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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
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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.
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.
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.
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.
