News Details

SAN JOSE, Calif., Jan. 27, 2022 (GLOBE NEWSWIRE) -- Heritage Commerce Corp (Nasdaq: HTBK), the holding company (the “Company”) for Heritage Bank of Commerce (the “Bank”), today announced fourth quarter 2021 net income of $14.0 million, or $0.23 per average diluted common share, compared to $11.6 million, or $0.19 per average diluted common share, for the fourth quarter of 2020, and $13.7 million, or $0.23 per average diluted common share, for the third quarter of 2021. For the year ended December 31, 2021, net income was $47.7 million, or $0.79 per average diluted common share, an increase of 35% as compared to $35.3 million, or $0.59 per average diluted common share, for the year ended December 31, 2020. Earnings for the year ended December 31, 2021 included a pre-tax $4.0 million reserve for litigation expense that was recorded during the second quarter of 2021. Earnings for the year end December 31, 2020, were impacted by the effect of a $13.2 million pre-tax provision for potential credit losses on loans, incorporating the forecasted effects on economic activity from the Coronavirus pandemic, and $2.6 million of pre-tax merger-related costs. All results are unaudited.

“The fourth quarter of 2021 results capped a stellar year for our Company which delivered record earnings for both the fourth quarter and for the full year of 2021. Net income for the fourth quarter of 2021 increased 20% over the fourth quarter a year ago, supported by 11% growth in net interest income, a return on average tangible equity of 13.50%, a return on average tangible assets of 1.00%, and an improving efficiency ratio of 54.32%. Earnings for the full year of 2021 increased 35% to a record $47.7 million,” said Walter Kaczmarek, President and Chief Executive Officer. “We ended the year with $5.5 billion in total assets. Our loan portfolio grew 18% from a year ago to $3.09 billion, reflecting growth in commercial loans, both owner occupied and non-owner occupied commercial real estate (“CRE”) loans, multifamily loans, and from the purchase of residential mortgage loans. Total deposits grew 22% to $4.76 billion year-over-year, with noninterest-bearing deposits representing 40% of total deposits at year end. Growth in total deposits has been consistently robust over the past several quarters, and we expect to leverage our excess liquidity in the coming quarters to increase interest income.”

“Credit metrics were also sound at year end. Nonperforming assets (“NPAs”) decreased 52% in the fourth quarter of 2021 from a year ago, and were down 21% from the preceding quarter. Despite taking a negative provision for credit losses on loans of $615,000 during the fourth quarter of 2021, the allowance for credit losses on loans (“ACLL”) to total loans remained solid at 1.40%, and the ACLL to total nonperforming loans was 1,158.11%, at December 31, 2021,” said Mr. Kaczmarek. “Although COVID-19 continues to pose a challenge to businesses and communities in our markets, our staff and this Bank remain prepared and dedicated to helping our clients navigate pandemic-related disruptions and continue to benefit from improving economic conditions in 2022.”

Fourth Quarter Ended December 31, 2021
Operating Results, Balance Sheet Review, Capital Management, and Credit Quality

(as of, or for the periods ended December 31, 2021, compared to December 31, 2020, and September 30, 2021, except as noted):

Operating Results:

• Diluted earnings per share were $0.23 for the fourth quarter of 2021, compared to $0.19 for the fourth quarter of 2020, and $0.23 for the third quarter of 2021. Diluted earnings per share were $0.79 for the year ended December 31, 2021, compared to $0.59 for the year ended December 31, 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 11% to $38.1 million for the fourth quarter of 2021, compared to $34.2 million for the fourth quarter of 2020, primarily due to higher average balances of loans, investment securities, and overnight funds, and an increase in the accretion of the loan purchase discount into interest income from acquired loans. Net interest income remained relatively flat compared to $38.2 million for the third quarter of 2021.

• 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 fourth and third quarters of 2021, compared to 0.14% for the fourth quarter of 2020. The average cost of total deposits was 0.11% for the year ended December 31, 2021, compared to 0.17% for the year ended December 31, 2020.
  
  
• During the fourth quarter of 2021, there was a $615,000 negative provision for credit losses on loans, primarily due to recoveries on previously charged-off loans, compared to a $1.3 million negative provision for credit losses on loans taken in the fourth quarter of 2020, and a $514,000 negative provision for credit losses on loans for the third quarter of 2021. There was a $3.1 million negative provision for credit losses on loans for the year ended December 31, 2021, compared to a $13.2 million provision for credit losses on loans for year ended December 31, 2020.

• Total noninterest income increased to $2.8 million for the fourth quarter of 2021, compared to $2.1 million for the fourth quarter of 2020, and $2.4 million for the third quarter of 2021, primarily due to higher termination fees at Bay View Funding, a subsidiary of the Bank.

• Total noninterest expense for the fourth quarter of 2021 increased to $22.2 million, compared to $21.6 million for the fourth quarter of 2020, primarily due to higher salaries and employee benefits during the fourth quarter of 2021. Noninterest expense for the fourth quarter of 2021 increased from $21.8 million for the third quarter of 2021, primarily due to higher salaries and employee benefits during the fourth quarter of 2021

• The efficiency ratio was 54.32% for the fourth quarter of 2021, compared to 59.45% for the fourth quarter of 2020, and 53.78% for the third quarter of 2021. The efficiency ratio for year ended December 31, 2021 was 59.74%, compared to 58.96% for the year ended December 31, 2020.
  
  
• Income tax expense was $5.3 million for the fourth quarter of 2021, compared to $4.4 million for the fourth quarter of 2020, and $5.6 million the third quarter of 2021. The effective tax rate for the fourth quarter of 2021 was 27.7%, compared to 27.6% for the fourth quarter of 2020, and 28.8% for the third quarter of 2021. Income tax expense for the year ended December 31, 2021 was $18.2 million, compared to $13.8 million for the year ended December 31, 2020. The effective tax rate for the year ended December 31, 2021 was 27.6%, compared to 28.1% for the year ended December 31, 2020.

Balance Sheet Review, Capital Management and Credit Quality:

• Total assets increased 19% to $5.499 billion at December 31, 2021, compared to $4.634 billion at December 31, 2020, and increased 1% from $5.463 billion at September 30, 2021.
  
  
• Securities available-for-sale, at fair value, totaled $102.3 million at December 31, 2021, compared to $235.8 million at December 31, 2020, and $121.0 million at September 30, 2021. At December 31, 2021, the Company’s securities available-for-sale portfolio was entirely comprised of agency mortgage-backed securities (all issued by U.S. Government sponsored entities). The pre-tax unrealized gain on securities available-for-sale at December 31, 2021 was $2.9 million, compared to a pre-tax unrealized gain on securities available-for-sale of $5.8 million at December 31, 2020, and a pre-tax unrealized gain on securities available-for-sale of $4.0 million at September 30, 2021. All other factors remaining the same, when market interest rates are increasing, the Company will experience a lower unrealized gain (or a higher unrealized loss) on the securities portfolio.
  
  
• At December 31, 2021, securities held-to-maturity, at amortized cost, totaled $658.4 million, compared to $297.4 million at December 31, 2020, and $537.3 million at September 30, 2021. At December 31, 2021, the Company’s securities held-to-maturity portfolio was comprised of $607.4 million of agency mortgage-backed securities, and $51.0 million of tax-exempt municipal bonds. During the fourth quarter of 2021, the Company purchased $151.7 million of agency mortgage-backed securities (securities held-to-maturity), with a book yield of 1.71% and an average life of 6.01 years. During 2021, the Company purchased $474.2 million of agency mortgage-backed securities (securities held-to-maturity), with a book yield of 1.56% and an average life of 5.78 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 December 31, 2021, as reflected in the following table:

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

• Tangible equity was $416.7 million at December 31, 2021, compared to $393.6 million at December 31, 2020, and $408.1 million at September 30, 2021. Tangible book value per share was $6.91 at December 31, 2021, compared to $6.57 at December 31, 2020, and $6.77 at September 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
Debbie.Reuter@herbank.com