Heritage Commerce Corp Earns $13.3 Million for the Fourth Quarter of 2023, and $64.4 Million for the Full Year 2023


SAN JOSE, Calif., Jan. 25, 2024 (GLOBE NEWSWIRE) -- Heritage Commerce Corp (Nasdaq: HTBK), (the “Company”), the holding company for Heritage Bank of Commerce (the “Bank”), today announced that its fourth quarter 2023 net income was $13.3 million, or $0.22 per average diluted common share, compared to $20.8 million, or $0.34 per average diluted common share, for the fourth quarter of 2022, and $15.8 million, or $0.26 per average diluted common share, for the third quarter of 2023. For the year ended December 31, 2023, net income was $64.4 million, or $1.05 per average diluted common share, compared to $66.6 million, or $1.09 per average diluted common share, for the year ended December 31, 2022. All results are unaudited.

"In 2023, despite challenges faced by many banks, the Company had a successful year with stable client deposits and 9% growth in year-over-year tangible book value. The fourth quarter showed solid performance, contributing to our second-best year in net income, surpassed only by the record profits of 2022," said Clay Jones, President and Chief Executive Officer. "Our loan growth resulted in an increase of 2% for both year-over-year and from the prior quarter. This loan growth, coupled with stable client deposits, showcases our resilience in an increasing interest rate environment. Although net interest income was impacted, as expected, we anticipate stabilization in our cost of funds following the recent Fed guidance on expected rate reductions in 2024."

Mr. Jones added, "Our focus remains on orderly organic growth, while avoiding borrowed funds and brokered deposits. Our local community retail and commercial deposit relationships serve as a stable and lower-cost funding source, reflecting our disciplined management approach. We have a strong balance sheet, evidenced by robust capital, ample liquidity, and a diversified loan portfolio.  We continue to add to loan reserves reflecting our solid loan growth while credit costs are modest.  I extend my gratitude to our dedicated team members for their talent and commitment in serving our community and clients, and driving our company forward."

Current Financial Condition and Liquidity Position

The following are important factors in understanding our current financial condition and liquidity position:

Liquidity and Available Lines of Credit:

  • The following table shows our liquidity and available lines of credit at December 31, 2023:
    
LIQUIDITY AND AVAILABLE LINES OF CREDIT Total
(in $000’s, unaudited) Available
Excess funds at the Federal Reserve Bank ("FRB") $365,500
FRB discount window collateralized line of credit  1,235,573
Federal Home Loan Bank ("FHLB") collateralized borrowing capacity  1,100,931
Unpledged investment securities (at fair value)  58,120
Federal funds purchase arrangements  90,000
Holding company line of credit  20,000
Total $2,870,124
    
  • The Company’s total liquidity and borrowing capacity was $2.87 billion, all of which remained available at December 31, 2023.
  • The available liquidity and borrowing capacity was 66% of the Company’s total deposits and approximately 142% of the Bank’s estimated uninsured deposits at December 31, 2023.
  • The Bank increased its credit line availability from the FRB and the FHLB by $1.50 billion to $2.34 billion at December 31, 2023, from $839.5 million at December 31, 2022.
  • The loan to deposit ratio was 76.52% at December 31, 2023, compared to 75.14% at December 31, 2022, and 71.81% at September 30, 2023, providing the Bank with ample liquidity and capacity to provide future credit to the community.

Deposits:

  • Total deposits were relatively flat at $4.38 billion at December 31, 2023, compared to $4.39 billion at December 31, 2022. Total deposits decreased ($197.0) million, or (4%) from $4.58 billion at September 30, 2023, as a result of deposit outflows from clients operating expenses, tax payments, one-time capital events, profit distributions, and to a lesser extent clients moving deposits to outside investment alternatives.
  • Migration of client deposits into interest-bearing accounts resulted in an increase in Insured Cash Sweep (“ICS”)/Certificate of Deposit Account Registry Service (“CDARS”) deposits to $854.1 million at December 31, 2023, compared to $30.4 million at December 31, 2022, and decreased ($67.1) million from $921.2 million at September 30, 2023.   
  • Noninterest-bearing demand deposits decreased ($444.2) million, or (26%), to $1.29 billion at December 31, 2023 from $1.74 billion at December 31, 2022, largely in response to the increasing interest rate environment. Noninterest-bearing demand deposits increased $49.0 million, or 4%, from $1.24 billion at September 30, 2023, evidencing stabilization in deposit mix and partially helped by a single customer temporarily moving significant deposits into this category at year-end.
  • The Bank had 24,737 deposit accounts at December 31, 2023, with an average balance of $177,000, compared to 24,769 deposit accounts at September 30, 2023, with an average balance of $185,000. At December 31, 2022, the Company had 23,833 deposit accounts, with an average balance of $184,000.
  • Deposits from the Bank’s top 100 client relationships, representing 22% of the total number of accounts, totaled $1.96 billion, representing 45% of total deposits, with an average account size of $368,000, at December 31, 2023. At December 31, 2022, deposits from the Bank's top 100 client relationships, representing 18% of the total number of accounts, totaled $2.03 billion, representing 46% of total deposits, with an average account size of $469,000. At September 30, 2023, deposits from the Bank’s top 100 client relationships, representing 22% of the total number of accounts, totaled $2.19 billion, representing 48% of total deposits, with an average account size of $408,000.

Investment Securities:

  • Investment securities totaled $1.09 billion at December 31, 2023, of which $442.6 million were in the securities available-for-sale portfolio (at fair value), and $650.6 million were in the securities held-to-maturity portfolio (at amortized cost, net of allowance for credit losses of $12,000). The fair value of the securities held-to-maturity portfolio was $564.1 million at December 31, 2023.
  • The weighted average life of the total investment securities portfolio was 4.40 years at December 31, 2023.
  • The following are the projected cash flows from paydowns and maturities in the investment securities portfolio for the periods indicated based on the current interest rate environment:
          
     Agency   
     Mortgage-   
    backed and  
PROJECTED INVESTMENT SECURITIES PAYDOWNS & MATURITIES U.S. Municipal  
(in $000’s, unaudited)    Treasury    Securities    Total
First quarter of 2024 $37,000 $28,977 $65,977
Second quarter of 2024  131,000  20,338  151,338
Third quarter of 2024  37,500  20,441  57,941
Fourth quarter of 2024  9,000  19,320  28,320
First quarter of 2025  35,000  18,835  53,835
Second quarter of 2025  118,000  18,366  136,366
Third quarter of 2025  25,500  19,209  44,709
Fourth quarter of 2025    17,460  17,460
Total $393,000 $162,946 $555,946
          

Loans:

  • Loans, excluding loans held-for-sale, increased $51.8 million, or 2%, to $3.35 billion at December 31, 2023 from $3.30 billion at December 31, 2022, and increased $64.9 million, or 2%, from $3.29 billion at September 30, 2023. Core loans, excluding residential mortgages, increased $92.8 million, or 3%, to $2.85 billion at December 31, 2023, compared to $2.76 billion at December 31, 2022, and increased $71.0 million, or 3%, from $2.78 billion at September 30, 2023.  
  • Commercial real estate (“CRE”) loans totaled $1.84 billion at December 31, 2023, of which 32% were owner occupied and 68% were investor CRE loans.
  • During the fourth quarter of 2023, there were 28 new CRE loans originated totaling $57 million with a weighted average loan-to-value and debt-service coverage for the non-owner occupied portfolio of 35% and 2.31 times, respectively.
  • The average loan size for all CRE loans was $1.6 million, and the average loan size for office CRE loans was also $1.6 million.
  • The Company has personal guarantees on 91% of its CRE portfolio. A substantial portion of the unguaranteed CRE loans were made to credit-worthy non-profit organizations.
  • Total office exposure in the CRE portfolio was $399 million, including 29 loans totaling approximately $75 million in San Jose, 17 loans totaling approximately $26 million in San Francisco, and eight loans totaling approximately $16 million in Oakland, at December 31, 2023.   Non-owner occupied CRE with office exposure totaled $312 million at December 31, 2023.
  • Of the $399 million of CRE loans with office exposure, approximately $36 million, or 9%, are situated in the Bay Area downtown business districts of San Jose and San Francisco, with an average loan balance of $2.1 million.
  • At December 31, 2023, the weighted average loan-to-value and debt-service coverage ratio for the entire non-owner occupied office portfolio were 42.9% and 1.82 times, respectively. For the nine non-owner occupied office loans in San Francisco at December 31, 2023, the weighted average loan-to-value and debt-service coverage ratio were 35% and 1.48 times, respectively.

Fourth Quarter Ended December 31, 2023
Operating Results, Balance Sheet Review, Capital Management, and Credit Quality

(as of, or for the periods ended December 31, 2023, compared to December 31, 2022, and September 30, 2023, except as noted):

Operating Results:

  • Diluted earnings per share were $0.22 for the fourth quarter of 2023, compared to $0.34 for the fourth quarter of 2022, and $0.26 for the third quarter of 2023. Diluted earnings per share were $1.05 for the year ended December 31, 2023, compared to $1.09 for the year ended December 31, 2022.

  • The following table indicates the ratios for the return on average tangible assets and the return on average tangible common equity for the periods indicated:

                
  For the Quarter Ended: For the Year Ended:
     December 31,     September 30,     December 31,  December 31,     December 31, 
(unaudited) 2023 2023 2022 2023 2022
Return on average tangible assets 1.03%  1.20%  1.59%  1.26%  1.27% 
Return on average tangible common equity 10.84%  13.06%  18.89%  13.57%  15.57% 
                     
  • Net interest income decreased (18%) to $42.3 million for the fourth quarter of 2023, compared to $51.7 million for the fourth quarter of 2022. The fully tax equivalent (“FTE”) net interest margin decreased (69) basis points to 3.41% for the fourth quarter of 2023, from 4.10% for the fourth quarter of 2022, primarily due to higher rates paid on customer deposits, and a decrease in the average balances of noninterest-bearing demand deposits, partially offset by increases in the prime rate and the rate on overnight funds.

    • Net interest income decreased (7%) to $42.3 million for the fourth quarter of 2023, compared to $45.4 million for the third quarter of 2023. The FTE net interest margin decreased (16) basis points to 3.41% for the fourth quarter of 2023 from 3.57% for the third quarter of 2023, primarily due to higher rates paid on customer deposits, and a decrease in the average balances of noninterest bearing demand deposits, partially offset by higher average yields on overnight funds, and an increase in the average balance of loans.

    • For the year ended December 31, 2023, the net interest income increased 2% to $183.2 million, compared to $179.9 million for the year ended December 31, 2022. The FTE net interest margin increased 13 basis points to 3.70% for the year ended December 31, 2023, from 3.57% for the year ended December 31, 2022, primarily due to increases in the prime rate and the rate on overnight funds, and a shift in the mix of earning assets as the Company invested its excess liquidity into higher yielding loans, partially offset by a higher rates paid on customer deposits, a decrease in the average balances of noninterest-bearing demand deposits, and an increase in the average balances of short-term borrowings.

  • The following table, as of December 31, 2023, sets forth the estimated changes in the Company’s annual net interest income that would result from an instantaneous shift in interest rates from the base rate:
         
   Increase/(Decrease) in  
   Estimated Net  
   Interest Income(1)  
 CHANGE IN INTEREST RATES (basis points) Amount Percent  
 (in $000's, unaudited)       
 +400 $10,703  5.6% 
 +300 $7,997  4.2% 
 +200 $5,311  2.8% 
 +100 $2,648  1.4% 
 0      
 −100 $(3,197) (1.7)% 
 −200 $(10,513) (5.5)% 
 −300 $(22,609) (11.8)% 
 −400 $(37,896) (19.8)% 


   
(1)Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results. These projections are forward-looking and should be considered in light of the Forward-Looking Statement Disclaimer below. Actual rates paid on deposits may differ from the hypothetical interest rates modeled due to competitive or market factors, which could reduce any actual impact on net interest income.
   


  • The following tables present the average balance of loans outstanding, interest income, and the average yield for the periods indicated:

    • The average yield on the total loan portfolio decreased to 5.39% for the fourth quarter of 2023, compared to 5.46% for the third quarter of 2023, primarily due to lower loan yields on the core bank, lower average balances of asset-based lending loans, a decrease in the accretion of loan purchase discount into interest income from acquired loans, and lower prepayment fees.
                  
  For the Quarter Ended For the Quarter Ended 
  December 31, 2023 September 30, 2023 
  Average Interest Average Average Interest Average 
(in $000’s, unaudited) Balance Income Yield Balance Income Yield 
Loans, core bank $2,758,935  $37,303 5.36%  $2,720,010  $37,171 5.42%  
Prepayment fees     91 0.01%      182 0.03%  
Asset-based lending  14,717   371 10.00%   23,983   593 9.81%  
Bay View Funding factored receivables  52,861   2,803 21.04%   51,664   2,775 21.31%  
Purchased residential mortgages  459,268   3,812 3.29%   465,471   3,811 3.25%  
Loan fair value mark / accretion  (3,352)  255 0.04%   (3,648)  321 0.05%  
Total loans (includes loans held-for-sale) $3,282,429  $44,635 5.39%  $3,257,480  $44,853 5.46%  


  • The average yield on the total loan portfolio increased to 5.39% for the fourth quarter of 2023, compared to 5.19% for the fourth quarter of 2022, primarily due to increases in the prime rate.
                  
  For the Quarter Ended For the Quarter Ended 
  December 31, 2023 December 31, 2022 
  Average Interest Average Average Interest Average 
(in $000’s, unaudited) Balance Income Yield Balance Income Yield 
Loans, core bank $2,758,935  $37,303 5.36%  $2,662,873  $33,702 5.02%  
Prepayment fees     91 0.01%      123 0.02%  
Asset-based lending  14,717   371 10.00%   35,519   756 8.44%  
Bay View Funding factored receivables  52,861   2,803 21.04%   71,789   3,696 20.43%  
Purchased residential mortgages  459,268   3,812 3.29%   485,149   3,842 3.14%  
Loan fair value mark / accretion  (3,352)  255 0.04%   (4,774)  382 0.06%  
Total loans (includes loans held-for-sale) $3,282,429  $44,635 5.39%  $3,250,556  $42,501 5.19%  


 The average yield on the total loan portfolio increased to 5.45% for the year ended December 31, 2023, compared to 4.91% for the year ended December 31, 2022, primarily due to increases in the prime rate, partially offset by a decrease in the accretion of the loan purchase discount into interest income from acquired loans, lower prepayment fees, and higher average balances of lower yielding purchased residential mortgages.


                  
  For the Year Ended  For the Year Ended  
  December 31, 2023 December 31, 2022 
  Average Interest Average Average Interest Average 
(in $000’s, unaudited) Balance Income Yield Balance Income Yield 
Loans, core bank $2,707,198  $144,751 5.35%  $2,591,027  $120,166 4.64%  
Prepayment fees     484 0.02%      1,278 0.05%  
Asset-based lending  23,591   2,277 9.65%   51,990   3,613 6.95%  
Bay View Funding factored receivables  62,642   13,426 21.43%   64,099   12,819 20.00%  
Purchased residential mortgages  472,582   15,309 3.24%   417,672   12,395 2.97%  
Loan fair value mark / accretion  (3,819)  1,381 0.05%   (5,782)  2,739 0.11%  
Total loans (includes loans held-for-sale) $3,262,194  $177,628 5.45%  $3,119,006  $153,010 4.91%  


 In aggregate, the remaining net purchase discount on total loans acquired was $3.2 million at December 31, 2023.

  • The following table presents the average balance of deposits and interest-bearing liabilities, interest expense, and the average rate for the periods indicated:
                  
  For the Quarter Ended For the Quarter Ended 
  December 31, 2023 September 30, 2023 
  Average Interest Average Average Interest Average 
(in $000’s, unaudited) Balance Expense Rate Balance Expense Rate 
Deposits:                   
Demand, noninterest-bearing $1,243,222      $1,302,606      
                  
Demand, interest-bearing  948,061 $1,661 0.70%   1,017,686 $1,730 0.67%  
Savings and money market  1,096,962  6,216 2.25%   1,087,336  5,514 2.01%  
Time deposits - under $100  11,389  37 1.29%   11,966  30 0.99%  
Time deposits - $100 and over  234,140  2,130 3.61%   272,362  2,489 3.63%  
ICS/CDARS - interest-bearing demand, money market                 
and time deposits  920,976  6,009 2.59%   881,665  5,117 2.30%  
Total interest-bearing deposits  3,211,528  16,053 1.98%   3,271,015  14,880 1.80%  
Total deposits  4,454,750  16,053 1.43%   4,573,621  14,880 1.29%  
                  
Short-term borrowings  29   0.00%   31   0.00%  
Subordinated debt, net of issuance costs  39,477  538 5.41%   39,439  539 5.42%  
Total interest-bearing liabilities  3,251,034  16,591 2.02%   3,310,485  15,419 1.85%  
Total interest-bearing liabilities and demand,                 
noninterest-bearing / cost of funds $4,494,256 $16,591 1.46%  $4,613,091 $15,419 1.33%  
                  


 The average cost of total deposits increased to 1.43% for the fourth quarter of 2023, compared to 1.29% for the third quarter of 2023. The average cost of funds increased to 1.46% for the fourth quarter of 2023, compared to 1.33% for the third quarter of 2023. The average cost of deposits was 0.25% and the average cost of funds was 0.30% for the fourth quarter of 2022.
   
 The average cost of total deposits increased to 1.06% for the year ended December 31, 2023, compared to 0.15% for the year ended December 31, 2022. The average cost of funds increased to 1.13% for the year ended December 31, 2023, compared to 0.19% for the year ended December 31, 2022.
   
 The increase in the average cost of total deposits and the average cost of funds for the fourth quarter of 2023 and the year ended December 31, 2023 was primarily due to clients seeking higher yields and moving noninterest-bearing deposits to the Bank’s interest-bearing and ICS deposits and an increase in market interest rates.
   
  • During the fourth quarter of 2023, we recorded a provision for credit losses on loans of $289,000, compared to a $508,000 provision for credit losses on loans for the fourth quarter of 2022, and a provision for credit losses on loans of $168,000 for the third quarter of 2023. There was a provision for credit losses on loans of $749,000 for the year ended December 31, 2023, compared to a $766,000 provision for credit losses on loans for the year ended December 31, 2022.
  • Total noninterest income decreased (30%) to $1.9 million for the fourth quarter of 2023, compared to $2.8 million for the fourth quarter of 2022, primarily due to lower service charges and fees on deposit accounts during the fourth quarter of 2023. Total noninterest income decreased (12%) to $1.9 million for the fourth quarter of 2023, compared to $2.2 million for the third quarter of 2023, primarily due to no gain on sales of SBA loans, lower termination fees at Bay View Funding, and a lower gain on proceeds from company-owned life insurance during the fourth quarter of 2023.

    • For the year ended December 31, 2023, total noninterest income decreased (11%) to $9.0 million, compared to $10.1 million for the year ended December 31, 2022, primarily due to a $669,000 gain on warrants during the year ended December 31, 2022, and lower service charges and fees on deposit accounts, servicing income, and interchange fee income on credit cards, during the year ended December 31, 2023.
  • Total noninterest expense for the fourth quarter of 2023 increased to $25.5 million, compared to $24.5 million for the fourth quarter of 2022, primarily due to higher insurance costs, regulatory assessments, and information technology related expenses included in other noninterest expense, partially offset by lower professional fees and occupancy and equipment expense during the fourth quarter of 2023. Total noninterest expense for the fourth quarter of 2023 increased to $25.5 million, compared to $25.2 million for the third quarter of 2023, primarily due to higher professional fees.

    • Total noninterest expense for the year ended December 31, 2023 increased to $101.1 million, compared to $94.9 million for the year ended December 31, 2022, primarily due to higher salaries and employee benefits, and higher insurance costs, regulatory assessments, improvements in information technology, and ICS/CDARS fee expenses included in other noninterest expense, partially offset by lower professional fees and occupancy and equipment expense during the year ended December 31, 2023.

    • Full time equivalent employees were 349 at December 31, 2023, and 340 at December 31, 2022, and 348 at September 30, 2023.  
  • The efficiency ratio was 57.62% for the fourth quarter of 2023, compared to 44.98% for the fourth quarter of 2022, and 52.89% for the third quarter of 2023. The efficiency ratio was 52.57% for the year ended December 31, 2023, compared to 49.93% for the year ended December 31, 2022.

  • Income tax expense was $5.1 million for the fourth quarter of 2023, compared to $8.7 million for the fourth quarter of 2022, and $6.5 million for the third quarter of 2023. The effective tax rate for the fourth quarter of 2023 was 27.8%, compared to 29.5% for the fourth quarter of 2022, and 29.0% for the third quarter of 2023. Income tax expense for the year ended December 31, 2023 was $26.0 million, compared to $27.8 million for the year ended December 31, 2022. The effective tax rate for the year ended December 31, 2023 was 28.7%, compared to 29.5% for the year ended December 31, 2022.

Balance Sheet Review, Capital Management and Credit Quality:

  • Total assets increased 1% to $5.19 billion at December 31, 2023, compared to $5.16 billion at December 31, 2022, and decreased (4%) from $5.40 billion at September 30, 2023.  

  • The following table shows the balances of securities available-for-sale, at fair value, and the related pre-tax unrealized (loss) for the periods indicated:
          
SECURITIES AVAILABLE-FOR-SALE December 31,  September 30,  December 31, 
(in $000’s, unaudited)    2023 2023 2022
Balance (at fair value):         
U.S. Treasury $382,369  $396,996  $418,474 
Agency mortgage-backed securities  60,267   60,198   71,122 
Total $442,636  $457,194  $489,596 
          
Pre-tax unrealized (loss):         
U.S. Treasury $(5,621) $(9,606) $(10,323)
Agency mortgage-backed securities  (4,313)  (7,185)  (5,794)
Total $(9,934) $(16,791) $(16,117)
          


 The pre-tax unrealized loss on the securities available-for-sale portfolio was ($9.9) million, or ($7.1) million net of taxes, which was 1.1% of total shareholders’ equity at December 31, 2023, down from ($16.8) million, or ($12.0) million net of taxes, at September 30, 2023, due to lower interest rates.
   
 The weighted average life of the securities available-for-sale portfolio was 1.29 years at December 31, 2023.
   
  • The following table shows the balances of securities held-to-maturity, at amortized cost, and the related pre-tax unrecognized (loss) and allowance for credit losses for the periods indicated:
          
SECURITIES HELD-TO-MATURITY December 31,  September 30,  December 31, 
(in $000’s, unaudited)    2023 2023 2022
Balance (at amortized cost):         
Agency mortgage-backed securities $618,374  $632,241  $677,381 
Municipals — exempt from Federal tax (1)  32,203   32,453   37,623 
Total (1) $650,577  $664,694  $715,004 
          
Pre-tax unrecognized (loss):         
Agency mortgage-backed securities $(85,729) $(119,932) $(99,742)
Municipals — exempt from Federal tax  (721)  (2,753)  (810)
Total $(86,450) $(122,685) $(100,552)
          
Allowance for credit losses on municipal securities $(12) $(13) $(14)
          


   
(1)Gross of the allowance for credit losses of $12,000 at December, 2023, $13,000 at September 30, 2023, and $14,000 at December 31, 2022.
   


 The pre-tax unrecognized loss on the securities held-to-maturity portfolio was ($86.5) million, or ($60.9) million net of taxes, which was 9.0% of total shareholders’ equity at December 31, 2023, down from ($122.7) million, or ($86.4) million net of taxes, at September 30, 2023, due to lower interest rates.
   
 The weighted average life of the securities held-to-maturity portfolio was 6.57 years at December 31, 2023, which includes Community Reinvestment Act ("CRA") mortgage-backed securities with longer maturities.
   
  • The unrealized and unrecognized losses in both the available-for-sale and held-to-maturity portfolios were due to higher interest rates at December 31, 2023 compared to when the securities were purchased. The issuers are of high credit quality and all principal amounts are expected to be repaid when the securities mature. The fair value is expected to recover as the securities approach their maturity date and/or market rates decline.

  • The following table summarizes the distribution of loans, excluding loans held-for-sale, and the percentage of distribution in each category for the periods indicated:
                 
LOANS  December 31, 2023 September 30, 2023 December 31, 2022 
(in $000’s, unaudited)    Balance     % to Total    Balance     % to Total    Balance     % to Total    
Commercial $463,778  14%    $430,664  13%    $533,915  16%    
Real estate:                
CRE - owner occupied  583,253  17%     589,751  18%     614,663  19%    
CRE - non-owner occupied  1,256,590  37%     1,208,324  37%     1,066,368  32%    
Land and construction  140,513  4%     158,138  5%     163,577  5%    
Home equity  119,125  4%     124,477  4%     120,724  4%    
Multifamily  269,734  8%     253,129  7%     244,882  7%    
Residential mortgages  496,961  15%     503,006  15%     537,905  16%    
Consumer and other  20,919  1%     18,526  1%     17,033  1%    
Total Loans  3,350,873  100%     3,286,015  100%     3,299,067  100%    
Deferred loan costs (fees), net  (495)   (554)   (517)  
Loans, net of deferred costs and fees  $3,350,378  100%    $3,285,461  100%    $3,298,550  100%    


 Loans, excluding loans held-for-sale, increased $51.8 million, or 2%, to $3.35 billion at December 31, 2023, compared to $3.30 billion at December 31, 2022, and increased $64.9 million, or 2%, from $3.29 billion at September 30, 2023.   Core loans, excluding residential mortgages, increased $92.8 million, or 3%, to $2.85 billion at December, 2023, compared to $2.76 billion at December 31, 2022, and increased $71.0 million from $2.78 billion at September 30, 2023.  
   
 Commercial and industrial (“C&I”) line utilization was 29% at both December 31, 2023 and December 31, 2022, compared to 27% at September 30, 2023.
   
 At December 31, 2023, there was 32% of the CRE loan portfolio secured by owner occupied real estate, compared to 37% at December 31, 2022, and 33% at September 30, 2023.
   
  • The following table presents the maturity distribution of the Company’s loans, excluding loans held-for-sale, as of December 31, 2023. The table shows the distribution of such loans between those loans with predetermined (fixed) interest rates and those with variable (floating) interest rates. Floating rates generally fluctuate with changes in the prime rate as reflected in the Western Edition of The Wall Street Journal, and contractual repricing dates.
                      
  Due in Over One Year But         
LOAN MATURITIES One Year or Less Less than Five Years Over Five Years   
(in $000’s, unaudited)    Balance    % to Total    Balance    % to Total    Balance    % to Total    Total
Loans with variable interest rates $359,013 40%   $269,586 30%   $274,829 30%   $903,428
Loans with fixed interest rates  74,940 3%    621,480 25%    1,751,025 72%    2,447,445
Loans $433,953 13%   $891,066 27%   $2,025,854 60%   $3,350,873
                      


 At December 31, 2023, approximately 27% of the Company’s loan portfolio consisted of floating interest rate loans, compared to 33% at December 31, 2022, and 27% at September 30, 2023.
   
  • The following table summarizes the allowance for credit losses on loans (“ACLL”) for the periods indicated:

                 
  At or For the Quarter Ended: At or For the Year Ended: 
ALLOWANCE FOR CREDIT LOSSES ON LOANS    December 31,     September 30,     December 31,  December 31,     December 31,  
(in $000’s, unaudited) 2023 2023 2022 2023 2022 
Balance at beginning of period $47,702  $47,803  $46,921  $47,512  $43,290  
Charge-offs during the period  (160)  (447)  (56)  (1,011)  (434) 
Recoveries during the period  127   178   139   708   3,890  
Net recoveries (charge-offs) during the period  (33)  (269)  83   (303)  3,456  
Provision for credit losses on loans during the period  289   168   508   749   766  
Balance at end of period $47,958  $47,702  $47,512  $47,958  $47,512  
                 
Total loans, net of deferred fees $3,350,378  $3,285,461  $3,298,550  $3,350,378  $3,298,550  
Total nonperforming loans $7,707  $5,484  $2,425  $7,707  $2,425  
ACLL to total loans  1.43%  1.45%  1.44  1.43%  1.44%  
ACLL to total nonperforming loans  622.27%  869.84%  1,959.26  622.27  1,959.26 


 The following table shows the drivers of change in ACLL for each of the four quarters of 2023:


DRIVERS OF CHANGE IN ACLL  
(in $000’s, unaudited)  
ACLL at December 31, 2022 $47,512 
Portfolio changes during the first quarter of 2023  (160)
Qualitative and quantitative changes during the first   
quarter of 2023 including changes in economic forecasts  (79)
ACLL at March 31, 2023  47,273 
Portfolio changes during the second quarter of 2023  1,652 
Qualitative and quantitative changes during the second   
quarter of 2023 including changes in economic forecasts  (1,122)
ACLL at June 30, 2023  47,803 
Portfolio changes during the third quarter of 2023  (117)
Qualitative and quantitative changes during the third   
quarter of 2023 including changes in economic forecasts  16 
ACLL at September 30, 2023  47,702 
Portfolio changes during the fourth quarter of 2023  1,216 
Qualitative and quantitative changes during the fourth   
quarter of 2023 including changes in economic forecasts  (960)
ACLL at December 31, 2023 $47,958 
 
  • The following is a breakout of nonperforming assets (“NPAs”) at the periods indicated:
                 
NONPERFORMING ASSETS December 31, 2023 September 30, 2023 December 31, 2022 
(in $000’s, unaudited)    Balance    % of Total    Balance    % of Total    Balance    % of Total 
Land and construction loans $4,661 60%$ 0%$ 0%
Commercial loans  1,236 16% 1,712 31% 642 26%
Restructured and loans over 90 days past due                
and still accruing  889 12% 1,966 36% 1,685 70%
Residential mortgages  779 10% 1,716 31%  0%
Home equity loans  142 2% 90 2% 98 4%
CRE loans   0%  0%  0%
Total nonperforming assets $7,707 100%$5,484 100%$2,425 100%


 There were 12 borrowers included in NPAs totaling $7.7 million, or 0.15% of total assets, at December 31, 2023, compared to 9 borrowers totaling $2.4 million, or 0.05% of total assets, at December 31, 2022, and 11 borrowers totaling $5.5 million, or 0.10% of total assets at September 30, 2023. The increase in NPAs at December 31, 2023, was primarily due to the downgrade of loans to one customer totaling $4.6 million, which are well collateralized and there are no specific reserves for these loans. This increase in NPAs was partially offset by pay-offs of loans previously included in NPAs.
   
 There were no CRE loans included in NPAs at December 31, 2023, December 31, 2022, or September 30, 2023.
   
 There were no foreclosed assets on the balance sheet at December 31, 2023, December 31, 2022, or September 30, 2023.
   
 There were no Shared National Credits (“SNCs”) or material purchased participations included in NPAs or total loans at December 31, 2023, December 31, 2022, or September 30, 2023.
   
 Classified assets totaled $31.8 million, or 0.61% of total assets, at December 31, 2023, compared to $14.5 million, or 0.28% of total assets, at December 31, 2022, and $31.1 million, or 0.57% of total assets, at September 30, 2023.
   
  • The following table summarizes the distribution of deposits and the percentage of distribution in each category for the periods indicated:
                 
DEPOSITS December 31, 2023 September 30, 2023 December 31, 2022 
(in $000’s, unaudited)    Balance    % to Total  Balance    % to Total  Balance    % to Total 
Demand, noninterest-bearing $1,292,486 30%  $1,243,501 27%  $1,736,722 40%  
Demand, interest-bearing  914,066 21%   1,004,185 22%   1,196,427 27%  
Savings and money market  1,087,518 25%   1,110,640 24%   1,285,444 29%  
Time deposits — under $250  38,055 1%   43,906 1%   32,445 1%  
Time deposits — $250 and over  192,228 4%   252,001 6%   108,192 2%  
ICS/CDARS — interest-bearing demand,                
money market and time deposits  854,105 19%   921,224 20%   30,374 1%  
Total deposits $4,378,458 100%  $4,575,457 100%  $4,389,604 100%  
                 


 The Bank’s uninsured deposits were approximately $2.01 billion, or 46% of total deposits, at December 31, 2023, compared to $2.12 billion, or 46% of total deposits, at September 30, 2023, and $2.15 billion, or 48% of total deposits, at June 30, 2023, and $2.56 billion, or 58% of total deposits, at March 31, 2023, and $2.79 billion, or 64% of total deposits, at December 31, 2022.
   
  • The Company’s consolidated capital ratios exceeded regulatory guidelines and the Bank’s capital ratios exceeded regulatory guidelines under the Basel III prompt corrective action (“PCA”) regulatory guidelines for a well-capitalized financial institution, and the Basel III minimum regulatory requirements at December 31, 2023, as reflected in the following table:
             
                       Well-capitalized  
        Financial  
        Institution Basel III
  Heritage Heritage Basel III PCA Minimum
  Commerce Bank of Regulatory 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 10.0%   10.3%   5.0%   4.0%
Tangible common equity / tangible assets (2) 9.8%   10.2%   N/A  N/A 


   
(1)Basel III minimum regulatory requirements for both the Company and the Bank include a 2.5% capital conservation buffer, except the leverage ratio.
(2)Represents shareholders’ equity minus goodwill and other intangible assets divided by total assets minus goodwill and other intangible assets.
   


  • The following table reflects the components of accumulated other comprehensive loss, net of taxes, for the periods indicated:
          
ACCUMULATED OTHER COMPREHENSIVE LOSS December 31,  September 30,  December 31, 
(in $000’s, unaudited)    2023 2023 2022
Unrealized loss on securities available-for-sale $(7,116) $(11,985) $(11,506)
Split dollar insurance contracts liability  (2,809)  (3,234)  (3,091)
Supplemental executive retirement plan liability  (2,892)  (2,343)  (2,371)
Unrealized gain on interest-only strip from SBA loans  87   93   112 
Total accumulated other comprehensive loss $(12,730) $(17,469) $(16,856)
          

Heritage Commerce Corp, a bank holding company established in October 1997, is the parent company of Heritage Bank of Commerce, established in 1994 and headquartered in San Jose, CA with full-service branches in Danville, Fremont, Gilroy, Hollister, Livermore, Los Altos, Los Gatos, Morgan Hill, Oakland, Palo Alto, Pleasanton, Redwood City, San Francisco, San Jose, San Mateo, San Rafael, and Walnut Creek. Heritage Bank of Commerce is an SBA Preferred Lender. Bay View Funding, a subsidiary of Heritage Bank of Commerce, is based in San Jose, CA and provides business-essential working capital factoring financing to various industries throughout the United States. For more information, please visit www.heritagecommercecorp.com. The contents of our website are not incorporated into, and do not perform a part of, this release or of our filings with the Securities and Exchange Commission.

Forward-Looking Statement Disclaimer

Certain matters discussed in this press release constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may be deemed to include, among other things, statements relating to the Company’s future financial performance, projected cash flows of our investment securities portfolio, the performance of our loan portfolio, estimated net interest income resulting from a shift in interest rates, expectation of high credit quality issuers ability to repay, as well as statements relating to the anticipated effects on the Company’s financial condition and results of operations from expected developments or events. These forward-looking statements are subject to various risks and uncertainties that may be outside our control and our actual results could differ materially from our projected results. Risks and uncertainties that could cause our financial performance to differ materially from our goals, plans, expectations and projections expressed in forward-looking statements include those set forth in our filings with the Securities and Exchange Commission (“SEC”), Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, and the following: (1) factors that affect our liquidity and our ability to meet customer demands for deposit withdrawals, including our cash on hand and the availability of funds from our lines of credit; (2) factors that affect the collectability of our loans, including fluctuations in interest rates as those changes affect our borrowers’ ability to pay and perform on all other terms of our loans; (3) media items and consumer confidence as those factors affect depositors’ confidence in the banking system generally and our bank in particular; (4) factors that affect the value and liquidity of our investment portfolios, particularly the values of securities available-for-sale; (5) the effect of our measures to assure adequate liquidity of deposits as those measures affect profitability, including increasing interest rates on deposits as a component of our interest expense; (6) our ability to estimate accurately, and to establish adequate reserves against, the risk of loss associated with our loan and lease portfolio; (7) events and circumstances that affect our borrowers’ financial condition, results of operations and cash flows, which may, during periods of economic uncertainty or decline, adversely affect those borrowers’ ability to repay our loans timely and in full, or to comply with their other obligations under our loan agreements with those customers; (8) geopolitical and domestic political developments, including ongoing conflicts in Ukraine and the Middle East, as well as other regions that are experiencing or that may in the future experience political or economic upheaval, that can increase levels of political and economic unpredictability, contribute to rising energy and commodity prices, and increase the volatility of financial markets; (9) current and future economic and market conditions in the United States generally or in the communities we serve, including the effects of declines in property values and overall slowdowns in economic growth should these events occur; (10) effects of and changes in trade, monetary and fiscal policies and laws, including the interest rate policies of the Federal Open Market Committee of the Federal Reserve Board and other factors that affect market interest rates generally; (11) inflationary pressures and changes in the interest rate environment that reduce our margins and yields, the fair value of financial instruments or our level of loan originations, or increase the level of defaults, losses and prepayments on loans to customers, whether held in the portfolio or in the secondary market; (12) changes in the level of nonperforming assets and charge offs and other credit quality measures, and their impact on the adequacy of our allowance for credit losses and our provision for credit losses; (13) volatility in credit and equity markets and its effect on the global economy; (14) conditions relating to the impact of recent and potential future pandemic response measures on our customers, employees, businesses, liquidity, financial results and overall condition including severity and duration of the associated uncertainties in U.S. and global markets; (15) our ability to compete effectively with other banks and financial services companies and the effects of competition in the financial services industry on our business; (16) our ability to achieve loan growth and attract deposits in our market area; (17) risks associated with concentrations in real estate related loans; (18) the relative strength or weakness of the commercial and real estate markets where our borrowers are located, including related vacancy rates, and asset and market prices; (19) regulatory limits on the Bank’s ability to pay dividends to the Company; (20) operational issues stemming from, and/or capital spending necessitated by, the potential need to adapt to industry changes in information technology systems, on which we are highly dependent; (21) our inability to attract, recruit, and retain qualified officers and other personnel could harm our ability to implement our strategic plan, impair our relationships with customers and adversely affect our business, results of operations and growth prospects; (22) possible adjustment of the valuation of our deferred tax assets or of the goodwill associated with previous acquisitions; (23) our ability to keep pace with technological changes, including our ability to identify and address cyber-security risks such as data security breaches, “denial of service” attacks, “hacking” and identity theft; (24) inability of our framework to manage risks associated with our business, including operational risk and credit risk; (25) risks of loss of funding of the Small Business Administration (“SBA”) or SBA loan programs, or changes in those programs; (26) compliance with applicable laws and governmental and regulatory requirements, including the Dodd-Frank Act and others relating to banking, consumer protection, securities, accounting and tax matters; (27) effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; (28) the expense and uncertain resolution of litigation matters whether occurring in the ordinary course of business or otherwise; (29) availability of and competition for acquisition opportunities; (30) risks resulting from domestic or international terrorism, riots, widespread mayhem, and similar events or circumstances; (31) risks of natural disasters (including earthquakes, fires, and flooding) and other events beyond our control; and (32) our success in managing the risks involved in the foregoing factors.

Member FDIC

For additional information, contact:

Debbie Reuter
EVP, Corporate Secretary
Direct: (408) 494-4542
Debbie.Reuter@herbank.com

                        
  For the Quarter Ended: Percent Change From:  For the Year Ended:
CONSOLIDATED INCOME STATEMENTS    December 31,     September 30,     December 31,     September 30,     December 31,      December 31,     December 31,     Percent 
(in $000’s, unaudited) 2023 2023 2022 2023 2022  2023 2022 Change 
Interest income $58,892 $60,791 $55,192 (3)%7 % $234,298 $188,828 24 %
Interest expense  16,591  15,419  3,453 8 %380 %  51,074  8,948 471 %
Net interest income before provision                       
for credit losses on loans  42,301  45,372  51,739 (7)%(18)%  183,224  179,880 2 %
Provision for credit losses on loans  289  168  508 72 %(43)%  749  766 (2)%
Net interest income after provision                       
for credit losses on loans  42,012  45,204  51,231 (7)%(18)%  182,475  179,114 2 %
Noninterest income:                       
Service charges and fees on deposit                       
accounts  838  859  1,801 (2)%(53)%  4,341  4,640 (6)%
Increase in cash surrender value of                       
life insurance  519  517  481 0 %8 %  2,031  1,925 6 %
Servicing income  103  62  138 66 %(25)%  400  508 (21)%
Termination fees  25  118   (79)%N/A   154  61 152 %
Gain on proceeds from company-owned                       
life insurance  25  100   (75)%N/A   125  27 363 %
Gain on sales of SBA loans    207   (100)%N/A   482  491 (2)%
Gain on warrants       N/A N/A     669 (100)%
Other  432  353  352 22 %23 %  1,465  1,790 (18)%
Total noninterest income  1,942  2,216  2,772 (12)%(30)%  8,998  10,111 (11)%
Noninterest expense:                       
Salaries and employee benefits  13,919  14,147  13,915 (2)%0 %  56,862  55,331 3 %
Occupancy and equipment  2,367  2,301  2,510 3 %(6)%  9,490  9,639 (2)%
Professional fees  1,085  717  1,414 51 %(23)%  4,350  5,015 (13)%
Other  8,120  8,006  6,679 1 %22 %  30,352  24,874 22 %
Total noninterest expense  25,491  25,171  24,518 1 %4 %  101,054  94,859 7 %
Income before income taxes  18,463  22,249  29,485 (17)%(37)%  90,419  94,366 (4)%
Income tax expense  5,135  6,454  8,686 (20)%(41)%  25,976  27,811 (7)%
Net income $ 13,328 $ 15,795 $ 20,799 (16)%(36)% $ 64,443 $ 66,555 (3)%
                        
PER COMMON SHARE DATA                          
(unaudited)                            
Basic earnings per share $0.22 $0.26 $0.34 (15)%(35)% $1.06 $1.10 (4)%
Diluted earnings per share $0.22 $0.26 $0.34 (15)%(35)% $1.05 $1.09 (4)%
Weighted average shares outstanding - basic  61,118,485  61,093,289  60,788,803 0 %1 %  61,038,857  60,602,962 1 %
Weighted average shares outstanding - diluted  61,412,816  61,436,240  61,357,023 0 %0 %  61,311,318  61,090,290 0 %
Common shares outstanding at period-end  61,146,835  61,099,155  60,852,723 0 %0 %  61,146,835  60,852,723 0 %
Dividend per share $0.13 $0.13 $0.13 0 %0 % $0.52 $0.52 0 %
Book value per share $11.00 $10.83 $10.39 2 %6 % $11.00 $10.39 6 %
Tangible book value per share $8.12 $7.94 $7.46 2 %9 % $8.12 $7.46 9 %
                        
KEY FINANCIAL RATIOS                               
(unaudited)                               
Annualized return on average equity  7.96% 9.54% 13.40%(17)%(41)%  9.88% 10.95%(10)%
Annualized return on average tangible                       
common equity  10.84% 13.06% 18.89%(17)%(43)%  13.57% 15.57%(13)%
Annualized return on average assets  1.00% 1.16% 1.54%(14)%(35)%  1.21% 1.23%(2)%
Annualized return on average tangible assets  1.03% 1.20% 1.59%(14)%(35)%  1.26% 1.27%(1)%
Net interest margin (FTE)  3.41% 3.57% 4.10%(4)%(17)%  3.70% 3.57%4 %
Efficiency ratio  57.62% 52.89% 44.98%9 %28 %  52.57% 49.93%5 %
                        
AVERAGE BALANCES                              
(in $000’s, unaudited)                               
Average assets $5,291,962 $5,399,930 $5,360,867 (2)%(1)% $5,310,277 $5,401,220 (2)%
Average tangible assets $5,115,321 $5,222,692 $5,181,793 (2)%(1)% $5,132,741 $5,221,159 (2)%
Average earning assets $4,923,582 $5,051,710 $5,009,578 (3)%(2)% $4,955,018 $5,051,552 (2)%
Average loans held-for-sale $1,612 $2,765 $2,346 (42)%(31)% $2,821 $2,238 26 %
Average total loans $3,280,817 $3,254,715 $3,248,210 1 %1 % $3,259,373 $3,116,768 5 %
Average deposits $4,454,750 $4,573,621 $4,600,533 (3)%(3)% $4,467,489 $4,647,200 (4)%
Average demand deposits - noninterest-bearing $1,243,222 $1,302,606 $1,851,003 (5)%(33)% $1,393,949 $1,863,928 (25)%
Average interest-bearing deposits $3,211,528 $3,271,015 $2,749,530 (2)%17 % $3,073,540 $2,783,272 10 %
Average interest-bearing liabilities $3,251,034 $3,310,485 $2,788,880 (2)%17 % $3,140,105 $2,825,035 11 %
Average equity $664,638 $656,973 $615,941 1 %8 % $652,449 $607,603 7 %
Average tangible common equity $487,997 $479,735 $436,867 2 %12 % $474,913 $427,542 11 %


                 
  For the Quarter Ended: 
CONSOLIDATED INCOME STATEMENTS    December 31,     September 30,     June 30,     March 31,     December 31,  
(in $000’s, unaudited) 2023 2023 2023 2023 2022 
Interest income $58,892 $60,791 $58,341 $56,274 $55,192 
Interest expense  16,591  15,419  12,048  7,016  3,453 
Net interest income before provision                
for credit losses on loans  42,301  45,372  46,293  49,258  51,739 
Provision for credit losses on loans  289  168  260  32  508 
Net interest income after provision                
for credit losses on loans  42,012  45,204  46,033  49,226  51,231 
Noninterest income:                
Service charges and fees on deposit                
accounts  838  859  901  1,743  1,801 
Increase in cash surrender value of                
life insurance  519  517  502  493  481 
Servicing income  103  62  104  131  138 
Termination fees  25  118    11   
Gain on proceeds from company-owned                
life insurance  25  100       
Gain on sales of SBA loans    207  199  76   
Gain on warrants           
Other  432  353  368  312  352 
Total noninterest income  1,942  2,216  2,074  2,766  2,772 
Noninterest expense:                
Salaries and employee benefits  13,919  14,147  13,987  14,809  13,915 
Occupancy and equipment  2,367  2,301  2,422  2,400  2,510 
Professional fees  1,085  717  1,149  1,399  1,414 
Other  8,120  8,006  7,433  6,793  6,679 
Total noninterest expense  25,491  25,171  24,991  25,401  24,518 
Income before income taxes  18,463  22,249  23,116  26,591  29,485 
Income tax expense  5,135  6,454  6,713  7,674  8,686 
Net income $ 13,328 $ 15,795 $ 16,403 $ 18,917 $ 20,799 
                 
PER COMMON SHARE DATA                
(unaudited)                   
Basic earnings per share $0.22 $0.26 $0.27 $0.31 $0.34 
Diluted earnings per share $0.22 $0.26 $0.27 $0.31 $0.34 
Weighted average shares outstanding - basic  61,118,485  61,093,289  61,035,435  60,908,221  60,788,803 
Weighted average shares outstanding - diluted  61,412,816  61,436,240  61,266,059  61,268,072  61,357,023 
Common shares outstanding at period-end  61,146,835  61,099,155  61,091,155  60,948,607  60,852,723 
Dividend per share $0.13 $0.13 $0.13 $0.13 $0.13 
Book value per share $11.00 $10.83 $10.70 $10.62 $10.39 
Tangible book value per share $8.12 $7.94 $7.80 $7.70 $7.46 
                 
KEY FINANCIAL RATIOS                    
(unaudited)                     
Annualized return on average equity  7.96% 9.54% 10.12% 12.03% 13.40%
Annualized return on average tangible                
common equity  10.84% 13.06% 13.93% 16.71% 18.89%
Annualized return on average assets  1.00% 1.16% 1.25% 1.47% 1.54%
Annualized return on average tangible assets  1.03% 1.20% 1.29% 1.52% 1.59%
Net interest margin (FTE)  3.41% 3.57% 3.76% 4.09% 4.10%
Efficiency ratio  57.62% 52.89% 51.67% 48.83% 44.98%
                 
AVERAGE BALANCES                     
(in $000’s, unaudited)                     
Average assets $5,291,962 $5,399,930 $5,278,243 $5,235,506 $5,360,867 
Average tangible assets $5,115,321 $5,222,692 $5,100,399 $5,057,063 $5,181,793 
Average earning assets $4,923,582 $5,051,710 $4,948,397 $4,895,009 $5,009,578 
Average loans held-for-sale $1,612 $2,765 $4,166 $2,755 $2,346 
Average total loans $3,280,817 $3,254,715 $3,227,175 $3,274,770 $3,248,210 
Average deposits $4,454,750 $4,573,621 $4,424,041 $4,415,952 $4,600,533 
Average demand deposits - noninterest-bearing $1,243,222 $1,302,606 $1,368,373 $1,667,260 $1,851,003 
Average interest-bearing deposits $3,211,528 $3,271,015 $3,055,668 $2,748,692 $2,749,530 
Average interest-bearing liabilities $3,251,034 $3,310,485 $3,157,722 $2,834,732 $2,788,880 
Average equity $664,638 $656,973 $650,240 $637,597 $615,941 
Average tangible common equity $487,997 $479,735 $472,396 $459,154 $436,867 


               
  End of Period: Percent Change From: 
CONSOLIDATED BALANCE SHEETS    December 31,     September 30,     December 31,     September 30,     December 31,  
(in $000’s, unaudited) 2023 2023 2022 2023 2022 
 
ASSETS                   
Cash and due from banks $41,592  $40,076  $27,595  4 %  51 %
Other investments and interest-bearing deposits              
in other financial institutions  366,537   605,476   279,008  (39)%  31 %
Securities available-for-sale, at fair value  442,636   457,194   489,596  (3)%  (10)%
Securities held-to-maturity, at amortized cost  650,565   664,681   714,990  (2)%  (9)%
Loans held-for-sale - SBA, including deferred costs  2,205   841   2,456  162 %  (10)%
Loans:               
Commercial  463,778   430,664   533,915  8 %  (13)%
Real estate:               
CRE - owner occupied  583,253   589,751   614,663  (1)%  (5)%
CRE - non-owner occupied  1,256,590   1,208,324   1,066,368  4 %  18 %
Land and construction  140,513   158,138   163,577  (11)%  (14)%
Home equity  119,125   124,477   120,724  (4)%  (1)%
Multifamily  269,734   253,129   244,882  7 %  10 %
Residential mortgages  496,961   503,006   537,905  (1)%  (8)%
Consumer and other  20,919   18,526   17,033  13 %  23 %
Loans  3,350,873   3,286,015   3,299,067  2 %  2 %
Deferred loan fees, net  (495)  (554)  (517) (11)%  (4)%
Total loans, net of deferred costs and fees  3,350,378   3,285,461   3,298,550  2 %  2 %
Allowance for credit losses on loans  (47,958)  (47,702)  (47,512) 1 %  1 %
Loans, net  3,302,420   3,237,759   3,251,038  2 %  2 %
Company-owned life insurance  79,489   79,607   78,945  0 %  1 %
Premises and equipment, net  9,857   9,707   9,301  2 %  6 %
Goodwill  167,631   167,631   167,631  0 %  0 %
Other intangible assets  8,627   9,229   11,033  (7)%  (22)%
Accrued interest receivable and other assets  122,536   131,106   125,987  (7%  3 %
Total assets $5,194,095  $ 5,403,307  $ 5,157,580  (4)%  1 %
               
LIABILITIES AND SHAREHOLDERS’ EQUITY                
Liabilities:                 
Deposits:                
Demand, noninterest-bearing $1,292,486  $1,243,501  $1,736,722  4 %  (26)%
Demand, interest-bearing  914,066   1,004,185   1,196,427  (9)%  (24)%
Savings and money market  1,087,518   1,110,640   1,285,444  (2)%  (15)%
Time deposits - under $250  38,055   43,906   32,445  (13)%  17 %
Time deposits - $250 and over  192,228   252,001   108,192  (24)%  78 %
ICS/CDARS - interest-bearing demand, money market              
and time deposits  854,105   921,224   30,374  (7)%  2712 %
Total deposits  4,378,458   4,575,457   4,389,604  (4)%  0 %
Subordinated debt, net of issuance costs  39,502   39,463   39,350  0 %  0 %
Accrued interest payable and other liabilities  103,234   126,457   96,170  (18%  7 %
Total liabilities  4,521,194   4,741,377   4,525,124  (5)%  0 %
               
Shareholders’ Equity:                   
Common stock  506,539   505,692   502,923  0 %  1 %
Retained earnings  179,092   173,707   146,389  3 %  22 %
Accumulated other comprehensive loss  (12,730)  (17,469)  (16,856) (27)%  (24)%
Total shareholders' equity  672,901   661,930   632,456  2 %  6 %
Total liabilities and shareholders’ equity $5,194,095  $ 5,403,307  $ 5,157,580  (4)%  1 %
               


                
  End of Period:
CONSOLIDATED BALANCE SHEETS    December 31,     September 30,     June 30,     March 31,     December 31, 
(in $000’s, unaudited) 2023 2023 2023 2023 2022
ASSETS               
Cash and due from banks $41,592  $40,076  $42,551  $41,318  $27,595 
Other investments and interest-bearing deposits               
in other financial institutions  366,537   605,476   468,951   698,690   279,008 
Securities available-for-sale, at fair value  442,636   457,194   486,058   491,751   489,596 
Securities held-to-maturity, at amortized cost  650,565   664,681   682,095   698,231   714,990 
Loans held-for-sale - SBA, including deferred costs  2,205   841   3,136   2,792   2,456 
Loans:               
Commercial  463,778   430,664   466,354   506,602   533,915 
Real estate:               
CRE - owner occupied  583,253   589,751   608,031   603,298   614,663 
CRE - non-owner occupied  1,256,590   1,208,324   1,147,313   1,083,852   1,066,368 
Land and construction  140,513   158,138   162,816   166,408   163,577 
Home equity  119,125   124,477   128,009   124,481   120,724 
Multifamily  269,734   253,129   244,959   231,242   244,882 
Residential mortgages  496,961   503,006   514,064   528,639   537,905 
Consumer and other  20,919   18,526   17,635   17,905   17,033 
Loans  3,350,873   3,286,015   3,289,181   3,262,427   3,299,067 
Deferred loan fees, net  (495)  (554)  (397)  (512)  (517)
Total loans, net of deferred fees  3,350,378   3,285,461   3,288,784   3,261,915   3,298,550 
Allowance for credit losses on loans  (47,958)  (47,702)  (47,803)  (47,273)  (47,512)
Loans, net  3,302,420   3,237,759   3,240,981   3,214,642   3,251,038 
Company-owned life insurance  79,489   79,607   79,940   79,438   78,945 
Premises and equipment, net  9,857   9,707   9,197   9,142   9,301 
Goodwill  167,631   167,631   167,631   167,631   167,631 
Other intangible assets  8,627   9,229   9,830   10,431   11,033 
Accrued interest receivable and other assets  122,536   131,106   121,467   122,474   125,987 
Total assets $5,194,095  $ 5,403,307  $ 5,311,837  $ 5,536,540  $ 5,157,580 
                
LIABILITIES AND SHAREHOLDERS’ EQUITY               
Liabilities:               
Deposits:               
Demand, noninterest-bearing $1,292,486  $1,243,501  $1,319,844  $1,469,081  $1,736,722 
Demand, interest-bearing  914,066   1,004,185   1,064,638   1,196,789   1,196,427 
Savings and money market  1,087,518   1,110,640   1,075,835   1,264,567   1,285,444 
Time deposits - under $250  38,055   43,906   44,520   37,884   32,445 
Time deposits - $250 and over  192,228   252,001   171,852   172,070   108,192 
ICS/CDARS - interest-bearing demand, money market               
and time deposits  854,105   921,224   824,083   304,147   30,374 
Total deposits  4,378,458   4,575,457   4,500,772   4,444,538   4,389,604 
Other short-term borrowings           300,000    
Subordinated debt, net of issuance costs  39,502   39,463   39,425   39,387   39,350 
Accrued interest payable and other liabilities   103,234    126,457   117,970   105,407   96,170 
Total liabilities   4,521,194    4,741,377   4,658,167   4,889,332   4,525,124 
                
Shareholders’ Equity:               
Common stock  506,539   505,692   505,075   504,135   502,923 
Retained earnings  179,092   173,707   165,853   157,390   146,389 
Accumulated other comprehensive loss  (12,730)  (17,469)  (17,258)  (14,317)  (16,856)
Total shareholders' equity  672,901   661,930   653,670   647,208   632,456 
Total liabilities and shareholders’ equity $5,194,095  $ 5,403,307  $ 5,311,837  $ 5,536,540  $ 5,157,580 
                


               
  At or For the Quarter Ended: Percent Change From: 
CREDIT QUALITY DATA    December 31,     September 30,     December 31,     September 30,     December 31,  
(in $000’s, unaudited) 2023 2023 2022 2023 2022 
Nonaccrual loans - held-for-investment $6,818 $3,518 $740  94 %821 %
Restructured and loans over 90 days past due              
and still accruing  889  1,966  1,685  (55)%(47)%
Total nonperforming loans  7,707  5,484  2,425  41 %218 %
Foreclosed assets        N/A  N/A  
Total nonperforming assets $7,707 $5,484 $2,425  41 %218 %
Other restructured loans still accruing $ $ $171  N/A  (100)%
Net charge-offs (recoveries) during the quarter $33 $269 $(83) (88)%140 %
Provision for credit losses on loans during the quarter $289 $168 $508  72 %(43)%
Allowance for credit losses on loans $47,958 $47,702 $47,512  1 %1 %
Classified assets $31,763 $31,062 $14,544  2 %118 %
Allowance for credit losses on loans to total loans  1.43% 1.45% 1.44 %(1)%(1)%
Allowance for credit losses on loans to total nonperforming loans  622.27% 869.84% 1,959.26 %(28)%(68)%
Nonperforming assets to total assets  0.15% 0.10% 0.05 %50 %200 %
Nonperforming loans to total loans  0.23% 0.17% 0.07 %35 %229 %
Classified assets to Heritage Commerce Corp              
Tier 1 capital plus allowance for credit losses on loans  6% 6% 3 %0 %100 %
Classified assets to Heritage Bank of Commerce              
Tier 1 capital plus allowance for credit losses on loans  5% 5% 3 %0 %67 %
               
OTHER PERIOD-END STATISTICS                   
(in $000’s, unaudited)                   
Heritage Commerce Corp:              
Tangible common equity (1) $496,643 $485,070 $453,792  2 %9 %
Shareholders’ equity / total assets  12.88% 12.25% 12.26 %5 %5 %
Tangible common equity / tangible assets (2)  9.84% 9.28% 9.11 %6 %8 %
Loan to deposit ratio  76.52% 71.81% 75.14 %7 %2 %
Noninterest-bearing deposits / total deposits  29.52% 27.18% 39.56 %9 %(25)%
Total capital ratio  15.4% 15.6% 14.8 %(1)%4 %
Tier 1 capital ratio  13.2% 13.4% 12.7 %(1)%4 %
Common Equity Tier 1 capital ratio  13.2% 13.4% 12.7 %(1)%4 %
Tier 1 leverage ratio  10.0% 9.6% 9.2 %4 %9 %
Heritage Bank of Commerce:              
Total capital ratio  14.8% 15.0% 14.2 %(1)%4 %
Tier 1 capital ratio  13.7% 13.9% 13.2 %(1)%4 %
Common Equity Tier 1 capital ratio  13.7% 13.9% 13.2 %(1)%4 %
Tier 1 leverage ratio  10.3% 10.0% 9.5 %3 %8 %
               


 

   
(1)Represents shareholders' equity minus goodwill and other intangible assets.
(2)Represents shareholders' equity minus goodwill and other intangible assets divided by total assets minus goodwill and other intangible assets.
   


                 
  At or For the Quarter Ended: 
CREDIT QUALITY DATA    December 31,     September 30,     June 30,     March 31,     December 31,  
(in $000’s, unaudited) 2023 2023 2023 2023 2022 
Nonaccrual loans - held-for-investment $6,818 $3,518 $3,275  $781 $740  
Restructured and loans over 90 days past due                
and still accruing  889  1,966  2,262   1,459  1,685  
Total nonperforming loans  7,707  5,484  5,537   2,240  2,425  
Foreclosed assets             
Total nonperforming assets $7,707 $5,484 $5,537  $2,240 $2,425  
Other restructured loans still accruing $ $ $  $ $171  
Net charge-offs (recoveries) during the quarter $33 $269 $(270) $271 $(83) 
Provision for credit losses on loans during the quarter $289 $168 $260  $32 $508  
Allowance for credit losses on loans $47,958 $47,702 $47,803  $47,273 $47,512  
Classified assets $31,763 $31,062 $30,500  $26,800 $14,544  
Allowance for credit losses on loans to total loans  1.43%   1.45%   1.45 %   1.45%   1.44 %  
Allowance for credit losses on loans to total nonperforming loans  622.27%   869.84%   863.34 %   2,110.40%   1,959.26 %  
Nonperforming assets to total assets  0.15%   0.10%   0.10 %   0.04%   0.05 %  
Nonperforming loans to total loans  0.23%   0.17%   0.17 %   0.07%   0.07 %  
Classified assets to Heritage Commerce Corp                
Tier 1 capital plus allowance for credit losses on loans  6%   6%   6 %   5%   3 %  
Classified assets to Heritage Bank of Commerce                
Tier 1 capital plus allowance for credit losses on loans  5%   5%   5 %   5%   3 %  
                 
OTHER PERIOD-END STATISTICS                     
(in $000’s, unaudited)                     
Heritage Commerce Corp:                     
Tangible common equity (1) $496,643 $485,070 $476,209  $469,146 $453,792  
Shareholders’ equity / total assets  12.88%   12.25%   12.31 %   11.69%   12.26 %  
Tangible common equity / tangible assets (2)  9.84%   9.28%   9.27 %   8.76%   9.11 %  
Loan to deposit ratio  76.52%   71.81%   73.07 %   73.39%   75.14 %  
Noninterest-bearing deposits / total deposits  29.52%   27.18%   29.32 %   33.05%   39.56 %  
Total capital ratio  15.4%   15.6%   15.4 %   15.3%   14.8 %  
Tier 1 capital ratio  13.2%   13.4%   13.2 %   13.1%   12.7 %  
Common Equity Tier 1 capital ratio  13.2%   13.4%   13.2 %   13.1%   12.7 %  
Tier 1 leverage ratio  10.0%   9.6%   9.7 %   9.6%   9.2 %  
Heritage Bank of Commerce:                
Total capital ratio  14.8%   15.0%   14.8 %   14.7%   14.2 %  
Tier 1 capital ratio  13.7%   13.9%   13.7 %   13.5%   13.2 %  
Common Equity Tier 1 capital ratio  13.7%   13.9%   13.7 %   13.5%   13.2 %  
Tier 1 leverage ratio  10.3%   10.0%   10.0 %   9.9%   9.5 %  

 


   
(1)Represents shareholders' equity minus goodwill and other intangible assets.
(2)Represents shareholders' equity minus goodwill and other intangible assets divided by total assets minus goodwill and other intangible assets.
   


                  
  For the Quarter Ended For the Quarter Ended 
  December 31, 2023 December 31, 2022 
           Interest    Average          Interest    Average 
NET INTEREST INCOME AND NET INTEREST MARGIN Average Income/ Yield/ Average Income/ Yield/ 
(in $000’s, unaudited) Balance Expense Rate Balance Expense Rate 
Assets:                 
Loans, gross (1)(2) $3,282,429 $44,635  5.39%$3,250,556 $42,501  5.19%
Securities - taxable  1,074,638  6,516  2.41% 1,156,563  6,941  2.38%
Securities - exempt from Federal tax (3)  32,244  288  3.54% 37,958  324  3.39%
Other investments and interest-bearing deposits                 
in other financial institutions  534,271  7,514  5.58% 564,501  5,494  3.86%
Total interest earning assets (3)  4,923,582  58,953  4.75% 5,009,578  55,260  4.38%
Cash and due from banks  35,214       36,392      
Premises and equipment, net  9,843       9,436      
Goodwill and other intangible assets  176,641       179,074      
Other assets  146,682       126,387      
Total assets $5,291,962      $5,360,867      
                  
Liabilities and shareholders’ equity:                 
Deposits:                 
Demand, noninterest-bearing $1,243,222      $1,851,003      
                  
Demand, interest-bearing  948,061  1,661  0.70% 1,164,378  945  0.32%
Savings and money market  1,096,962  6,216  2.25% 1,424,964  1,694  0.47%
Time deposits - under $100  11,389  37  1.29% 12,157  7  0.23%
Time deposits - $100 and over  234,140  2,130  3.61% 120,246  268  0.88%
ICS/CDARS - interest-bearing demand, money market                 
and time deposits  920,976  6,009  2.59% 27,785  1  0.01%
Total interest-bearing deposits  3,211,528  16,053  1.98% 2,749,530  2,915  0.42%
Total deposits  4,454,750  16,053  1.43% 4,600,533  2,915  0.25%
                  
Short-term borrowings  29    0.00% 24    0.00%
Subordinated debt, net of issuance costs  39,477  538  5.41% 39,326  538  5.43%
Total interest-bearing liabilities  3,251,034  16,591  2.02% 2,788,880  3,453  0.49%
Total interest-bearing liabilities and demand,                 
noninterest-bearing / cost of funds  4,494,256  16,591  1.46% 4,639,883  3,453  0.30%
Other liabilities  133,068       105,043      
Total liabilities  4,627,324       4,744,926      
Shareholders’ equity  664,638       615,941      
Total liabilities and shareholders’ equity $5,291,962      $5,360,867      
                  
Net interest income (3) / margin     42,362  3.41%    51,807  4.10%
Less tax equivalent adjustment (3)     (61)       (68)   
Net interest income    $42,301       $51,739    


   
(1)Includes loans held-for-sale. Nonaccrual loans are included in average balances.
(2)Yield amounts earned on loans include fees and costs. The accretion of net deferred loan fees into loan interest income was $147,000 for the fourth quarter of 2023, compared to $326,000 for the fourth quarter of 2022. Prepayment fees totaled $91,000 for the fourth quarter of 2023, compared to $123,000 for the fourth quarter of 2022.
(3)Reflects the FTE adjustment for Federal tax-exempt income based on a 21% tax rate.
   


                  
  For the Quarter Ended For the Quarter Ended 
  December 31, 2023 September 30, 2023 
           Interest    Average          Interest    Average 
NET INTEREST INCOME AND NET INTEREST MARGIN Average Income/ Yield/ Average Income/ Yield/ 
(in $000’s, unaudited) Balance Expense Rate Balance Expense Rate 
Assets:                       
Loans, gross (1)(2) $3,282,429 $44,635  5.39%  $3,257,480 $44,853  5.46%  
Securities - taxable  1,074,638  6,516  2.41%   1,114,782  6,797  2.42%  
Securities - exempt from Federal tax (3)  32,244  288  3.54%   32,947  293  3.53%  
Other investments and interest-bearing deposits                 
in other financial institutions  534,271  7,514  5.58%   646,501  8,909  5.47%  
Total interest earning assets (3)  4,923,582  58,953  4.75%   5,051,710  60,852  4.78%  
Cash and due from banks  35,214        35,911       
Premises and equipment, net  9,843        9,374       
Goodwill and other intangible assets  176,641        177,238       
Other assets  146,682        125,697       
Total assets $5,291,962       $5,399,930       
                  
Liabilities and shareholders’ equity:                   
Deposits:                   
Demand, noninterest-bearing $1,243,222       $1,302,606       
                  
Demand, interest-bearing  948,061  1,661  0.70%   1,017,686  1,730  0.67%  
Savings and money market  1,096,962  6,216  2.25%   1,087,336  5,514  2.01%  
Time deposits - under $100  11,389  37  1.29%   11,966  30  0.99%  
Time deposits - $100 and over  234,140  2,130  3.61%   272,362  2,489  3.63%  
ICS/CDARS - interest-bearing demand, money market                 
and time deposits  920,976  6,009  2.59%   881,665  5,117  2.30%  
Total interest-bearing deposits  3,211,528  16,053  1.98%   3,271,015  14,880  1.80%  
Total deposits  4,454,750  16,053  1.43%   4,573,621  14,880  1.29%  
                  
Short-term borrowings  29    0.00%   31    0.00%  
Subordinated debt, net of issuance costs  39,477  538  5.41%   39,439  539  5.42%  
Total interest-bearing liabilities  3,251,034  16,591  2.02%   3,310,485  15,419  1.85%  
Total interest-bearing liabilities and demand,                 
noninterest-bearing / cost of funds  4,494,256  16,591  1.46%   4,613,091  15,419  1.33%  
Other liabilities  133,068        129,866       
Total liabilities  4,627,324        4,742,957       
Shareholders’ equity  664,638        656,973       
Total liabilities and shareholders’ equity $5,291,962       $5,399,930       
                  
Net interest income (3) / margin      42,362  3.41%       45,433  3.57%  
Less tax equivalent adjustment (3)      (61)         (61)    
Net interest income     $42,301         $45,372     
                  


   
(1)Includes loans held-for-sale. Nonaccrual loans are included in average balances.
(2)Yield amounts earned on loans include fees and costs. The accretion of net deferred loan fees into loan interest income was $147,000 for the fourth quarter of 2023, compared to $201,000 for the third quarter of 2023. Prepayment fees totaled $91,000 for the fourth quarter of 2023, compared to $182,000 for the third quarter of 2023.
(3)Reflects the FTE adjustment for Federal tax-exempt income based on a 21% tax rate.
   


                  
  For the Year Ended For the Year Ended 
  December 31, 2023 December 31, 2022 
           Interest    Average          Interest    Average 
NET INTEREST INCOME AND NET INTEREST MARGIN Average Income/ Yield/ Average Income/ Yield/ 
(in $000’s, unaudited) Balance Expense Rate Balance Expense Rate 
Assets:                       
Loans, gross (1)(2) $3,262,194 $177,628  5.45%  $3,119,006 $153,010  4.91%  
Securities - taxable  1,124,190  27,351  2.43%   983,137  20,666  2.10%  
Securities - exempt from Federal tax (3)  33,806  1,196  3.54%   40,478  1,372  3.39%  
Other investments, interest-bearing deposits in other                 
financial institutions and Federal funds sold  534,828  28,374  5.31%   908,931  14,068  1.55%  
Total interest earning assets (3)  4,955,018  234,549  4.73%   5,051,552  189,116  3.74%  
Cash and due from banks  35,955        37,287       
Premises and equipment, net  9,421        9,574       
Goodwill and other intangible assets  177,536        180,061       
Other assets  132,347        122,746       
Total assets $5,310,277       $5,401,220       
                  
Liabilities and shareholders’ equity:                     
Deposits:                     
Demand, noninterest-bearing $1,393,949       $1,863,928       
                  
Demand, interest-bearing  1,074,523  6,655  0.62%   1,224,676  2,415  0.20%  
Savings and money market  1,144,032  19,857  1.74%   1,394,283  3,720  0.27%  
Time deposits - under $100  11,809  97  0.82%   12,587  21  0.17%  
Time deposits - $100 and over  218,131  6,874  3.15%   122,018  609  0.50%  
ICS/CDARS - interest-bearing demand, money market                 
and time deposits  625,045  14,074  2.25%   29,708  5  0.02%  
Total interest-bearing deposits  3,073,540  47,557  1.55%   2,783,272  6,770  0.24%  
Total deposits  4,467,489  47,557  1.06%   4,647,200  6,770  0.15%  
                  
Short-term borrowings  27,145  1,365  5.03%   24    0.00%  
Subordinated debt, net of issuance costs  39,420  2,152  5.46%   41,739  2,178  5.22%  
Total interest-bearing liabilities  3,140,105