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Heritage Commerce Corp Earns $16.4 Million for the Second Quarter of 2023, and $35.3 Million for the First Six Months of 2023; Continued Deposit Growth
来源: Nasdaq GlobeNewswire / 27 7月 2023 17:52:24 America/New_York
SAN JOSE, Calif., July 27, 2023 (GLOBE NEWSWIRE) -- Heritage Commerce Corp (Nasdaq: HTBK), the holding company (the “Company”) for Heritage Bank of Commerce (the “Bank”), today announced second quarter 2023 net income increased 11% to $16.4 million, or $0.27 per average diluted common share, compared to $14.8 million, or $0.24 per average diluted common share, for the second quarter of 2022, and decreased (13%) from $18.9 million, or $0.31 per average diluted common share, for the first quarter of 2023. For the six months ended June 30, 2023, net income increased 28% to $35.3 million, or $0.58 per average diluted common share, compared to $27.7 million, or $0.45 per average diluted common share, for the six months ended June 30, 2022. All results are unaudited.
"We are pleased to report excellent operating results for the second quarter of 2023, achieving record earnings not only for this quarter but also for the first six months of the year,” said Clay Jones, President and Chief Executive Officer. “Our profits have shown a notable 28% increase compared to the first six months of 2022. This growth is attributed to the expansion of our loan portfolio, increased deposits, higher net interest income, and improved efficiency."
Mr. Jones further acknowledged that as clients sought higher yields on their deposits, there was an anticipated shift towards interest-bearing deposits. While this shift affected margins during the period, it reflects the Bank's responsiveness to client preferences and demonstrates the commitment to meeting their financial needs.
“Our credit quality remains strong, with only a minor increase to nonperforming and classified assets.” said Mr. Jones. “We remain confident in our allowance for credit losses with respect to our loan portfolio, as our reserves represent 863% of nonperforming loans and 1.45% of total loans.”
"Looking ahead to the second half of the year, we remain confident in the Bank's well-positioned balance sheet, with an emphasis on strength, stability, and liquidity. With a well-diversified and stable deposit base, along with abundant alternative funding sources, we are successfully navigating the current challenges within the banking industry," stated Mr. Jones.
Mr. Jones conveyed his gratitude to the loyal clients, dedicated team members, community nonprofits, and the Company’s shareholders, recognizing their continuing support. Their trust and collaboration play a crucial role in the Company’s ongoing success and ability to provide exceptional financial services to our clients.
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 June 30, 2023:
LIQUIDITY AND AVAILABLE LINES OF CREDIT Total (in $000’s, unaudited) Available Excess funds at the Federal Reserve Bank ("FRB") $ 464,100 FRB discount window collateralized line of credit 1,266,522 Federal Home Loan Bank ("FHLB") collateralized borrowing capacity 1,087,564 Unpledged investment securities (at fair value) 108,571 Off-balance sheet deposits 86,734 Federal funds purchase arrangements 80,000 Holding company line of credit 20,000 Total $ 3,113,491 - The Company’s total liquidity and borrowing capacity was $3.113 billion, all of which remained available at June 30, 2023.
- The available liquidity and borrowing capacity was 69% of total deposits and approximately 145% of estimated uninsured deposits at June 30, 2023.
- The Bank increased its credit line availability from the FRB and the FHLB by $332.3 million to $2.354 billion at June 30, 2023, from $2.022 billion at March 31, 2023, and increased by $1.515 billion from $839.5 million at December 31, 2022.
- The Company borrowed $150.0 million on its line of credit with the FRB, and another $150.0 million on its line of credit with the FHLB during the first quarter of 2023, and both lines of credit were repaid in full on April 20, 2023. These short-term borrowings provided rapid, flexible liquidity during an uncertain time.
- The loan to deposit ratio was 73.07% at June 30, 2023, compared to 75.14% at December 31, 2022, and 73.39% at March 31, 2023.
Deposits:
- Total deposits increased $111.2 million, or 3%, to $4.501 billion at June 30, 2023 from $4.390 billion at December 31, 2022, and increased $56.2 million, or 1% from March 31, 2023.
- Migration of customer deposits resulted in an increase in Insured Cash Sweep (“ICS”)/Certificate of Deposit Account Registry Service (“CDARS”) deposits of $793.7 million to $824.1 million at June 30, 2023, compared to $30.4 million at December 31, 2022. ICS/CDARS deposits increased $520.0 million to $824.1 million at June 30, 2023 from $304.1 million at March 31, 2023.
- Noninterest-bearing demand deposits decreased ($416.9) million, or (24%), to $1.320 billion at June 30, 2023 from December 31, 2022, and decreased ($149.2) million, or (10%) from March 31, 2023, primarily due to clients seeking higher yields and moving noninterest-bearing deposits to the Bank’s interest-bearing and ICS deposits.
- The Company had 24,404 deposits accounts at June 30, 2023, with an average balance of $187,000, compared to 24,103 deposit accounts at March 31, 2023, with an average balance of $184,000. At December 31, 2023, the Company had 23,833 deposit accounts, with an average balance of $184,000.
- Deposits from the top 100 client relationships totaled $2.108 billion, representing 47% of total deposits, with an average account size of $401,000, representing 22% of the total number of accounts at June 30, 2023.
Investment Securities:
- Investment securities totaled $1.168 billion at June 30, 2023, of which $486.1 million were in the securities available-for-sale portfolio (at fair value), and $682.1 million were in the securities held-to-maturity portfolio (at amortized cost, net of allowance for credit losses of $13,000).
- The weighted average life of the total investment securities portfolio was 4.79 years at June 30, 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 CASH FLOWS U.S. Municipal (in $000’s, unaudited) Treasury Securities Total Third quarter of 2023 $ 27,000 $ 24,587 $ 51,587 Fourth quarter of 2023 20,000 19,739 39,739 First quarter of 2024 37,000 19,458 56,458 Second quarter of 2024 131,000 18,624 149,624 Total $ 215,000 $ 82,408 $ 297,408 Loans:
- Loans, excluding loans held-for-sale, decreased ($9.8) million to $3.289 billion at June 30, 2023 from December 31, 2022, and increased $26.9 million, or 1%, from March 31, 2023.
- Commercial real estate (“CRE”) loans totaled $1.755 billion at June 30, 2023, of which 35% were owner occupied and 65% were investor CRE loans.
- During the second quarter of 2023, 41 new CRE loans were originated totaling $92 million with a weighted average loan-to-value and debt-service coverage for the non-owner occupied portfolio of 40% and 1.77 times, respectively
- The average loan size for all CRE loans was $1.6 million, and the average loan size for office CRE loans was $1.7 million.
- The Company has personal guarantees on 90% 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 $397 million, including 30 loans totaling approximately $76 million, in San Jose, 17 loans totaling approximately $29 million in San Francisco, and 6 loans totaling approximately $11 million, in Oakland, at June 30, 2023. Non-owner occupied CRE with office exposure totaled $307 million at June 30, 2023.
- Of the $397 million of CRE loans with office exposure, approximately $35 million, or 9%, are situated in the Bay Area downtown business districts of San Jose and San Francisco, with an average balance of $2.3 million.
- At June 30, 2023, the weighted average loan-to-value and debt-service coverage for the entire non-owner occupied office portfolio were 43.6% and 1.87 times, respectively. For the 8 non-owner occupied office loans in San Francisco at June 30, 2023, the weighted average loan-to-value and debt-service coverage were 34% and 1.55 times, respectively.
Second Quarter Ended June 30, 2023
Operating Results, Balance Sheet Review, Capital Management, and Credit Quality(as of, or for the periods ended June 30, 2023, compared to June 30, 2022, and March 31, 2023, except as noted):
Operating Results:
- Diluted earnings per share were $0.27 for the second quarter of 2023, compared to $0.24 for the second quarter of 2022, and $0.31 for the first quarter of 2023. Diluted earnings per share were $0.58 for the first six months of 2023, compared to $0.45 for the first six months of 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 Six Months Ended: June 30, March 31, June 30, June 30, June 30, (unaudited) 2023 2023 2022 2023 2022 Return on average tangible assets 1.29 % 1.52 % 1.15 % 1.40 % 1.07 % Return on average tangible common equity 13.93 % 16.71 % 14.06 % 15.29 % 13.28 % - Net interest income increased 11% to $46.3 million for the second quarter of 2023, compared to $41.9 million for the second quarter of 2022. The fully tax equivalent (“FTE”) net interest margin increased 38 basis points to 3.76% for the second quarter of 2023, from 3.38% for the second quarter of 2022, primarily due to increases in the prime rate and the rate on overnight funds, partially offset by a higher cost of funds, a decrease in the average balances of noninterest bearing demand deposits and an increase in the average balances of short-term borrowings.
- Net interest income decreased (6%) to $46.3 million for the second quarter of 2023, compared to $49.3 million for the first quarter of 2023. The FTE net interest margin decreased (33) basis points to 3.76% for the second quarter of 2023 from 4.09% for the first quarter of 2023, primarily due to a higher cost of funds, a decrease in the average balances of noninterest bearing demand deposits, and a decrease in the accretion of the loan purchase discount into interest income from acquired loans partially offset by increases in the prime rate and higher average yields on overnight funds.
- For the first six months of 2023, the net interest income increased 19% to $95.6 million, compared to $80.1 million for the first six months of 2022. The FTE net interest margin increased 71 basis points to 3.92% for the first six months of 2023, from 3.21% for the first six months of 2022, primarily due to increases in the prime rate and the rate on overnight funds, partially offset by a higher cost of funds, a decrease in the average balances of noninterest bearing demand deposits, and an increase in the average balances of short-term borrowings.
- Net interest income decreased (6%) to $46.3 million for the second quarter of 2023, compared to $49.3 million for the first quarter of 2023. The FTE net interest margin decreased (33) basis points to 3.76% for the second quarter of 2023 from 4.09% for the first quarter of 2023, primarily due to a higher cost of funds, a decrease in the average balances of noninterest bearing demand deposits, and a decrease in the accretion of the loan purchase discount into interest income from acquired loans partially offset by increases in the prime rate and higher average yields on overnight funds.
- The following table, as of June 30, 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 $ 16,770 8.2 % +300 $ 12,537 6.2 % +200 $ 8,326 4.1 % +100 $ 4,147 2.0 % 0 — — −100 $ (5,371 ) (2.6 ) % −200 $ (17,083 ) (8.4 ) % −300 $ (32,894 ) (16.2 ) % −400 $ (48,726 ) (24.0 ) % (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. 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 increased to 5.47% for the second quarter of 2023, compared to 5.46% for the first quarter of 2023, primarily due to increases in the prime rate.
For the Quarter Ended For the Quarter Ended June 30, 2023 March 31, 2023 Average Interest Average Average Interest Average (in $000’s, unaudited) Balance Income Yield Balance Income Yield Loans, core bank $ 2,660,119 $ 35,310 5.32 % $ 2,688,800 $ 34,967 5.27 % Prepayment fees — 73 0.01 % — 138 0.02 % Asset-based lending 28,251 686 9.74 % 27,550 627 9.23 % Bay View Funding factored receivables 68,680 3,847 22.47 % 77,755 4,001 20.87 % Purchased residential mortgages 478,220 3,829 3.21 % 487,780 3,857 3.21 % Loan fair value mark / accretion (3,929 ) 283 0.04 % (4,360 ) 522 0.08 % Total loans (includes loans held-for-sale) $ 3,231,341 $ 44,028 5.47 % $ 3,277,525 $ 44,112 5.46 % - The average yield on the total loan portfolio increased to 5.47% for the second quarter of 2023, compared to 4.80% for the second quarter of 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 Quarter Ended For the Quarter Ended June 30, 2023 June 30, 2022 Average Interest Average Average Interest Average (in $000’s, unaudited) Balance Income Yield Balance Income Yield Loans, core bank $ 2,660,119 $ 35,310 5.32 % $ 2,560,740 $ 28,025 4.39 % Prepayment fees — 73 0.01 % — 549 0.09 % Asset-based lending 28,251 686 9.74 % 49,667 874 7.06 % Bay View Funding factored receivables 68,680 3,847 22.47 % 64,085 3,129 19.58 % Purchased residential mortgages 478,220 3,829 3.21 % 381,988 2,711 2.85 % Loan fair value mark / accretion (3,929 ) 283 0.04 % (6,303 ) 1,250 0.20 % Total loans (includes loans held-for-sale) $ 3,231,341 $ 44,028 5.47 % $ 3,050,177 $ 36,538 4.80 % - The average yield on the total loan portfolio increased to 5.46% for the first six months of 2023, compared to 4.75% for the first six months of 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 Six Months Ended For the Six Months Ended June 30, 2023 June 30, 2022 Average Interest Average Average Interest Average (in $000’s, unaudited) Balance Income Yield Balance Income Yield Loans, core bank $ 2,674,389 $ 70,277 5.30 % $ 2,556,636 $ 55,690 4.39 % Prepayment fees — 211 0.02 % — 1,059 0.08 % Asset-based lending 27,902 1,313 9.49 % 59,587 1,825 6.18 % Bay View Funding factored receivables 73,193 7,848 21.62 % 60,940 5,922 19.60 % Purchased residential mortgages 482,964 7,686 3.21 % 368,880 5,139 2.81 % Loan fair value mark / accretion (4,143 ) 805 0.06 % (6,600 ) 2,004 0.16 % Total loans (includes loans held-for-sale) $ 3,254,305 $ 88,140 5.46 % $ 3,039,443 $ 71,639 4.75 % • In aggregate, the remaining net purchase discount on total loans acquired was $3.8 million at June 30, 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 June 30, 2023 March 31, 2023 Average Interest Average Average Interest Average (in $000’s, unaudited) Balance Expense Rate Balance Expense Rate Deposits: Demand, noninterest-bearing $ 1,368,373 $ 1,667,260 Demand, interest-bearing 1,118,200 $ 1,788 0.64 % 1,217,731 $ 1,476 0.49 % Savings and money market 1,109,347 4,638 1.68 % 1,285,173 3,489 1.10 % Time deposits - under $100 11,610 20 0.69 % 12,280 10 0.33 % Time deposits - $100 and over 201,600 1,410 2.81 % 163,047 845 2.10 % ICS/CDARS - interest-bearing demand, money market and time deposits 614,911 2,867 1.87 % 70,461 81 0.47 % Total interest-bearing deposits 3,055,668 10,723 1.41 % 2,748,692 5,901 0.87 % Total deposits 4,424,041 10,723 0.97 % 4,415,952 5,901 0.54 % Short-term borrowings 62,653 787 5.04 % 46,677 578 5.02 % Subordinated debt, net of issuance costs 39,401 538 5.48 % 39,363 537 5.53 % Total interest-bearing liabilities 3,157,722 12,048 1.53 % 2,834,732 7,016 1.00 % Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds $ 4,526,095 $ 12,048 1.07 % $ 4,501,992 $ 7,016 0.63 % • The average cost of total deposits increased to 0.97% for the second quarter of 2023, compared to 0.54% for the first quarter of 2023. The average cost of funds increased to 1.07% for the second quarter of 2023, compared to 0.63% for the first quarter of 2023. The average cost of deposits was 0.10% and the average cost of funds was 0.15% for the second quarter of 2022. • The average cost of total deposits increased to 0.76% for the first six months of 2023, compared to 0.10% for the first six months of 2022. The average cost of funds increased to 0.85% for the first six months of 2023, compared to 0.14% for the first six months of 2022. • The increase in the average cost of total deposits and the average cost of funds for the second quarter of 2023 and first six months of 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 second quarter of 2023, we recorded a provision for credit losses on loans of $260,000, compared to a ($181,000) recapture of provision for credit losses on loans for the second quarter of 2022, and a provision for credit losses on loans of $32,000 for the first quarter of 2023. There was a provision for credit losses on loans of $292,000 for the six months ended June 30, 2023, compared to a ($748,000) recapture of provision for credit losses on loans for the six months ended June 30, 2022.
- Total noninterest income remained relatively flat at $2.1 million for both the second quarter of 2023 and the second quarter of 2022. Total noninterest income decreased (25%) to $2.1 million for the second quarter of 2023, compared to $2.8 million for the first quarter of 2023, primarily due to lower service charges and fees on deposit accounts.
- For the six months ended June 30, 2023, total noninterest income increased 6% to $4.8 million, compared to $4.6 million for the six months ended June 30, 2022, primarily due to higher service charges and fees on deposit accounts, partially offset by a $637,000 gain on warrants during the first six months of 2022.
- Total noninterest expense for the second quarter of 2023 increased to $25.0 million, compared to $23.2 million for the second quarter of 2022, primarily due to higher salaries and employee benefits, and higher insurance and information technology related expenses included in other noninterest expense during the second quarter of 2023. Total noninterest expense for the second quarter of 2023 decreased to $25.0 million, compared to $25.4 million for the first quarter of 2023, primarily due to a decrease in payroll taxes, vacation and 401(k) expenses, higher deferred loan origination costs, and lower professional fees, partially offset by higher information technology related expenses.
- Total noninterest expense for the six months ended June 30, 2023 increased to $50.4 million, compared to $46.4 million for the six months ended June 30, 2022, primarily due to higher salaries and employee benefits, and higher insurance and information technology related expenses included in other noninterest expense during the six months ended June 30, 2023.
- Full time equivalent employees were 347 at June 30, 2023, and 332 at June 30, 2022, and 339 at March 31, 2023.
- Total noninterest expense for the six months ended June 30, 2023 increased to $50.4 million, compared to $46.4 million for the six months ended June 30, 2022, primarily due to higher salaries and employee benefits, and higher insurance and information technology related expenses included in other noninterest expense during the six months ended June 30, 2023.
- The efficiency ratio was 51.67% for the second quarter of 2023, compared to 52.73% for the second quarter of 2022, and 48.83% for the first quarter of 2023. The efficiency ratio improved to 50.20% for the six months ended June 30, 2023, compared to 54.86% for the six months ended June 30, 2022, primarily due to higher net interest income.
- Income tax expense was $6.7 million for the second quarter of 2023, compared to $6.1 million for the second quarter of 2022, and $7.7 million for the first quarter of 2023. The effective tax rate for the second quarter of 2023 was 29.0%, compared to 29.3% for the second quarter of 2022, and 28.9% for the first quarter of 2023. Income tax expense for the six months ended June 30, 2023 was $14.4 million, compared to $11.3 million for the six months ended June 30, 2022. The effective tax rate for both the six months ended June 30, 2023 and June 30, 2022 was 28.9%.
Balance Sheet Review, Capital Management and Credit Quality:
- Total assets decreased (1%) to $5.312 billion at June 30, 2023, compared to $5.357 billion at June 30, 2022. Total assets decreased (4%) from $5.537 billion at March 31, 2023, due to the repayment during the second quarter of 2023 of $300.0 million in borrowings that were outstanding at March 31, 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 June 30, March 31, June 30, (in $000’s, unaudited) 2023 2023 2022 Balance (at fair value): U.S. Treasury $ 421,146 $ 422,903 $ 250,126 Agency mortgage-backed securities 64,912 68,848 82,003 Total $ 486,058 $ 491,751 $ 332,129 Pre-tax unrealized (loss): U.S. Treasury $ (10,903 ) $ (7,510 ) $ (1,239 ) Agency mortgage-backed securities (5,659 ) (4,969 ) (2,949 ) Total $ (16,562 ) $ (12,479 ) $ (4,188 ) • The pre-tax unrealized loss on the securities available-for-sale portfolio was ($16.6) million, or ($11.7) million net of taxes, which was 2% of total shareholders’ equity at June 30, 2023. • The weighted average life of the securities available-for-sale portfolio was 1.64 years at June 30, 2023. - The following table shows the balances of securities held-to-maturity, at amortized cost, and the related pre-tax unrealized (loss) gain and allowance for credit losses for the periods indicated:
SECURITIES HELD-TO-MATURITY June 30, March 31, June 30, (in $000’s, unaudited) 2023 2023 2022 Balance (at amortized cost): Agency mortgage-backed securities $ 648,337 $ 663,481 $ 683,779 Municipals — exempt from Federal tax 33,771 34,764 39,976 Total $ 682,108 $ 698,245 $ 723,755 Pre-tax unrealized (loss): Agency mortgage-backed securities $ (95,285 ) $ (89,962 ) $ (72,490 ) Municipals — exempt from Federal tax (1,052 ) (297 ) (436 ) Total $ (96,337 ) $ (90,259 ) $ (72,926 ) Allowance for credit losses on municipal securities $ (13 ) $ (14 ) $ (39 ) • The pre-tax unrealized loss on the securities held-to-maturity portfolio was ($96.3) million at June 30, 2023, or ($67.9) million net of taxes, which was 11% of total shareholders’ equity at June 30, 2023. • The weighted average life of the securities held-to-maturity portfolio was 7.12 years at June 30, 2023. - The unrealized losses in both the available-for-sale and held-to-maturity portfolios were due to higher interest rates at June 30, 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 loan portfolio remains well-diversified as reflected in the following table which summarizes the distribution of loans, excluding loans held-for-sale, and the percentage of distribution in each category for the periods indicated:
LOANS June 30, 2023 March 31, 2023 June 30, 2022 (in $000’s, unaudited) Balance % to Total Balance % to Total Balance % to Total Commercial $ 466,354 14 % $ 506,602 16 % $ 531,421 17 % Real estate: CRE - owner occupied 608,031 18 % 603,298 18 % 597,521 19 % CRE - non-owner occupied 1,147,313 35 % 1,083,852 33 % 993,621 32 % Land and construction 162,816 5 % 166,408 5 % 155,389 5 % Home equity 128,009 4 % 124,481 4 % 116,641 4 % Multifamily 244,959 7 % 231,242 7 % 221,938 7 % Residential mortgages 514,064 16 % 528,639 16 % 448,958 15 % Consumer and other 17,635 1 % 17,905 1 % 18,354 1 % Total Loans 3,289,181 100 % 3,262,427 100 % 3,083,843 100 % Deferred loan costs (fees), net (397 ) — (512 ) — (1,391 ) — Loans, net of deferred costs and fees $ 3,288,784 100 % $ 3,261,915 100 % $ 3,082,452 100 % • Loans, excluding loans held-for-sale, increased $206.3 million, or 7%, to $3.289 billion at June 30, 2023, compared to $3.082 billion at June 30, 2022, and increased $26.9 million, or 1%, from $3.262 billion at March 31, 2023. Loans, excluding residential mortgages, increased $141.2 million, or 5%, to $2.775 billion at June 30, 2023, compared to $2.633 billion at June 30, 2022, and increased $41.4 million, or 2%, from $2.733 billion at March 31, 2023. • Commercial and industrial (“C&I”) line utilization was 29% at June 30, 2023, compared to 28% at June 30, 2022, and 31% at March 31, 2023. • At June 30, 2023, there was 35% of the CRE loan portfolio secured by owner occupied real estate, compared to 36% at both June 30, 2022 and March 31, 2023. - The following table presents the maturity distribution of the Company’s loans, excluding loans held-for-sale, as of June 30, 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 Total Loans with variable interest rates $ 392,663 41 % $ 259,692 27 % $ 307,481 32 % $ 959,836 Loans with fixed interest rates 66,900 3 % 576,870 25 % 1,685,575 72 % 2,329,345 Loans $ 459,563 14 % $ 836,562 25 % $ 1,993,056 61 % $ 3,289,181 • At June 30, 2023, approximately 29% of the Company’s loan portfolio consisted of floating interest rate loans, compared to 36% at June 30, 2022, and 31% at March 31, 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 Six Months Ended: ALLOWANCE FOR CREDIT LOSSES ON LOANS June 30, March 31, June 30, June 30, June 30, (in $000’s, unaudited) 2023 2023 2022 2023 2022 Balance at beginning of period $ 47,273 $ 47,512 $ 42,788 $ 47,512 $ 43,290 Charge-offs during the period (24 ) (380 ) (355 ) (404 ) (371 ) Recoveries during the period 294 109 3,238 403 3,319 Net recoveries (charge-offs) during the period 270 (271 ) 2,883 (1 ) 2,948 Provision for (recapture of) credit losses on loans during the period 260 32 (181 ) 292 (748 ) Balance at end of period $ 47,803 $ 47,273 $ 45,490 $ 47,803 $ 45,490 Total loans, net of deferred fees $ 3,288,784 $ 3,261,915 $ 3,082,452 $ 3,288,784 $ 3,082,452 Total nonperforming loans $ 5,537 $ 2,240 $ 2,715 $ 5,537 $ 2,715 ACLL to total loans 1.45 % 1.45 % 1.48 % 1.45 % 1.48 % ACLL to total nonperforming loans 863.34 % 2,110.40 % 1,675.51 % 863.34 % 1,675.51 % • The following table shows the drivers of change in ACLL for the first and second 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 - The following is a breakout of nonperforming assets (“NPAs”) at the periods indicated:
NONPERFORMING ASSETS June 30, 2023 March 31, 2023 June 30, 2022 (in $000’s, unaudited) Balance % of Total Balance % of Total Balance % of Total Restructured and loans over 90 days past due and still accruing $ 2,262 41 % $ 1,459 65 % $ 981 36 % Residential mortgages 1,873 34 % — — % — — % Commercial loans 1,306 23 % 685 31 % 640 24 % Home equity loans 96 2 % 96 4 % — — % CRE loans — — % — — % 1,094 40 % Total nonperforming assets $ 5,537 100 % $ 2,240 100 % $ 1,621 60 % • NPAs totaled $5.5 million, or 0.10% of total assets, at June 30, 2023, compared to $2.7 million, or 0.05% of total assets, at June 30, 2022, and $2.2 million, or 0.04% of total assets, at March 31, 2023. • There were no foreclosed assets on the balance sheet at June 30, 2023, June 30, 2022, or March 31, 2023. • Classified assets totaled $30.5 million, or 0.57% of total assets, at June 30, 2023, compared to $28.9 million, or 0.54% of total assets, at June 30, 2022, and $26.8 million, or 0.48% of total assets, at March 31, 2023. - The following table summarizes the distribution of deposits and the percentage of distribution in each category for the periods indicated:
DEPOSITS June 30, 2023 March 31, 2023 June 30, 2022 (in $000’s, unaudited) Balance % to Total Balance % to Total Balance % to Total Demand, noninterest-bearing $ 1,319,844 29 % $ 1,469,081 33 % $ 1,846,365 40 % Demand, interest-bearing 1,064,638 24 % 1,196,789 27 % 1,218,538 26 % Savings and money market 1,075,835 24 % 1,264,567 28 % 1,387,003 30 % Time deposits — under $250 44,520 1 % 37,884 1 % 36,691 1 % Time deposits — $250 and over 171,852 4 % 172,070 4 % 98,760 2 % ICS/CDARS — interest-bearing demand, money market and time deposits 824,083 18 % 304,147 7 % 26,287 1 % Total deposits $ 4,500,772 100 % $ 4,444,538 100 % $ 4,613,644 100 % • Total deposits decreased ($112.9) million, or (2%), to $4.501 billion at June 30, 2023, compared to $4.614 billion at June 30, 2022, and increased $56.2 million, or 1%, from $4.445 billion at March 31, 2023. • ICS/CDARS deposits increased $797.8 million to $824.1 million at June 30, 2023, compared to $26.3 million at June 30, 2022, and increased $519.9 million from $304.1 million at March 31, 2023. • Uninsured deposits were approximately $2.148 billion, or 48% of total deposits, at June 30, 2023, compared to $2.556 billion, or 58% of total deposits, at March 31, 2023, and $2.788 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 June 30, 2023, as reflected in the following table:
Well-capitalized Financial Institution Basel III Heritage Heritage Basel III PCA Minimum Commerce Bank of Regulatory Regulatory CAPITAL RATIOS (unaudited) Corp Commerce Guidelines Requirement (1) Total 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 9.7 % 10.0 % 5.0 % 4.0 % Tangible common equity / tangible assets (2) 9.3 % 9.6 % 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 June 30, March 31, June 30, (in $000’s, unaudited) 2023 2023 2022 Unrealized loss on securities available-for-sale $ (11,822 ) $ (8,924 ) $ (3,036 ) Split dollar insurance contracts liability (3,187 ) (3,139 ) (5,501 ) Supplemental executive retirement plan liability (2,352 ) (2,361 ) (7,508 ) Unrealized gain on interest-only strip from SBA loans 103 107 127 Total accumulated other comprehensive loss $ (17,258 ) $ (14,317 ) $ (15,918 ) 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 SEC.
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. 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) geopolitical and domestic political developments that can increase levels of political and economic unpredictability, contribute to rising energy and commodity prices, and increase the volatility of financial markets; (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) 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 we have made and make, whether held in the portfolio or in the secondary market; (5) liquidity risks, including public announcements by, and media stories regarding, other financial institutions that may affect depositors’ confidence in the banking system; (6) our ability to mitigate and manage deposit liabilities in a manner that balances the need to meet current and expected withdrawals while investing a sufficient portion of our assets to promote strong earning capacity; (7) 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; (8) volatility in credit and equity markets and its effect on the global economy; (9) conditions relating to the impact of the COVID-19 pandemic, and other infectious illness outbreaks that may arise in the future, our customers, employees, businesses, liquidity, financial results and overall condition including severity and duration of the associated uncertainties in U.S. and global markets; (10) 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; (11) our ability to achieve loan growth and attract deposits in our market area, the impact of the cost of deposits and our ability to retain deposits; (12) risks associated with concentrations in real estate related loans; (13) 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; (14) credit related impairment charges to our securities portfolio; (15) 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; (16) regulatory limits on Heritage Bank of Commerce’s ability to pay dividends to the Company; (17) 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; (18) 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; (19) possible adjustment of the valuation of our deferred tax assets; (20) 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; (21) inability of our framework to manage risks associated with our business, including operational risk and credit risk; (22) risks of loss of funding of Small Business Administration (“SBA”) or SBA loan programs, or changes in those programs; (23) 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; (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) 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 resulting from social unrest and protests; (29) risks of natural disasters (including earthquakes, fires, and flooding) and other events beyond our control; and (30) 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.comFor the Quarter Ended: Percent Change From: For the Six Months Ended: CONSOLIDATED INCOME STATEMENTS June 30, March 31, June 30, March 31, June 30, June 30, June 30, Percent (in $000’s, unaudited) 2023 2023 2022 2023 2022 2023 2022 Change Interest income $ 58,341 $ 56,274 $ 43,556 4 % 34 % $ 114,615 $ 83,462 37 % Interest expense 12,048 7,016 1,677 72 % 618 % 19,064 3,362 467 % Net interest income before provision for credit losses on loans 46,293 49,258 41,879 (6 ) % 11 % 95,551 80,100 19 % Provision for (recapture of) credit losses on loans 260 32 (181 ) 713 % 244 % 292 (748 ) 139 % Net interest income after provision for credit losses on loans 46,033 49,226 42,060 (6 ) % 9 % 95,259 80,848 18 % Noninterest income: Service charges and fees on deposit accounts 901 1,743 867 (48 ) % 4 % 2,644 1,479 79 % Increase in cash surrender value of life insurance 502 493 480 2 % 5 % 995 960 4 % Gain on sales of SBA loans 199 76 27 162 % 637 % 275 183 50 % Servicing income 104 131 139 (21 ) % (25 ) % 235 245 (4 ) % Termination fees — 11 45 (100 ) % (100 ) % 11 45 (76 ) % Gain on proceeds from company-owned life insurance — — 27 N/A (100 ) % — 27 (100 ) % Gain on warrants — — — N/A N/A — 637 (100 ) % Other 368 312 513 18 % (28 ) % 680 982 (31 ) % Total noninterest income 2,074 2,766 2,098 (25 ) % (1 ) % 4,840 4,558 6 % Noninterest expense: Salaries and employee benefits 13,987 14,809 13,476 (6 ) % 4 % 28,796 27,297 5 % Occupancy and equipment 2,422 2,400 2,277 1 % 6 % 4,822 4,714 2 % Professional fees 1,149 1,399 1,291 (18 ) % (11 ) % 2,548 2,371 7 % Other 7,433 6,793 6,146 9 % 21 % 14,226 12,060 18 % Total noninterest expense 24,991 25,401 23,190 (2 ) % 8 % 50,392 46,442 9 % Income before income taxes 23,116 26,591 20,968 (13 ) % 10 % 49,707 38,964 28 % Income tax expense 6,713 7,674 6,147 (13 ) % 9 % 14,387 11,277 28 % Net income $ 16,403 $ 18,917 $ 14,821 (13 ) % 11 % $ 35,320 $ 27,687 28 % PER COMMON SHARE DATA (unaudited) Basic earnings per share $ 0.27 $ 0.31 $ 0.24 (13 ) % 13 % $ 0.58 $ 0.46 26 % Diluted earnings per share $ 0.27 $ 0.31 $ 0.24 (13 ) % 13 % $ 0.58 $ 0.45 29 % Weighted average shares outstanding - basic 61,035,435 60,908,221 60,542,170 0 % 1 % 60,971,828 60,468,027 1 % Weighted average shares outstanding - diluted 61,167,689 61,268,072 60,969,154 0 % 0 % 61,192,720 60,945,711 0 % Common shares outstanding at period-end 61,091,155 60,948,607 60,666,794 0 % 1 % 61,091,155 60,666,794 1 % Dividend per share $ 0.13 $ 0.13 $ 0.13 0 % 0 % $ 0.26 $ 0.26 0 % Book value per share $ 10.70 $ 10.62 $ 10.01 1 % 7 % $ 10.70 $ 10.01 7 % Tangible book value per share $ 7.80 $ 7.70 $ 7.04 1 % 11 % $ 7.80 $ 7.04 11 % KEY FINANCIAL RATIOS (unaudited) Annualized return on average equity 10.12 % 12.03 % 9.86 % (16 ) % 3 % 11.06 % 9.29 % 19 % Annualized return on average tangible common equity 13.93 % 16.71 % 14.06 % (17 ) % (1 ) % 15.29 % 13.28 % 15 % Annualized return on average assets 1.25 % 1.47 % 1.11 % (15 ) % 13 % 1.35 % 1.04 % 30 % Annualized return on average tangible assets 1.29 % 1.52 % 1.15 % (15 ) % 12 % 1.40 % 1.07 % 31 % Net interest margin (FTE) 3.76 % 4.09 % 3.38 % (8 ) % 11 % 3.92 % 3.21 % 22 % Efficiency ratio 51.67 % 48.83 % 52.73 % 6 % (2 ) % 50.20 % 54.86 % (8 ) % AVERAGE BALANCES (in $000’s, unaudited) Average assets $ 5,278,243 $ 5,235,506 $ 5,334,636 1 % (1 ) % $ 5,256,993 $ 5,388,638 (2 ) % Average tangible assets $ 5,100,399 $ 5,057,063 $ 5,154,245 1 % (1 ) % $ 5,078,851 $ 5,207,912 (2 ) % Average earning assets $ 4,948,397 $ 4,895,009 $ 4,985,611 1 % (1 ) % $ 4,921,850 $ 5,039,432 (2 ) % Average loans held-for-sale $ 4,166 $ 2,755 $ 1,824 51 % 128 % $ 3,764 $ 1,652 128 % Average total loans $ 3,227,175 $ 3,274,770 $ 3,048,353 (1 ) % 6 % $ 3,250,541 $ 3,037,791 7 % Average deposits $ 4,424,041 $ 4,415,952 $ 4,579,436 0 % (3 ) % $ 4,420,019 $ 4,637,960 (5 ) % Average demand deposits - noninterest-bearing $ 1,368,373 $ 1,667,260 $ 1,836,350 (18 ) % (25 ) % $ 1,516,991 $ 1,846,699 (18 ) % Average interest-bearing deposits $ 3,055,668 $ 2,748,692 $ 2,743,086 11 % 11 % $ 2,903,028 $ 2,791,261 4 % Average interest-bearing liabilities $ 3,157,722 $ 2,834,732 $ 2,791,527 11 % 13 % $ 2,997,119 $ 2,835,495 6 % Average equity $ 650,240 $ 637,597 $ 603,182 2 % 8 % $ 643,954 $ 601,279 7 % Average tangible common equity $ 472,396 $ 459,154 $ 422,791 3 % 12 % $ 465,812 $ 420,553 11 % For the Quarter Ended: CONSOLIDATED INCOME STATEMENTS June 30, March 31, December 31, September 30, June 30, (in $000’s, unaudited) 2023 2023 2022 2022 2022 Interest income $ 58,341 $ 56,274 $ 55,192 $ 50,174 $ 43,556 Interest expense 12,048 7,016 3,453 2,133 1,677 Net interest income before provision for credit losses on loans 46,293 49,258 51,739 48,041 41,879 Provision for (recapture of) credit losses on loans 260 32 508 1,006 (181 ) Net interest income after provision for credit losses on loans 46,033 49,226 51,231 47,035 42,060 Noninterest income: Service charges and fees on deposit accounts 901 1,743 1,801 1,360 867 Increase in cash surrender value of life insurance 502 493 481 484 480 Gain on sales of SBA loans 199 76 — 308 27 Servicing income 104 131 138 125 139 Termination fees — 11 — 16 45 Gain on proceeds from company-owned life insurance — — — — 27 Gain on warrants — — — 32 — Other 368 312 352 456 513 Total noninterest income 2,074 2,766 2,772 2,781 2,098 Noninterest expense: Salaries and employee benefits 13,987 14,809 13,915 14,119 13,476 Occupancy and equipment 2,422 2,400 2,510 2,415 2,277 Professional fees 1,149 1,399 1,414 1,230 1,291 Other 7,433 6,793 6,679 6,135 6,146 Total noninterest expense 24,991 25,401 24,518 23,899 23,190 Income before income taxes 23,116 26,591 29,485 25,917 20,968 Income tax expense 6,713 7,674 8,686 7,848 6,147 Net income $ 16,403 $ 18,917 $ 20,799 $ 18,069 $ 14,821 PER COMMON SHARE DATA (unaudited) Basic earnings per share $ 0.27 $ 0.31 $ 0.34 $ 0.30 $ 0.24 Diluted earnings per share $ 0.27 $ 0.31 $ 0.34 $ 0.30 $ 0.24 Weighted average shares outstanding - basic 61,035,435 60,908,221 60,788,803 60,686,992 60,542,170 Weighted average shares outstanding - diluted 61,167,689 61,268,072 61,357,023 61,123,801 60,969,154 Common shares outstanding at period-end 61,091,155 60,948,607 60,852,723 60,716,794 60,666,794 Dividend per share $ 0.13 $ 0.13 $ 0.13 $ 0.13 $ 0.13 Book value per share $ 10.70 $ 10.62 $ 10.39 $ 10.04 $ 10.01 Tangible book value per share $ 7.80 $ 7.70 $ 7.46 $ 7.09 $ 7.04 KEY FINANCIAL RATIOS (unaudited) Annualized return on average equity 10.12 % 12.03 % 13.40 % 11.72 % 9.86 % Annualized return on average tangible common equity 13.93 % 16.71 % 18.89 % 16.60 % 14.06 % Annualized return on average assets 1.25 % 1.47 % 1.54 % 1.31 % 1.11 % Annualized return on average tangible assets 1.29 % 1.52 % 1.59 % 1.36 % 1.15 % Net interest margin (FTE) 3.76 % 4.09 % 4.10 % 3.73 % 3.38 % Efficiency ratio 51.67 % 48.83 % 44.98 % 47.02 % 52.73 % AVERAGE BALANCES (in $000’s, unaudited) Average assets $ 5,278,243 $ 5,235,506 $ 5,360,867 $ 5,466,330 $ 5,334,636 Average tangible assets $ 5,100,399 $ 5,057,063 $ 5,181,793 $ 5,286,591 $ 5,154,245 Average earning assets $ 4,948,397 $ 4,895,009 $ 5,009,578 $ 5,117,373 $ 4,985,611 Average loans held-for-sale $ 4,166 $ 2,755 $ 2,346 $ 3,282 $ 1,824 Average total loans $ 3,227,175 $ 3,274,770 $ 3,248,210 $ 3,140,705 $ 3,048,353 Average deposits $ 4,424,041 $ 4,415,952 $ 4,600,533 $ 4,712,044 $ 4,579,436 Average demand deposits - noninterest-bearing $ 1,368,373 $ 1,667,260 $ 1,851,003 $ 1,910,748 $ 1,836,350 Average interest-bearing deposits $ 3,055,668 $ 2,748,692 $ 2,749,530 $ 2,801,296 $ 2,743,086 Average interest-bearing liabilities $ 3,157,722 $ 2,834,732 $ 2,788,880 $ 2,840,611 $ 2,791,527 Average equity $ 650,240 $ 637,597 $ 615,941 $ 611,707 $ 603,182 Average tangible common equity $ 472,396 $ 459,154 $ 436,867 $ 431,968 $ 422,791 End of Period: Percent Change From: CONSOLIDATED BALANCE SHEETS June 30, March 31, June 30, March 31, June 30, (in $000’s, unaudited) 2023 2023 2022 2023 2022 ASSETS Cash and due from banks $ 42,551 $ 41,318 $ 35,764 3 % 19 % Other investments and interest-bearing deposits in other financial institutions 468,951 698,690 840,821 (33 ) % (44 ) % Securities available-for-sale, at fair value 486,058 491,751 332,129 (1 ) % 46 % Securities held-to-maturity, at amortized cost 682,095 698,231 723,716 (2 ) % (6 ) % Loans held-for-sale - SBA, including deferred costs 3,136 2,792 2,281 12 % 37 % Loans: Commercial 466,354 506,602 531,421 (8 ) % (12 ) % Real estate: CRE - owner occupied 608,031 603,298 597,521 1 % 2 % CRE - non-owner occupied 1,147,313 1,083,852 993,621 6 % 15 % Land and construction 162,816 166,408 155,389 (2 ) % 5 % Home equity 128,009 124,481 116,641 3 % 10 % Multifamily 244,959 231,242 221,938 6 % 10 % Residential mortgages 514,064 528,639 448,958 (3 ) % 15 % Consumer and other 17,635 17,905 18,354 (2 ) % (4 ) % Loans 3,289,181 3,262,427 3,083,843 1 % 7 % Deferred loan fees, net (397 ) (512 ) (1,391 ) (22 ) % (71 ) % Total loans, net of deferred costs and fees 3,288,784 3,261,915 3,082,452 1 % 7 % Allowance for credit losses on loans (47,803 ) (47,273 ) (45,490 ) 1 % 5 % Loans, net 3,240,981 3,214,642 3,036,962 1 % 7 % Company-owned life insurance 79,940 79,438 77,972 1 % 3 % Premises and equipment, net 9,197 9,142 9,593 1 % (4 ) % Goodwill 167,631 167,631 167,631 0 % 0 % Other intangible assets 9,830 10,431 12,351 (6 ) % (20 ) % Accrued interest receivable and other assets 121,467 122,474 117,621 (1 ) % 3 % Total assets $ 5,311,837 $ 5,536,540 $ 5,356,841 (4 ) % (1 ) % LIABILITIES AND SHAREHOLDERS’ EQUITY Liabilities: Deposits: Demand, noninterest-bearing $ 1,319,844 $ 1,469,081 $ 1,846,365 (10 ) % (29 ) % Demand, interest-bearing 1,064,638 1,196,789 1,218,538 (11 ) % (13 ) % Savings and money market 1,075,835 1,264,567 1,387,003 (15 ) % (22 ) % Time deposits - under $250 44,520 37,884 36,691 18 % 21 % Time deposits - $250 and over 171,852 172,070 98,760 0 % 74 % ICS/CDARS - interest-bearing demand, money market and time deposits 824,083 304,147 26,287 171 % 3035 % Total deposits 4,500,772 4,444,538 4,613,644 1 % (2 ) % Other short-term borrowings — 300,000 — N/A N/A Subordinated debt, net of issuance costs 39,425 39,387 39,274 0 % 0 % Accrued interest payable and other liabilities 117,970 105,407 96,699 12 % 22 % Total liabilities 4,658,167 4,889,332 4,749,617 (5 ) % (2 ) % Shareholders’ Equity: Common stock 505,075 504,135 499,832 0 % 1 % Retained earnings 165,853 157,390 123,310 5 % 35 % Accumulated other comprehensive loss (17,258 ) (14,317 ) (15,918 ) (21 ) % (8 ) % Total shareholders' equity 653,670 647,208 607,224 1 % 8 % Total liabilities and shareholders’ equity $ 5,311,837 $ 5,536,540 $ 5,356,841 (4 ) % (1 ) % End of Period: CONSOLIDATED BALANCE SHEETS June 30, March 31, December 31, September 30, June 30, (in $000’s, unaudited) 2023 2023 2022 2022 2022 ASSETS Cash and due from banks $ 42,551 $ 41,318 $ 27,595 $ 40,500 $ 35,764 Other investments and interest-bearing deposits in other financial institutions 468,951 698,690 279,008 641,251 840,821 Securities available-for-sale, at fair value 486,058 491,751 489,596 478,534 332,129 Securities held-to-maturity, at amortized cost 682,095 698,231 714,990 703,794 723,716 Loans held-for-sale - SBA, including deferred costs 3,136 2,792 2,456 2,081 2,281 Loans: Commercial 466,354 506,602 533,915 542,829 531,421 Real estate: CRE - owner occupied 608,031 603,298 614,663 612,241 597,521 CRE - non-owner occupied 1,147,313 1,083,852 1,066,368 1,023,405 993,621 Land and construction 162,816 166,408 163,577 167,439 155,389 Home equity 128,009 124,481 120,724 116,489 116,641 Multifamily 244,959 231,242 244,882 229,455 221,938 Residential mortgages 514,064 528,639 537,905 508,839 448,958 Consumer and other 17,635 17,905 17,033 16,620 18,354 Loans 3,289,181 3,262,427 3,299,067 3,217,317 3,083,843 Deferred loan fees, net (397 ) (512 ) (517 ) (844 ) (1,391 ) Total loans, net of deferred fees 3,288,784 3,261,915 3,298,550 3,216,473 3,082,452 Allowance for credit losses on loans (47,803 ) (47,273 ) (47,512 ) (46,921 ) (45,490 ) Loans, net 3,240,981 3,214,642 3,251,038 3,169,552 3,036,962 Company-owned life insurance 79,940 79,438 78,945 78,456 77,972 Premises and equipment, net 9,197 9,142 9,301 9,428 9,593 Goodwill 167,631 167,631 167,631 167,631 167,631 Other intangible assets 9,830 10,431 11,033 11,692 12,351 Accrued interest receivable and other assets 121,467 122,474 125,987 128,343 117,621 Total assets $ 5,311,837 $ 5,536,540 $ 5,157,580 $ 5,431,262 $ 5,356,841 LIABILITIES AND SHAREHOLDERS’ EQUITY Liabilities: Deposits: Demand, noninterest-bearing $ 1,319,844 $ 1,469,081 $ 1,736,722 $ 1,883,574 $ 1,846,365 Demand, interest-bearing 1,064,638 1,196,789 1,196,427 1,154,403 1,218,538 Savings and money market 1,075,835 1,264,567 1,285,444 1,487,400 1,387,003 Time deposits - under $250 44,520 37,884 32,445 34,728 36,691 Time deposits - $250 and over 171,852 172,070 108,192 93,263 98,760 ICS/CDARS - interest-bearing demand, money market and time deposits 824,083 304,147 30,374 29,897 26,287 Total deposits 4,500,772 4,444,538 4,389,604 4,683,265 4,613,644 Other short-term borrowings — 300,000 — — — Subordinated debt, net of issuance costs 39,425 39,387 39,350 39,312 39,274 Accrued interest payable and other liabilities 117,970 105,407 96,170 99,168 96,699 Total liabilities 4,658,167 4,889,332 4,525,124 4,821,745 4,749,617 Shareholders’ Equity: Common stock 505,075 504,135 502,923 501,240 499,832 Retained earnings 165,853 157,390 146,389 133,489 123,310 Accumulated other comprehensive loss (17,258 ) (14,317 ) (16,856 ) (25,212 ) (15,918 ) Total shareholders' equity 653,670 647,208 632,456 609,517 607,224 Total liabilities and shareholders’ equity $ 5,311,837 $ 5,536,540 $ 5,157,580 $ 5,431,262 $ 5,356,841 At or For the Quarter Ended: Percent Change From: CREDIT QUALITY DATA June 30, March 31, June 30, March 31, June 30, (in $000’s, unaudited) 2023 2023 2022 2023 2022 Nonaccrual loans - held-for-investment $ 3,275 $ 781 $ 1,734 319 % 89 % Restructured and loans over 90 days past due and still accruing 2,262 1,459 981 55 % 131 % Total nonperforming loans 5,537 2,240 2,715 147 % 104 % Foreclosed assets — — — N/A N/A Total nonperforming assets $ 5,537 $ 2,240 $ 2,715 147 % 104 % Other restructured loans still accruing $ — $ — $ 113 N/A (100 ) % Net charge-offs (recoveries) during the quarter $ (270 ) $ 271 $ (2,883 ) (200 ) % 91 % Provision for (recapture of) credit losses on loans during the quarter $ 260 $ 32 $ (181 ) 713 % 244 % Allowance for credit losses on loans $ 47,803 $ 47,273 $ 45,490 1 % 5 % Classified assets $ 30,500 $ 26,800 $ 28,929 14 % 5 % Allowance for credit losses on loans to total loans 1.45 % 1.45 % 1.48 % 0 % (2 ) % Allowance for credit losses on loans to total nonperforming loans 863.34 % 2,110.40 % 1,675.51 % (59 ) % (48 ) % Nonperforming assets to total assets 0.10 % 0.04 % 0.05 % 150 % 100 % Nonperforming loans to total loans 0.17 % 0.07 % 0.09 % 143 % 89 % Classified assets to Heritage Commerce Corp Tier 1 capital plus allowance for credit losses on loans 6 % 5 % 6 % 20 % 0 % Classified assets to Heritage Bank of Commerce Tier 1 capital plus allowance for credit losses on loans 5 % 5 % 6 % 0 % (17 ) % OTHER PERIOD-END STATISTICS (in $000’s, unaudited) Heritage Commerce Corp: Tangible common equity (1) $ 476,209 $ 469,146 $ 427,242 2 % 11 % Shareholders’ equity / total assets 12.31 % 11.69 % 11.34 % 5 % 9 % Tangible common equity / tangible assets (2) 9.27 % 8.76 % 8.25 % 6 % 12 % Loan to deposit ratio 73.07 % 73.39 % 66.81 % 0 % 9 % Noninterest-bearing deposits / total deposits 29.32 % 33.05 % 40.02 % (11 ) % (27 ) % Total capital ratio 15.4 % 15.3 % 14.6 % 1 % 5 % Tier 1 capital ratio 13.2 % 13.1 % 12.5 % 1 % 6 % Common Equity Tier 1 capital ratio 13.2 % 13.1 % 12.5 % 1 % 6 % Tier 1 leverage ratio 9.7 % 9.6 % 8.7 % 1 % 11 % Heritage Bank of Commerce: Total capital ratio 14.8 % 14.7 % 14.1 % 1 % 5 % Tier 1 capital ratio 13.7 % 13.5 % 13.0 % 1 % 5 % Common Equity Tier 1 capital ratio 13.7 % 13.5 % 13.0 % 1 % 5 % Tier 1 leverage ratio 10.0 % 9.9 % 9.0 % 1 % 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. At or For the Quarter Ended: CREDIT QUALITY DATA June 30, March 31, December 31, September 30, June 30, (in $000’s, unaudited) 2023 2023 2022 2022 2022 Nonaccrual loans - held-for-investment $ 3,275 $ 781 $ 740 $ 491 $ 1,734 Restructured and loans over 90 days past due and still accruing 2,262 1,459 1,685 545 981 Total nonperforming loans 5,537 2,240 2,425 1,036 2,715 Foreclosed assets — — — — — Total nonperforming assets $ 5,537 $ 2,240 $ 2,425 $ 1,036 $ 2,715 Other restructured loans still accruing $ — $ — $ 171 $ 93 $ 113 Net charge-offs (recoveries) during the quarter $ (270 ) $ 271 $ (83 ) $ (425 ) $ (2,883 ) Provision for (recapture of) credit losses on loans during the quarter $ 260 $ 32 $ 508 $ 1,006 $ (181 ) Allowance for credit losses on loans $ 47,803 $ 47,273 $ 47,512 $ 46,921 $ 45,490 Classified assets $ 30,500 $ 26,800 $ 14,544 $ 28,570 $ 28,929 Allowance for credit losses on loans to total loans 1.45 % 1.45 % 1.44 % 1.46 % 1.48 % Allowance for credit losses on loans to total nonperforming loans 863.34 % 2,110.40 % 1,959.26 % 4,529.05 % 1,675.51 % Nonperforming assets to total assets 0.10 % 0.04 % 0.05 % 0.02 % 0.05 % Nonperforming loans to total loans 0.17 % 0.07 % 0.07 % 0.03 % 0.09 % Classified assets to Heritage Commerce Corp Tier 1 capital plus allowance for credit losses on loans 6 % 5 % 3 % 6 % 6 % Classified assets to Heritage Bank of Commerce Tier 1 capital plus allowance for credit losses on loans 5 % 5 % 3 % 5 % 6 % OTHER PERIOD-END STATISTICS (in $000’s, unaudited) Heritage Commerce Corp: Tangible common equity (1) $ 476,209 $ 469,146 $ 453,792 $ 430,194 $ 427,242 Shareholders’ equity / total assets 12.31 % 11.69 % 12.26 % 11.22 % 11.34 % Tangible common equity / tangible assets (2) 9.27 % 8.76 % 9.11 % 8.19 % 8.25 % Loan to deposit ratio 73.07 % 73.39 % 75.14 % 68.68 % 66.81 % Noninterest-bearing deposits / total deposits 29.32 % 33.05 % 39.56 % 40.22 % 40.02 % Total capital ratio 15.4 % 15.3 % 14.8 % 14.5 % 14.6 % Tier 1 capital ratio 13.2 % 13.1 % 12.7 % 12.4 % 12.5 % Common Equity Tier 1 capital ratio 13.2 % 13.1 % 12.7 % 12.4 % 12.5 % Tier 1 leverage ratio 9.7 % 9.6 % 9.2 % 8.7 % 8.7 % Heritage Bank of Commerce: Total capital ratio 14.8 % 14.7 % 14.2 % 14.0 % 14.1 % Tier 1 capital ratio 13.7 % 13.5 % 13.2 % 12.9 % 13.0 % Common Equity Tier 1 capital ratio 13.7 % 13.5 % 13.2 % 12.9 % 13.0 % Tier 1 leverage ratio 10.0 % 9.9 % 9.5 % 9.0 % 9.0 % (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 June 30, 2023 June 30, 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) $ 3,231,341 $ 44,028 5.47 % $ 3,050,177 $ 36,538 4.80 % Securities - taxable 1,147,375 6,982 2.44 % 912,408 4,407 1.94 % Securities - exempt from Federal tax (3) 34,070 302 3.56 % 40,447 343 3.40 % Other investments and interest-bearing deposits in other financial institutions 535,611 7,092 5.31 % 982,579 2,340 0.96 % Total interest earning assets (3) 4,948,397 58,404 4.73 % 4,985,611 43,628 3.51 % Cash and due from banks 35,159 37,172 Premises and equipment, net 9,190 9,666 Goodwill and other intangible assets 177,844 180,391 Other assets 107,653 121,796 Total assets $ 5,278,243 $ 5,334,636 Liabilities and shareholders’ equity: Deposits: Demand, noninterest-bearing $ 1,368,373 $ 1,836,350 Demand, interest-bearing 1,118,200 1,788 0.64 % 1,249,875 468 0.15 % Savings and money market 1,109,347 4,638 1.68 % 1,327,665 558 0.17 % Time deposits - under $100 11,610 20 0.69 % 12,643 4 0.13 % Time deposits - $100 and over 201,600 1,410 2.81 % 125,258 114 0.37 % ICS/CDARS - interest-bearing demand, money market and time deposits 614,911 2,867 1.87 % 27,645 2 0.03 % Total interest-bearing deposits 3,055,668 10,723 1.41 % 2,743,086 1,146 0.17 % Total deposits 4,424,041 10,723 0.97 % 4,579,436 1,146 0.10 % Short-term borrowings 62,653 787 5.04 % 16 — 0.00 % Subordinated debt, net of issuance costs 39,401 538 5.48 % 48,425 531 4.40 % Total interest-bearing liabilities 3,157,722 12,048 1.53 % 2,791,527 1,677 0.24 % Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds 4,526,095 12,048 1.07 % 4,627,877 1,677 0.15 % Other liabilities 101,908 103,577 Total liabilities 4,628,003 4,731,454 Shareholders’ equity 650,240 603,182 Total liabilities and shareholders’ equity $ 5,278,243 $ 5,334,636 Net interest income (3) / margin 46,356 3.76 % 41,951 3.38 % Less tax equivalent adjustment (3) (63 ) (72 ) Net interest income $ 46,293 $ 41,879 (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 $94,000 for the second quarter of 2023, compared to $816,000 for the second quarter of 2022. Prepayment fees totaled $73,000 for the second quarter of 2023, compared to $549,000 for the second 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 June 30, 2023 March 31, 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) $ 3,231,341 $ 44,028 5.47 % $ 3,277,525 $ 44,112 5.46 % Securities - taxable 1,147,375 6,982 2.44 % 1,161,021 7,056 2.46 % Securities - exempt from Federal tax (3) 34,070 302 3.56 % 36,012 313 3.52 % Other investments and interest-bearing deposits in other financial institutions 535,611 7,092 5.31 % 420,451 4,859 4.69 % Total interest earning assets (3) 4,948,397 58,404 4.73 % 4,895,009 56,340 4.67 % Cash and due from banks 35,159 37,563 Premises and equipment, net 9,190 9,269 Goodwill and other intangible assets 177,844 178,443 Other assets 107,653 115,222 Total assets $ 5,278,243 $ 5,235,506 Liabilities and shareholders’ equity: Deposits: Demand, noninterest-bearing $ 1,368,373 $ 1,667,260 Demand, interest-bearing 1,118,200 1,788 0.64 % 1,217,731 1,476 0.49 % Savings and money market 1,109,347 4,638 1.68 % 1,285,173 3,489 1.10 % Time deposits - under $100 11,610 20 0.69 % 12,280 10 0.33 % Time deposits - $100 and over 201,600 1,410 2.81 % 163,047 845 2.10 % ICS/CDARS - interest-bearing demand, money market and time deposits 614,911 2,867 1.87 % 70,461 81 0.47 % Total interest-bearing deposits 3,055,668 10,723 1.41 % 2,748,692 5,901 0.87 % Total deposits 4,424,041 10,723 0.97 % 4,415,952 5,901 0.54 % Short-term borrowings 62,653 787 5.04 % 46,677 578 5.02 % Subordinated debt, net of issuance costs 39,401 538 5.48 % 39,363 537 5.53 % Total interest-bearing liabilities 3,157,722 12,048 1.53 % 2,834,732 7,016 1.00 % Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds 4,526,095 12,048 1.07 % 4,501,992 7,016 0.63 % Other liabilities 101,908 95,917 Total liabilities 4,628,003 4,597,909 Shareholders’ equity 650,240 637,597 Total liabilities and shareholders’ equity $ 5,278,243 $ 5,235,506 Net interest income (3) / margin 46,356 3.76 % 49,324 4.09 % Less tax equivalent adjustment (3) (63 ) (66 ) Net interest income $ 46,293 $ 49,258 (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 $94,000 for the second quarter of 2023, compared to $300,000 for the first quarter of 2023. Prepayment fees totaled $73,000 for the second quarter of 2023, compared to $138,000 for the first quarter of 2023. (3) Reflects the FTE adjustment for Federal tax-exempt income based on a 21% tax rate. For the Six Months Ended For the Six Months Ended June 30, 2023 June 30, 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) $ 3,254,305 $ 88,140 5.46 % $ 3,039,443 $ 71,639 4.75 % Securities - taxable 1,154,160 14,038 2.45 % 847,409 7,851 1.87 % Securities - exempt from Federal tax (3) 35,036 615 3.54 % 42,647 719 3.40 % Other investments, interest-bearing deposits in other financial institutions and Federal funds sold 478,349 11,951 5.04 % 1,109,933 3,404 0.62 % Total interest earning assets (3) 4,921,850 114,744 4.70 % 5,039,432 83,613 3.35 % Cash and due from banks 36,354 37,400 Premises and equipment, net 9,229 9,636 Goodwill and other intangible assets 178,142 180,726 Other assets 111,418 121,444 Total assets $ 5,256,993 $ 5,388,638 Liabilities and shareholders’ equity: Deposits: Demand, noninterest-bearing $ 1,516,991 $ 1,846,699 Demand, interest-bearing 1,167,690 3,264 0.56 % 1,264,849 927 0.15 % Savings and money market 1,196,774 8,127 1.37 % 1,361,014 1,101 0.16 % Time deposits - under $100 11,943 30 0.51 % 12,937 9 0.14 % Time deposits - $100 and over 182,430 2,255 2.49 % 122,187 220 0.36 % ICS/CDARS - interest-bearing demand, money market and time deposits 344,191 2,948 1.73 % 30,274 3 0.02 % Total interest-bearing deposits 2,903,028 16,624 1.15 % 2,791,261 2,260 0.16 % Total deposits 4,420,019 16,624 0.76 % 4,637,960 2,260 0.10 % Short-term borrowings 54,709 1,365 5.03 % 23 — 0.00 % Subordinated debt, net of issuance costs 39,382 1,075 5.50 % 44,211 1,102 5.03 % Total interest-bearing liabilities 2,997,119 19,064 1.28 % 2,835,495 3,362 0.24 % Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds 4,514,110 19,064 0.85 % 4,682,194 3,362 0.14 % Other liabilities 98,929 105,165 Total liabilities 4,613,039 4,787,359 Shareholders’ equity 643,954 601,279 Total liabilities and shareholders’ equity $ 5,256,993 $ 5,388,638 Net interest income (3) / margin 95,680 3.92 % 80,251 3.21 % Less tax equivalent adjustment (3) (129 ) (151 ) Net interest income $ 95,551 $ 80,100 (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 $394,000 for the first six months of 2023, compared to $2,604,000 for the first six months of 2022. Prepayment fees totaled $211,000 for the first six months of 2023, compared to $1,059,000 for the first six months of 2022. (3) Reflects the FTE adjustment for Federal tax-exempt income based on a 21% tax rate.
- The following table shows our liquidity and available lines of credit at June 30, 2023: