTE”) net interest margin contracted 103 basis points to 3.22% for the first quarter of 2021, from 4.25% for the first quarter of 2020, primarily due to declines in the average yields on loans, investment securities, and overnight funds, partially offset by a decline in the cost of interest-bearing liabilities and higher interest income and fees on PPP loans. The FTE net interest margin increased seven basis points for the first quarter of 2021 from 3.15% for the fourth quarter of 2020. 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 5.24% for the first quarter of 2021, compared to 5.57% for the first quarter of 2020, primarily due to a decline in the prime rate and new average balances of lower yielding PPP loans, partially offset by interest income and fees on PPP loans. For the Quarter Ended For the Quarter Ended March 31, 2021 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 $2,225,342 $25,581 4.66%$2,422,020 $30,104 5.00%SBA PPP loans 319,168 784 1.00% — — N/A PPP fees, net — 3,401 4.32% — — N/A Bay View Funding factored receivables 48,094 2,650 22.35% 47,470 2,877 24.38%Purchased residential mortgages 22,194 119 2.17% 33,075 230 2.80%Purchased commercial real estate ("CRE") loans 17,162 172 4.06% 27,340 249 3.66%Loan fair value mark / accretion (11,626) 1,129 0.21% (16,180) 1,322 0.22%Total loans (includes loans held-for-sale) $2,620,334 $33,836 5.24%$2,513,725 $34,782 5.57% •The average yield on the total loan portfolio increased to 5.24% for the first quarter of 2021 compared to 4.93% for the fourth quarter of 2020, primarily due to higher fees from PPP loans and an increase in the accretion of the loan purchase discount into interest income from acquired loans. For the Quarter Ended For the Quarter Ended March 31, 2021 December 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 $2,225,342 $25,581 4.66%$2,256,944 $26,348 4.64%SBA PPP loans 319,168 784 1.00% 313,335 787 1.00%PPP fees, net — 3,401 4.32% — 1,935 2.46%Bay View Funding factored receivables 48,094 2,650 22.35% 50,720 2,856 22.40%Purchased residential mortgages 22,194 119 2.17% 24,955 118 1.88%Purchased CRE loans 17,162 172 4.06% 20,854 176 3.36%Loan fair value mark / accretion (11,626) 1,129 0.21% (12,017) 687 0.12%Total loans (includes loans held-for-sale) $2,620,334 $33,836 5.24%$2,654,791 $32,907 4.93% •In aggregate, the original total net purchase discount on loans from the Focus Business Bank, Tri-Valley Bank, United American Bank, and Presidio Bank loan portfolio was $25.2 million. In aggregate, the remaining net purchase discount on total loans acquired was $11.0 million at March 31, 2021. The average cost of total deposits was 0.12% for the first quarter of 2021, compared to 0.22% for the first quarter of 2020 and 0.14% for the fourth quarter of 2020. During the first quarter of 2021, there was a recapture of ($1.5) million in provision for credit losses on loans, primarily due to recoveries on previously charged-off loans, compared to a $13.3 provision for credit losses on loans taken in the first quarter of 2020, and the recapture of ($1.3) million to the provision for credit losses on loans taken in the fourth quarter of 2020. The higher provision for credit losses on loans for the first quarter of 2020 was driven primarily by a significantly deteriorated economic outlook resulting from the Coronavirus pandemic. Ongoing impacts of the CECL methodology will be dependent upon changes in economic conditions and forecasts, originated and acquired loan portfolio composition, portfolio duration, and other factors. Total noninterest income was $2.3 million for the first quarter of 2021, compared to $3.2 million for the first quarter of 2020, primarily due to a gain on the disposition of foreclosed assets and from higher service charges and fees on deposit accounts for the first quarter of 2020. Total noninterest income increased to $2.3 million for the first quarter of 2021 from $2.1 million for the fourth quarter of 2020, primarily due to an increase in gains on the sale of SBA loans and servicing income. Total noninterest expense for the first quarter of 2021 decreased to $23.2 million, compared to $25.8 million for the first quarter of 2020, primarily due to lower merger-related costs, partially offset by higher severance expense during the first quarter of 2021. For the fourth quarter of 2020, total noninterest expense was $21.6 million. The following table reflects pre-tax merger-related costs resulting from the merger with Presidio for the periods indicated: For the Quarter EndedMERGER-RELATED COSTS March 31, December 31, March 31, (in $000’s, unaudited) 2021 2020 2020Salaries and employee benefits $— $— $356Other 58 101 2,068Total merger-related costs $58 $101 $2,424 •Noninterest expense for the first quarter of 2021 included approximately $1.5 million in severance expense, partially offset by $766,000 in deferred origination costs on Round 2 PPP loans. •Full time equivalent employees were 325 at March 31, 2021, and 337 at March 31, 2020, and 331 at December 31, 2020. The efficiency ratio was 62.38% for the first quarter of 2021, compared to 61.70% for the first quarter of 2020, and 59.45% for the fourth quarter of 2020. Income tax expense was $4.3 million for the first quarter of 2021, compared to $868,000 for the first quarter of 2020, and $4.4 million for the fourth quarter of 2020. The effective tax rate for the first quarter of 2021 was 27.8%, compared to 31.8% for the first quarter of 2020, and 27.6% for the fourth 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. 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 reached $5.00 billion at March 31, 2021, an increase of 23% from $4.08 billion at March 31, 2020, and increased 8% from $4.63 billion at December 31, 2020. Securities available-for-sale, at fair value, totaled $196.7 million at March 31, 2021, compared to $373.6 million at March 31, 2020, and $235.8 million at December 31, 2020. At March 31, 2021, the Company’s securities available-for-sale portfolio was comprised of $151.5 million of agency mortgage-backed securities (all issued by U.S. Government sponsored entities), and $45.2 million of U.S. Treasury securities. The pre-tax unrealized gain on securities available-for-sale at March 31, 2021 was $4.9 million, compared to a pre-tax unrealized gain on securities available-for-sale of $9.4 million at March 31, 2020, and a pre-tax unrealized gain on securities available-for-sale of $5.8 million at December 31, 2020. All other factors remaining the same, when market interest rates are decreasing, the Company will experience a higher unrealized gain (or a lower unrealized loss) on the securities portfolio. At March 31, 2021, securities held-to-maturity, at amortized cost, totaled $306.5 million, compared to $348.0 million at March 31, 2020, and $297.4 million at December 31, 2020. At March 31, 2021, the Company’s securities held-to-maturity portfolio was comprised of $242.7 million of agency mortgage-backed securities, and $63.8 million of tax-exempt municipal bonds. During the first quarter of 2021, the Company purchased $40.4 million of agency mortgage-backed securities (securities held-to-maturity), with a book yield of 1.54% and an average life of 5.6 years. The loan portfolio remains well-diversified as reflected in the following table which summarizes the distribution of loans, excluding loans held-for-sale, and the percentage of distribution in each category for the periods indicated: LOANS March 31, 2021 December 31, 2020 March 31, 2020 (in $000’s, unaudited) Balance % to Total Balance % to Total Balance % to Total Commercial $559,698 20%$555,707 21%$696,168 27%Paycheck Protection Program Loans 349,744 13% 290,679 11% — 0%Real estate: CRE - owner occupied 568,637 21% 560,362 21% 539,465 21%CRE - non-owner occupied 700,117 26% 693,103 27% 748,245 29%Land and construction 159,504 6% 144,594 6% 153,321 6%Home equity 104,303 4% 111,885 4% 117,544 5%Multifamily 168,917 6% 166,425 6% 170,292 7%Residential mortgages 82,181 3% 85,116 3% 95,808 4%Consumer and other 19,872 1% 18,116 1% 33,326 1%Total Loans 2,712,973 100% 2,625,987 100% 2,554,169 100%Deferred loan costs (fees), net (8,266) — (6,726) — (258) — Loans, net of deferred costs and fees $2,704,707 100%$2,619,261 100%$2,553,911 100% •Loans, excluding loans held-for-sale, increased $150.8 million, or 6%, to $2.70 billion at March 31, 2021, compared to $2.55 billion at March 31, 2020, and increased $85.4 million, or 3% from $2.62 billion at December 31, 2020. Total loans at March 31, 2021 included $349.7 million of PPP loans, compared to $290.7 million at December 31, 2020. Total loans at March 31, 2021, excluding PPP loans, increased $26.4 million from December 31, 2020. •Commercial and industrial line usage was 28% at March 31, 2021, compared to 36% at March 31, 2020, and 28% at December 31, 2020. •At March 31, 2021, 45% of the CRE loan portfolio was secured by owner-occupied real estate. •At March 31, 2021, approximately 40% of the Company’s loan portfolio consisted of floating rate interest loans. •The following table summarizes the allowance for credit losses on loans for the periods indicated: For the Quarter Ended ALLOWANCE FOR CREDIT LOSSES ON LOANS March 31, December 31, March 31, (in $000’s, unaudited) 2021 2020 2020 Balance at beginning of period $44,400 $45,422 $23,285 Charge-offs during the period (263) (144) (673) Recoveries during the period 1,671 470 251 Net recoveries (charge-offs) during the period 1,408 326 (422) Impact of adopting Topic 326 — — 8,570 Provision (recapture) for credit losses on loans during the period (1,512) (1,348) 13,270 Balance at end of period $44,296 $44,400 $44,703 Total loans, net of deferred fees $2,704,707 $2,619,261 $2,553,911 Total nonperforming loans $5,593 $7,869 $12,088 Allowance for credit losses on loans to total loans 1.64 % 1.70 % 1.75 %Allowance for credit losses on loans to total nonperforming loans 791.99 % 564.24 % 369.81 % •The ACLL was 1.64% of total loans at March 31, 2021 and the ACLL to total nonperforming loans was 791.99% at March 31, 2021. The ACLL was 1.75% of total loans and the ACLL to nonperforming loans was 369.81% at March 31, 2020. The ACLL was 1.70% of total loans and the ACLL to total nonperforming loans was 564.24% at December 31, 2020. The ACLL to total loans, excluding PPP loans, was 1.88% at March 31, 2021, and 1.91% at December 31, 2020. There were no PPP loans at March 31, 2020. •The following table shows the drivers of change in ACLL under CECL for the quarter ended March 31, 2021: DRIVERS OF CHANGE IN ACLL UNDER CECL (in $000’s, unaudited) ALLL at December 31, 2020 $44,400 Net recoveries during the first quarter of 2021 1,408 Portfolio changes during the first quarter of 2021 313 Economic factors during the first quarter of 2021 (1,825)ACLL at March 31, 2021 $44,296 •Net recoveries totaled $1.4 million for the first quarter of 2021, compared to net charge-offs of $422,000 for the first quarter of 2020, and net recoveries of $326,000 for the fourth quarter of 2020. •The following is a breakout of NPAs at the periods indicated: End of Period: NONPERFORMING ASSETS March 31, 2021 December 31, 2020 March 31, 2020 (in $000’s, unaudited) Balance % of Total Balance % of Total Balance % of Total CRE loans $2,973 53%$3,706 47%$7,346 61%Commercial loans 1,985 36% 2,726 35% 3,403 28%Consumer and other loans 407 7% 407 5% 771 6%Home equity loans 177 3% 949 12% 442 4%Restructured and loans over 90 days past due and still accruing 51 1% 81 1% 126 1%Total nonperforming assets $5,593 100%$7,869 100%$12,088 100% •NPAs totaled $5.6 million, or 0.11% of total assets, at March 31, 2021, compared to $12.1 million, or 0.30% of total assets, at March 31, 2020, and $7.9 million, or 0.17% of total assets, at December 31, 2020. •There were no foreclosed assets on the balance sheet at March 31, 2021, March 31, 2020, or December 31, 2020. •Classified assets decreased to $33.4 million, or 0.67% of total assets, at March 31, 2021, compared to $39.6 million, or 0.97% of total assets, at March 31, 2020, and decreased from $34.0 million, or 0.73% of total assets, at December 31, 2020. The following table summarizes the distribution of deposits and the percentage of distribution in each category for the periods indicated: DEPOSITS March 31, 2021 December 31, 2020 March 31, 2020 (in $000’s, unaudited) Balance % to Total Balance % to Total Balance % to Total Demand, noninterest-bearing $1,813,962 42%$1,661,655 42%$1,444,534 42%Demand, interest-bearing 1,101,807 26% 960,179 24% 810,425 24%Savings and money market 1,189,566 28% 1,119,968 29% 949,076 28%Time deposits — under $250 42,596 1% 45,027 1% 51,009 2%Time deposits — $250 and over 102,508 2% 103,746 3% 96,540 3%CDARS — interest-bearing demand, money market and time deposits 28,663 1% 23,911 1% 15,055 1%Total deposits $4,279,102 100%$3,914,486 100%$3,366,639 100% •Total deposits increased $912.5 million, or 27%, to $4.28 billion at March 31, 2021, compared to $3.37 billion at March 31, 2020. Total deposits increased $364.6 million, or 9%, from $3.91 billion at December 31, 2020. •Deposits, excluding all time deposits and CDARS deposits, increased $901.3 million, or 28%, to $4.11 billion at March 31, 2021, compared to $3.20 billion at March 31, 2020. Deposits, excluding all time deposits and CDARS increased $363.5 million, or 10%, to $4.11 billion at March 31, 2021, compared to $3.74 billion at December 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 March 31, 2021, as reflected in the following table: Well-capitalized Financial Institution Basel III Heritage Heritage Basel III PCA Minimum Commerce Bank of Regulatory RegulatoryCAPITAL RATIOS (unaudited) Corp Commerce Guidelines Requirement (1)Total Capital 16.5% 15.8% 10.0% 10.5%Tier 1 Capital 14.0% 14.7% 8.0% 8.5%Common Equity Tier 1 Capital 14.0% 14.7% 6.5% 7.0%Tier 1 Leverage 9.1% 9.5% 5.0% 4.0% ________________________(1) Basel III minimum regulatory requirements for both the Company and the Bank include a 2.5% capital conservation buffer, except the leverage ratio.________________________ The following table reflects the components of accumulated other comprehensive loss, net of taxes, for the periods indicated: ACCUMULATED OTHER COMPREHENSIVE LOSS March 31, December 31, March 31, (in $000’s, unaudited) 2021 2020 2020Unrealized gain on securities available-for-sale $3,113 $3,709 $6,299 Remaining unamortized unrealized gain on securities available-for-sale transferred to held-to-maturity 252 261 288 Split dollar insurance contracts liability (6,148) (6,140) (4,850)Supplemental executive retirement plan liability (8,698) (8,767) (6,774)Unrealized gain on interest-only strip from SBA loans 213 220 328 Total accumulated other comprehensive loss $(11,268) $(10,717) $(4,709) Tangible equity was $398.1 million at March 31, 2021, compared to $384.5 million at March 31, 2020, and $393.6 million at December 31, 2020. Tangible book value per share was $6.64 at March 31, 2021, compared to $6.46 at March 31, 2020, and $6.57 at December 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 https://ift.tt/2nLgdNq. Forward-Looking Statement Disclaimer These forward-looking statements are subject to various risks and uncertainties that may be outside our control and our actual results could differ materially from our projected results. Risks and uncertainties that could cause our financial performance to differ materially from our goals, plans, expectations and projections expressed in forward-looking statements include those set forth in our filings with the Securities and Exchange Commission (“SEC”), Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, and the following: (1) current and future economic and market conditions in the United States generally or in the communities we serve, including the effects of declines in property values and overall slowdowns in economic growth should these events occur; (2) effects of and changes in trade, monetary and fiscal policies and laws, including the interest rate policies of the Federal Open Market Committee of the Federal Reserve Board; (3) our ability to anticipate interest rate changes and manage interest rate risk; (4) changes in inflation, interest rates, and market liquidity which may impact interest margins and impact funding sources; (5) volatility in credit and equity markets and its effect on the global economy; (6) our ability to effectively compete with other banks and financial services companies and the effects of competition in the financial services industry on our business; (7) our ability to achieve loan growth and attract deposits; (8) risks associated with concentrations in real estate related loans; (9) the relative strength or weakness of the commercial and real estate markets where our borrowers are located, including related asset and market prices; (10) other than temporary impairment charges to our securities portfolio; (11) changes in the level of NPAs and charge offs and other credit quality measures, and their impact on the adequacy of the Company’s allowance for credit losses and the Company’s provision for credit losses; (12) increased capital requirements for our continual growth or as imposed by banking regulators, which may require us to raise capital at a time when capital is not available on favorable terms or at all; (13) regulatory limits on Heritage Bank of Commerce’s ability to pay dividends to the Company; (14) changes in our capital management policies, including those regarding business combinations, dividends, and share repurchases; (15) operational issues stemming from, and/or capital spending necessitated by, the potential need to adapt to industry changes in information technology systems, on which we are highly dependent; (16) our inability to attract, recruit, and retain qualified officers and other personnel could harm our ability to implement our strategic plan, impair our relationships with customers and adversely affect our business, results of operations and growth prospects; (17) possible adjustment of the valuation of our deferred tax assets; (18) our ability to keep pace with technological changes, including our ability to identify and address cyber-security risks such as data security breaches, “denial of service” attacks, “hacking” and identity theft; (19) inability of our framework to manage risks associated with our business, including operational risk and credit risk; (20) risks of loss of funding of SBA or SBA loan programs, or changes in those programs; (21) compliance with governmental and regulatory requirements, including the Dodd-Frank Act and others relating to banking, consumer protection, securities, accounting and tax matters; (22) significant changes in applicable laws and regulations, including those concerning taxes, banking and securities; (23) effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; (24) costs and effects of legal and regulatory developments, including resolution of regulatory or other governmental inquiries, and the results of regulatory examinations or reviews; (25) the expense and uncertain resolution of litigation matters whether occurring in the ordinary course of business or otherwise; (26) availability of and competition for acquisition opportunities; (27) risks resulting from domestic terrorism; (28) risks of natural disasters (including earthquakes) and other events beyond our control; (29) the effect of the COVID-19 pandemic, and other infectious illness outbreaks that may arise in the future, on the Bank’s customers, employees, businesses, liquidity, financial results and overall condition and which has created significant uncertainties in U.S. and global markets, including our customers' ability to make timely payments on obligations, and operating expense due to alternative approaches to doing business; (30) changes in governmental policy and regulation, including measures taken in response to economic, business, political and social conditions, such as the SBA Paycheck Protection Program (“PPP”), the Federal Reserve Board's efforts to provide liquidity to the financial system and provide credit to private commercial and municipal borrowers, and other programs designed to address the effects of the COVID-19 pandemic; (31) the Bank's participation as a lender in the PPP and similar programs and its effect on the Bank's liquidity, financial results, businesses and customers, including the availability of program funds and the ability of customers to comply with requirements and otherwise perform with respect to loans obtained under such programs; (32) our success in managing the risks involved in the foregoing factors. Member FDIC For additional information, contact:Debbie ReuterEVP, Corporate SecretaryDirect: (408) 494-4542Debbie.Reuter@herbank.com For the Quarter Ended: Percent Change From: CONSOLIDATED INCOME STATEMENTS March 31, December 31, March 31, December 31, March 31, (in $000’s, unaudited) 2021 2020 2020 2020 2020 Interest income $36,761 $36,145 $40,942 2 %(10)%Interest expense 1,803 1,940 2,362 (7)%(24)%Net interest income before provision for credit losses on loans 34,958 34,205 38,580 2 %(9)%Provision (recapture) for credit losses on loans (1,512) (1,348) 13,270 (12)%(111)%Net interest income after provision for credit losses on loans 36,470 35,553 25,310 3 %44 %Noninterest income: Service charges and fees on deposit accounts 601 608 969 (1)%(38)%Gain on sales of SBA loans 550 372 67 48 %721 %Increase in cash surrender value of life insurance 456 465 458 (2)%0 %Servicing income 182 98 183 86 %(1)%Gain on sales of securities 11 7 100 57 %(89)%Gain on the disposition of foreclosed assets — — 791 N/A (100)%Other 501 506 625 (1)%(20)%Total noninterest income 2,301 2,056 3,193 12 %(28)%Noninterest expense: Salaries and employee benefits 13,958 12,457 14,203 12 %(2)%Occupancy and equipment 2,274 2,197 1,772 4 %28 %Professional fees 1,719 1,396 1,435 23 %20 %Other 5,293 5,507 8,364 (4)%(37)%Total noninterest expense 23,244 21,557 25,774 8 %(10)%Income before income taxes 15,527 16,052 2,729 (3)%469 %Income tax expense 4,323 4,429 868 (2)%398 % Net income $ 11,204 $ 11,623 $ 1,861 (4)%502 % PER COMMON SHARE DATA (unaudited) Basic earnings per share $0.19 $0.19 $0.03 0 %533 %Diluted earnings per share $0.19 $0.19 $0.03 0 %533 %Weighted average shares outstanding - basic 59,641,309 59,616,951 59,286,927 0 %1 %Weighted average shares outstanding - diluted 60,404,213 60,247,296 60,194,025 0 %0 %Common shares outstanding at period-end 59,932,334 59,917,457 59,568,219 0 %1 %Dividend per share $0.13 $0.13 $0.13 0 %0 %Book value per share $9.71 $9.64 $9.59 1 %1 %Tangible book value per share $6.64 $6.57 $6.46 1 %3 % KEY FINANCIAL RATIOS (unaudited) Annualized return on average equity 7.85 % 7.99 % 1.29 %(2)%509 %Annualized return on average tangible equity 11.50 % 11.75 % 1.91 %(2)%502 %Annualized return on average assets 0.95 % 0.98 % 0.19 %(3)%400 %Annualized return on average tangible assets 0.99 % 1.02 % 0.19 %(3)%421 %Net interest margin (FTE) 3.22 % 3.15 % 4.25 %2 %(24)%Efficiency ratio 62.38 % 59.45 % 61.70 %5 %1 % AVERAGE BALANCES (in $000’s, unaudited) Average assets $4,773,878 $4,703,154 $4,033,151 2 %18 %Average tangible assets $4,589,861 $4,518,279 $3,845,646 2 %19 %Average earning assets $4,419,963 $4,338,117 $3,665,151 2 %21 %Average loans held-for-sale $3,458 $2,772 $2,265 25 %53 %Average total loans $2,616,876 $2,652,019 $2,511,460 (1)%4 %Average deposits $4,048,953 $3,980,017 $3,327,812 2 %22 %Average demand deposits - noninterest-bearing $1,712,903 $1,749,837 $1,438,944 (2)%19 %Average interest-bearing deposits $2,336,050 $2,230,180 $1,888,868 5 %24 %Average interest-bearing liabilities $2,375,851 $2,269,960 $1,928,770 5 %23 %Average equity $579,157 $578,560 $579,051 0 %0 %Average tangible equity $395,140 $393,685 $391,546 0 %1 % For the Quarter Ended: CONSOLIDATED INCOME STATEMENTS March 31, December 31, September 30, June 30, March 31, (in $000’s, unaudited) 2021 2020 2020 2020 2020 Interest income $36,761 $36,145 $36,252 $37,132 $40,942 Interest expense 1,803 1,940 2,087 2,192 2,362 Net interest income before provision for credit losses on loans 34,958 34,205 34,165 34,940 38,580 Provision (recapture) for credit losses on loans (1,512) (1,348) 197 1,114 13,270 Net interest income after provision for credit losses on loans 36,470 35,553 33,968 33,826 25,310 Noninterest income: Service charges and fees on deposit accounts 601 608 632 650 969 Gain on sales of SBA loans 550 372 400 — 67 Increase in cash surrender value of life insurance 456 465 464 458 458 Servicing income 182 98 187 205 183 Gain on sales of securities 11 7 — 170 100 Gain on the disposition of foreclosed assets — — — — 791 Other 501 506 912 595 625 Total noninterest income 2,301 2,056 2,595 2,078 3,193 Noninterest expense: Salaries and employee benefits 13,958 12,457 11,967 12,300 14,203 Occupancy and equipment 2,274 2,197 2,283 1,766 1,772 Professional fees 1,719 1,396 1,352 1,155 1,435 Other 5,293 5,507 5,566 5,791 8,364 Total noninterest expense 23,244 21,557 21,168 21,012 25,774 Income before income taxes 15,527 16,052 15,395 14,892 2,729 Income tax expense 4,323 4,429 4,198 4,274 868 Net income $ 11,204 $ 11,623 $ 11,197 $ 10,618 $ 1,861 PER COMMON SHARE DATA (unaudited) Basic earnings per share $0.19 $0.19 $0.19 $0.18 $0.03 Diluted earnings per share $0.19 $0.19 $0.19 $0.18 $0.03 Weighted average shares outstanding - basic 59,641,309 59,616,951 59,589,243 59,420,592 59,286,927 Weighted average shares outstanding - diluted 60,404,213 60,247,296 60,141,412 60,112,423 60,194,025 Common shares outstanding at period-end 59,932,334 59,917,457 59,914,987 59,856,767 59,568,219 Dividend per share $0.13 $0.13 $0.13 $0.13 $0.13 Book value per share $9.71 $9.64 $9.64 $9.60 $9.59 Tangible book value per share $6.64 $6.57 $6.55 $6.49 $6.46 KEY FINANCIAL RATIOS (unaudited) Annualized return on average equity 7.85 % 7.99 % 7.73 % 7.45 % 1.29 %Annualized return on average tangible equity 11.50 % 11.75 % 11.41 % 11.06 % 1.91 %Annualized return on average assets 0.95 % 0.98 % 0.98 % 0.96 % 0.19 %Annualized return on average tangible assets 0.99 % 1.02 % 1.02 % 1.01 % 0.19 %Net interest margin (FTE) 3.22 % 3.15 % 3.24 % 3.46 % 4.25 %Efficiency ratio 62.38 % 59.45 % 57.58 % 56.76 % 61.70 % AVERAGE BALANCES (in $000’s, unaudited) Average assets $4,773,878 $4,703,154 $4,562,412 $4,434,238 $4,033,151 Average tangible assets $4,589,861 $4,518,279 $4,376,533 $4,247,522 $3,845,646 Average earning assets $4,419,963 $4,338,117 $4,203,902 $4,075,673 $3,665,151 Average loans held-for-sale $3,458 $2,772 $5,169 $3,617 $2,265 Average total loans $2,616,876 $2,652,019 $2,664,525 $2,683,476 $2,511,460 Average deposits $4,048,953 $3,980,017 $3,846,652 $3,720,850 $3,327,812 Average demand deposits - noninterest-bearing $1,712,903 $1,749,837 $1,700,972 $1,660,547 $1,438,944 Average interest-bearing deposits $2,336,050 $2,230,180 $2,145,680 $2,060,303 $1,888,868 Average interest-bearing liabilities $2,375,851 $2,269,960 $2,185,439 $2,099,982 $1,928,770 Average equity $579,157 $578,560 $576,135 $572,939 $579,051 Average tangible equity $395,140 $393,685 $390,256 $386,223 $391,546 End of Period: Percent Change From: CONSOLIDATED BALANCE SHEETS March 31, December 31, March 31, December 31, March 31, (in $000’s, unaudited) 2021 2020 2020 2020 2020 ASSETS Cash and due from banks $36,534 $30,598 $36,998 19 %(1)%Other investments and interest-bearing deposits in other financial institutions 1,406,520 1,100,475 406,399 28 %246 %Securities available-for-sale, at fair value 196,718 235,774 373,570 (17)%(47)%Securities held-to-maturity, at amortized cost 306,535 297,389 348,044 3 %(12)%Loans held-for-sale - SBA, including deferred costs 2,834 1,699 2,415 67 %17 %Loans: Commercial 559,698 555,707 696,168 1 %(20)%SBA PPP loans 349,744 290,679 — 20 %N/A Real estate: CRE - owner occupied 568,637 560,362 539,465 1 %5 %CRE - non-owner occupied 700,117 693,103 748,245 1 %(6)%Land and construction 159,504 144,594 153,321 10 %4 %Home equity 104,303 111,885 117,544 (7)%(11)%Multifamily 168,917 166,425 170,292 1 %(1)%Residential mortgages 82,181 85,116 95,808 (3)%(14)%Consumer and other 19,872 18,116 33,326 10 %(40)%Loans 2,712,973 2,625,987 2,554,169 3 %6 %Deferred loan fees, net (8,266) (6,726) (258) 23 %3104 %Total loans, net of deferred costs and fees 2,704,707 2,619,261 2,553,911 3 %6 %Allowance for credit losses on loans (44,296) (44,400) (44,703) 0 %(1)%Loans, net 2,660,411 2,574,861 2,509,208 3 %6 %Company-owned life insurance 77,421 77,523 76,485 0 %1 %Premises and equipment, net 10,220 10,459 9,025 (2)%13 %Goodwill 167,631 167,631 167,371 0 %0 %Other intangible assets 15,931 16,664 19,557 (4)%(19)%Accrued interest receivable and other assets 120,635 121,041 129,090 0 %(7)%Total assets $ 5,001,390 $ 4,634,114 $ 4,078,162 8 %23 % LIABILITIES AND SHAREHOLDERS’ EQUITY Liabilities: Deposits: Demand, noninterest-bearing $1,813,962 $1,661,655 $1,444,534 9 %26 %Demand, interest-bearing 1,101,807 960,179 810,425 15 %36 %Savings and money market 1,189,566 1,119,968 949,076 6 %25 %Time deposits-under $250 42,596 45,027 51,009 (5)%(16)%Time deposits-$250 and over 102,508 103,746 96,540 (1)%6 %CDARS - money market and time deposits 28,663 23,911 15,055 20 %90 %Total deposits 4,279,102 3,914,486 3,366,639 9 %27 %Subordinated debt, net of issuance costs 39,786 39,740 39,600 0 %0 %Accrued interest payable and other liabilities 100,839 101,999 100,482 (1)%0 %Total liabilities 4,419,727 4,056,225 3,506,721 9 %26 % Shareholders’ Equity: Common stock 494,617 493,707 491,347 0 %1 %Retained earnings 98,314 94,899 84,803 4 %16 %Accumulated other comprehensive loss (11,268) (10,717) (4,709) (5)%(139)%Total shareholders' equity 581,663 577,889 571,441 1 %2 % Total liabilities and shareholders’ equity $ 5,001,390 $ 4,634,114 $ 4,078,162 8 %23 % End of Period:CONSOLIDATED BALANCE SHEETS March 31, December 31, September 30, June 30, March 31, (in $000’s, unaudited) 2021 2020 2020 2020 2020ASSETS Cash and due from banks $36,534 $30,598 $33,353 $40,108 $36,998 Other investments and interest-bearing deposits in other financial institutions 1,406,520 1,100,475 926,915 885,792 406,399 Securities available-for-sale, at fair value 196,718 235,774 294,438 323,565 373,570 Securities held-to-maturity, at amortized cost 306,535 297,389 295,609 322,677 348,044 Loans held-for-sale - SBA, including deferred costs 2,834 1,699 3,565 4,324 2,415 Loans: Commercial 559,698 555,707 574,359 553,843 696,168 SBA PPP loans 349,744 290,679 323,550 324,550 — Real estate: CRE - owner occupied 568,637 560,362 561,528 553,463 539,465 CRE - non-owner occupied 700,117 693,103 713,563 725,776 748,245 Land and construction 159,504 144,594 142,632 138,284 153,321 Home equity 104,303 111,885 111,468 112,679 117,544 Multifamily 168,917 166,425 169,791 169,637 170,292 Residential mortgages 82,181 85,116 91,077 95,033 95,808 Consumer and other 19,872 18,116 17,511 22,759 33,326 Loans 2,712,973 2,625,987 2,705,479 2,696,024 2,554,169 Deferred loan fees, net (8,266) (6,726) (8,463) (9,635) (258)Total loans, net of deferred fees 2,704,707 2,619,261 2,697,016 2,686,389 2,553,911 Allowance for credit losses on loans (44,296) (44,400) (45,422) (45,444) (44,703)Loans, net 2,660,411 2,574,861 2,651,594 2,640,945 2,509,208 Company-owned life insurance 77,421 77,523 77,059 76,944 76,485 Premises and equipment, net 10,220 10,459 10,412 9,500 9,025 Goodwill 167,631 167,631 167,631 167,631 167,371 Other intangible assets 15,931 16,664 17,628 18,593 19,557 Accrued interest receivable and other assets 120,635 121,041 128,581 124,322 129,090 Total assets $ 5,001,390 $ 4,634,114 $ 4,606,785 $ 4,614,401 $ 4,078,162 LIABILITIES AND SHAREHOLDERS’ EQUITY Liabilities: Deposits: Demand, noninterest-bearing $1,813,962 $1,661,655 $1,698,027 $1,714,058 $1,444,534 Demand, interest-bearing 1,101,807 960,179 926,041 934,780 810,425 Savings and money market 1,189,566 1,119,968 1,108,252 1,091,740 949,076 Time deposits-under $250 42,596 45,027 46,684 49,493 51,009 Time deposits-$250 and over 102,508 103,746 92,276 93,822 96,540 CDARS - money market and time deposits 28,663 23,911 19,121 16,333 15,055 Total deposits 4,279,102 3,914,486 3,890,401 3,900,226 3,366,639 Subordinated debt, net of issuance costs 39,786 39,740 39,693 39,646 39,600 Other short-term borrowings — — — — — Accrued interest payable and other liabilities 100,839 101,999 98,884 99,722 100,482 Total liabilities 4,419,727 4,056,225 4,028,978 4,039,594 3,506,721 Shareholders’ Equity: Common stock 494,617 493,707 493,126 492,333 491,347 Retained earnings 98,314 94,899 91,065 87,654 84,803 Accumulated other comprehensive loss (11,268) (10,717) (6,384) (5,180) (4,709)Total shareholders' equity 581,663 577,889 577,807 574,807 571,441 Total liabilities and shareholders’ equity $ 5,001,390 $ 4,634,114 $ 4,606,785 $ 4,614,401 $ 4,078,162 End of Period: Percent Change From: CREDIT QUALITY DATA March 31, December 31, March 31, December 31, March 31, (in $000’s, unaudited) 2021 2020 2020 2020 2020 Nonaccrual loans - held-for-investment $5,542 $7,788 $11,646 (29)%(52)%Restructured and loans over 90 days past due and still accruing 51 81 442 (37)%(88)%Total nonperforming loans 5,593 7,869 12,088 (29)%(54)%Foreclosed assets — — — N/A N/A Total nonperforming assets $5,593 $7,869 $12,088 (29)%(54)%Other restructured loans still accruing $152 $169 $103 (10)%48 %Net charge-offs (recoveries) during the quarter $(1,408) $(326) $422 (332)%(434)%Provision (recapture) for credit losses on loans during the quarter $(1,512) $(1,348) $13,270 (12)%(111)%Allowance for credit losses on loans $44,296 $44,400 $44,703 0 %(1)%Classified assets $33,420 $34,028 $39,603 (2)%(16)%Allowance for credit losses on loans to total loans 1.64 % 1.70 % 1.75 %(4)%(6)%Allowance for credit losses on loans to total nonperforming loans 791.99 % 564.24 % 369.81 %40 %114 %Nonperforming assets to total assets 0.11 % 0.17 % 0.30 %(35)%(63)%Nonperforming loans to total loans 0.21 % 0.30 % 0.47 %(30)%(55)%Classified assets to Heritage Commerce Corp Tier 1 capital plus allowance for credit losses on loans 7 % 7 % 9 %0 %(22)%Classified assets to Heritage Bank of Commerce Tier 1 capital plus allowance for credit losses on loans 7 % 7 % 9 %0 %(22)% OTHER PERIOD-END STATISTICS (in $000’s, unaudited) Heritage Commerce Corp: Tangible common equity (1) $398,101 $393,594 $384,513 1 %4 %Shareholders’ equity / total assets 11.63 % 12.47 % 14.01 %(7)%(17)%Tangible common equity / tangible assets (2) 8.26 % 8.85 % 9.88 %(7)%(16)%Loan to deposit ratio 63.21 % 66.91 % 75.86 %(6)%(17)%Noninterest-bearing deposits / total deposits 42.39 % 42.45 % 42.91 %0 %(1)%Total capital ratio 16.5 % 16.5 % 14.8 %0 %11 %Tier 1 capital ratio 14.0 % 14.0 % 12.5 %0 %12 %Common Equity Tier 1 capital ratio 14.0 % 14.0 % 12.5 %0 %12 %Tier 1 leverage ratio 9.1 % 9.1 % 10.3 %0 %(12)%Heritage Bank of Commerce: Total capital ratio 15.8 % 15.8 % 14.1 %0 %12 %Tier 1 capital ratio 14.7 % 14.6 % 13.0 %1 %13 %Common Equity Tier 1 capital ratio 14.7 % 14.6 % 13.0 %1 %13 %Tier 1 leverage ratio 9.5 % 9.5 % 10.7 %0 %(11)% ________________________(1) Represents shareholders' equity minus goodwill and other intangible assets(2) Represents shareholders' equity minus goodwill and other intangible assets divided by total assets minus goodwill and other intangible assets End of Period: CREDIT QUALITY DATA March 31, December 31, September 30, June 30, March 31, (in $000’s, unaudited) 2021 2020 2020 2020 2020 Nonaccrual loans - held-for-investment $5,542 $7,788 $9,661 $8,457 $11,646 Restructured and loans over 90 days past due and still accruing 51 81 601 668 442 Total nonperforming loans 5,593 7,869 10,262 9,125 12,088 Foreclosed assets — — — — — Total nonperforming assets $5,593 $7,869 $10,262 $9,125 $12,088 Other restructured loans still accruing $152 $169 $98 $64 $103 Net charge-offs (recoveries) during the quarter $(1,408) $(326) $219 $373 $422 Provision (recapture) for credit losses on loans during the quarter $(1,512) $(1,348) $197 $1,114 $13,270 Adoption of Topic 326 $— $— $— $— $8,570 Allowance for credit losses on loans $44,296 $44,400 $45,422 $45,444 $44,703 Classified assets $33,420 $34,028 $33,024 $31,452 $39,603 Allowance for credit losses on loans to total loans 1.64 % 1.70 % 1.68 % 1.69 % 1.75 % Allowance for credit losses on loans to total nonperforming loans 791.99 % 564.24 % 442.62 % 498.02 % 369.81 % Nonperforming assets to total assets 0.11 % 0.17 % 0.22 % 0.20 % 0.30 % Nonperforming loans to total loans 0.21 % 0.30 % 0.38 % 0.34 % 0.47 % Classified assets to Heritage Commerce Corp Tier 1 capital plus allowance for credit losses on loans 7 % 7 % 7 % 7 % 9 % Classified assets to Heritage Bank of Commerce Tier 1 capital plus allowance for credit losses on loans 7 % 7 % 7 % 7 % 9 % OTHER PERIOD-END STATISTICS (in $000’s, unaudited) Heritage Commerce Corp: Tangible common equity (1) $398,101 $393,594 $392,548 $388,583 $384,513 Shareholders’ equity / total assets 11.63 % 12.47 % 12.54 % 12.46 % 14.01 % Tangible common equity / tangible assets (2) 8.26 % 8.85 % 8.88 % 8.78 % 9.88 % Loan to deposit ratio 63.21 % 66.91 % 69.32 % 68.88 % 75.86 % Noninterest-bearing deposits / total deposits 42.39 % 42.45 % 43.65 % 43.95 % 42.91 % Total capital ratio 16.5 % 16.5 % 16.0 % 15.9 % 14.8 % Tier 1 capital ratio 14.0 % 14.0 % 13.5 % 13.4 % 12.5 % Common Equity Tier 1 capital ratio 14.0 % 14.0 % 13.5 % 13.4 % 12.5 % Tier 1 leverage ratio 9.1 % 9.1 % 9.3 % 9.4 % 10.3 % Heritage Bank of Commerce: Total capital ratio 15.8 % 15.8 % 15.2 % 15.1 % 14.1 % Tier 1 capital ratio 14.7 % 14.6 % 14.1 % 14.0 % 13.0 % Common Equity Tier 1 capital ratio 14.7 % 14.6 % 14.1 % 14.0 % 13.0 % Tier 1 leverage ratio 9.5 % 9.5 % 9.7 % 9.9 % 10.7 % ________________________(1) Represents shareholders' equity minus goodwill and other intangible assets(2) Represents shareholders' equity minus goodwill and other intangible assets divided by total assets minus goodwill and other intangible assets For the Quarter Ended For the Quarter Ended March 31, 2021 March 31, 2020 NET INTEREST INCOME AND NET INTEREST MARGIN Average InterestIncome/ AverageYield/ Average InterestIncome/ AverageYield/ (in $000’s, unaudited) Balance Expense Rate Balance Expense Rate Assets: Loans, gross (1)(2) $2,620,334 $33,836 5.24%$2,513,725 $34,782 5.57%Securities - taxable 436,858 1,728 1.60% 670,299 3,948 2.37%Securities - exempt from Federal tax (3) 66,513 542 3.30% 80,369 647 3.24%Other investments and interest-bearing deposits in other financial institutions 1,296,258 768 0.24% 400,758 1,701 1.71%Total interest earning assets (3) 4,419,963 36,874 3.38% 3,665,151 41,078 4.51%Cash and due from banks 40,823 44,539 Premises and equipment, net 10,369 8,607 Goodwill and other intangible assets 184,017 187,505 Other assets 118,706 127,349 Total assets $4,773,878 $4,033,151 Liabilities and shareholders’ equity: Deposits: Demand, noninterest-bearing $1,712,903 $1,438,944 Demand, interest-bearing 1,026,210 479 0.19% 800,800 542 0.27%Savings and money market 1,137,837 572 0.20% 920,422 914 0.40%Time deposits - under $100 15,900 9 0.23% 18,777 22 0.47%Time deposits - $100 and over 130,843 171 0.53% 132,314 305 0.93%CDARS - money market and time deposits 25,260 1 0.02% 16,555 2 0.05%Total interest-bearing deposits 2,336,050 1,232 0.21% 1,888,868 1,785 0.38%Total deposits 4,048,953 1,232 0.12% 3,327,812 1,785 0.22% Subordinated debt, net of issuance costs 39,757 571 5.82% 39,571 577 5.86%Short-term borrowings 44 — 0.00% 331 — 0.00%Total interest-bearing liabilities 2,375,851 1,803 0.31% 1,928,770 2,362 0.49%Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds 4,088,754 1,803 0.18% 3,367,714 2,362 0.28%Other liabilities 105,967 86,386 Total liabilities 4,194,721 3,454,100 Shareholders’ equity 579,157 579,051 Total liabilities and shareholders’ equity $4,773,878 $4,033,151 Net interest income (3) / margin 35,071 3.22% 38,716 4.25%Less tax equivalent adjustment (3) (113) (136) Net interest income $34,958 $38,580 ________________________(1) Includes loans held-for-sale. Nonaccrual loans are included in average balance.(2) Yield amounts earned on loans include fees and costs. The accretion of net deferred loan fees into loan interest income was $3,689,000 for the first quarter of 2021 (of which $3,401,000 was from PPP loans), compared to $139,000 for the first quarter of 2020.(3) Reflects the FTE adjustment for Federal tax-exempt income based on a 21%. For the Quarter Ended For the Quarter Ended March 31, 2021 December 31, 2020 NET INTEREST INCOME AND NET INTEREST MARGIN Average InterestIncome/ AverageYield/ Average InterestIncome/ AverageYield/ (in $000’s, unaudited) Balance Expense Rate Balance Expense Rate Assets: Loans, gross (1)(2) $2,620,334 $33,836 5.24%$2,654,791 $32,907 4.93%Securities - taxable 436,858 1,728 1.60% 482,951 2,053 1.69%Securities - exempt from Federal tax (3) 66,513 542 3.30% 70,318 570 3.22%Other investments and interest-bearing deposits in other financial institutions 1,296,258 768 0.24% 1,130,057 735 0.26%Total interest earning assets (3) 4,419,963 36,874 3.38% 4,338,117 36,265 3.33%Cash and due from banks 40,823 42,861 Premises and equipment, net 10,369 10,387 Goodwill and other intangible assets 184,017 184,875 Other assets 118,706 126,914 Total assets $4,773,878 $4,703,154 Liabilities and shareholders’ equity: Deposits: Demand, noninterest-bearing $1,712,903 $1,749,837 Demand, interest-bearing 1,026,210 479 0.19% 939,203 462 0.20%Savings and money market 1,137,837 572 0.20% 1,121,636 674 0.24%Time deposits - under $100 15,900 9 0.23% 16,748 11 0.26%Time deposits - $100 and over 130,843 171 0.53% 131,740 208 0.63%CDARS - money market and time deposits 25,260 1 0.02% 20,853 1 0.02%Total interest-bearing deposits 2,336,050 1,232 0.21% 2,230,180 1,356 0.24%Total deposits 4,048,953 1,232 0.12% 3,980,017 1,356 0.14% Subordinated debt, net of issuance costs 39,757 571 5.82% 39,710 583 5.84%Short-term borrowings 44 — 0.00% 70 1 5.68%Total interest-bearing liabilities 2,375,851 1,803 0.31% 2,269,960 1,940 0.34%Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds 4,088,754 1,803 0.18% 4,019,797 1,940 0.19%Other liabilities 105,967 104,797 Total liabilities 4,194,721 4,124,594 Shareholders’ equity 579,157 578,560 Total liabilities and shareholders’ equity $4,773,878 $4,703,154 Net interest income (3) / margin 35,071 3.22% 34,325 3.15%Less tax equivalent adjustment (3) (113) (120) Net interest income $34,958 $34,205 ________________________(1) Includes loans held-for-sale. Nonaccrual loans are included in average balance.(2) Yield amounts earned on loans include fees and costs. The accretion of net deferred loan fees into loan interest income was $3,689,000 for the first quarter of 2021 (of which $3,401,000 was from PPP loans), compared to $2,120,000 for the fourth quarter of 2020 (of which $1,935,000 was from PPP loans).(3) Reflects the FTE adjustment for Federal tax-exempt income based on a 21%.
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