Heritage Commerce Corp Reports Increased Average Loans and Average Deposits and Enhanced Credit Quality

SAN JOSE, Calif., July 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 second quarter 2024 net income was $9.2 million, or $0.15 per average diluted common share, compared to $10.2 million, or $0.17 per average diluted common share, for the first quarter of 2024, and $16.4 million, or $0.27 per average diluted common share, for the second quarter of 2023. For the six months ended June 30, 2024, net income was $19.4 million, or $0.32 per average diluted common share, compared to $35.3 million, or $0.58 per average diluted common share, for the six months ended June 30, 2023. All data are unaudited.

“In the first six months of 2024, we continued to invest in people and technology to achieve our Company’s growth, security and client service goals,” said Clay Jones, President and Chief Executive Officer. “Our strong credit quality metrics further improved, as nonperforming assets and classified assets were both down at the end of the second quarter of 2024 from the linked quarter. We continued to strengthen our allowance for credit losses on loans during the second quarter of 2024, which was driven by prudent credit risk management and the increase in loan balances.”

“Our loan portfolio, excluding loans held-for-sale, increased by $43.7 million at June 30, 2024, from the preceding quarter and increased by $91.0 million year-over-year,” said Mr. Jones. “Our total deposits remained steady at $4.4 billion at June 30, 2024, while average deposits increased during the second quarter of 2024 from the linked quarter.”

“On behalf of the Board of Directors, I would like to thank our dedicated bank team members for all they do to support our loyal clients, communities and dedicated shareholders, and we look forward to continued success in the second half of the year,” Mr. Jones said. “It is because of them that we remain well-positioned to execute on our growth objectives.”

Second Quarter Ended June 30, 2024
Operating Results, Liquidity Position, Financial Condition, Credit Quality, and Capital Management

(as of, or for the periods ended June 30, 2024, compared to March 31, 2024, and June 30, 2023, except as noted):

Operating Results:

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

Net Interest Income:

• Net interest income decreased (2%) to $39.5 million for the second quarter of 2024, compared to $40.1 million for the first quarter of 2024. The non-GAAP fully tax equivalent (“FTE”) net interest margin contracted 8 basis points to 3.26% for the second quarter of 2024 from 3.34% for the first quarter of 2024, primarily due to higher rates paid on client deposits, partially offset by maturing securities invested in higher yielding overnight funds and higher average yields on loans.
• Net interest income decreased (15%) to $39.5 million for the second quarter of 2024, compared to $46.3 million for the second quarter of 2023. The non-GAAP FTE net interest margin contracted 50 basis points to 3.26% for the second quarter of 2024, from 3.76% for the second quarter of 2023, primarily due to higher rates paid on client deposits, a decrease in the average balance of noninterest-bearing demand deposits, a decrease in average interest earning assets, and a decrease in the average balance of higher yielding Bay View Funding factored receivables, partially offset by an increase in the rate on core loans and overnight funds.
• For the first six months of 2024, net interest income decreased (17%) to $79.5 million, compared to $95.6 million for the first six months of 2023. The non-GAAP FTE net interest margin decreased 62 basis points to 3.30% for the first six months of 2024, from 3.92% for the first six months of 2023, primarily due to higher rates paid on client deposits, a decrease in the average balance of noninterest-bearing demand deposits, a decrease in average interest earning assets, and a decrease in the average balances of higher yielding Bay View Funding factored receivables, partially offset by an increase in the rate on core loans and overnight funds.
• The following tables set forth the estimated changes in the Company’s annual net interest income and economic value of equity (a non-GAAP financial measure) that would result from the designated instantaneous parallel shift in interest rates noted, and assuming a flat balance sheet with consistent product mix, as of June 30, 2024:

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

• The following table presents the average balance of deposits and interest-bearing liabilities, interest expense, and the average rate for the periods indicated:

Provision for Credit Losses on Loans:

• During the second quarter of 2024, we recorded a provision for credit losses on loans of $471,000, compared to a $184,000 provision for credit losses on loans for the first quarter of 2024, and a provision for credit losses on loans of $260,000 for the second quarter of 2023.
• There was a provision for credit losses on loans of $655,000 for the six months ended June 30, 2024, compared to a $292,000 provision for credit losses on loans for the six months ended June 30, 2023.

Noninterest Income:

• Total noninterest income increased 11% to $2.3 million for the second quarter of 2024, compared to $2.0 million for the first quarter of 2024, and increased 10% from $2.1 million for the second quarter of 2023, primarily due to a higher gain on proceeds from company-owned life insurance and higher termination fees, partially offset by a lower gain on sales of SBA loans during the second quarter of 2024.
• Total noninterest income decreased (11%) to $4.3 million for the first six months of 2024, compared to $4.8 million for the first six months of 2023, primarily due to lower service charges and fees on deposit accounts, partially offset by a higher gain on proceeds from company-owned life insurance and higher termination fees for the first six months of 2024.

Noninterest Expense:

• Total noninterest expense for the second quarter of 2024 increased to $28.2 million, compared to $27.5 million for the first quarter of 2024, primarily due to higher salaries and employee benefits as a result of annual merit increases and staff additions, and higher information technology related expenses, partially offset by lower professional fees and marketing related expenses for the second quarter of 2024. Total noninterest expense for the second quarter of 2024 increased to $28.2 million, compared to $25.0 million for the second quarter of 2023, primarily due to higher salaries and employee benefits, rent expense included in occupancy and equipment, and information technology related expenses included in other noninterest expense.
• Total noninterest expense for the first six months of 2024 increased to $55.7 million, compared to $50.4 million for the first six months of 2023, primarily due to higher salaries and employee benefits, and information technology related expenses, homeowner association vendor payments, regulatory assessments, and ICS/CDARS fee expense included in other noninterest expense.   
• Full time equivalent employees were 353 at June 30, 2024, compared to 351 at March 31, 2024, and 347 at June 30, 2023.  
• The efficiency ratio increased to 67.55% for the second quarter of 2024, compared to 65.34% for the first quarter of 2024, and 51.67% for the second quarter of 2023. The efficiency ratio increased to 66.44% for the six months ended June 30, 2024 compared to 50.20% for the six months ended June 30, 2023. The increase in the efficiency ratio for the second quarter of 2024 and six months ended June 30, 2024 was due to both higher noninterest expense and lower net revenue. The efficiency ratio is a non-GAAP financial measure.

Income Tax Expense:

• Income tax expense was $3.8 million for the second quarter of 2024, compared to $4.3 million for the first quarter of 2024, and $6.7 million for the second quarter of 2023. The effective tax rate for the second quarter of 2024 was 29.4%, compared to 29.5% for the first quarter of 2024, and 29.0% for the second quarter of 2023.
• Income tax expense for the six months ended June 30, 2024 was $8.1 million, compared to $14.4 million for the six months ended June 30, 2023. The effective tax rate for six months ended June 30, 2024 was 29.4%, compared to 28.9% for the six months ended June 30, 2023.

Liquidity Position, Financial Condition, Credit Quality, and Capital Management:

Liquidity and Available Lines of Credit:

• The following table shows our liquidity, available lines of credit and the amounts outstanding at June 30, 2024:

• Total assets remained flat at $5.3 billion at June 30, 2024, March 31, 2024, and June 30, 2023.

Investment Securities:

• Investment securities totaled $894.2 million at June 30, 2024, of which $273.0 million were in the securities available-for-sale portfolio (at fair value), and $621.2 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 $527.4 million at June 30, 2024.
• The following table shows the balances of securities available-for-sale, at fair value, and the related pre-tax unrealized (loss) at the dates indicated:

• 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 at the dates indicated:

• The unrealized and unrecognized losses in both the available-for-sale and held-to-maturity portfolios were due to higher interest rates at June 30, 2024 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 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:

Loans:

• The following table summarizes the distribution of loans, excluding loans held-for-sale, and the percentage of distribution in each category at the dates indicated:

• The following table presents the maturity distribution of the Company’s loans, excluding loans held-for-sale, as of June 30, 2024. 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.

Credit Quality:

• The following table summarizes the allowance for credit losses on loans (“ACLL”) for the periods indicated:

• The following is a breakout of nonperforming assets (“NPAs”) at the dates indicated:

• Classified assets totaled $33.6 million, or 0.64% of total assets, at June 30, 2024, compared to $35.4 million, or 0.67% of total assets, at March 31, 2024, and $30.5 million, or 0.57% of total assets, at June 30, 2023.

Deposits:

• The following table summarizes the distribution of deposits and the percentage of distribution in each category at the dates indicated:

Capital Management:

• The Company’s consolidated capital ratios exceeded regulatory guidelines and the Bank’s capital ratios exceeded regulatory guidelines under the prompt corrective action (“PCA”) regulatory guidelines for a well-capitalized financial institution, and the Basel III minimum regulatory requirements at June 30, 2024, as reflected in the following table:

• The following table reflects the components of accumulated other comprehensive loss, net of taxes, at the dates indicated:

• Tangible common equity was $504.0 million at June 30, 2024, compared to $500.6 million at March 31, 2024, and $476.2 million at June 30, 2023. Tangible book value per share was $8.22 at June 30, 2024, compared to $8.17 at March 31, 2024, and $7.80 at June 30, 2023. Tangible common equity and tangible book value per share are non-GAAP financial measures.

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.

Non-GAAP Financial Measures

Financial results are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and prevailing practices in the banking industry. However, certain non-GAAP performance measures and ratios are used by management to evaluate and measure the Company’s performance. Management believes these non-GAAP financial measures are common in the banking industry, and may enhance comparability for peer comparison purposes. These non-GAAP financial measures should be supplemental to primary GAAP financial measures and should not be read in isolation or relied upon as a substitute for primary GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures are presented in the tables at the end of this earnings release under “Reconciliation of Non-GAAP Financial Measures.”

Forward-Looking Statement Disclaimer

Certain matters discussed in this press release constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. 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. Any statements that reflect our belief about, confidence in, or expectations for future events, performance or condition should be considered forward-looking statements. Readers should not construe these statements as assurances of a given level of performance, nor as promises that we will take actions that we currently expect to take. All statements are subject to various risks and uncertainties, many of which are outside our control and some of which may fall outside our ability to predict or anticipate. Accordingly, our actual results may differ materially from our projected results, and we may take actions or experience events that we do not currently expect. 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, Item 1A of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2024, and the following: (1) factors that affect our liquidity and our ability to meet client demands for deposit withdrawals, including our cash on hand and the availability of funds from our lines of credit; (2) media items and consumer confidence as those factors affect depositors’ confidence in the banking system generally and in our bank specifically; (3) factors that affect the value and liquidity of our investment portfolios, particularly the values of securities available-for-sale; (4) market fluctuations that affect the costs we pay for sources of funding, including the interest we pay on deposits and loans; (5) 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; (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 clients; (8) factors that affect the relative strength or weakness of loan guarantees and the ability of the guarantors to fulfill the obligations of their guaranty agreements; (9) geopolitical and domestic political developments, including recent, current and potential future wars and international and multinational conflicts, acts of terrorism, insurrection, piracy and civil unrest, and events reflecting or resulting from social instability, any of which can increase levels of political and economic unpredictability, contribute to rising energy and commodity prices, can affect the physical security of our assets and the assets of our Clients, and which may increase the volatility of financial markets; (10) 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; (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 Clients, 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 pandemics, epidemics and other infectious illness outbreaks that may arise in the future, on our Clients, 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) 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; (20) regulatory limits and practical factors that affect Heritage Bank of Commerce’s ability to pay dividends to the Company; (21) 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; (22) 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 Clients and adversely affect our business, results of operations and growth prospects; (23) possible adjustment of the valuation of our deferred tax assets or of the goodwill associated with previous acquisitions; (24) our ability to keep pace with technological changes, including our ability to identify and address cyber-security risks, including those posed by the increasing use of artificial intelligence, such as data security breaches, “denial of service” attacks, “hacking” and identity theft affecting us or third party vendors or service providers; (25) inability of our framework to manage risks associated with our business, including operational risk and credit risk; (26) risks of loss of funding of the Small Business Administration (“SBA”) or SBA loan programs, or changes in those programs; (27) 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; (28) 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; (29) the expense and uncertain resolution of litigation matters whether occurring in the ordinary course of business or otherwise; (30) availability of and competition for acquisition opportunities; (31) geographic and sociopolitical factors that arise by virtue of the fact that we operate primarily in the general San Francisco Bay Area of Northern California; (32) risks of natural disasters (including earthquakes, fires, and flooding) and other events beyond our control; (33) actions taken, planned, or announced by federal, state, regional and local governments in response to the occurrence or threat of any of the foregoing; and (34) 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