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WKN: 924039 | ISIN: US4269271098 | Ticker-Symbol: XHC
Frankfurt
29.05.24
08:52 Uhr
7,300 Euro
0,000
0,00 %
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HERITAGE COMMERCE CORP Chart 1 Jahr
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7,1507,65022:12
GlobeNewswire (Europe)
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Heritage Commerce Corp Earns $15.8 Million for the Third Quarter of 2023, and $51.1 Million for the First Nine Months of 2023; Supported by Continued Deposit Growth and Strong Credit Quality

SAN JOSE, Calif., Oct. 26, 2023 (GLOBE NEWSWIRE) -- Heritage Commerce Corp (Nasdaq: HTBK), (the "Company"), the holding company for Heritage Bank of Commerce (the "Bank"), today announced that its third quarter 2023 net income was $15.8 million, or $0.26 per average diluted common share, compared to $18.1 million, or $0.30 per average diluted common share, for the third quarter of 2022, and $16.4 million, or $0.27 per average diluted common share, for the second quarter of 2023. For the nine months ended September 30, 2023, net income increased 12% to $51.1 million, or $0.83 per average diluted common share, compared to $45.8 million, or $0.75 per average diluted common share, for the nine months ended September 30, 2022. All results are unaudited.

"We delivered strong third quarter of 2023 operating results allowing us to achieve record earnings for the first nine months of 2023," said Clay Jones, President & Chief Executive Officer. "While our third quarter profits were impacted by the expected increased cost of deposits, our year-to-date net income increased 12% compared to the first nine months of 2022. These profits were fueled by a steady growth in deposits, moderate loan demand, and higher net interest income. The net interest margin contraction we experienced during the third quarter was primarily related to deposit pricing."

"Our credits metrics remained strong during the third quarter," said Mr. Jones. "We continued to maintain the strength on our balance sheet along with a solid allowance for credit losses on loans, reflecting our prudent credit risk management. Further, our strong liquidity position is enhanced by a well-diversified deposit profile and access to ample alternative funding sources. We are well positioned to navigate challenging economic headwinds and continue to grow the franchise."

"Our commitment to delivering exceptional client service and meeting performance targets remains the driving force behind our success. I would like to express my appreciation to our committed Board of Directors and team members for their continued dedication to serving our clients, communities, and shareholders," stated Mr. Jones.

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 September 30, 2023:
LIQUIDITY AND AVAILABLE LINES OF CREDIT Total
(in $000's, unaudited) Available
Excess funds at the Federal Reserve Bank ("FRB") $599,000
FRB discount window collateralized line of credit 1,214,537
Federal Home Loan Bank ("FHLB") collateralized borrowing capacity 1,151,769
Unpledged investment securities (at fair value) 76,712
Off-balance sheet deposits 47,094
Federal funds purchase arrangements 80,000
Holding company line of credit 20,000
Total $3,189,112
  • The Company's total liquidity and borrowing capacity was $3.189 billion, all of which remained available at September 30, 2023.
  • The available liquidity and borrowing capacity was 70% of total deposits and approximately 150% of the Bank's estimated uninsured deposits at September 30, 2023.
  • The Bank increased its credit line availability from the FRB and the FHLB by $1.527 billion to $2.366 billion at September 30, 2023, from $839.5 million at December 31, 2022.
  • The loan to deposit ratio was 71.81% at September 30, 2023, compared to 75.14% at December 31, 2022, and 73.07% at June 30, 2023, providing us with ample liquidity and capacity to provide future credit to the community.

Deposits:

  • Total deposits increased $185.9 million, or 4%, to $4.575 billion at September 30, 2023 from $4.390 billion at December 31, 2022, and increased $74.7 million, or 2% from June 30, 2023.
  • Migration of customer deposits resulted in an increase in Insured Cash Sweep ("ICS")/Certificate of Deposit Account Registry Service ("CDARS") deposits of $890.8 million to $921.2 million at September 30, 2023, compared to $30.4 million at December 31, 2022, and increased $97.1 million from $824.1 million at June 30, 2023.
  • Noninterest-bearing demand deposits decreased ($493.2) million, or (28%), to $1.244 billion at September 30, 2023 from December 31, 2022, and decreased ($76.3) million, or (6%) from June 30, 2023, largely in response to the interest rate environment.
  • The Bank had 24,769 deposit accounts at September 30, 2023, with an average balance of $185,000, compared to 24,404 deposit accounts at June 30, 2023, with an average balance of $187,000. 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 totaled $2.185 billion, representing 48% of total deposits, with an average account size of $408,000, representing 22% of the total number of accounts at September 30, 2023.

Investment Securities:

  • Investment securities totaled $1.122 billion at September 30, 2023, of which $457.2 million were in the securities available-for-sale portfolio (at fair value), and $664.7 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 4.72 years at September 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
Fourth quarter of 2023 $20,000 $20,314 $40,314
First quarter of 2024 37,000 19,578 56,578
Second quarter of 2024 131,000 18,752 149,752
Third quarter of 2024 37,500 19,522 57,022
Fourth quarter of 2024 9,000 18,028 27,028
First quarter of 2025 35,000 17,528 52,528
Second quarter of 2025 118,000 17,145 135,145
Third quarter of 2025 25,500 18,430 43,930
Fourth quarter of 2025 - 16,961 16,961
Total $413,000 $166,258 $579,258

Loans:

  • Loans, excluding loans held-for-sale, decreased ($13.1) million to $3.285 billion at September 30, 2023 from $3.299 billion at December 31, 2022, and decreased ($3.3) million from $3.289 billion at June 30, 2023. Loans, excluding residential mortgages, increased $21.8 million, or 1%, to $2.782 billion at September 30, 2023, compared to $2.761 billion at December 31, 2022, and increased $7.7 million from $2.775 billion at June 30, 2023.
  • Commercial real estate ("CRE") loans totaled $1.798 billion at September 30, 2023, of which 33% were owner occupied and 67% were investor CRE loans.
  • During the third quarter of 2023, 42 new CRE loans were originated totaling $86 million with a weighted average loan-to-value and debt-service coverage for the non-owner occupied portfolio of 43% and 2.37 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 $401 million, including 30 loans totaling approximately $76 million, in San Jose, 17 loans totaling approximately $26 million in San Francisco, and eight loans totaling approximately $16 million, in Oakland, at September 30, 2023. Non-owner occupied CRE with office exposure totaled $316 million at September 30, 2023.
  • Of the $401 million of CRE loans with office exposure, approximately $37 million, or 9%, are situated in the Bay Area downtown business districts of San Jose and San Francisco, with an average balance of $2.2 million.
  • At September 30, 2023, the weighted average loan-to-value and debt-service coverage for the entire non-owner occupied office portfolio were 43.1% and 1.82 times, respectively. For the nine non-owner occupied office loans in San Francisco at September 30, 2023, the weighted average loan-to-value and debt-service coverage were 36% and 1.49 times, respectively.

Third Quarter Ended September 30, 2023
Operating Results, Balance Sheet Review, Capital Management, and Credit Quality

(as of, or for the periods ended September 30, 2023, compared to September 30, 2022, and June 30, 2023, except as noted):

Operating Results:

  • Diluted earnings per share were $0.26 for the third quarter of 2023, compared to $0.30 for the third quarter of 2022, and $0.27 for the second quarter of 2023. Diluted earnings per share were $0.83 for the first nine months of 2023, compared to $0.75 for the first nine 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 Nine Months Ended:
September 30, June 30, September 30, September 30, September 30,
(unaudited) 2023 2023 2022 2023 2022
Return on average tangible assets 1.20% 1.29% 1.36% 1.33% 1.17%
Return on average tangible common equity 13.06% 13.93% 16.60% 14.52% 14.41%
  • Net interest income decreased (6%) to $45.4 million for the third quarter of 2023, compared to $48.0 million for the third quarter of 2022. The fully tax equivalent ("FTE") net interest margin decreased (16) basis points to 3.57% for the third quarter of 2023, from 3.73% for the third quarter of 2022, primarily due to a higher cost of funds, 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, and a shift in the mix of earning assets as the Company invested its excess liquidity into higher yielding loans and investment securities.

    • Net interest income decreased (2%) to $45.4 million for the third quarter of 2023, compared to $46.3 million for the second quarter of 2023. The FTE net interest margin decreased (19) basis points to 3.57% for the third quarter of 2023 from 3.76% for the second quarter of 2023, primarily due to a higher cost of funds, and a decrease in the average balances of noninterest bearing demand deposits, partially offset by increases in the prime rate and higher average yields on overnight funds, an increase in the average balance of loans, and a decrease in the average balances of short-term borrowings.

    • For the first nine months of 2023, the net interest income increased 10% to $140.9 million, compared to $128.1 million for the first nine months of 2022. The FTE net interest margin increased 41 basis points to 3.80% for the first nine months of 2023, from 3.39% for the first nine months of 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 and investment securities, 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.
  • The following table, as of September 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 $15,507 7.7 %
+300 $11,594 5.8 %
+200 $7,702 3.8 %
+100 $3,844 1.9 %
0 - -
-100 $(4,725) (2.3)%
-200 $(13,249) (6.6)%
-300 $(26,427) (13.1)%
-400 $(43,348) (21.6)%

_____________________
(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 was relatively flat at 5.46% for the third quarter of 2023, compared to 5.47% for the second quarter of 2023, as lower average balances of Bay View Funding factored receivables, were mostly offset by increases in the prime rate.
For the Quarter Ended For the Quarter Ended
September 30, 2023 June 30, 2023
Average Interest Average Average Interest Average
(in $000's, unaudited) Balance Income Yield Balance Income Yield
Loans, core bank $2,720,010 $37,171 5.42%$2,660,119 $35,310 5.32%
Prepayment fees - 182 0.03% - 73 0.01%
Asset-based lending 23,983 593 9.81% 28,251 686 9.74%
Bay View Funding factored receivables 51,664 2,775 21.31% 68,680 3,847 22.47%
Purchased residential mortgages 465,471 3,811 3.25% 478,220 3,829 3.21%
Loan fair value mark / accretion (3,648) 321 0.05% (3,929) 283 0.04%
Total loans (includes loans held-for-sale) $3,257,480 $44,853 5.46%$3,231,341 $44,028 5.47%
  • The average yield on the total loan portfolio increased to 5.46% for the third quarter of 2023, compared to 4.90% for the third quarter of 2022, primarily due to increases in the prime rate.
For the Quarter Ended For the Quarter Ended
September 30, 2023 September 30, 2022
Average Interest Average Average Interest Average
(in $000's, unaudited) Balance Income Yield Balance Income Yield
Loans, core bank $2,720,010 $37,171 5.42%$2,587,772 $30,774 4.72%
Prepayment fees - 182 0.03% - 96 0.01%
Asset-based lending 23,983 593 9.81% 53,514 1,032 7.65%
Bay View Funding factored receivables 51,664 2,775 21.31% 62,623 3,201 20.28%
Purchased residential mortgages 465,471 3,811 3.25% 445,256 3,414 3.04%
Loan fair value mark / accretion (3,648) 321 0.05% (5,178) 353 0.05%
Total loans (includes loans held-for-sale) $3,257,480 $44,853 5.46%$3,143,987 $38,870 4.90%
The average yield on the total loan portfolio increased to 5.46% for the first nine months of 2023, compared to 4.81% for the first nine 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 Nine Months Ended For the Nine Months Ended
September 30, 2023 September 30, 2022
Average Interest Average Average Interest Average
(in $000's, unaudited) Balance Income Yield Balance Income Yield
Loans, core bank $2,689,763 $107,448 5.34%$2,567,129 $86,464 4.50%
Prepayment fees - 393 0.02% - 1,155 0.06%
Asset-based lending 26,582 1,906 9.59% 57,540 2,857 6.64%
Bay View Funding factored receivables 65,938 10,623 21.54% 61,508 9,123 19.83%
Purchased residential mortgages 477,068 11,497 3.22% 394,618 8,553 2.90%
Loan fair value mark / accretion (3,976) 1,126 0.06% (6,121) 2,357 0.12%
Total loans (includes loans held-for-sale) $3,255,375 $132,993 5.46%$3,074,674 $110,509 4.81%
In aggregate, the remaining net purchase discount on total loans acquired was $3.5 million at September 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
September 30, 2023 June 30, 2023
Average Interest Average Average Interest Average
(in $000's, unaudited) Balance Expense Rate Balance Expense Rate
Deposits:
Demand, noninterest-bearing $1,302,606 $1,368,373
Demand, interest-bearing 1,017,686 $1,730 0.67% 1,118,200 $1,788 0.64%
Savings and money market 1,087,336 5,514 2.01% 1,109,347 4,638 1.68%
Time deposits - under $100 11,966 30 0.99% 11,610 20 0.69%
Time deposits - $100 and over 272,362 2,489 3.63% 201,600 1,410 2.81%
ICS/CDARS - interest-bearing demand, money market and time deposits 881,665 5,117 2.30% 614,911 2,867 1.87%
Total interest-bearing deposits 3,271,015 14,880 1.80% 3,055,668 10,723 1.41%
Total deposits 4,573,621 14,880 1.29% 4,424,041 10,723 0.97%
Short-term borrowings 31 - 0.00% 62,653 787 5.04%
Subordinated debt, net of issuance costs 39,439 539 5.42% 39,401 538 5.48%
Total interest-bearing liabilities 3,310,485 15,419 1.85% 3,157,722 12,048 1.53%
Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds $4,613,091 $15,419 1.33%$4,526,095 $12,048 1.07%
The average cost of total deposits increased to 1.29% for the third quarter of 2023, compared to 0.97% for the second quarter of 2023. The average cost of funds increased to 1.33% for the third quarter of 2023, compared to 1.07% for the second quarter of 2023. The average cost of deposits was 0.13% and the average cost of funds was 0.18% for the third quarter of 2022.
The average cost of total deposits increased to 0.94% for the first nine months of 2023, compared to 0.11% for the first nine months of 2022. The average cost of funds increased to 1.01% for the first nine months of 2023, compared to 0.16% for the first nine months of 2022.
The increase in the average cost of total deposits and the average cost of funds for the third quarter of 2023 and first nine 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 third quarter of 2023, we recorded a provision for credit losses on loans of $168,000, compared to a $1.0 million provision for credit losses on loans for the third quarter of 2022, and a provision for credit losses on loans of $260,000 for the second quarter of 2023. There was a provision for credit losses on loans of $460,000 for the nine months ended September 30, 2023, compared to a $258,000 provision for credit losses on loans for the nine months ended September 30, 2022.
  • Total noninterest income decreased (20%) to $2.2 million for the third quarter of 2023, compared to $2.8 million for the third quarter of 2022, primarily due to lower service charges and fees on deposit accounts, a lower gain on sales of SBA loans and lower servicing income, partially offset by higher termination fees at Bay View Funding, and a gain on proceeds from company-owned life insurance during the third quarter of 2023. Total noninterest income increased 7% to $2.2 million for the third quarter of 2023, compared to $2.1 million for the second quarter of 2023, primarily due to higher termination fees at Bay View Funding, and a gain on proceeds from company-owned life insurance during the third quarter of 2023.
For the nine months ended September 30, 2023, total noninterest income decreased (4%) to $7.1 million, compared to $7.4 million for the nine months ended September 30, 2022, primarily due to a $669,000 gain on warrants during the first nine months of 2022, and lower interchange fee income on credit cards during the first nine months of 2023, partially offset by higher service charges and fees on deposit accounts during the first nine months of 2023.
  • Total noninterest expense for the third quarter of 2023 increased to $25.2 million, compared to $23.9 million for the third quarter of 2022, primarily due to higher insurance, 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 third quarter of 2023. Total noninterest expense for the third quarter of 2023 remained relatively flat at $25.2 million, compared to $25.0 million for the second quarter of 2023, as higher regulatory assessments, shareholders relations and insurance expense were mostly offset by lower professional fees.
Total noninterest expense for the nine months ended September 30, 2023 increased to $75.6 million, compared to $70.3 million for the nine months ended September 30, 2022, primarily due to higher salaries and employee benefits, and higher insurance, regulatory assessments, improvements in information technology, and ICS/CDARS fee expenses included in other noninterest expense, partially offset by lower professional fees during the nine months ended September 30, 2023.
Full time equivalent employees were 348 at September 30, 2023, and 327 at September 30, 2022, and 347 at June 30, 2023.
  • The efficiency ratio was 52.89% for the third quarter of 2023, compared to 47.02% for the third quarter of 2022, and 51.67% for the second quarter of 2023. The efficiency ratio was 51.06% for the nine months ended September 30, 2023, compared to 51.92% for the nine months ended September 30, 2022, primarily due to higher net interest income.

  • Income tax expense was $6.5 million for the third quarter of 2023, compared to $7.8 million for the third quarter of 2022, and $6.7 million for the second quarter of 2023. The effective tax rate for both the third quarter of 2023 and second quarter of 2023 was 29.0%, compared to 30.3% for the third quarter of 2022. Income tax expense for the nine months ended September 30, 2023 was $20.8 million, compared to $19.1 million for the nine months ended September 30, 2022. The effective tax rate for the nine months ended September 30, 2023 was 29.0%, compared to 29.5% for the nine months ended September 30, 2022.

Balance Sheet Review, Capital Management and Credit Quality:

  • Total assets decreased (1%) to $5.403 billion at September 30, 2023, compared to $5.431 billion at September 30, 2022, and increased 2% from $5.312 billion at June 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 September 30, June 30, September 30,
(in $000's, unaudited)2023
2023
2022
Balance (at fair value):
U.S. Treasury $396,996 $421,146 $405,389
Agency mortgage-backed securities 60,198 64,912 73,145
Total $457,194 $486,058 $478,534
Pre-tax unrealized (loss):
U.S. Treasury $(9,606) $(10,903) $(10,070)
Agency mortgage-backed securities (7,185) (5,659) (7,304)
Total $(16,791) $(16,562) $(17,374)
The pre-tax unrealized loss on the securities available-for-sale portfolio was ($16.8) million, or ($12.0) million net of taxes, which was 1.8% of total shareholders' equity at September 30, 2023.
The weighted average life of the securities available-for-sale portfolio was 1.49 years at September 30, 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 September 30, June 30, September 30,
(in $000's, unaudited)2023 2023 2022
Balance (at amortized cost):
Agency mortgage-backed securities $632,241 $648,337 $665,679
Municipals - exempt from Federal tax 32,453 33,771 38,130
Total $664,694 $682,108 $703,809
Pre-tax unrecognized (loss):
Agency mortgage-backed securities $(119,932) $(95,285) $(108,074)
Municipals - exempt from Federal tax (2,753) (1,052) (2,125)
Total $(122,685) $(96,337) $(110,199)
Allowance for credit losses on municipal securities $(13) $(13) $(15)
The pre-tax unrecognized loss on the securities held-to-maturity portfolio was ($122.7) million, or ($86.4) million net of taxes, which was 13.1% of total shareholders' equity at September 30, 2023.
The weighted average life of the securities held-to-maturity portfolio was 7.03 years at September 30, 2023.
  • The unrealized and unrecognized losses in both the available-for-sale and held-to-maturity portfolios were due to higher interest rates at September 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 September 30, 2023 June 30, 2023 September 30, 2022
(in $000's, unaudited)Balance % to TotalBalance % to TotalBalance % to Total
Commercial $430,664 13%$466,354 14%$542,829 17%
Real estate:
CRE - owner occupied 589,751 18% 608,031 18% 612,241 19%
CRE - non-owner occupied 1,208,324 37% 1,147,313 35% 1,023,405 32%
Land and construction 158,138 5% 162,816 5% 167,439 5%
Home equity 124,477 4% 128,009 4% 116,489 3%
Multifamily 253,129 7% 244,959 7% 229,455 7%
Residential mortgages 503,006 15% 514,064 16% 508,839 16%
Consumer and other 18,526 1% 17,635 1% 16,620 1%
Total Loans 3,286,015 100% 3,289,181 100% 3,217,317 100%
Deferred loan costs (fees), net (554) - (397) - (844) -
Loans, net of deferred costs and fees $3,285,461 100%$3,288,784 100%$3,216,473 100%
Loans, excluding loans held-for-sale, increased $69.0 million, or 2%, to $3.285 billion at September 30, 2023, compared to $3.216 billion at September 30, 2022, and decreased ($3.3) million from $3.289 billion at June 30, 2023. Loans, excluding residential mortgages, increased $74.8 million, or 3%, to $2.782 billion at September 30, 2023, compared to $2.708 billion at September 30, 2022, and increased $7.7 million from $2.775 billion at June 30, 2023.
Commercial and industrial ("C&I") line utilization was 27% at September 30, 2023, compared to 29% at both September 30, 2022 and June 30, 2023.
At September 30, 2023, there was 33% of the CRE loan portfolio secured by owner occupied real estate, compared to 37% at September 30, 2022, and 35% at June 30, 2023.
  • The following table presents the maturity distribution of the Company's loans, excluding loans held-for-sale, as of September 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 TotalBalance% to TotalBalance% to TotalTotal
Loans with variable interest rates $348,293 39% $253,687 28% $295,647 33% $897,627
Loans with fixed interest rates 65,092 3% 590,351 25% 1,732,945 72% 2,388,388
Loans $413,385 12% $844,038 26% $2,028,592 62% $3,286,015
At September 30, 2023, approximately 27% of the Company's loan portfolio consisted of floating interest rate loans, compared to 34% at September 30, 2022, and 29% at June 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 Nine Months Ended:
ALLOWANCE FOR CREDIT LOSSES ON LOANS September 30, June 30, September 30, September 30, September 30,
(in $000's, unaudited) 2023
2023
2022
2023
2022
Balance at beginning of period $47,803 $47,273 $45,490 $47,512 $43,290
Charge-offs during the period (447) (24) (7) (851) (378)
Recoveries during the period 178 294 432 581 3,751
Net recoveries (charge-offs) during the period (269) 270 425 (270) 3,373
Provision for credit losses on loans during the period 168 260 1,006 460 258
Balance at end of period $47,702 $47,803 $46,921 $47,702 $46,921
Total loans, net of deferred fees $3,285,461 $3,288,784 $3,216,473 $3,285,461 $3,216,473
Total nonperforming loans $5,484 $5,537 $1,036 $5,484 $1,036
ACLL to total loans 1.45 % 1.45 % 1.46 % 1.45 % 1.46 %
ACLL to total nonperforming loans 869.84 % 863.34 % 4,529.05 % 869.84 % 4,529.05 %
The following table shows the drivers of change in ACLL for the first, second, and third 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
  • The following is a breakout of nonperforming assets ("NPAs") at the periods indicated:
NONPERFORMING ASSETS September 30, 2023 June 30, 2023 September 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 $1,966 36%$2,262 41%$545 53%
Residential mortgages 1,716 31% 1,873 34% - -%
Commercial loans 1,712 31% 1,306 23% 491 47%
Home equity loans 90 2% 96 2% - -%
CRE - -% - -% - -%
Total nonperforming assets $5,484 100%$5,537 100%$1,036 100%
NPAs totaled $5.5 million, or 0.10% of total assets, at both September 30, 2023 and June 30, 2023, compared to $1.0 million, or 0.02% of total assets, at September 30, 2022.
There were no foreclosed assets on the balance sheet at September 30, 2023, September 30, 2022, or June 30, 2023.
There were no CRE loans, Shared National Credits ("SNCs") or material purchased participations included in NPAs or total loans at September 30, 2023, September 30, 2022, or June 30, 2023.
Classified assets totaled $31.1 million, or 0.57% of total assets, at September 30, 2023, compared to $28.6 million, or 0.53% of total assets, at September 30, 2022, and $30.5 million, or 0.57% of total assets, at June 30, 2023.
  • The following table summarizes the distribution of deposits and the percentage of distribution in each category for the periods indicated:
DEPOSITS September 30, 2023 June 30, 2023 September 30, 2022
(in $000's, unaudited) Balance % to Total Balance % to Total Balance % to Total
Demand, noninterest-bearing $1,243,501 27%$1,319,844 29%$1,883,574 40%
Demand, interest-bearing 1,004,185 22% 1,064,638 24% 1,154,403 24%
Savings and money market 1,110,640 24% 1,075,835 24% 1,487,400 32%
Time deposits - under $250 43,906 1% 44,520 1% 34,728 1%
Time deposits - $250 and over 252,001 6% 171,852 4% 93,263 2%
ICS/CDARS - interest-bearing demand, money market and time deposits 921,224 20% 824,083 18% 29,897 1%
Total deposits $4,575,457 100%$4,500,772 100%$4,683,265 100%
Total deposits increased $74.7 million, or 2%, to $4.575 billion at September 30, 2023, compared to $4.501 billion at June 30, 2023, and decreased ($107.8) million, or (2%), from $4.683 billion at September 30, 2022.
ICS/CDARS deposits increased $97.1 million to $921.2 million at September 30, 2023, compared to $824.1 million at June 30, 2023, and increased $891.3 million from $29.9 million at September 30, 2022.
The Bank's uninsured deposits were approximately $2.123 billion, or 46% of total deposits, at September 30, 2023, compared to $2.148 billion, or 48% of total deposits, at June 30, 2023, and $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 September 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 15.6% 15.0% 10.0% 10.5%
Tier 1 Capital 13.4% 13.9% 8.0% 8.5%
Common Equity Tier 1 Capital 13.4% 13.9% 6.5% 7.0%
Tier 1 Leverage 9.6% 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 September 30, June 30, September 30,
(in $000's, unaudited) 2023
2023
2022
Unrealized loss on securities available-for-sale $(11,985) $(11,822) $(12,398)
Split dollar insurance contracts liability (3,234) (3,187) (5,511)
Supplemental executive retirement plan liability (2,343) (2,352) (7,428)
Unrealized gain on interest-only strip from SBA loans 93 103 125
Total accumulated other comprehensive loss $(17,469) $(17,258) $(25,212)

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, and media items and consumer confidence as those factors affect depositors' confidence in the banking system generally and our bank in particular; (2) factors that affect the value and liquidity of our investment portfolios, particularly the values of securities available-for-sale; (3) 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; (4) our ability to estimate accurately, and to establish adequate reserves against, the risk of loss associated with our loan and lease portfolio; (5) the ability of issuers to repay the full principal amounts of securities, in both the available-for-sale and held-to-maturity portfolios, at maturity; (6) 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; (7) 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; (8) 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; (9) 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; (10) 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; (11) volatility in credit and equity markets and its effect on the global economy; (12) conditions relating to the impact of the COVID-19 pandemic, and other infectious illness outbreaks that may arise in the future, 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; (13) 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; (14) our ability to achieve loan growth and attract deposits in our market area; (15) risks associated with concentrations in real estate related loans; (16) 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; (17) 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; (18) regulatory limits on Heritage Bank of Commerce's ability to pay dividends to the Company; (19) 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; (20) 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; (21) possible adjustment of the valuation of our deferred tax assets; (22) 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; (23) inability of our framework to manage risks associated with our business, including operational risk and credit risk; (24) risks of loss of funding of the Small Business Administration ("SBA") or SBA loan programs, or changes in those programs; (25) 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; (26) 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; (27) the expense and uncertain resolution of litigation matters whether occurring in the ordinary course of business or otherwise; (28) availability of and competition for acquisition opportunities; (29) risks resulting from domestic terrorism; (30) risks resulting from social unrest and protests; (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 Reuter
EVP, Corporate Secretary
Direct: (408) 494-4542
Debbie.Reuter@herbank.com

For the Quarter Ended: Percent Change From: For the Nine Months Ended:
CONSOLIDATED INCOME STATEMENTS September 30, June 30, September 30, June 30, September 30, September 30, September 30, Percent
(in $000's, unaudited) 2023 2023 2022 2023
2022
2023 2022 Change
Interest income $60,791 $58,341 $50,174 4 %21 % $175,406 $133,636 31 %
Interest expense 15,419 12,048 2,133 28 %623 % 34,483 5,495 528 %
Net interest income before provision for credit losses on loans 45,372 46,293 48,041 (2)%(6)% 140,923 128,141 10 %
Provision for (recapture of) credit losses on loans 168 260 1,006 (35)%(83) % 460 258 78 %
Net interest income after provision for credit losses on loans 45,204 46,033 47,035 (2)%(4)% 140,463 127,883 10 %
Noninterest income:
Service charges and fees on deposit accounts 859 901 1,360 (5)%(37)% 3,503 2,839 23 %
Increase in cash surrender value of life insurance 517 502 484 3 %7 % 1,512 1,444 5 %
Gain on sales of SBA loans 207 199 308 4 %(33)% 482 491 (2)%
Termination fees 118 - 16 N/A 638 % 129 61 111 %
Gain on proceeds from company-owned life insurance 100 - - N/A N/A 100 27 270 %
Servicing income 62 104 125 (40)%(50)% 297 370 (20)%
Gain on warrants - - 32 N/A (100)% - 669 (100)%
Other 353 368 456 (4)%(23)% 1,033 1,438 (28)%
Total noninterest income 2,216 2,074 2,781 7 %(20)% 7,056 7,339 (4)%
Noninterest expense:
Salaries and employee benefits 14,147 13,987 14,119 1 %0 % 42,943 41,416 4 %
Occupancy and equipment 2,301 2,422 2,415 (5)%(5)% 7,123 7,129 0 %
Professional fees 717 1,149 1,230 (38)%(42)% 3,265 3,601 (9)%
Other 8,006 7,433 6,135 8 %30 % 22,232 18,195 22 %
Total noninterest expense 25,171 24,991 23,899 1 %5 % 75,563 70,341 7 %
Income before income taxes 22,249 23,116 25,917 (4)%(14)% 71,956 64,881 11 %
Income tax expense 6,454 6,713 7,848 (4)%(18)% 20,841 19,125 9 %
Net income $15,795 $16,403 $18,069 (4)%(13)% $51,115 $45,756 12 %
PER COMMON SHARE DATA
(unaudited)
Basic earnings per share $0.26 $0.27 $0.30 (4)%(13)% $0.84 $0.76 11 %
Diluted earnings per share $0.26 $0.27 $0.30 (4)%(13)% $0.83 $0.75 11 %
Weighted average shares outstanding - basic 61,093,289 61,035,435 60,686,992 0 %1 % 61,012,315 60,541,015 1 %
Weighted average shares outstanding - diluted 61,436,240 61,266,059 61,123,801 0 %1 % 61,284,590 61,004,840 0 %
Common shares outstanding at period-end 61,099,155 61,091,155 60,716,794 0 %1 % 61,099,155 60,716,794 1 %
Dividend per share $0.13 $0.13 $0.13 0 %0 % $0.39 $0.39 0 %
Book value per share $10.83 $10.70 $10.04 1 %8 % $10.83 $10.04 8 %
Tangible book value per share $7.94 $7.80 $7.09 2 %12 % $7.94 $7.09 12 %
KEY FINANCIAL RATIOS
(unaudited)
Annualized return on average equity 9.54% 10.12% 11.72%(6)%(19)% 10.54% 10.12%4 %
Annualized return on average tangible common equity 13.06% 13.93% 16.60%(6)%(21)% 14.52% 14.41%1 %
Annualized return on average assets 1.16% 1.25% 1.31%(7)%(11)% 1.29% 1.13%14 %
Annualized return on average tangible assets 1.20% 1.29% 1.36%(7)%(12)% 1.33% 1.17%14 %
Net interest margin (FTE) 3.57% 3.76% 3.73%(5)%(4)% 3.80% 3.39%12 %
Efficiency ratio 52.89% 51.67% 47.02%2 %12 % 51.06% 51.92%(2)%
AVERAGE BALANCES
(in $000's, unaudited)
Average assets $5,399,930 $5,278,243 $5,466,330 2 %(1)% $5,316,447 $5,414,820 (2)%
Average tangible assets $5,222,692 $5,100,399 $5,286,591 2 %(1)% $5,138,610 $5,234,427 (2)%
Average earning assets $5,051,710 $4,948,397 $5,117,373 2 %(1)% $4,965,613 $5,065,698 (2)%
Average loans held-for-sale $2,765 $4,166 $3,282 (34)%(16)% $3,229 $2,201 47 %
Average total loans $3,254,715 $3,227,175 $3,140,705 1 %4 % $3,252,146 $3,072,473 6 %
Average deposits $4,573,621 $4,424,041 $4,712,044 3 %(3)% $4,471,783 $4,662,926 (4)%
Average demand deposits - noninterest-bearing $1,302,606 $1,368,373 $1,910,748 (5)%(32)% $1,444,744 $1,868,283 (23)%
Average interest-bearing deposits $3,271,015 $3,055,668 $2,801,296 7 %17 % $3,027,039 $2,794,643 8 %
Average interest-bearing liabilities $3,310,485 $3,157,722 $2,840,611 5 %17 % $3,102,723 $2,837,219 9 %
Average equity $656,973 $650,240 $611,707 1 %7 % $648,341 $604,794 7 %
Average tangible common equity $479,735 $472,396 $431,968 2 %11 % $470,504 $424,401 11 %
For the Quarter Ended:
CONSOLIDATED INCOME STATEMENTS September 30, June 30, March 31, December 31, September 30,
(in $000's, unaudited) 2023 2023 2023 2022 2022
Interest income $60,791 $58,341 $56,274 $55,192 $50,174
Interest expense 15,419 12,048 7,016 3,453 2,133
Net interest income before provision for credit losses on loans 45,372 46,293 49,258 51,739 48,041
Provision for (recapture of) credit losses on loans 168 260 32 508 1,006
Net interest income after provision for credit losses on loans 45,204 46,033 49,226 51,231 47,035
Noninterest income:
Service charges and fees on deposit accounts 859 901 1,743 1,801 1,360
Increase in cash surrender value of life insurance 517 502 493 481 484
Gain on sales of SBA loans 207 199 76 - 308
Termination fees 118 - 11 - 16
Gain on proceeds from company-owned life insurance 100 - - - -
Servicing income 62 104 131 138 125
Gain on warrants - - - - 32
Other 353 368 312 352 456
Total noninterest income 2,216 2,074 2,766 2,772 2,781
Noninterest expense:
Salaries and employee benefits 14,147 13,987 14,809 13,915 14,119
Occupancy and equipment 2,301 2,422 2,400 2,510 2,415
Professional fees 717 1,149 1,399 1,414 1,230
Other 8,006 7,433 6,793 6,679 6,135
Total noninterest expense 25,171 24,991 25,401 24,518 23,899
Income before income taxes 22,249 23,116 26,591 29,485 25,917
Income tax expense 6,454 6,713 7,674 8,686 7,848
Net income $15,795 $16,403 $18,917 $20,799 $18,069
PER COMMON SHARE DATA
(unaudited)
Basic earnings per share $0.26 $0.27 $0.31 $0.34 $0.30
Diluted earnings per share $0.26 $0.27 $0.31 $0.34 $0.30
Weighted average shares outstanding - basic 61,093,289 61,035,435 60,908,221 60,788,803 60,686,992
Weighted average shares outstanding - diluted 61,436,240 61,266,059 61,268,072 61,357,023 61,123,801
Common shares outstanding at period-end 61,099,155 61,091,155 60,948,607 60,852,723 60,716,794
Dividend per share $0.13 $0.13 $0.13 $0.13 $0.13
Book value per share $10.83 $10.70 $10.62 $10.39 $10.04
Tangible book value per share $7.94 $7.80 $7.70 $7.46 $7.09
KEY FINANCIAL RATIOS
(unaudited)
Annualized return on average equity 9.54% 10.12% 12.03% 13.40% 11.72%
Annualized return on average tangible common equity 13.06% 13.93% 16.71% 18.89% 16.60%
Annualized return on average assets 1.16% 1.25% 1.47% 1.54% 1.31%
Annualized return on average tangible assets 1.20% 1.29% 1.52% 1.59% 1.36%
Net interest margin (FTE) 3.57% 3.76% 4.09% 4.10% 3.73%
Efficiency ratio 52.89% 51.67% 48.83% 44.98% 47.02%
AVERAGE BALANCES
(in $000's, unaudited)
Average assets $5,399,930 $5,278,243 $5,235,506 $5,360,867 $5,466,330
Average tangible assets $5,222,692 $5,100,399 $5,057,063 $5,181,793 $5,286,591
Average earning assets $5,051,710 $4,948,397 $4,895,009 $5,009,578 $5,117,373
Average loans held-for-sale $2,765 $4,166 $2,755 $2,346 $3,282
Average total loans $3,254,715 $3,227,175 $3,274,770 $3,248,210 $3,140,705
Average deposits $4,573,621 $4,424,041 $4,415,952 $4,600,533 $4,712,044
Average demand deposits - noninterest-bearing $1,302,606 $1,368,373 $1,667,260 $1,851,003 $1,910,748
Average interest-bearing deposits $3,271,015 $3,055,668 $2,748,692 $2,749,530 $2,801,296
Average interest-bearing liabilities $3,310,485 $3,157,722 $2,834,732 $2,788,880 $2,840,611
Average equity $656,973 $650,240 $637,597 $615,941 $611,707
Average tangible common equity $479,735 $472,396 $459,154 $436,867 $431,968
End of Period: Percent Change From:
CONSOLIDATED BALANCE SHEETS September 30, June 30, September 30, June 30, September 30,
(in $000's, unaudited) 2023
2023
2022
2023
2022
ASSETS
Cash and due from banks $40,076 $42,551 $40,500 (6)%(1)%
Other investments and interest-bearing deposits
in other financial institutions 605,476 468,951 641,251 29 %(6)%
Securities available-for-sale, at fair value 457,194 486,058 478,534 (6)%(4)%
Securities held-to-maturity, at amortized cost 664,681 682,095 703,794 (3)%(6)%
Loans held-for-sale - SBA, including deferred costs 841 3,136 2,081 (73)%(60)%
Loans:
Commercial 430,664 466,354 542,829 (8)%(21)%
Real estate:
CRE - owner occupied 589,751 608,031 612,241 (3)%(4)%
CRE - non-owner occupied 1,208,324 1,147,313 1,023,405 5 %18 %
Land and construction 158,138 162,816 167,439 (3)%(6)%
Home equity 124,477 128,009 116,489 (3)%7 %
Multifamily 253,129 244,959 229,455 3 %10 %
Residential mortgages 503,006 514,064 508,839 (2)%(1)%
Consumer and other 18,526 17,635 16,620 5 %11 %
Loans 3,286,015 3,289,181 3,217,317 0 %2 %
Deferred loan fees, net (554) (397) (844) 40 %(34)%
Total loans, net of deferred costs and fees 3,285,461 3,288,784 3,216,473 0 %2 %
Allowance for credit losses on loans (47,702) (47,803) (46,921) 0 %2 %
Loans, net 3,237,759 3,240,981 3,169,552 0 %2 %
Company-owned life insurance 79,607 79,940 78,456 0 %1 %
Premises and equipment, net 9,707 9,197 9,428 6 %3 %
Goodwill 167,631 167,631 167,631 0 %0 %
Other intangible assets 9,229 9,830 11,692 (6)%(21)%
Accrued interest receivable and other assets 131,106 121,467 128,343 8 %2 %
Total assets $5,403,307 $5,311,837 $5,431,262 2 %(1)%
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand, noninterest-bearing $1,243,501 $1,319,844 $1,883,574 (6)%(34)%
Demand, interest-bearing 1,004,185 1,064,638 1,154,403 (6)%(13)%
Savings and money market 1,110,640 1,075,835 1,487,400 3 %(25)%
Time deposits - under $250 43,906 44,520 34,728 (1)%26 %
Time deposits - $250 and over 252,001 171,852 93,263 47 %170 %
ICS/CDARS - interest-bearing demand, money market and time deposits 921,224 824,083 29,897 12 %2981 %
Total deposits 4,575,457 4,500,772 4,683,265 2 %(2)%
Subordinated debt, net of issuance costs 39,463 39,425 39,312 0 %0 %
Accrued interest payable and other liabilities 126,457 117,970 99,168 7 %28 %
Total liabilities 4,741,377 4,658,167 4,821,745 2 %(2)%
Shareholders' Equity:
Common stock 505,692 505,075 501,240 0 %1 %
Retained earnings 173,707 165,853 133,489 5 %30 %
Accumulated other comprehensive loss (17,469) (17,258) (25,212) 1 %(31)%
Total shareholders' equity 661,930 653,670 609,517 1 %9 %
Total liabilities and shareholders' equity $5,403,307 $5,311,837 $5,431,262 2 %(1)%
End of Period:
CONSOLIDATED BALANCE SHEETS September 30, June 30, March 31, December 31, September 30,
(in $000's, unaudited) 2023
2023
2023
2022
2022
ASSETS
Cash and due from banks $40,076 $42,551 $41,318 $27,595 $40,500
Other investments and interest-bearing deposits in other financial institutions 605,476 468,951 698,690 279,008 641,251
Securities available-for-sale, at fair value 457,194 486,058 491,751 489,596 478,534
Securities held-to-maturity, at amortized cost 664,681 682,095 698,231 714,990 703,794
Loans held-for-sale - SBA, including deferred costs 841 3,136 2,792 2,456 2,081
Loans:
Commercial 430,664 466,354 506,602 533,915 542,829
Real estate:
CRE - owner occupied 589,751 608,031 603,298 614,663 612,241
CRE - non-owner occupied 1,208,324 1,147,313 1,083,852 1,066,368 1,023,405
Land and construction 158,138 162,816 166,408 163,577 167,439
Home equity 124,477 128,009 124,481 120,724 116,489
Multifamily 253,129 244,959 231,242 244,882 229,455
Residential mortgages 503,006 514,064 528,639 537,905 508,839
Consumer and other 18,526 17,635 17,905 17,033 16,620
Loans 3,286,015 3,289,181 3,262,427 3,299,067 3,217,317
Deferred loan fees, net (554) (397) (512) (517) (844)
Total loans, net of deferred fees 3,285,461 3,288,784 3,261,915 3,298,550 3,216,473
Allowance for credit losses on loans (47,702) (47,803) (47,273) (47,512) (46,921)
Loans, net 3,237,759 3,240,981 3,214,642 3,251,038 3,169,552
Company-owned life insurance 79,607 79,940 79,438 78,945 78,456
Premises and equipment, net 9,707 9,197 9,142 9,301 9,428
Goodwill 167,631 167,631 167,631 167,631 167,631
Other intangible assets 9,229 9,830 10,431 11,033 11,692
Accrued interest receivable and other assets 131,106 121,467 122,474 125,987 128,343
Total assets $5,403,307 $5,311,837 $5,536,540 $5,157,580 $5,431,262
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Demand, noninterest-bearing $1,243,501 $1,319,844 $1,469,081 $1,736,722 $1,883,574
Demand, interest-bearing 1,004,185 1,064,638 1,196,789 1,196,427 1,154,403
Savings and money market 1,110,640 1,075,835 1,264,567 1,285,444 1,487,400
Time deposits - under $250 43,906 44,520 37,884 32,445 34,728
Time deposits - $250 and over 252,001 171,852 172,070 108,192 93,263
ICS/CDARS - interest-bearing demand, money market and time deposits 921,224 824,083 304,147 30,374 29,897
Total deposits 4,575,457 4,500,772 4,444,538 4,389,604 4,683,265
Other short-term borrowings - - 300,000 - -
Subordinated debt, net of issuance costs 39,463 39,425 39,387 39,350 39,312
Accrued interest payable and other liabilities 126,457 117,970 105,407 96,170 99,168
Total liabilities 4,741,377 4,658,167 4,889,332 4,525,124 4,821,745
Shareholders' Equity:
Common stock 505,692 505,075 504,135 502,923 501,240
Retained earnings 173,707 165,853 157,390 146,389 133,489
Accumulated other comprehensive loss (17,469) (17,258) (14,317) (16,856) (25,212)
Total shareholders' equity 661,930 653,670 647,208 632,456 609,517
Total liabilities and shareholders' equity $5,403,307 $5,311,837 $5,536,540 $5,157,580 $5,431,262
At or For the Quarter Ended: Percent Change From:
CREDIT QUALITY DATA September 30, June 30, September 30, June 30, September 30,
(in $000's, unaudited) 2023 2023
2022
2023
2022
Nonaccrual loans - held-for-investment $3,518 $3,275 $491 7 %616 %
Restructured and loans over 90 days past due and still accruing 1,966 2,262 545 (13)%261 %
Total nonperforming loans 5,484 5,537 1,036 (1)%429 %
Foreclosed assets - - - N/A N/A
Total nonperforming assets $5,484 $5,537 $1,036 (1)%429 %
Other restructured loans still accruing $- $- $93 N/A (100)%
Net charge-offs (recoveries) during the quarter $269 $(270) $(425) 200 %163 %
Provision for credit losses on loans during the quarter $168 $260 $1,006 (35)%(83)%
Allowance for credit losses on loans $47,702 $47,803 $46,921 0 %2 %
Classified assets $31,062 $30,500 $28,570 2 %9 %
Allowance for credit losses on loans to total loans 1.45% 1.45 % 1.46 %0 %(1)%
Allowance for credit losses on loans to total nonperforming loans 869.84% 863.34 % 4,529.05 %1 %(81)%
Nonperforming assets to total assets 0.10% 0.10 % 0.02 %0 %400 %
Nonperforming loans to total loans 0.17% 0.17 % 0.03 %0 %467 %
Classified assets to Heritage Commerce Corp
Tier 1 capital plus allowance for credit losses on loans 6% 6 % 6 %0 %0 %
Classified assets to Heritage Bank of Commerce
Tier 1 capital plus allowance for credit losses on loans 5% 5 % 5 %0 %0 %
OTHER PERIOD-END STATISTICS
(in $000's, unaudited)
Heritage Commerce Corp:
Tangible common equity (1) $485,070 $476,209 $430,194 2 %13 %
Shareholders' equity / total assets 12.25% 12.31 % 11.22 %0 %9 %
Tangible common equity / tangible assets (2) 9.28% 9.27 % 8.19 %0 %13 %
Loan to deposit ratio 71.81% 73.07 % 68.68 %(2)%5 %
Noninterest-bearing deposits / total deposits 27.18% 29.32 % 40.22 %(7)%(32)%
Total capital ratio 15.6% 15.4 % 14.5 %1 %8 %
Tier 1 capital ratio 13.4% 13.2 % 12.4 %2 %8 %
Common Equity Tier 1 capital ratio 13.4% 13.2 % 12.4 %2 %8 %
Tier 1 leverage ratio 9.6% 9.7 % 8.7 %(1)%10 %
Heritage Bank of Commerce:
Total capital ratio 15.0% 14.8 % 14.0 %1 %7 %
Tier 1 capital ratio 13.9% 13.7 % 12.9 %1 %8 %
Common Equity Tier 1 capital ratio 13.9% 13.7 % 12.9 %1 %8 %
Tier 1 leverage ratio 10.0% 10.0 % 9.0 %0 %11 %


(1)Represents shareholders' equity minus goodwill and other intangible assets.
(2)Represents shareholders' equity minus goodwill and other intangible assets divided by total assets minus goodwill and other intangible assets.
At or For the Quarter Ended:
CREDIT QUALITY DATA September 30, June 30, March 31, December 31, September 30,
(in $000's, unaudited) 2023 2023 2023 2022 2022
Nonaccrual loans - held-for-investment $3,518 $3,275 $781 $740 $491
Restructured and loans over 90 days past due and still accruing 1,966 2,262 1,459 1,685 545
Total nonperforming loans 5,484 5,537 2,240 2,425 1,036
Foreclosed assets - - - - -
Total nonperforming assets $5,484 $5,537 $2,240 $2,425 $1,036
Other restructured loans still accruing $- $- $- $171 $93
Net charge-offs (recoveries) during the quarter $269 $(270) $271 $(83) $(425)
Provision for credit losses on loans during the quarter $168 $260 $32 $508 $1,006
Allowance for credit losses on loans $47,702 $47,803 $47,273 $47,512 $46,921
Classified assets $31,062 $30,500 $26,800 $14,544 $28,570
Allowance for credit losses on loans to total loans 1.45% 1.45 % 1.45% 1.44 % 1.46 %
Allowance for credit losses on loans to total nonperforming loans 869.84% 863.34 % 2,110.40% 1,959.26 % 4,529.05 %
Nonperforming assets to total assets 0.10% 0.10 % 0.04% 0.05 % 0.02 %
Nonperforming loans to total loans 0.17% 0.17 % 0.07% 0.07 % 0.03 %
Classified assets to Heritage Commerce Corp
Tier 1 capital plus allowance for credit losses on loans 6% 6 % 5% 3 % 6 %
Classified assets to Heritage Bank of Commerce
Tier 1 capital plus allowance for credit losses on loans 5% 5 % 5% 3 % 5 %
OTHER PERIOD-END STATISTICS
(in $000's, unaudited)
Heritage Commerce Corp:
Tangible common equity (1) $485,070 $476,209 $469,146 $453,792 $430,194
Shareholders' equity / total assets 12.25% 12.31 % 11.69% 12.26 % 11.22 %
Tangible common equity / tangible assets (2) 9.28% 9.27 % 8.76% 9.11 % 8.19 %
Loan to deposit ratio 71.81% 73.07 % 73.39% 75.14 % 68.68 %
Noninterest-bearing deposits / total deposits 27.18% 29.32 % 33.05% 39.56 % 40.22 %
Total capital ratio 15.6% 15.4 % 15.3% 14.8 % 14.5 %
Tier 1 capital ratio 13.4% 13.2 % 13.1% 12.7 % 12.4 %
Common Equity Tier 1 capital ratio 13.4% 13.2 % 13.1% 12.7 % 12.4 %
Tier 1 leverage ratio 9.6% 9.7 % 9.6% 9.2 % 8.7 %
Heritage Bank of Commerce:
Total capital ratio 15.0% 14.8 % 14.7% 14.2 % 14.0 %
Tier 1 capital ratio 13.9% 13.7 % 13.5% 13.2 % 12.9 %
Common Equity Tier 1 capital ratio 13.9% 13.7 % 13.5% 13.2 % 12.9 %
Tier 1 leverage ratio 10.0% 10.0 % 9.9% 9.5 % 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
September 30, 2023 September 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) $3,257,480 $44,853 5.46%$3,143,987 $38,870 4.90%
Securities - taxable 1,114,782 6,797 2.42% 1,076,742 5,874 2.16%
Securities - exempt from Federal tax (3) 32,947 293 3.53% 38,733 329 3.37%
Other investments and interest-bearing deposits in other financial institutions 646,501 8,909 5.47% 857,911 5,170 2.39%
Total interest earning assets (3) 5,051,710 60,852 4.78% 5,117,373 50,243 3.90%
Cash and due from banks 35,911 37,961
Premises and equipment, net 9,374 9,591
Goodwill and other intangible assets 177,238 179,739
Other assets 125,697 121,666
Total assets $5,399,930 $5,466,330
Liabilities and shareholders' equity:
Deposits:
Demand, noninterest-bearing $1,302,606 $1,910,748
Demand, interest-bearing 1,017,686 1,730 0.67% 1,205,937 543 0.18%
Savings and money market 1,087,336 5,514 2.01% 1,429,055 925 0.26%
Time deposits - under $100 11,966 30 0.99% 12,329 5 0.16%
Time deposits - $100 and over 272,362 2,489 3.63% 123,458 121 0.39%
ICS/CDARS - interest-bearing demand, money market and time deposits 881,665 5,117 2.30% 30,517 1 0.01%
Total interest-bearing deposits 3,271,015 14,880 1.80% 2,801,296 1,595 0.23%
Total deposits 4,573,621 14,880 1.29% 4,712,044 1,595 0.13%
Short-term borrowings 31 - 0.00% 27 - 0.00%
Subordinated debt, net of issuance costs 39,439 539 5.42% 39,288 538 5.43%
Total interest-bearing liabilities 3,310,485 15,419 1.85% 2,840,611 2,133 0.30%
Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds 4,613,091 15,419 1.33% 4,751,359 2,133 0.18%
Other liabilities 129,866 103,264
Total liabilities 4,742,957 4,854,623
Shareholders' equity 656,973 611,707
Total liabilities and shareholders' equity $5,399,930 $5,466,330
Net interest income (3) / margin 45,433 3.57% 48,110 3.73%
Less tax equivalent adjustment (3) (61) (69)
Net interest income $45,372 $48,041


(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 $201,000 for the third quarter of 2023, compared to $507,000 for the third quarter of 2022. Prepayment fees totaled $182,000 for the third quarter of 2023, compared to $96,000 for the third 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
September 30, 2023 June 30, 2023
InterestAverage InterestAverage
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) $3,257,480 $44,853 5.46%$3,231,341 $44,028 5.47%
Securities - taxable 1,114,782 6,797 2.42% 1,147,375 6,982 2.44%
Securities - exempt from Federal tax (3) 32,947 293 3.53% 34,070 302 3.56%
Other investments and interest-bearing deposits
in other financial institutions 646,501 8,909 5.47% 535,611 7,092 5.31%
Total interest earning assets (3) 5,051,710 60,852 4.78% 4,948,397 58,404 4.73%
Cash and due from banks 35,911 35,159
Premises and equipment, net 9,374 9,190
Goodwill and other intangible assets 177,238 177,844
Other assets 125,697 107,653
Total assets $5,399,930 $5,278,243
Liabilities and shareholders' equity:
Deposits:
Demand, noninterest-bearing $1,302,606 $1,368,373
Demand, interest-bearing 1,017,686 1,730 0.67% 1,118,200 1,788 0.64%
Savings and money market 1,087,336 5,514 2.01% 1,109,347 4,638 1.68%
Time deposits - under $100 11,966 30 0.99% 11,610 20 0.69%
Time deposits - $100 and over 272,362 2,489 3.63% 201,600 1,410 2.81%
ICS/CDARS - interest-bearing demand, money market
and time deposits 881,665 5,117 2.30% 614,911 2,867 1.87%
Total interest-bearing deposits 3,271,015 14,880 1.80% 3,055,668 10,723 1.41%
Total deposits 4,573,621 14,880 1.29% 4,424,041 10,723 0.97%
Short-term borrowings 31 - 0.00% 62,653 787 5.04%
Subordinated debt, net of issuance costs 39,439 539 5.42% 39,401 538 5.48%
Total interest-bearing liabilities 3,310,485 15,419 1.85% 3,157,722 12,048 1.53%
Total interest-bearing liabilities and demand,
noninterest-bearing / cost of funds 4,613,091 15,419 1.33% 4,526,095 12,048 1.07%
Other liabilities 129,866 101,908
Total liabilities 4,742,957 4,628,003
Shareholders' equity 656,973 650,240
Total liabilities and shareholders' equity $5,399,930 $5,278,243
Net interest income (3) / margin 45,433 3.57% 46,356 3.76%
Less tax equivalent adjustment (3) (61) (63)
Net interest income $45,372 $46,293

_____________________

(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 $201,000 for the third quarter of 2023, compared to $94,000 for the second quarter of 2023. Prepayment fees totaled $182,000 for the third quarter of 2023, compared to $73,000 for the second quarter of 2023.
(3)Reflects the FTE adjustment for Federal tax-exempt income based on a 21% tax rate.


For the Nine Months Ended For the Nine Months Ended
September 30, 2023 September 30, 2022
InterestAverage InterestAverage
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) $3,255,375 $132,993 5.46%$3,074,674 $110,509 4.81%
Securities - taxable 1,140,890 20,835 2.44% 924,694 13,725 1.98%
Securities - exempt from Federal tax (3) 34,332 908 3.54% 41,328 1,048 3.39%
Other investments, interest-bearing deposits in other
financial institutions and Federal funds sold 535,016 20,860 5.21% 1,025,002 8,574 1.12%
Total interest earning assets (3) 4,965,613 175,596 4.73% 5,065,698 133,856 3.53%
Cash and due from banks 36,205 37,589
Premises and equipment, net 9,278 9,621
Goodwill and other intangible assets 177,837 180,393
Other assets 127,514 121,519
Total assets $5,316,447 $5,414,820
Liabilities and shareholders' equity:
Deposits:
Demand, noninterest-bearing $1,444,744 $1,868,283
Demand, interest-bearing 1,117,140 4,994 0.60% 1,244,996 1,470 0.16%
Savings and money market 1,159,894 13,641 1.57% 1,383,944 2,026 0.20%
Time deposits - under $100 11,951 60 0.67% 12,732 14 0.15%
Time deposits - $100 and over 212,736 4,744 2.98% 122,615 341 0.37%
ICS/CDARS - interest-bearing demand, money market
and time deposits 525,318 8,065 2.05% 30,356 4 0.02%
Total interest-bearing deposits 3,027,039 31,504 1.39% 2,794,643 3,855 0.18%
Total deposits 4,471,783 31,504 0.94% 4,662,926 3,855 0.11%
Short-term borrowings 36,283 1,365 5.03% 24 - 0.00%
Subordinated debt, net of issuance costs 39,401 1,614 5.48% 42,552 1,640 5.15%
Total interest-bearing liabilities 3,102,723 34,483 1.49% 2,837,219 5,495 0.26%
Total interest-bearing liabilities and demand,
noninterest-bearing / cost of funds 4,547,467 34,483 1.01% 4,705,502 5,495 0.16%
Other liabilities 120,639 104,524
Total liabilities 4,668,106 4,810,026
Shareholders' equity 648,341 604,794
Total liabilities and shareholders' equity $5,316,447 $5,414,820
Net interest income (3) / margin 141,113 3.80% 128,361 3.39%
Less tax equivalent adjustment (3) (190) (220)
Net interest income $140,923 $128,141

_____________________

(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 $595,000 for the first nine months of 2023, compared to $3,111,000 for the first nine months of 2022. Prepayment fees totaled $393,000 for the first nine months of 2023, compared to $1,155,000 for the first nine months of 2022.
(3)Reflects the FTE adjustment for Federal tax-exempt income based on a 21% tax rate.

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