Heritage Commerce Corp Earns $13.3 Million for the Fourth Quarter of 2023, and $64.4 Million for the Full Year 2023
SAN JOSE, Calif., Jan. 25, 2024 (GLOBE NEWSWIRE) — Heritage Commerce Corp (Nasdaq: HTBK), (the “Company”), the holding company for Heritage Bank of Commerce (the “Bank”), today announced that its fourth quarter 2023 net income was $13.3 million, or $0.22 per average diluted common share, compared to $20.8 million, or $0.34 per average diluted common share, for the fourth quarter of 2022, and $15.8 million, or $0.26 per average diluted common share, for the third quarter of 2023. For the year ended December 31, 2023, net income was $64.4 million, or $1.05 per average diluted common share, compared to $66.6 million, or $1.09 per average diluted common share, for the year ended December 31, 2022. All results are unaudited.
“In 2023, despite challenges faced by many banks, the Company had a successful year with stable client deposits and 9% growth in year-over-year tangible book value. The fourth quarter showed solid performance, contributing to our second-best year in net income, surpassed only by the record profits of 2022,” said Clay Jones, President and Chief Executive Officer. “Our loan growth resulted in an increase of 2% for both year-over-year and from the prior quarter. This loan growth, coupled with stable client deposits, showcases our resilience in an increasing interest rate environment. Although net interest income was impacted, as expected, we anticipate stabilization in our cost of funds following the recent Fed guidance on expected rate reductions in 2024.”
Mr. Jones added, “Our focus remains on orderly organic growth, while avoiding borrowed funds and brokered deposits. Our local community retail and commercial deposit relationships serve as a stable and lower-cost funding source, reflecting our disciplined management approach. We have a strong balance sheet, evidenced by robust capital, ample liquidity, and a diversified loan portfolio. We continue to add to loan reserves reflecting our solid loan growth while credit costs are modest. I extend my gratitude to our dedicated team members for their talent and commitment in serving our community and clients, and driving our company forward.”
Current Financial Condition and Liquidity Position
The following are important factors in understanding our current financial condition and liquidity position:
Liquidity and Available Lines of Credit:
The following table shows our liquidity and available lines of credit at December 31, 2023: LIQUIDITY AND AVAILABLE LINES OF CREDIT Total(in $000’s, unaudited) AvailableExcess funds at the Federal Reserve Bank (“FRB”) $365,500FRB discount window collateralized line of credit 1,235,573Federal Home Loan Bank (“FHLB”) collateralized borrowing capacity 1,100,931Unpledged investment securities (at fair value) 58,120Federal funds purchase arrangements 90,000Holding company line of credit 20,000Total $2,870,124 The Company’s total liquidity and borrowing capacity was $2.87 billion, all of which remained available at December 31, 2023.The available liquidity and borrowing capacity was 66% of the Company’s total deposits and approximately 142% of the Bank’s estimated uninsured deposits at December 31, 2023.The Bank increased its credit line availability from the FRB and the FHLB by $1.50 billion to $2.34 billion at December 31, 2023, from $839.5 million at December 31, 2022.The loan to deposit ratio was 76.52% at December 31, 2023, compared to 75.14% at December 31, 2022, and 71.81% at September 30, 2023, providing the Bank with ample liquidity and capacity to provide future credit to the community.
Deposits:
Total deposits were relatively flat at $4.38 billion at December 31, 2023, compared to $4.39 billion at December 31, 2022. Total deposits decreased ($197.0) million, or (4%) from $4.58 billion at September 30, 2023, as a result of deposit outflows from clients operating expenses, tax payments, one-time capital events, profit distributions, and to a lesser extent clients moving deposits to outside investment alternatives.Migration of client deposits into interest-bearing accounts resulted in an increase in Insured Cash Sweep (“ICS”)/Certificate of Deposit Account Registry Service (“CDARS”) deposits to $854.1 million at December 31, 2023, compared to $30.4 million at December 31, 2022, and decreased ($67.1) million from $921.2 million at September 30, 2023. Noninterest-bearing demand deposits decreased ($444.2) million, or (26%), to $1.29 billion at December 31, 2023 from $1.74 billion at December 31, 2022, largely in response to the increasing interest rate environment. Noninterest-bearing demand deposits increased $49.0 million, or 4%, from $1.24 billion at September 30, 2023, evidencing stabilization in deposit mix and partially helped by a single customer temporarily moving significant deposits into this category at year-end.The Bank had 24,737 deposit accounts at December 31, 2023, with an average balance of $177,000, compared to 24,769 deposit accounts at September 30, 2023, with an average balance of $185,000. At December 31, 2022, the Company had 23,833 deposit accounts, with an average balance of $184,000.Deposits from the Bank’s top 100 client relationships, representing 22% of the total number of accounts, totaled $1.96 billion, representing 45% of total deposits, with an average account size of $368,000, at December 31, 2023. At December 31, 2022, deposits from the Bank’s top 100 client relationships, representing 18% of the total number of accounts, totaled $2.03 billion, representing 46% of total deposits, with an average account size of $469,000. At September 30, 2023, deposits from the Bank’s top 100 client relationships, representing 22% of the total number of accounts, totaled $2.19 billion, representing 48% of total deposits, with an average account size of $408,000.
Investment Securities:
Investment securities totaled $1.09 billion at December 31, 2023, of which $442.6 million were in the securities available-for-sale portfolio (at fair value), and $650.6 million were in the securities held-to-maturity portfolio (at amortized cost, net of allowance for credit losses of $12,000). The fair value of the securities held-to-maturity portfolio was $564.1 million at December 31, 2023.The weighted average life of the total investment securities portfolio was 4.40 years at December 31, 2023.The following are the projected cash flows from paydowns and maturities in the investment securities portfolio for the periods indicated based on the current interest rate environment: Agency Mortgage- backed and PROJECTED INVESTMENT SECURITIES PAYDOWNS & MATURITIES U.S. Municipal (in $000’s, unaudited) Treasury Securities TotalFirst quarter of 2024 $37,000 $28,977 $65,977Second quarter of 2024 131,000 20,338 151,338Third quarter of 2024 37,500 20,441 57,941Fourth quarter of 2024 9,000 19,320 28,320First quarter of 2025 35,000 18,835 53,835Second quarter of 2025 118,000 18,366 136,366Third quarter of 2025 25,500 19,209 44,709Fourth quarter of 2025 — 17,460 17,460Total $393,000 $162,946 $555,946
Loans:
Loans, excluding loans held-for-sale, increased $51.8 million, or 2%, to $3.35 billion at December 31, 2023 from $3.30 billion at December 31, 2022, and increased $64.9 million, or 2%, from $3.29 billion at September 30, 2023. Core loans, excluding residential mortgages, increased $92.8 million, or 3%, to $2.85 billion at December 31, 2023, compared to $2.76 billion at December 31, 2022, and increased $71.0 million, or 3%, from $2.78 billion at September 30, 2023. Commercial real estate (“CRE”) loans totaled $1.84 billion at December 31, 2023, of which 32% were owner occupied and 68% were investor CRE loans.During the fourth quarter of 2023, there were 28 new CRE loans originated totaling $57 million with a weighted average loan-to-value and debt-service coverage for the non-owner occupied portfolio of 35% and 2.31 times, respectively.The average loan size for all CRE loans was $1.6 million, and the average loan size for office CRE loans was also $1.6 million.The Company has personal guarantees on 91% of its CRE portfolio. A substantial portion of the unguaranteed CRE loans were made to credit-worthy non-profit organizations.Total office exposure in the CRE portfolio was $399 million, including 29 loans totaling approximately $75 million in San Jose, 17 loans totaling approximately $26 million in San Francisco, and eight loans totaling approximately $16 million in Oakland, at December 31, 2023. Non-owner occupied CRE with office exposure totaled $312 million at December 31, 2023.Of the $399 million of CRE loans with office exposure, approximately $36 million, or 9%, are situated in the Bay Area downtown business districts of San Jose and San Francisco, with an average loan balance of $2.1 million.At December 31, 2023, the weighted average loan-to-value and debt-service coverage ratio for the entire non-owner occupied office portfolio were 42.9% and 1.82 times, respectively. For the nine non-owner occupied office loans in San Francisco at December 31, 2023, the weighted average loan-to-value and debt-service coverage ratio were 35% and 1.48 times, respectively.
Fourth Quarter Ended December 31, 2023 Operating Results, Balance Sheet Review, Capital Management, and Credit Quality
(as of, or for the periods ended December 31, 2023, compared to December 31, 2022, and September 30, 2023, except as noted):
Operating Results:
Diluted earnings per share were $0.22 for the fourth quarter of 2023, compared to $0.34 for the fourth quarter of 2022, and $0.26 for the third quarter of 2023. Diluted earnings per share were $1.05 for the year ended December 31, 2023, compared to $1.09 for the year ended December 31, 2022. The following table indicates the ratios for the return on average tangible assets and the return on average tangible common equity for the periods indicated: For the Quarter Ended: For the Year Ended: December 31, September 30, December 31, December 31, December 31, (unaudited) 2023 2023 2022 2023 2022Return on average tangible assets 1.03% 1.20% 1.59% 1.26% 1.27% Return on average tangible common equity 10.84% 13.06% 18.89% 13.57% 15.57% Net interest income decreased (18%) to $42.3 million for the fourth quarter of 2023, compared to $51.7 million for the fourth quarter of 2022. The fully tax equivalent (“FTE”) net interest margin decreased (69) basis points to 3.41% for the fourth quarter of 2023, from 4.10% for the fourth quarter of 2022, primarily due to higher rates paid on customer deposits, and a decrease in the average balances of noninterest-bearing demand deposits, partially offset by increases in the prime rate and the rate on overnight funds. Net interest income decreased (7%) to $42.3 million for the fourth quarter of 2023, compared to $45.4 million for the third quarter of 2023. The FTE net interest margin decreased (16) basis points to 3.41% for the fourth quarter of 2023 from 3.57% for the third quarter of 2023, primarily due to higher rates paid on customer deposits, and a decrease in the average balances of noninterest bearing demand deposits, partially offset by higher average yields on overnight funds, and an increase in the average balance of loans. For the year ended December 31, 2023, the net interest income increased 2% to $183.2 million, compared to $179.9 million for the year ended December 31, 2022. The FTE net interest margin increased 13 basis points to 3.70% for the year ended December 31, 2023, from 3.57% for the year ended December 31, 2022, primarily due to increases in the prime rate and the rate on overnight funds, and a shift in the mix of earning assets as the Company invested its excess liquidity into higher yielding loans, partially offset by a higher rates paid on customer deposits, a decrease in the average balances of noninterest-bearing demand deposits, and an increase in the average balances of short-term borrowings. The following table, as of December 31, 2023, sets forth the estimated changes in the Company’s annual net interest income that would result from an instantaneous shift in interest rates from the base rate: Increase/(Decrease) in Estimated Net Interest Income(1) CHANGE IN INTEREST RATES (basis points) Amount Percent (in $000’s, unaudited) +400 $10,703 5.6% +300 $7,997 4.2% +200 $5,311 2.8% +100 $2,648 1.4% 0 — — −100 $(3,197) (1.7)% −200 $(10,513) (5.5)% −300 $(22,609) (11.8)% −400 $(37,896) (19.8)% (1)Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results. These projections are forward-looking and should be considered in light of the Forward-Looking Statement Disclaimer below. Actual rates paid on deposits may differ from the hypothetical interest rates modeled due to competitive or market factors, which could reduce any actual impact on net interest income. 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 5.39% for the fourth quarter of 2023, compared to 5.46% for the third quarter of 2023, primarily due to lower loan yields on the core bank, lower average balances of asset-based lending loans, a decrease in the accretion of loan purchase discount into interest income from acquired loans, and lower prepayment fees. For the Quarter Ended For the Quarter Ended December 31, 2023 September 30, 2023 Average Interest Average Average Interest Average (in $000’s, unaudited) Balance Income Yield Balance Income Yield Loans, core bank $2,758,935 $37,303 5.36% $2,720,010 $37,171 5.42% Prepayment fees — 91 0.01% — 182 0.03% Asset-based lending 14,717 371 10.00% 23,983 593 9.81% Bay View Funding factored receivables 52,861 2,803 21.04% 51,664 2,775 21.31% Purchased residential mortgages 459,268 3,812 3.29% 465,471 3,811 3.25% Loan fair value mark / accretion (3,352) 255 0.04% (3,648) 321 0.05% Total loans (includes loans held-for-sale) $3,282,429 $44,635 5.39% $3,257,480 $44,853 5.46% The average yield on the total loan portfolio increased to 5.39% for the fourth quarter of 2023, compared to 5.19% for the fourth quarter of 2022, primarily due to increases in the prime rate. For the Quarter Ended For the Quarter Ended December 31, 2023 December 31, 2022 Average Interest Average Average Interest Average (in $000’s, unaudited) Balance Income Yield Balance Income Yield Loans, core bank $2,758,935 $37,303 5.36% $2,662,873 $33,702 5.02% Prepayment fees — 91 0.01% — 123 0.02% Asset-based lending 14,717 371 10.00% 35,519 756 8.44% Bay View Funding factored receivables 52,861 2,803 21.04% 71,789 3,696 20.43% Purchased residential mortgages 459,268 3,812 3.29% 485,149 3,842 3.14% Loan fair value mark / accretion (3,352) 255 0.04% (4,774) 382 0.06% Total loans (includes loans held-for-sale) $3,282,429 $44,635 5.39% $3,250,556 $42,501 5.19% •The average yield on the total loan portfolio increased to 5.45% for the year ended December 31, 2023, compared to 4.91% for the year ended December 31, 2022, primarily due to increases in the prime rate, partially offset by a decrease in the accretion of the loan purchase discount into interest income from acquired loans, lower prepayment fees, and higher average balances of lower yielding purchased residential mortgages. For the Year Ended For the Year Ended December 31, 2023 December 31, 2022 Average Interest Average Average Interest Average (in $000’s, unaudited) Balance Income Yield Balance Income Yield Loans, core bank $2,707,198 $144,751 5.35% $2,591,027 $120,166 4.64% Prepayment fees — 484 0.02% — 1,278 0.05% Asset-based lending 23,591 2,277 9.65% 51,990 3,613 6.95% Bay View Funding factored receivables 62,642 13,426 21.43% 64,099 12,819 20.00% Purchased residential mortgages 472,582 15,309 3.24% 417,672 12,395 2.97% Loan fair value mark / accretion (3,819) 1,381 0.05% (5,782) 2,739 0.11% Total loans (includes loans held-for-sale) $3,262,194 $177,628 5.45% $3,119,006 $153,010 4.91% •In aggregate, the remaining net purchase discount on total loans acquired was $3.2 million at December 31, 2023.The following table presents the average balance of deposits and interest-bearing liabilities, interest expense, and the average rate for the periods indicated: For the Quarter Ended For the Quarter Ended December 31, 2023 September 30, 2023 Average Interest Average Average Interest Average (in $000’s, unaudited) Balance Expense Rate Balance Expense Rate Deposits: Demand, noninterest-bearing $1,243,222 $1,302,606 Demand, interest-bearing 948,061 $1,661 0.70% 1,017,686 $1,730 0.67% Savings and money market 1,096,962 6,216 2.25% 1,087,336 5,514 2.01% Time deposits – under $100 11,389 37 1.29% 11,966 30 0.99% Time deposits – $100 and over 234,140 2,130 3.61% 272,362 2,489 3.63% ICS/CDARS – interest-bearing demand, money market and time deposits 920,976 6,009 2.59% 881,665 5,117 2.30% Total interest-bearing deposits 3,211,528 16,053 1.98% 3,271,015 14,880 1.80% Total deposits 4,454,750 16,053 1.43% 4,573,621 14,880 1.29% Short-term borrowings 29 — 0.00% 31 — 0.00% Subordinated debt, net of issuance costs 39,477 538 5.41% 39,439 539 5.42% Total interest-bearing liabilities 3,251,034 16,591 2.02% 3,310,485 15,419 1.85% Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds $4,494,256 $16,591 1.46% $4,613,091 $15,419 1.33% •The average cost of total deposits increased to 1.43% for the fourth quarter of 2023, compared to 1.29% for the third quarter of 2023. The average cost of funds increased to 1.46% for the fourth quarter of 2023, compared to 1.33% for the third quarter of 2023. The average cost of deposits was 0.25% and the average cost of funds was 0.30% for the fourth quarter of 2022. •The average cost of total deposits increased to 1.06% for the year ended December 31, 2023, compared to 0.15% for the year ended December 31, 2022. The average cost of funds increased to 1.13% for the year ended December 31, 2023, compared to 0.19% for the year ended December 31, 2022. •The increase in the average cost of total deposits and the average cost of funds for the fourth quarter of 2023 and the year ended December 31, 2023 was primarily due to clients seeking higher yields and moving noninterest-bearing deposits to the Bank’s interest-bearing and ICS deposits and an increase in market interest rates. During the fourth quarter of 2023, we recorded a provision for credit losses on loans of $289,000, compared to a $508,000 provision for credit losses on loans for the fourth quarter of 2022, and a provision for credit losses on loans of $168,000 for the third quarter of 2023. There was a provision for credit losses on loans of $749,000 for the year ended December 31, 2023, compared to a $766,000 provision for credit losses on loans for the year ended December 31, 2022.Total noninterest income decreased (30%) to $1.9 million for the fourth quarter of 2023, compared to $2.8 million for the fourth quarter of 2022, primarily due to lower service charges and fees on deposit accounts during the fourth quarter of 2023. Total noninterest income decreased (12%) to $1.9 million for the fourth quarter of 2023, compared to $2.2 million for the third quarter of 2023, primarily due to no gain on sales of SBA loans, lower termination fees at Bay View Funding, and a lower gain on proceeds from company-owned life insurance during the fourth quarter of 2023.For the year ended December 31, 2023, total noninterest income decreased (11%) to $9.0 million, compared to $10.1 million for the year ended December 31, 2022, primarily due to a $669,000 gain on warrants during the year ended December 31, 2022, and lower service charges and fees on deposit accounts, servicing income, and interchange fee income on credit cards, during the year ended December 31, 2023.Total noninterest expense for the fourth quarter of 2023 increased to $25.5 million, compared to $24.5 million for the fourth quarter of 2022, primarily due to higher insurance costs, regulatory assessments, and information technology related expenses included in other noninterest expense, partially offset by lower professional fees and occupancy and equipment expense during the fourth quarter of 2023. Total noninterest expense for the fourth quarter of 2023 increased to $25.5 million, compared to $25.2 million for the third quarter of 2023, primarily due to higher professional fees.Total noninterest expense for the year ended December 31, 2023 increased to $101.1 million, compared to $94.9 million for the year ended December 31, 2022, primarily due to higher salaries and employee benefits, and higher insurance costs, regulatory assessments, improvements in information technology, and ICS/CDARS fee expenses included in other noninterest expense, partially offset by lower professional fees and occupancy and equipment expense during the year ended December 31, 2023.Full time equivalent employees were 349 at December 31, 2023, and 340 at December 31, 2022, and 348 at September 30, 2023. The efficiency ratio was 57.62% for the fourth quarter of 2023, compared to 44.98% for the fourth quarter of 2022, and 52.89% for the third quarter of 2023. The efficiency ratio was 52.57% for the year ended December 31, 2023, compared to 49.93% for the year ended December 31, 2022.Income tax expense was $5.1 million for the fourth quarter of 2023, compared to $8.7 million for the fourth quarter of 2022, and $6.5 million for the third quarter of 2023. The effective tax rate for the fourth quarter of 2023 was 27.8%, compared to 29.5% for the fourth quarter of 2022, and 29.0% for the third quarter of 2023. Income tax expense for the year ended December 31, 2023 was $26.0 million, compared to $27.8 million for the year ended December 31, 2022. The effective tax rate for the year ended December 31, 2023 was 28.7%, compared to 29.5% for the year ended December 31, 2022.
Balance Sheet Review, Capital Management and Credit Quality:
Total assets increased 1% to $5.19 billion at December 31, 2023, compared to $5.16 billion at December 31, 2022, and decreased (4%) from $5.40 billion at September 30, 2023. The following table shows the balances of securities available-for-sale, at fair value, and the related pre-tax unrealized (loss) for the periods indicated: SECURITIES AVAILABLE-FOR-SALE December 31, September 30, December 31, (in $000’s, unaudited) 2023 2023 2022Balance (at fair value): U.S. Treasury $382,369 $396,996 $418,474 Agency mortgage-backed securities 60,267 60,198 71,122 Total $442,636 $457,194 $489,596 Pre-tax unrealized (loss): U.S. Treasury $(5,621) $(9,606) $(10,323)Agency mortgage-backed securities (4,313) (7,185) (5,794)Total $(9,934) $(16,791) $(16,117) •The pre-tax unrealized loss on the securities available-for-sale portfolio was ($9.9) million, or ($7.1) million net of taxes, which was 1.1% of total shareholders’ equity at December 31, 2023, down from ($16.8) million, or ($12.0) million net of taxes, at September 30, 2023, due to lower interest rates. •The weighted average life of the securities available-for-sale portfolio was 1.29 years at December 31, 2023. The following table shows the balances of securities held-to-maturity, at amortized cost, and the related pre-tax unrecognized (loss) and allowance for credit losses for the periods indicated: SECURITIES HELD-TO-MATURITY December 31, September 30, December 31, (in $000’s, unaudited) 2023 2023 2022Balance (at amortized cost): Agency mortgage-backed securities $618,374 $632,241 $677,381 Municipals — exempt from Federal tax (1) 32,203 32,453 37,623 Total (1) $650,577 $664,694 $715,004 Pre-tax unrecognized (loss): Agency mortgage-backed securities $(85,729) $(119,932) $(99,742)Municipals — exempt from Federal tax (721) (2,753) (810)Total $(86,450) $(122,685) $(100,552) Allowance for credit losses on municipal securities $(12) $(13) $(14) (1)Gross of the allowance for credit losses of $12,000 at December, 2023, $13,000 at September 30, 2023, and $14,000 at December 31, 2022. •The pre-tax unrecognized loss on the securities held-to-maturity portfolio was ($86.5) million, or ($60.9) million net of taxes, which was 9.0% of total shareholders’ equity at December 31, 2023, down from ($122.7) million, or ($86.4) million net of taxes, at September 30, 2023, due to lower interest rates. •The weighted average life of the securities held-to-maturity portfolio was 6.57 years at December 31, 2023, which includes Community Reinvestment Act (“CRA”) mortgage-backed securities with longer maturities. The unrealized and unrecognized losses in both the available-for-sale and held-to-maturity portfolios were due to higher interest rates at December 31, 2023 compared to when the securities were purchased. The issuers are of high credit quality and all principal amounts are expected to be repaid when the securities mature. The fair value is expected to recover as the securities approach their maturity date and/or market rates decline.The following table summarizes the distribution of loans, excluding loans held-for-sale, and the percentage of distribution in each category for the periods indicated: LOANS December 31, 2023 September 30, 2023 December 31, 2022 (in $000’s, unaudited) Balance % to Total Balance % to Total Balance % to Total Commercial $463,778 14% $430,664 13% $533,915 16% Real estate: CRE – owner occupied 583,253 17% 589,751 18% 614,663 19% CRE – non-owner occupied 1,256,590 37% 1,208,324 37% 1,066,368 32% Land and construction 140,513 4% 158,138 5% 163,577 5% Home equity 119,125 4% 124,477 4% 120,724 4% Multifamily 269,734 8% 253,129 7% 244,882 7% Residential mortgages 496,961 15% 503,006 15% 537,905 16% Consumer and other 20,919 1% 18,526 1% 17,033 1% Total Loans 3,350,873 100% 3,286,015 100% 3,299,067 100% Deferred loan costs (fees), net (495) — (554) — (517) — Loans, net of deferred costs and fees $3,350,378 100% $3,285,461 100% $3,298,550 100% •Loans, excluding loans held-for-sale, increased $51.8 million, or 2%, to $3.35 billion at December 31, 2023, compared to $3.30 billion at December 31, 2022, and increased $64.9 million, or 2%, from $3.29 billion at September 30, 2023. Core loans, excluding residential mortgages, increased $92.8 million, or 3%, to $2.85 billion at December, 2023, compared to $2.76 billion at December 31, 2022, and increased $71.0 million from $2.78 billion at September 30, 2023. •Commercial and industrial (“C&I”) line utilization was 29% at both December 31, 2023 and December 31, 2022, compared to 27% at September 30, 2023. •At December 31, 2023, there was 32% of the CRE loan portfolio secured by owner occupied real estate, compared to 37% at December 31, 2022, and 33% at September 30, 2023. The following table presents the maturity distribution of the Company’s loans, excluding loans held-for-sale, as of December 31, 2023. The table shows the distribution of such loans between those loans with predetermined (fixed) interest rates and those with variable (floating) interest rates. Floating rates generally fluctuate with changes in the prime rate as reflected in the Western Edition of The Wall Street Journal, and contractual repricing dates. Due in Over One Year But LOAN MATURITIES One Year or Less Less than Five Years Over Five Years (in $000’s, unaudited) Balance % to Total Balance % to Total Balance % to Total TotalLoans with variable interest rates $359,013 40% $269,586 30% $274,829 30% $903,428Loans with fixed interest rates 74,940 3% 621,480 25% 1,751,025 72% 2,447,445Loans $433,953 13% $891,066 27% $2,025,854 60% $3,350,873 •At December 31, 2023, approximately 27% of the Company’s loan portfolio consisted of floating interest rate loans, compared to 33% at December 31, 2022, and 27% at September 30, 2023. The following table summarizes the allowance for credit losses on loans (“ACLL”) for the periods indicated: At or For the Quarter Ended: At or For the Year Ended: ALLOWANCE FOR CREDIT LOSSES ON LOANS December 31, September 30, December 31, December 31, December 31, (in $000’s, unaudited) 2023 2023 2022 2023 2022 Balance at beginning of period $47,702 $47,803 $46,921 $47,512 $43,290 Charge-offs during the period (160) (447) (56) (1,011) (434) Recoveries during the period 127 178 139 708 3,890 Net recoveries (charge-offs) during the period (33) (269) 83 (303) 3,456 Provision for credit losses on loans during the period 289 168 508 749 766 Balance at end of period $47,958 $47,702 $47,512 $47,958 $47,512 Total loans, net of deferred fees $3,350,378 $3,285,461 $3,298,550 $3,350,378 $3,298,550 Total nonperforming loans $7,707 $5,484 $2,425 $7,707 $2,425 ACLL to total loans 1.43% 1.45% 1.44% 1.43% 1.44% ACLL to total nonperforming loans 622.27% 869.84% 1,959.26% 622.27% 1,959.26% •The following table shows the drivers of change in ACLL for each of the four quarters of 2023:DRIVERS OF CHANGE IN ACLL (in $000’s, unaudited) ACLL at December 31, 2022 $47,512 Portfolio changes during the first quarter of 2023 (160)Qualitative and quantitative changes during the first quarter of 2023 including changes in economic forecasts (79)ACLL at March 31, 2023 47,273 Portfolio changes during the second quarter of 2023 1,652 Qualitative and quantitative changes during the second quarter of 2023 including changes in economic forecasts (1,122)ACLL at June 30, 2023 47,803 Portfolio changes during the third quarter of 2023 (117)Qualitative and quantitative changes during the third quarter of 2023 including changes in economic forecasts 16 ACLL at September 30, 2023 47,702 Portfolio changes during the fourth quarter of 2023 1,216 Qualitative and quantitative changes during the fourth quarter of 2023 including changes in economic forecasts (960)ACLL at December 31, 2023 $47,958 The following is a breakout of nonperforming assets (“NPAs”) at the periods indicated: NONPERFORMING ASSETS December 31, 2023 September 30, 2023 December 31, 2022 (in $000’s, unaudited) Balance % of Total Balance % of Total Balance % of Total Land and construction loans $4,661 60%$— 0%$— 0%Commercial loans 1,236 16% 1,712 31% 642 26%Restructured and loans over 90 days past due and still accruing 889 12% 1,966 36% 1,685 70%Residential mortgages 779 10% 1,716 31% — 0%Home equity loans 142 2% 90 2% 98 4%CRE loans — 0% — 0% — 0%Total nonperforming assets $7,707 100%$5,484 100%$2,425 100% •There were 12 borrowers included in NPAs totaling $7.7 million, or 0.15% of total assets, at December 31, 2023, compared to 9 borrowers totaling $2.4 million, or 0.05% of total assets, at December 31, 2022, and 11 borrowers totaling $5.5 million, or 0.10% of total assets at September 30, 2023. The increase in NPAs at December 31, 2023, was primarily due to the downgrade of loans to one customer totaling $4.6 million, which are well collateralized and there are no specific reserves for these loans. This increase in NPAs was partially offset by pay-offs of loans previously included in NPAs. •There were no CRE loans included in NPAs at December 31, 2023, December 31, 2022, or September 30, 2023. •There were no foreclosed assets on the balance sheet at December 31, 2023, December 31, 2022, or September 30, 2023. •There were no Shared National Credits (“SNCs”) or material purchased participations included in NPAs or total loans at December 31, 2023, December 31, 2022, or September 30, 2023. •Classified assets totaled $31.8 million, or 0.61% of total assets, at December 31, 2023, compared to $14.5 million, or 0.28% of total assets, at December 31, 2022, and $31.1 million, or 0.57% of total assets, at September 30, 2023. The following table summarizes the distribution of deposits and the percentage of distribution in each category for the periods indicated: DEPOSITS December 31, 2023 September 30, 2023 December 31, 2022 (in $000’s, unaudited) Balance % to Total Balance % to Total Balance % to Total Demand, noninterest-bearing $1,292,486 30% $1,243,501 27% $1,736,722 40% Demand, interest-bearing 914,066 21% 1,004,185 22% 1,196,427 27% Savings and money market 1,087,518 25% 1,110,640 24% 1,285,444 29% Time deposits — under $250 38,055 1% 43,906 1% 32,445 1% Time deposits — $250 and over 192,228 4% 252,001 6% 108,192 2% ICS/CDARS — interest-bearing demand, money market and time deposits 854,105 19% 921,224 20% 30,374 1% Total deposits $4,378,458 100% $4,575,457 100% $4,389,604 100% •The Bank’s uninsured deposits were approximately $2.01 billion, or 46% of total deposits, at December 31, 2023, compared to $2.12 billion, or 46% of total deposits, at September 30, 2023, and $2.15 billion, or 48% of total deposits, at June 30, 2023, and $2.56 billion, or 58% of total deposits, at March 31, 2023, and $2.79 billion, or 64% of total deposits, at December 31, 2022. 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, 2023, 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 15.4% 14.8% 10.0% 10.5%Tier 1 Capital 13.2% 13.7% 8.0% 8.5%Common Equity Tier 1 Capital 13.2% 13.7% 6.5% 7.0%Tier 1 Leverage 10.0% 10.3% 5.0% 4.0%Tangible common equity / tangible assets (2) 9.8% 10.2% N/A N/A (1)Basel III minimum regulatory requirements for both the Company and the Bank include a 2.5% capital conservation buffer, except the leverage ratio.(2)Represents shareholders’ equity minus goodwill and other intangible assets divided by total assets minus goodwill and other intangible assets. The following table reflects the components of accumulated other comprehensive loss, net of taxes, for the periods indicated: ACCUMULATED OTHER COMPREHENSIVE LOSS December 31, September 30, December 31, (in $000’s, unaudited) 2023 2023 2022Unrealized loss on securities available-for-sale $(7,116) $(11,985) $(11,506)Split dollar insurance contracts liability (2,809) (3,234) (3,091)Supplemental executive retirement plan liability (2,892) (2,343) (2,371)Unrealized gain on interest-only strip from SBA loans 87 93 112 Total accumulated other comprehensive loss $(12,730) $(17,469) $(16,856)
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, Oakland, Palo Alto, Pleasanton, Redwood City, San Francisco, San Jose, San Mateo, San Rafael, 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. The contents of our website are not incorporated into, and do not perform a part of, this release or of our filings with the Securities and Exchange Commission.
Forward-Looking Statement Disclaimer
Certain matters discussed in this press release constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may be deemed to include, among other things, statements relating to the Company’s future financial performance, projected cash flows of our investment securities portfolio, the performance of our loan portfolio, estimated net interest income resulting from a shift in interest rates, expectation of high credit quality issuers ability to repay, as well as statements relating to the anticipated effects on the Company’s financial condition and results of operations from expected developments or events. 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, 2022, and the following: (1) factors that affect our liquidity and our ability to meet customer demands for deposit withdrawals, including our cash on hand and the availability of funds from our lines of credit; (2) factors that affect the collectability of our loans, including fluctuations in interest rates as those changes affect our borrowers’ ability to pay and perform on all other terms of our loans; (3) media items and consumer confidence as those factors affect depositors’ confidence in the banking system generally and our bank in particular; (4) factors that affect the value and liquidity of our investment portfolios, particularly the values of securities available-for-sale; (5) the effect of our measures to assure adequate liquidity of deposits as those measures affect profitability, including increasing interest rates on deposits as a component of our interest expense; (6) our ability to estimate accurately, and to establish adequate reserves against, the risk of loss associated with our loan and lease portfolio; (7) events and circumstances that affect our borrowers’ financial condition, results of operations and cash flows, which may, during periods of economic uncertainty or decline, adversely affect those borrowers’ ability to repay our loans timely and in full, or to comply with their other obligations under our loan agreements with those customers; (8) geopolitical and domestic political developments, including ongoing conflicts in Ukraine and the Middle East, as well as other regions that are experiencing or that may in the future experience political or economic upheaval, that can increase levels of political and economic unpredictability, contribute to rising energy and commodity prices, and increase the volatility of financial markets; (9) 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; (10) 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 and other factors that affect market interest rates generally; (11) inflationary pressures and changes in the interest rate environment that reduce our margins and yields, the fair value of financial instruments or our level of loan originations, or increase the level of defaults, losses and prepayments on loans to customers, whether held in the portfolio or in the secondary market; (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) volatility in credit and equity markets and its effect on the global economy; (14) conditions relating to the impact of recent and potential future pandemic response measures on our customers, employees, businesses, liquidity, financial results and overall condition including severity and duration of the associated uncertainties in U.S. and global markets; (15) our ability to compete effectively with other banks and financial services companies and the effects of competition in the financial services industry on our business; (16) our ability to achieve loan growth and attract deposits in our market area; (17) risks associated with concentrations in real estate related loans; (18) the relative strength or weakness of the commercial and real estate markets where our borrowers are located, including related vacancy rates, and asset and market prices; (19) regulatory limits on the Bank’s ability to pay dividends to the Company; (20) 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; (21) 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; (22) possible adjustment of the valuation of our deferred tax assets or of the goodwill associated with previous acquisitions; (23) 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; (24) inability of our framework to manage risks associated with our business, including operational risk and credit risk; (25) risks of loss of funding of the Small Business Administration (“SBA”) or SBA loan programs, or changes in those programs; (26) compliance with applicable laws and governmental and regulatory requirements, including the Dodd-Frank Act and others relating to banking, consumer protection, securities, accounting and tax matters; (27) 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; (28) the expense and uncertain resolution of litigation matters whether occurring in the ordinary course of business or otherwise; (29) availability of and competition for acquisition opportunities; (30) risks resulting from domestic or international terrorism, riots, widespread mayhem, and similar events or circumstances; (31) risks of natural disasters (including earthquakes, fires, and flooding) and other events beyond our control; and (32) our success in managing the risks involved in the foregoing factors.
Member FDIC
For additional information, contact:
Debbie ReuterEVP, Corporate SecretaryDirect: (408) [email protected]
For the Quarter Ended: Percent Change From: For the Year Ended:CONSOLIDATED INCOME STATEMENTS December 31, September 30, December 31, September 30, December 31, December 31, December 31, Percent (in $000’s, unaudited) 2023 2023 2022 2023 2022 2023 2022 Change Interest income $58,892 $60,791 $55,192 (3)%7 % $234,298 $188,828 24 %Interest expense 16,591 15,419 3,453 8 %380 % 51,074 8,948 471 %Net interest income before provision for credit losses on loans 42,301 45,372 51,739 (7)%(18)% 183,224 179,880 2 %Provision for credit losses on loans 289 168 508 72 %(43)% 749 766 (2)%Net interest income after provision for credit losses on loans 42,012 45,204 51,231 (7)%(18)% 182,475 179,114 2 %Noninterest income: Service charges and fees on deposit accounts 838 859 1,801 (2)%(53)% 4,341 4,640 (6)%Increase in cash surrender value of life insurance 519 517 481 0 %8 % 2,031 1,925 6 %Servicing income 103 62 138 66 %(25)% 400 508 (21)%Termination fees 25 118 — (79)%N/A 154 61 152 %Gain on proceeds from company-owned life insurance 25 100 — (75)%N/A 125 27 363 %Gain on sales of SBA loans — 207 — (100)%N/A 482 491 (2)%Gain on warrants — — — N/A N/A — 669 (100)%Other 432 353 352 22 %23 % 1,465 1,790 (18)%Total noninterest income 1,942 2,216 2,772 (12)%(30)% 8,998 10,111 (11)%Noninterest expense: Salaries and employee benefits 13,919 14,147 13,915 (2)%0 % 56,862 55,331 3 %Occupancy and equipment 2,367 2,301 2,510 3 %(6)% 9,490 9,639 (2)%Professional fees 1,085 717 1,414 51 %(23)% 4,350 5,015 (13)%Other 8,120 8,006 6,679 1 %22 % 30,352 24,874 22 %Total noninterest expense 25,491 25,171 24,518 1 %4 % 101,054 94,859 7 %Income before income taxes 18,463 22,249 29,485 (17)%(37)% 90,419 94,366 (4)%Income tax expense 5,135 6,454 8,686 (20)%(41)% 25,976 27,811 (7)% Net income $ 13,328 $ 15,795 $ 20,799 (16)%(36)% $ 64,443 $ 66,555 (3)% PER COMMON SHARE DATA (unaudited) Basic earnings per share $0.22 $0.26 $0.34 (15)%(35)% $1.06 $1.10 (4)%Diluted earnings per share $0.22 $0.26 $0.34 (15)%(35)% $1.05 $1.09 (4)%Weighted average shares outstanding – basic 61,118,485 61,093,289 60,788,803 0 %1 % 61,038,857 60,602,962 1 %Weighted average shares outstanding – diluted 61,412,816 61,436,240 61,357,023 0 %0 % 61,311,318 61,090,290 0 %Common shares outstanding at period-end 61,146,835 61,099,155 60,852,723 0 %0 % 61,146,835 60,852,723 0 %Dividend per share $0.13 $0.13 $0.13 0 %0 % $0.52 $0.52 0 %Book value per share $11.00 $10.83 $10.39 2 %6 % $11.00 $10.39 6 %Tangible book value per share $8.12 $7.94 $7.46 2 %9 % $8.12 $7.46 9 % KEY FINANCIAL RATIOS (unaudited) Annualized return on average equity 7.96% 9.54% 13.40%(17)%(41)% 9.88% 10.95%(10)%Annualized return on average tangible common equity 10.84% 13.06% 18.89%(17)%(43)% 13.57% 15.57%(13)%Annualized return on average assets 1.00% 1.16% 1.54%(14)%(35)% 1.21% 1.23%(2)%Annualized return on average tangible assets 1.03% 1.20% 1.59%(14)%(35)% 1.26% 1.27%(1)%Net interest margin (FTE) 3.41% 3.57% 4.10%(4)%(17)% 3.70% 3.57%4 %Efficiency ratio 57.62% 52.89% 44.98%9 %28 % 52.57% 49.93%5 % AVERAGE BALANCES (in $000’s, unaudited) Average assets $5,291,962 $5,399,930 $5,360,867 (2)%(1)% $5,310,277 $5,401,220 (2)%Average tangible assets $5,115,321 $5,222,692 $5,181,793 (2)%(1)% $5,132,741 $5,221,159 (2)%Average earning assets $4,923,582 $5,051,710 $5,009,578 (3)%(2)% $4,955,018 $5,051,552 (2)%Average loans held-for-sale $1,612 $2,765 $2,346 (42)%(31)% $2,821 $2,238 26 %Average total loans $3,280,817 $3,254,715 $3,248,210 1 %1 % $3,259,373 $3,116,768 5 %Average deposits $4,454,750 $4,573,621 $4,600,533 (3)%(3)% $4,467,489 $4,647,200 (4)%Average demand deposits – noninterest-bearing $1,243,222 $1,302,606 $1,851,003 (5)%(33)% $1,393,949 $1,863,928 (25)%Average interest-bearing deposits $3,211,528 $3,271,015 $2,749,530 (2)%17 % $3,073,540 $2,783,272 10 %Average interest-bearing liabilities $3,251,034 $3,310,485 $2,788,880 (2)%17 % $3,140,105 $2,825,035 11 %Average equity $664,638 $656,973 $615,941 1 %8 % $652,449 $607,603 7 %Average tangible common equity $487,997 $479,735 $436,867 2 %12 % $474,913 $427,542 11 % For the Quarter Ended: CONSOLIDATED INCOME STATEMENTS December 31, September 30, June 30, March 31, December 31, (in $000’s, unaudited) 2023 2023 2023 2023 2022 Interest income $58,892 $60,791 $58,341 $56,274 $55,192 Interest expense 16,591 15,419 12,048 7,016 3,453 Net interest income before provision for credit losses on loans 42,301 45,372 46,293 49,258 51,739 Provision for credit losses on loans 289 168 260 32 508 Net interest income after provision for credit losses on loans 42,012 45,204 46,033 49,226 51,231 Noninterest income: Service charges and fees on deposit accounts 838 859 901 1,743 1,801 Increase in cash surrender value of life insurance 519 517 502 493 481 Servicing income 103 62 104 131 138 Termination fees 25 118 — 11 — Gain on proceeds from company-owned life insurance 25 100 — — — Gain on sales of SBA loans — 207 199 76 — Gain on warrants — — — — — Other 432 353 368 312 352 Total noninterest income 1,942 2,216 2,074 2,766 2,772 Noninterest expense: Salaries and employee benefits 13,919 14,147 13,987 14,809 13,915 Occupancy and equipment 2,367 2,301 2,422 2,400 2,510 Professional fees 1,085 717 1,149 1,399 1,414 Other 8,120 8,006 7,433 6,793 6,679 Total noninterest expense 25,491 25,171 24,991 25,401 24,518 Income before income taxes 18,463 22,249 23,116 26,591 29,485 Income tax expense 5,135 6,454 6,713 7,674 8,686 Net income $ 13,328 $ 15,795 $ 16,403 $ 18,917 $ 20,799 PER COMMON SHARE DATA (unaudited) Basic earnings per share $0.22 $0.26 $0.27 $0.31 $0.34 Diluted earnings per share $0.22 $0.26 $0.27 $0.31 $0.34 Weighted average shares outstanding – basic 61,118,485 61,093,289 61,035,435 60,908,221 60,788,803 Weighted average shares outstanding – diluted 61,412,816 61,436,240 61,266,059 61,268,072 61,357,023 Common shares outstanding at period-end 61,146,835 61,099,155 61,091,155 60,948,607 60,852,723 Dividend per share $0.13 $0.13 $0.13 $0.13 $0.13 Book value per share $11.00 $10.83 $10.70 $10.62 $10.39 Tangible book value per share $8.12 $7.94 $7.80 $7.70 $7.46 KEY FINANCIAL RATIOS (unaudited) Annualized return on average equity 7.96% 9.54% 10.12% 12.03% 13.40%Annualized return on average tangible common equity 10.84% 13.06% 13.93% 16.71% 18.89%Annualized return on average assets 1.00% 1.16% 1.25% 1.47% 1.54%Annualized return on average tangible assets 1.03% 1.20% 1.29% 1.52% 1.59%Net interest margin (FTE) 3.41% 3.57% 3.76% 4.09% 4.10%Efficiency ratio 57.62% 52.89% 51.67% 48.83% 44.98% AVERAGE BALANCES (in $000’s, unaudited) Average assets $5,291,962 $5,399,930 $5,278,243 $5,235,506 $5,360,867 Average tangible assets $5,115,321 $5,222,692 $5,100,399 $5,057,063 $5,181,793 Average earning assets $4,923,582 $5,051,710 $4,948,397 $4,895,009 $5,009,578 Average loans held-for-sale $1,612 $2,765 $4,166 $2,755 $2,346 Average total loans $3,280,817 $3,254,715 $3,227,175 $3,274,770 $3,248,210 Average deposits $4,454,750 $4,573,621 $4,424,041 $4,415,952 $4,600,533 Average demand deposits – noninterest-bearing $1,243,222 $1,302,606 $1,368,373 $1,667,260 $1,851,003 Average interest-bearing deposits $3,211,528 $3,271,015 $3,055,668 $2,748,692 $2,749,530 Average interest-bearing liabilities $3,251,034 $3,310,485 $3,157,722 $2,834,732 $2,788,880 Average equity $664,638 $656,973 $650,240 $637,597 $615,941 Average tangible common equity $487,997 $479,735 $472,396 $459,154 $436,867 End of Period: Percent Change From: CONSOLIDATED BALANCE SHEETS December 31, September 30, December 31, September 30, December 31, (in $000’s, unaudited) 2023 2023 2022 2023 2022 ASSETS Cash and due from banks $41,592 $40,076 $27,595 4 % 51 %Other investments and interest-bearing deposits in other financial institutions 366,537 605,476 279,008 (39)% 31 %Securities available-for-sale, at fair value 442,636 457,194 489,596 (3)% (10)%Securities held-to-maturity, at amortized cost 650,565 664,681 714,990 (2)% (9)%Loans held-for-sale – SBA, including deferred costs 2,205 841 2,456 162 % (10)%Loans: Commercial 463,778 430,664 533,915 8 % (13)%Real estate: CRE – owner occupied 583,253 589,751 614,663 (1)% (5)%CRE – non-owner occupied 1,256,590 1,208,324 1,066,368 4 % 18 %Land and construction 140,513 158,138 163,577 (11)% (14)%Home equity 119,125 124,477 120,724 (4)% (1)%Multifamily 269,734 253,129 244,882 7 % 10 %Residential mortgages 496,961 503,006 537,905 (1)% (8)%Consumer and other 20,919 18,526 17,033 13 % 23 %Loans 3,350,873 3,286,015 3,299,067 2 % 2 %Deferred loan fees, net (495) (554) (517) (11)% (4)%Total loans, net of deferred costs and fees 3,350,378 3,285,461 3,298,550 2 % 2 %Allowance for credit losses on loans (47,958) (47,702) (47,512) 1 % 1 %Loans, net 3,302,420 3,237,759 3,251,038 2 % 2 %Company-owned life insurance 79,489 79,607 78,945 0 % 1 %Premises and equipment, net 9,857 9,707 9,301 2 % 6 %Goodwill 167,631 167,631 167,631 0 % 0 %Other intangible assets 8,627 9,229 11,033 (7)% (22)%Accrued interest receivable and other assets 122,536 131,106 125,987 (7) % 3 %Total assets $5,194,095 $ 5,403,307 $ 5,157,580 (4)% 1 % LIABILITIES AND SHAREHOLDERS’ EQUITY Liabilities: Deposits: Demand, noninterest-bearing $1,292,486 $1,243,501 $1,736,722 4 % (26)%Demand, interest-bearing 914,066 1,004,185 1,196,427 (9)% (24)%Savings and money market 1,087,518 1,110,640 1,285,444 (2)% (15)%Time deposits – under $250 38,055 43,906 32,445 (13)% 17 %Time deposits – $250 and over 192,228 252,001 108,192 (24)% 78 %ICS/CDARS – interest-bearing demand, money market and time deposits 854,105 921,224 30,374 (7)% 2712 %Total deposits 4,378,458 4,575,457 4,389,604 (4)% 0 %Subordinated debt, net of issuance costs 39,502 39,463 39,350 0 % 0 %Accrued interest payable and other liabilities 103,234 126,457 96,170 (18) % 7 %Total liabilities 4,521,194 4,741,377 4,525,124 (5)% 0 % Shareholders’ Equity: Common stock 506,539 505,692 502,923 0 % 1 %Retained earnings 179,092 173,707 146,389 3 % 22 %Accumulated other comprehensive loss (12,730) (17,469) (16,856) (27)% (24)%Total shareholders’ equity 672,901 661,930 632,456 2 % 6 % Total liabilities and shareholders’ equity $5,194,095 $ 5,403,307 $ 5,157,580 (4)% 1 % End of Period:CONSOLIDATED BALANCE SHEETS December 31, September 30, June 30, March 31, December 31, (in $000’s, unaudited) 2023 2023 2023 2023 2022ASSETS Cash and due from banks $41,592 $40,076 $42,551 $41,318 $27,595 Other investments and interest-bearing deposits in other financial institutions 366,537 605,476 468,951 698,690 279,008 Securities available-for-sale, at fair value 442,636 457,194 486,058 491,751 489,596 Securities held-to-maturity, at amortized cost 650,565 664,681 682,095 698,231 714,990 Loans held-for-sale – SBA, including deferred costs 2,205 841 3,136 2,792 2,456 Loans: Commercial 463,778 430,664 466,354 506,602 533,915 Real estate: CRE – owner occupied 583,253 589,751 608,031 603,298 614,663 CRE – non-owner occupied 1,256,590 1,208,324 1,147,313 1,083,852 1,066,368 Land and construction 140,513 158,138 162,816 166,408 163,577 Home equity 119,125 124,477 128,009 124,481 120,724 Multifamily 269,734 253,129 244,959 231,242 244,882 Residential mortgages 496,961 503,006 514,064 528,639 537,905 Consumer and other 20,919 18,526 17,635 17,905 17,033 Loans 3,350,873 3,286,015 3,289,181 3,262,427 3,299,067 Deferred loan fees, net (495) (554) (397) (512) (517)Total loans, net of deferred fees 3,350,378 3,285,461 3,288,784 3,261,915 3,298,550 Allowance for credit losses on loans (47,958) (47,702) (47,803) (47,273) (47,512)Loans, net 3,302,420 3,237,759 3,240,981 3,214,642 3,251,038 Company-owned life insurance 79,489 79,607 79,940 79,438 78,945 Premises and equipment, net 9,857 9,707 9,197 9,142 9,301 Goodwill 167,631 167,631 167,631 167,631 167,631 Other intangible assets 8,627 9,229 9,830 10,431 11,033 Accrued interest receivable and other assets 122,536 131,106 121,467 122,474 125,987 Total assets $5,194,095 $ 5,403,307 $ 5,311,837 $ 5,536,540 $ 5,157,580 LIABILITIES AND SHAREHOLDERS’ EQUITY Liabilities: Deposits: Demand, noninterest-bearing $1,292,486 $1,243,501 $1,319,844 $1,469,081 $1,736,722 Demand, interest-bearing 914,066 1,004,185 1,064,638 1,196,789 1,196,427 Savings and money market 1,087,518 1,110,640 1,075,835 1,264,567 1,285,444 Time deposits – under $250 38,055 43,906 44,520 37,884 32,445 Time deposits – $250 and over 192,228 252,001 171,852 172,070 108,192 ICS/CDARS – interest-bearing demand, money market and time deposits 854,105 921,224 824,083 304,147 30,374 Total deposits 4,378,458 4,575,457 4,500,772 4,444,538 4,389,604 Other short-term borrowings — — — 300,000 — Subordinated debt, net of issuance costs 39,502 39,463 39,425 39,387 39,350 Accrued interest payable and other liabilities 103,234 126,457 117,970 105,407 96,170 Total liabilities 4,521,194 4,741,377 4,658,167 4,889,332 4,525,124 Shareholders’ Equity: Common stock 506,539 505,692 505,075 504,135 502,923 Retained earnings 179,092 173,707 165,853 157,390 146,389 Accumulated other comprehensive loss (12,730) (17,469) (17,258) (14,317) (16,856)Total shareholders’ equity 672,901 661,930 653,670 647,208 632,456 Total liabilities and shareholders’ equity $5,194,095 $ 5,403,307 $ 5,311,837 $ 5,536,540 $ 5,157,580 At or For the Quarter Ended: Percent Change From: CREDIT QUALITY DATA December 31, September 30, December 31, September 30, December 31, (in $000’s, unaudited) 2023 2023 2022 2023 2022 Nonaccrual loans – held-for-investment $6,818 $3,518 $740 94 %821 %Restructured and loans over 90 days past due and still accruing 889 1,966 1,685 (55)%(47)%Total nonperforming loans 7,707 5,484 2,425 41 %218 %Foreclosed assets — — — N/A N/A Total nonperforming assets $7,707 $5,484 $2,425 41 %218 %Other restructured loans still accruing $— $— $171 N/A (100)%Net charge-offs (recoveries) during the quarter $33 $269 $(83) (88)%140 %Provision for credit losses on loans during the quarter $289 $168 $508 72 %(43)%Allowance for credit losses on loans $47,958 $47,702 $47,512 1 %1 %Classified assets $31,763 $31,062 $14,544 2 %118 %Allowance for credit losses on loans to total loans 1.43% 1.45% 1.44 %(1)%(1)%Allowance for credit losses on loans to total nonperforming loans 622.27% 869.84% 1,959.26 %(28)%(68)%Nonperforming assets to total assets 0.15% 0.10% 0.05 %50 %200 %Nonperforming loans to total loans 0.23% 0.17% 0.07 %35 %229 %Classified assets to Heritage Commerce Corp Tier 1 capital plus allowance for credit losses on loans 6% 6% 3 %0 %100 %Classified assets to Heritage Bank of Commerce Tier 1 capital plus allowance for credit losses on loans 5% 5% 3 %0 %67 % OTHER PERIOD-END STATISTICS (in $000’s, unaudited) Heritage Commerce Corp: Tangible common equity (1) $496,643 $485,070 $453,792 2 %9 %Shareholders’ equity / total assets 12.88% 12.25% 12.26 %5 %5 %Tangible common equity / tangible assets (2) 9.84% 9.28% 9.11 %6 %8 %Loan to deposit ratio 76.52% 71.81% 75.14 %7 %2 %Noninterest-bearing deposits / total deposits 29.52% 27.18% 39.56 %9 %(25)%Total capital ratio 15.4% 15.6% 14.8 %(1)%4 %Tier 1 capital ratio 13.2% 13.4% 12.7 %(1)%4 %Common Equity Tier 1 capital ratio 13.2% 13.4% 12.7 %(1)%4 %Tier 1 leverage ratio 10.0% 9.6% 9.2 %4 %9 %Heritage Bank of Commerce: Total capital ratio 14.8% 15.0% 14.2 %(1)%4 %Tier 1 capital ratio 13.7% 13.9% 13.2 %(1)%4 %Common Equity Tier 1 capital ratio 13.7% 13.9% 13.2 %(1)%4 %Tier 1 leverage ratio 10.3% 10.0% 9.5 %3 %8 %
(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. At or For the Quarter Ended: CREDIT QUALITY DATA December 31, September 30, June 30, March 31, December 31, (in $000’s, unaudited) 2023 2023 2023 2023 2022 Nonaccrual loans – held-for-investment $6,818 $3,518 $3,275 $781 $740 Restructured and loans over 90 days past due and still accruing 889 1,966 2,262 1,459 1,685 Total nonperforming loans 7,707 5,484 5,537 2,240 2,425 Foreclosed assets — — — — — Total nonperforming assets $7,707 $5,484 $5,537 $2,240 $2,425 Other restructured loans still accruing $— $— $— $— $171 Net charge-offs (recoveries) during the quarter $33 $269 $(270) $271 $(83) Provision for credit losses on loans during the quarter $289 $168 $260 $32 $508 Allowance for credit losses on loans $47,958 $47,702 $47,803 $47,273 $47,512 Classified assets $31,763 $31,062 $30,500 $26,800 $14,544 Allowance for credit losses on loans to total loans 1.43% 1.45% 1.45 % 1.45% 1.44 % Allowance for credit losses on loans to total nonperforming loans 622.27% 869.84% 863.34 % 2,110.40% 1,959.26 % Nonperforming assets to total assets 0.15% 0.10% 0.10 % 0.04% 0.05 % Nonperforming loans to total loans 0.23% 0.17% 0.17 % 0.07% 0.07 % Classified assets to Heritage Commerce Corp Tier 1 capital plus allowance for credit losses on loans 6% 6% 6 % 5% 3 % Classified assets to Heritage Bank of Commerce Tier 1 capital plus allowance for credit losses on loans 5% 5% 5 % 5% 3 % OTHER PERIOD-END STATISTICS (in $000’s, unaudited) Heritage Commerce Corp: Tangible common equity (1) $496,643 $485,070 $476,209 $469,146 $453,792 Shareholders’ equity / total assets 12.88% 12.25% 12.31 % 11.69% 12.26 % Tangible common equity / tangible assets (2) 9.84% 9.28% 9.27 % 8.76% 9.11 % Loan to deposit ratio 76.52% 71.81% 73.07 % 73.39% 75.14 % Noninterest-bearing deposits / total deposits 29.52% 27.18% 29.32 % 33.05% 39.56 % Total capital ratio 15.4% 15.6% 15.4 % 15.3% 14.8 % Tier 1 capital ratio 13.2% 13.4% 13.2 % 13.1% 12.7 % Common Equity Tier 1 capital ratio 13.2% 13.4% 13.2 % 13.1% 12.7 % Tier 1 leverage ratio 10.0% 9.6% 9.7 % 9.6% 9.2 % Heritage Bank of Commerce: Total capital ratio 14.8% 15.0% 14.8 % 14.7% 14.2 % Tier 1 capital ratio 13.7% 13.9% 13.7 % 13.5% 13.2 % Common Equity Tier 1 capital ratio 13.7% 13.9% 13.7 % 13.5% 13.2 % Tier 1 leverage ratio 10.3% 10.0% 10.0 % 9.9% 9.5 %
(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 December 31, 2023 December 31, 2022 Interest Average Interest Average NET INTEREST INCOME AND NET INTEREST MARGIN Average Income/ Yield/ Average Income/ Yield/ (in $000’s, unaudited) Balance Expense Rate Balance Expense Rate Assets: Loans, gross (1)(2) $3,282,429 $44,635 5.39%$3,250,556 $42,501 5.19%Securities – taxable 1,074,638 6,516 2.41% 1,156,563 6,941 2.38%Securities – exempt from Federal tax (3) 32,244 288 3.54% 37,958 324 3.39%Other investments and interest-bearing deposits in other financial institutions 534,271 7,514 5.58% 564,501 5,494 3.86%Total interest earning assets (3) 4,923,582 58,953 4.75% 5,009,578 55,260 4.38%Cash and due from banks 35,214 36,392 Premises and equipment, net 9,843 9,436 Goodwill and other intangible assets 176,641 179,074 Other assets 146,682 126,387 Total assets $5,291,962 $5,360,867 Liabilities and shareholders’ equity: Deposits: Demand, noninterest-bearing $1,243,222 $1,851,003 Demand, interest-bearing 948,061 1,661 0.70% 1,164,378 945 0.32%Savings and money market 1,096,962 6,216 2.25% 1,424,964 1,694 0.47%Time deposits – under $100 11,389 37 1.29% 12,157 7 0.23%Time deposits – $100 and over 234,140 2,130 3.61% 120,246 268 0.88%ICS/CDARS – interest-bearing demand, money market and time deposits 920,976 6,009 2.59% 27,785 1 0.01%Total interest-bearing deposits 3,211,528 16,053 1.98% 2,749,530 2,915 0.42%Total deposits 4,454,750 16,053 1.43% 4,600,533 2,915 0.25% Short-term borrowings 29 — 0.00% 24 — 0.00%Subordinated debt, net of issuance costs 39,477 538 5.41% 39,326 538 5.43%Total interest-bearing liabilities 3,251,034 16,591 2.02% 2,788,880 3,453 0.49%Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds 4,494,256 16,591 1.46% 4,639,883 3,453 0.30%Other liabilities 133,068 105,043 Total liabilities 4,627,324 4,744,926 Shareholders’ equity 664,638 615,941 Total liabilities and shareholders’ equity $5,291,962 $5,360,867 Net interest income (3) / margin 42,362 3.41% 51,807 4.10%Less tax equivalent adjustment (3) (61) (68) Net interest income $42,301 $51,739 (1)Includes loans held-for-sale. Nonaccrual loans are included in average balances.(2)Yield amounts earned on loans include fees and costs. The accretion of net deferred loan fees into loan interest income was $147,000 for the fourth quarter of 2023, compared to $326,000 for the fourth quarter of 2022. Prepayment fees totaled $91,000 for the fourth quarter of 2023, compared to $123,000 for the fourth quarter of 2022.(3)Reflects the FTE adjustment for Federal tax-exempt income based on a 21% tax rate. For the Quarter Ended For the Quarter Ended December 31, 2023 September 30, 2023 Interest Average Interest Average NET INTEREST INCOME AND NET INTEREST MARGIN Average Income/ Yield/ Average Income/ Yield/ (in $000’s, unaudited) Balance Expense Rate Balance Expense Rate Assets: Loans, gross (1)(2) $3,282,429 $44,635 5.39% $3,257,480 $44,853 5.46% Securities – taxable 1,074,638 6,516 2.41% 1,114,782 6,797 2.42% Securities – exempt from Federal tax (3) 32,244 288 3.54% 32,947 293 3.53% Other investments and interest-bearing deposits in other financial institutions 534,271 7,514 5.58% 646,501 8,909 5.47% Total interest earning assets (3) 4,923,582 58,953 4.75% 5,051,710 60,852 4.78% Cash and due from banks 35,214 35,911 Premises and equipment, net 9,843 9,374 Goodwill and other intangible assets 176,641 177,238 Other assets 146,682 125,697 Total assets $5,291,962 $5,399,930 Liabilities and shareholders’ equity: Deposits: Demand, noninterest-bearing $1,243,222 $1,302,606 Demand, interest-bearing 948,061 1,661 0.70% 1,017,686 1,730 0.67% Savings and money market 1,096,962 6,216 2.25% 1,087,336 5,514 2.01% Time deposits – under $100 11,389 37 1.29% 11,966 30 0.99% Time deposits – $100 and over 234,140 2,130 3.61% 272,362 2,489 3.63% ICS/CDARS – interest-bearing demand, money market and time deposits 920,976 6,009 2.59% 881,665 5,117 2.30% Total interest-bearing deposits 3,211,528 16,053 1.98% 3,271,015 14,880 1.80% Total deposits 4,454,750 16,053 1.43% 4,573,621 14,880 1.29% Short-term borrowings 29 — 0.00% 31 — 0.00% Subordinated debt, net of issuance costs 39,477 538 5.41% 39,439 539 5.42% Total interest-bearing liabilities 3,251,034 16,591 2.02% 3,310,485 15,419 1.85% Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds 4,494,256 16,591 1.46% 4,613,091 15,419 1.33% Other liabilities 133,068 129,866 Total liabilities 4,627,324 4,742,957 Shareholders’ equity 664,638 656,973 Total liabilities and shareholders’ equity $5,291,962 $5,399,930 Net interest income (3) / margin 42,362 3.41% 45,433 3.57% Less tax equivalent adjustment (3) (61) (61) Net interest income $42,301 $45,372 (1)Includes loans held-for-sale. Nonaccrual loans are included in average balances.(2)Yield amounts earned on loans include fees and costs. The accretion of net deferred loan fees into loan interest income was $147,000 for the fourth quarter of 2023, compared to $201,000 for the third quarter of 2023. Prepayment fees totaled $91,000 for the fourth quarter of 2023, compared to $182,000 for the third quarter of 2023.(3)Reflects the FTE adjustment for Federal tax-exempt income based on a 21% tax rate. For the Year Ended For the Year Ended December 31, 2023 December 31, 2022 Interest Average Interest Average NET INTEREST INCOME AND NET INTEREST MARGIN Average Income/ Yield/ Average Income/ Yield/ (in $000’s, unaudited) Balance Expense Rate Balance Expense Rate Assets: Loans, gross (1)(2) $3,262,194 $177,628 5.45% $3,119,006 $153,010 4.91% Securities – taxable 1,124,190 27,351 2.43% 983,137 20,666 2.10% Securities – exempt from Federal tax (3) 33,806 1,196 3.54% 40,478 1,372 3.39% Other investments, interest-bearing deposits in other financial institutions and Federal funds sold 534,828 28,374 5.31% 908,931 14,068 1.55% Total interest earning assets (3) 4,955,018 234,549 4.73% 5,051,552 189,116 3.74% Cash and due from banks 35,955 37,287 Premises and equipment, net 9,421 9,574 Goodwill and other intangible assets 177,536 180,061 Other assets 132,347 122,746 Total assets $5,310,277 $5,401,220 Liabilities and shareholders’ equity: Deposits: Demand, noninterest-bearing $1,393,949 $1,863,928 Demand, interest-bearing 1,074,523 6,655 0.62% 1,224,676 2,415 0.20% Savings and money market 1,144,032 19,857 1.74% 1,394,283 3,720 0.27% Time deposits – under $100 11,809 97 0.82% 12,587 21 0.17% Time deposits – $100 and over 218,131 6,874 3.15% 122,018 609 0.50% ICS/CDARS – interest-bearing demand, money market and time deposits 625,045 14,074 2.25% 29,708 5 0.02% Total interest-bearing deposits 3,073,540 47,557 1.55% 2,783,272 6,770 0.24% Total deposits 4,467,489 47,557 1.06% 4,647,200 6,770 0.15% Short-term borrowings 27,145 1,365 5.03% 24 — 0.00% Subordinated debt, net of issuance costs 39,420 2,152 5.46% 41,739 2,178 5.22% Total interest-bearing liabilities 3,140,105 51,074 1.63% 2,825,035 8,948 0.32% Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds 4,534,054 51,074 1.13% 4,688,963 8,948 0.19% Other liabilities 123,774 104,654 Total liabilities 4,657,828 4,793,617 Shareholders’ equity 652,449 607,603 Total liabilities and shareholders’ equity $5,310,277 $5,401,220 Net interest income (3) / margin 183,475 3.70% 180,168 3.57% Less tax equivalent adjustment (3) (251) (288) Net interest income $183,224 $179,880 (1)Includes loans held-for-sale. Nonaccrual loans are included in average balances.(2)Yield amounts earned on loans include fees and costs. The accretion of net deferred loan fees into loan interest income was $742,000 for the year ended December 31 2023, compared to $3,437,000 for the year ended December 31, 2022. Prepayment fees totaled $484,000 for the year ended December 31, 2023, compared to $1,278,000 for the year ended December 31, 2022.(3)Reflects the FTE adjustment for Federal tax-exempt income based on a 21% tax rate.
