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Heritage Commerce Corp (HTBK) reported net income of $10.5 million ($0.17 per diluted share) for Q3 2024, up from $9.2 million in Q2 2024 but down from $15.8 million in Q3 2023. The quarter highlighted a 6% growth in total deposits and a 7% increase in noninterest-bearing demand deposits compared to the previous quarter. Core loans grew by $148.3 million (5%) over the last 12 months and $35.7 million (1%) from the prior quarter. Net interest income increased 1% to $39.9 million in Q3 2024 compared to Q2, while the net interest margin contracted 9 basis points to 3.17%.
Heritage Commerce Corp (HTBK) ha riportato un utile netto di 10,5 milioni di dollari (0,17 dollari per azione diluita) per il terzo trimestre del 2024, in aumento rispetto ai 9,2 milioni di dollari del secondo trimestre del 2024, ma in calo rispetto ai 15,8 milioni di dollari del terzo trimestre del 2023. Il trimestre ha evidenziato una crescita del 6% nei depositi totali e un aumento del 7% nei depositi a richiesta non remunerati rispetto al trimestre precedente. I prestiti core sono aumentati di 148,3 milioni di dollari (5%) nell’ultimo anno e di 35,7 milioni di dollari (1%) rispetto al trimestre precedente. I ricavi netti da interessi sono aumentati dell'1% a 39,9 milioni di dollari nel terzo trimestre del 2024 rispetto al secondo trimestre, mentre il margine d'interesse netto si è contratto di 9 punti base, portandosi al 3,17%.
Heritage Commerce Corp (HTBK) reportó un ingreso neto de 10,5 millones de dólares (0,17 dólares por acción diluida) para el tercer trimestre de 2024, un aumento respecto a los 9,2 millones de dólares en el segundo trimestre de 2024, pero una disminución desde los 15,8 millones de dólares en el tercer trimestre de 2023. El trimestre destacó un crecimiento del 6% en los depósitos totales y un aumento del 7% en los depósitos a la vista no remunerados en comparación con el trimestre anterior. Los préstamos principales crecieron en 148,3 millones de dólares (5%) en los últimos 12 meses y en 35,7 millones de dólares (1%) desde el trimestre anterior. Los ingresos netos por intereses aumentaron un 1% a 39,9 millones de dólares en el tercer trimestre de 2024 en comparación con el segundo trimestre, mientras que el margen neto de intereses se contrajo en 9 puntos base, situándose en el 3,17%.
헤리티지 커머스 코퍼레이션 (HTBK)은 2024년 3분기에 1,050만 달러(희석주당 0.17달러)의 순이익을 보고했으며, 이는 2024년 2분기 920만 달러에서 증가한 수치지만 2023년 3분기 1,580만 달러에서 감소한 것입니다. 이번 분기에서는 총 예금 6% 성장과 비이자 요구예금 7% 증가가 두드러졌습니다. 주요 대출은 지난 12개월 동안 1억 4,830만 달러(5%) 증가했으며, 전 분기 대비 3,570만 달러(1%) 증가했습니다. 순이자 수익은 2024년 3분기에 3990만 달러로 전 분기 대비 1% 증가했으며, 순이자 마진은 9bp 하락하여 3.17%에 도달했습니다.
Heritage Commerce Corp (HTBK) a annoncé un bénéfice net de 10,5 millions de dollars (0,17 dollar par action diluée) pour le troisième trimestre 2024, en hausse par rapport à 9,2 millions de dollars au deuxième trimestre 2024, mais en baisse par rapport à 15,8 millions de dollars au troisième trimestre 2023. Le trimestre a mis en évidence une croissance de 6% des dépôts totaux et une augmentation de 7% des dépôts à vue non rémunérés par rapport au trimestre précédent. Les prêts principaux ont augmenté de 148,3 millions de dollars (5%) au cours des 12 derniers mois et de 35,7 millions de dollars (1%) par rapport au trimestre précédent. Les revenus d'intérêts nets ont augmenté de 1% pour atteindre 39,9 millions de dollars au troisième trimestre 2024 par rapport au deuxième trimestre, tandis que la marge d'intérêt nette s'est contractée de 9 points de base à 3,17%.
Heritage Commerce Corp (HTBK) meldete für das 3. Quartal 2024 einen Nettogewinn von 10,5 Millionen Dollar (0,17 Dollar pro verwässerter Aktie), ein Anstieg gegenüber 9,2 Millionen Dollar im 2. Quartal 2024, aber ein Rückgang gegenüber 15,8 Millionen Dollar im 3. Quartal 2023. Das Quartal zeigte ein Wachstum der Gesamtguthaben um 6% und einen Rückgang der nicht zinsbringenden Einlagen um 7% im Vergleich zum vorherigen Quartal. Die Kernkredite stiegen in den letzten 12 Monaten um 148,3 Millionen Dollar (5%) und um 35,7 Millionen Dollar (1%) gegenüber dem vorherigen Quartal. Die Nettozinseinnahmen stiegen im 3. Quartal 2024 um 1% auf 39,9 Millionen Dollar im Vergleich zum 2. Quartal, während die Nettozinsmarge um 9 Basispunkte auf 3,17% zurückging.
Positive
Quarter-over-quarter net income increased from $9.2M to $10.5M
Total deposits grew 6% compared to previous quarter
Net interest income increased 1% to $39.9M compared to previous quarter
Negative
Year-over-year net income declined from $15.8M to $10.5M (-34%)
Nine-month net income decreased from $51.1M to $29.9M (-41%)
Net interest margin contracted 40 basis points YoY to 3.17%
Net interest income decreased 12% compared to Q3 2023
Insights
The Q3 2024 results show mixed signals for Heritage Commerce Corp. Net income increased to $10.5 million ($0.17 per share) from Q2's $9.2 million, but declined significantly from Q3 2023's $15.8 million. The deposit growth of 6% quarter-over-quarter is particularly noteworthy, with noninterest-bearing deposits up 7%, indicating strong client confidence despite market turbulence.
Key concerns include margin pressure, with net interest margin contracting to 3.17% from 3.26% in Q2 and 3.57% year-over-year. While core loans showed modest growth of 1% quarter-over-quarter, the interest rate sensitivity analysis reveals significant downside risk, with potential net interest income declining up to 25.9% in a -400bps scenario.
The bank's risk profile appears well-managed but faces challenges. The interest rate sensitivity analysis shows asymmetric risk exposure - potential upside of 13.6% in net interest income under a +400bps scenario versus a larger downside of 25.9% in a -400bps scenario. The economic value of equity impact is even more pronounced, with potential losses of up to 39.4% in severe down-rate scenarios.
Credit quality remains strong with low nonperforming assets and net charge-offs. The diversified funding sources and growing deposit base provide good liquidity buffers, though the declining proportion of noninterest-bearing deposits impacts profitability.
SAN JOSE, Calif., Oct. 24, 2024 (GLOBE NEWSWIRE) -- Heritage Commerce Corp (Nasdaq: HTBK), (the “Company”), the holding company for Heritage Bank of Commerce (the “Bank”), today announced that its third quarter 2024 net income was $10.5 million, or $0.17 per average diluted common share, compared to $9.2 million, or $0.15 per average diluted common share, for the second quarter of 2024, and $15.8 million, or $0.26 per average diluted common share, for the third quarter of 2023. For the nine months ended September 30, 2024, net income was $29.9 million, or $0.49 per average diluted common share, compared to $51.1 million, or $0.83 per average diluted common share, for the nine months ended September 30, 2023. All data are unaudited.
“The highlight of the third quarter of 2024 was significant deposit growth from our clients throughout our markets,” said Clay Jones, President and Chief Executive Officer. “Total deposit balances grew 6% at the end of the third quarter of 2024, compared to the prior quarter and notably, noninterest-bearing demand deposits grew 7% over the same period. Growth in deposits was a result of the successful conversion of new relationships that were impacted by the banking disruptions in our market. The loan portfolio had orderly growth during the third quarter 2024, with core loans increasing $148.3 million, or 5% over the last 12 months, while growing $35.7 million, or 1%, from the prior quarter. We remain optimistic about the growth opportunities in our markets, as loan and deposit pipelines and overall business activity remains healthy.”
“The credit portfolio continues to perform very well, with nonperforming assets and net charge-offs remaining low at September 30, 2024,” said Mr. Jones. “Additionally, our liquidity position remains strong, supported by access to diverse alternative funding sources.”
“Our commitment to achieving our growth and client service goals while meeting performance targets remains the driving force behind our success. I would like to express my appreciation for our bank team members for their continued commitment to serving our clients, communities and shareholders,” said Mr. Jones.
Third Quarter Ended September 30, 2024 Operating Results, Liquidity Position, Financial Condition, Credit Quality, Capital Management and Recent Events
(as of, or for the periods ended September 30, 2024, compared to June 30, 2024, and September 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:
For the Quarter Ended:
For the Nine Months Ended:
September 30,
June 30,
September 30,
September 30,
September 30,
(unaudited)
2024
2024
2023
2024
2023
Return on average equity
6.14
%
5.50
%
9.54
%
5.91
%
10.54
%
Return on average tangible common equity(1)
8.27
%
7.43
%
13.06
%
7.98
%
14.52
%
Return on average assets
0.78
%
0.71
%
1.16
%
0.76
%
1.29
%
Return on average tangible assets(1)
0.81
%
0.74
%
1.20
%
0.79
%
1.33
%
(1)
This is a non-GAAP financial measure as defined and discussed under “Non-GAAP Financial Measures” below.
Net Interest Income:
Net interest income increased 1% to $39.9 million for the third quarter of 2024, compared to $39.5 million for the second quarter of 2024. The non-GAAP fully tax equivalent (“FTE”) net interest margin contracted 9 basis points to 3.17% for the third quarter of 2024 from 3.26% for the second quarter of 2024, primarily due to higher rates paid on client deposits, partially offset by maturing securities invested in higher yielding overnight funds, one additional day during the third quarter of 2024, and a higher average yield on core loans.
Net interest income decreased (12%) to $39.9 million for the third quarter of 2024, compared to $45.4 million for the third quarter of 2023. The non-GAAP FTE net interest margin contracted 40 basis points to 3.17% for the third quarter of 2024, from 3.57% for the third quarter of 2023, primarily due to higher rates paid on client deposits, a decrease in the average balance of noninterest-bearing demand deposits, and a decrease in average interest earning assets, partially offset by a higher average yield on core loans and a higher average balance of loans.
For the first nine months of 2024, net interest income decreased (15%) to $119.5 million, compared to $140.9 million for the first nine months of 2023. The non-GAAP FTE net interest margin contracted 54 basis points to 3.26% for the first nine months of 2024, from 3.80% for the first nine months of 2023, primarily due to higher rates paid on client deposits, a decrease in the average balance of noninterest-bearing demand deposits, and a decrease in average interest earning assets, partially offset by an increase in the yield on core loans and overnight funds and a higher average balance of loans.
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 September 30, 2024:
Increase/(Decrease) in
Estimated Net
CHANGE IN INTEREST RATES (basis points)
Interest Income(1)
(in $000's, unaudited)
Amount
Percent
+400
$
24,681
13.6
%
+300
$
18,438
10.2
%
+200
$
12,241
6.8
%
+100
$
6,082
3.4
%
0
—
—
−100
$
(8,242
)
(4.5
)
%
−200
$
(18,720
)
(10.3
)
%
−300
$
(31,428
)
(17.3
)
%
−400
$
(47,015
)
(25.9
)
%
Increase/(Decrease) in
Estimated Economic
CHANGE IN INTEREST RATES (basis points)
Value of Equity(1)
(in $000's, unaudited)
Amount
Percent
+400
$
161,338
14.0
%
+300
$
133,760
11.6
%
+200
$
98,755
8.6
%
+100
$
55,024
4.8
%
0
—
—
−100
$
(86,037
)
(7.5
)
%
−200
$
(204,813
)
(17.8
)
%
−300
$
(345,418
)
(30.1
)
%
−400
$
(452,503
)
(39.4
)
%
(1)
Computations of prospective effects of hypothetical interest rate changes are for illustrative purposes only, 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 affect 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 5.42% for the third quarter of 2024, compared to 5.49% for the second quarter of 2024.
For the Quarter Ended
For the Quarter Ended
September 30, 2024
June 30, 2024
Average
Interest
Average
Average
Interest
Average
(in $000’s, unaudited)
Balance
Income
Yield
Balance
Income
Yield
Loans, core bank
$
2,867,076
$
39,621
5.50
%
$
2,830,260
$
38,496
5.47
%
Prepayment fees
—
4
0.00
%
—
54
0.01
%
Bay View Funding factored receivables(1)
55,391
2,144
15.40
%
54,777
2,914
21.40
%
Purchased residential mortgages
441,294
3,779
3.41
%
447,687
3,739
3.36
%
Loan fair value mark / accretion
(2,621
)
233
0.03
%
(2,863
)
267
0.04
%
Total loans (includes loans held-for-sale)
$
3,361,140
$
45,781
5.42
%
$
3,329,861
$
45,470
5.49
%
(1)
Interest income for the third quarter and first nine months of 2024 was reduced by an immaterial out-of-period adjustment of ($804,000).
•
The average yield on the total loan portfolio decreased to 5.42% for the third quarter of 2024, compared to 5.46% for the third quarter of 2023.
For the Quarter Ended
For the Quarter Ended
September 30, 2024
September 30, 2023
Average
Interest
Average
Average
Interest
Average
(in $000’s, unaudited)
Balance
Income
Yield
Balance
Income
Yield
Loans, core bank
$
2,867,076
$
39,621
5.50
%
$
2,743,993
$
37,764
5.46
%
Prepayment fees
—
4
0.00
%
—
182
0.03
%
Bay View Funding factored receivables(1)
55,391
2,144
15.40
%
51,664
2,775
21.31
%
Purchased residential mortgages
441,294
3,779
3.41
%
465,471
3,811
3.25
%
Loan fair value mark / accretion
(2,621
)
233
0.03
%
(3,648
)
321
0.05
%
Total loans (includes loans held-for-sale)
$
3,361,140
$
45,781
5.42
%
$
3,257,480
$
44,853
5.46
%
(1)
Interest income for the third quarter and first nine months of 2024 was reduced by an immaterial out-of-period adjustment of ($804,000).
•
The average yield on the total loan portfolio decreased to 5.45% for the first nine months of 2024, compared to 5.46% for the first nine months of 2023, primarily due to a lower average balance of Bay View Funding factored receivables, a decrease in the accretion of loan purchase discount into interest income from acquired loans, and lower prepayment fees, mostly offset by a higher yield on core loans for the first nine months of 2024.
For the Nine Months Ended
For the Nine Months Ended
September 30, 2024
September 30, 2023
Average
Interest
Average
Average
Interest
Average
(in $000’s, unaudited)
Balance
Income
Yield
Balance
Income
Yield
Loans, core bank
$
2,831,035
$
115,838
5.47
%
$
2,716,345
$
109,354
5.38
%
Prepayment fees
—
82
0.00
%
—
393
0.02
%
Bay View Funding factored receivables(1)
54,563
7,896
19.33
%
65,938
10,623
21.54
%
Purchased residential mortgages
447,709
11,306
3.37
%
477,068
11,497
3.22
%
Loan fair value mark / accretion
(2,865
)
729
0.03
%
(3,976
)
1,126
0.06
%
Total loans (includes loans held-for-sale)
$
3,330,442
$
135,851
5.45
%
$
3,255,375
$
132,993
5.46
%
(1)
Interest income for the third quarter and first nine months of 2024 was reduced by an immaterial out-of-period adjustment of ($804,000).
•
In aggregate, the unamortized net purchase discount on total loans acquired was $2.5 million at September 30, 2024.
The following table presents the average balance of deposits and interest-bearing liabilities, interest expense, and the average rate for the periods indicated:
For the Quarter Ended
For the Quarter Ended
September 30, 2024
June 30, 2024
Average
Interest
Average
Average
Interest
Average
(in $000’s, unaudited)
Balance
Expense
Rate
Balance
Expense
Rate
Deposits:
Demand, noninterest-bearing
$
1,172,304
$
1,127,145
Demand, interest-bearing
907,346
$
1,714
0.75
%
932,100
$
1,719
0.74
%
Savings and money market
1,188,057
9,128
3.06
%
1,104,589
7,867
2.86
%
Time deposits - under $100
11,133
47
1.68
%
10,980
46
1.68
%
Time deposits - $100 and over
229,565
2,349
4.07
%
228,248
2,245
3.96
%
Insured Cash Sweep ("ICS")/Certificate of Deposit Registry
Service ("CDARS") - interest-bearing demand, money market and time deposits
1,017,541
7,747
3.03
%
991,483
7,207
2.92
%
Total interest-bearing deposits
3,353,642
20,985
2.49
%
3,267,400
19,084
2.35
%
Total deposits
4,525,946
20,985
1.84
%
4,394,545
19,084
1.75
%
Short-term borrowings
32
—
0.00
%
19
—
0.00
%
Subordinated debt, net of issuance costs
39,590
538
5.41
%
39,553
538
5.47
%
Total interest-bearing liabilities
3,393,264
21,523
2.52
%
3,306,972
19,622
2.39
%
Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds
$
4,565,568
$
21,523
1.88
%
$
4,434,117
$
19,622
1.78
%
•
The average cost of total deposits increased to 1.72% for the first nine months of 2024, compared to 0.94% for the first nine months of 2023. The average cost of funds increased to 1.75% for the first nine months of 2024, compared to 1.01% for the first nine months of 2023.
•
The Bank continues to carefully manage deposit costs and implemented cost adjustments following the Federal Reserve Bank’s interest rate reduction in September 2024, to align with the changing interest rate environment.
•
The increase in the average cost of total deposits and the average cost of funds for the third quarter and first nine months of 2024 was primarily due to clients seeking higher yields and moving noninterest-bearing deposits to the Bank’s interest-bearing ICS/CDARS deposits and interest-bearing money market accounts and increases in market rates.
Provision for Credit Losses on Loans:
During the third quarter of 2024, we recorded a provision for credit losses on loans of $153,000, compared to a $471,000 provision for credit losses on loans for the second quarter of 2024, 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 $808,000 for the nine months ended September 30, 2024, compared to a $460,000 provision for credit losses on loans for the nine months ended September 30, 2023, primarily due to the increase in the balance of total loans.
Noninterest Income:
Total noninterest income decreased (2%) to $2.2 million for the third quarter of 2024, compared to $2.3 million for the second quarter of 2024, primarily due to a gain on proceeds from company-owned life insurance and higher termination fees during the second quarter of 2024. Total noninterest income was relatively flat at $2.2 million for both the third quarter of 2024 and the third quarter of 2023.
Total noninterest income decreased (7%) to $6.6 million for the first nine months of 2024, compared to $7.1 million for the first nine 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 for the first nine months of 2024.
Noninterest Expense:
Total noninterest expense for the third quarter of 2024 decreased to $27.6 million, compared to $28.2 million for the second quarter of 2024, primarily due to lower salaries and employee benefits and lower information technology related expenses, partially offset by higher professional fees. Total noninterest expense for the third quarter of 2024 increased to $27.6 million, compared to $25.2 million for the third quarter of 2023, primarily due to higher salaries and employee benefits, rent expense included in occupancy and equipment, and professional fees.
Total noninterest expense for the first nine months of 2024 increased to $83.3 million, compared to $75.6 million for the first nine months of 2023, primarily due to higher salaries and employee benefits, rent expense, and information technology related expenses, marketing related expenses, homeowner association vendor payments, regulatory assessments, and ICS/CDARS fee expense.
Full time equivalent employees were 353 at both September 30, 2024 and June 30, 2024, compared to 348 at September 30, 2023.
The efficiency ratio was 65.37% for the third quarter of 2024, compared to 67.55% for the second quarter of 2024, and 52.89% for the third quarter of 2023. The efficiency ratio increased to 66.08% for the nine months ended September 30, 2024 compared to 51.06% for the nine months ended September 30, 2023. The increase in the efficiency ratio for the third quarter of 2024 and nine months ended September 30, 2024, compared to the respective periods in 2023, 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 $3.9 million for the third quarter of 2024, compared to $3.8 million for the second quarter of 2024, and $6.5 million for the third quarter of 2023. The effective tax rate for the third quarter of 2024 was 27.3%, compared to 29.4% for the second quarter of 2024, and 29.0% for the third quarter of 2023.
Income tax expense for the nine months ended September 30, 2024 was $12.0 million, compared to $20.8 million for the nine months ended September 30, 2023. The effective tax rate for nine months ended September 30, 2024 was 28.7%, compared to 29.0% for the nine months ended September 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 September 30, 2024:
LIQUIDITY AND AVAILABLE LINES OF CREDIT
Total
Remaining
(in $000’s, unaudited)
Available
Outstanding
Available
Excess funds at the Federal Reserve Bank ("FRB")
$
903,900
$
—
$
903,900
FRB discount window collateralized line of credit
1,397,326
—
1,397,326
Federal Home Loan Bank collateralized borrowing capacity
765,134
—
765,134
Unpledged investment securities (at fair value)
66,158
—
66,158
Federal funds purchase arrangements
90,000
—
90,000
Holding company line of credit
25,000
—
25,000
Total
$
3,247,518
$
—
$
3,247,518
•
The Company’s total available liquidity and borrowing capacity was $3.2 billion at September 30, 2024, compared to $3.0 billion at June 30, 2024, and $3.1 billion at September 30, 2023.
•
The available liquidity and borrowing capacity was 69% of the Company’s total deposits and approximately 147% of the Bank’s estimated uninsured deposits at September 30, 2024. The available liquidity and borrowing capacity was 66% of the Company’s total deposits and approximately 148% of the Bank’s estimated uninsured deposits at June 30, 2024. The available liquidity and borrowing capacity was 70% of the Company’s total deposits and approximately 150% of the Bank’s estimated uninsured deposits at September 30, 2023.
•
The loan to deposit ratio was 72.11% at September 30, 2024, compared to 76.04% at June 30, 2024, and 71.81% at September 30, 2023.
Total assets increased 5% to $5.6 billion at September 30, 2024, compared to $5.3 billion at June 30, 2024, and increased 3% from $5.4 billion at September 30, 2023, primarily related to growth in client deposits and liquidity.
Investment Securities:
Investment securities totaled $841.8 million at September 30, 2024, of which $237.6 million were in the securities available-for-sale portfolio (at fair value), and $604.2 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 $531.5 million at September 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:
SECURITIES AVAILABLE-FOR-SALE
September 30,
June 30,
September 30,
(in $000’s, unaudited)
2024
2024
2023
Balance (at fair value):
U.S. Treasury
$
184,162
$
218,682
$
396,996
Agency mortgage-backed securities
53,450
54,361
60,198
Total
$
237,612
$
273,043
$
457,194
Pre-tax unrealized (loss):
U.S. Treasury
$
(1,440
)
$
(3,578
)
$
(9,606
)
Agency mortgage-backed securities
(2,923
)
(4,815
)
(7,185
)
Total
$
(4,363
)
$
(8,393
)
$
(16,791
)
Weighted average life (years)
1.32
1.39
1.49
•
The pre-tax unrealized loss on the securities available-for-sale portfolio was ($4.4) million, or ($3.2) million net of taxes, which equaled less than 1% of total shareholders’ equity at September 30, 2024.
•
The reduction in the securities available-for-sale portfolios was due to maturities and not due to any securities sold since June 30, 2023.
The following table shows the balances of securities held-to-maturity, at amortized cost, and the related pre-tax unrecognized (loss) and allowance for credit losses at the dates indicated:
SECURITIES HELD-TO-MATURITY
September 30,
June 30,
September 30,
(in $000’s, unaudited)
2024
2024
2023
Balance (at amortized cost):
Agency mortgage-backed securities
$
573,621
$
589,386
$
632,241
Municipals — exempt from Federal tax(1)
30,584
31,804
32,453
Total(1)
$
604,205
$
621,190
$
664,694
Pre-tax unrecognized (loss):
Agency mortgage-backed securities
$
(71,996
)
$
(92,058
)
$
(119,932
)
Municipals — exempt from Federal tax
(676
)
(1,694
)
(2,753
)
Total
$
(72,672
)
$
(93,752
)
$
(122,685
)
Allowance for credit losses on municipal securities
$
(12
)
$
(12
)
$
(13
)
Weighted average life (years)
5.94
6.57
7.03
(1)
Gross of the allowance for credit losses of ($12,000) at both September 30, 2024, and June 30, 2024, and ($13,000) at September 30, 2023.
•
The pre-tax unrecognized loss on the securities held-to-maturity portfolio was ($72.7) million, or ($51.2) million net of taxes, which equaled 7.5% of total shareholders’ equity at September 30, 2024.
•
The weighted average life of the securities held-to-maturity portfolio was 5.94 years at September 30, 2024, which includes Community Reinvestment Act 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 September 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 actual and/or 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-
PROJECTED INVESTMENT SECURITIES
backed and
PAYDOWNS & MATURITIES
U.S.
Municipal
(in $000’s, unaudited)
Treasury
Securities
Total
Fourth quarter of 2024
$
9,000
$
26,727
$
35,727
First quarter of 2025
35,000
21,336
56,336
Second quarter of 2025
118,000
20,700
138,700
Third quarter of 2025
25,200
21,885
47,085
Fourth quarter of 2025
—
19,486
19,486
First quarter of 2026
—
19,001
19,001
Second quarter of 2026
—
18,349
18,349
Third quarter of 2026
—
18,645
18,645
Total
$
187,200
$
166,129
$
353,329
•
The weighted average life of the total investment securities portfolio was 4.62 years at September 30, 2024, compared to 4.95 years at June 30, 2024, and 4.72 years at September 30, 2023.
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:
LOANS
September 30, 2024
June 30, 2024
September 30, 2023
(in $000’s, unaudited)
Balance
% to Total
Balance
% to Total
Balance
% to Total
Commercial
$
481,266
14
%
$
477,929
14
%
$
430,664
13
%
Real estate:
CRE(1) - owner occupied
602,062
18
%
594,504
18
%
589,751
18
%
CRE(1) - non-owner occupied
1,310,578
38
%
1,283,323
38
%
1,208,324
37
%
Land and construction
125,761
4
%
125,374
4
%
158,138
5
%
Home equity
124,090
4
%
126,562
4
%
124,477
4
%
Multifamily
273,103
8
%
268,968
8
%
253,129
7
%
Residential mortgages
479,524
14
%
484,809
14
%
503,006
15
%
Consumer and other
14,179
< 1
%
18,758
< 1
%
18,526
1
%
Total Loans
3,410,563
100
%
3,380,227
100
%
3,286,015
100
%
Deferred loan costs (fees), net
(327
)
—
(434
)
—
(554
)
—
Loans, net of deferred costs and fees
$
3,410,236
100
%
$
3,379,793
100
%
$
3,285,461
100
%
(1)
Commercial Real Estate
•
Loans, excluding loans held-for-sale, increased $30.4 million, or 1%, to $3.4 billion at September 30, 2024, from the prior quarter, and increased $124.8 million, or 4%, from $3.3 billion at September 30, 2023. Loans, excluding residential mortgages, increased $35.7 million, or 1%, to $2.9 billion at September 30, 2024 from June 30, 2024, and increased $148.3 million, or 5%, from $2.8 billion at September 30, 2023.
•
Commercial and industrial line utilization was 31% at both September 30, 2024 and June 30, 2024, compared to 27% at September 30, 2023.
•
CRE loans totaled $1.9 billion at September 30, 2024, of which 31% were owner occupied and 69% were investor CRE loans. There was 32% of the CRE loan portfolio secured by owner occupied real estate at June 30, 2024, and 33% at September 30, 2023.
•
During the third quarter of 2024, there were 41 new owner occupied and non-owner occupied CRE loans originated totaling $67 million with a weighted average loan-to-value (“LTV”) of 49%; the weighted average debt-service coverage ratio (“DSCR”) for the non-owner occupied portfolio was 1.92 times.
•
Loan Growth continued at an orderly organic rate as the Bank continues to serve our clients in the community.
•
The average loan size for all CRE loans was $1.6 million, and the average loan size for office CRE loans was $1.7 million.
•
The Company has personal guarantees on 92% of its CRE portfolio. A substantial portion of the unguaranteed CRE loans were made to credit-worthy non-profit organizations.
•
Total office exposure (excluding medical/dental offices) in the CRE portfolio was $419 million, including 32 loans totaling approximately $73 million in San Jose, 19 loans totaling approximately $26 million in San Francisco, and eight loans totaling approximately $16 million, in Oakland, at September 30, 2024. Non-owner occupied CRE with office exposure totaled $329 million at September 30, 2024.
•
At September 30, 2024, the weighted average LTV and DSCR for the entire non-owner occupied office portfolio were 41.8% and 1.82 times, respectively.
•
Total medical/dental office exposure in the non-owner occupied CRE portfolio consisted of 15 loans totaling $12 million, with a weighted average LTV and DSCR of 37.4% and 2.41 times, respectively, at September 30, 2024.
•
The following table presents the weighted average LTV and DSCR by collateral type for CRE loans at September 30, 2024:
CRE - Non-owner Occupied
CRE - Owner Occupied
Total CRE
COLLATERAL TYPE
Outstanding
LTV
DSCR
Outstanding
LTV
Outstanding
LTV
Retail
26
%
38.0
%
1.89
16
%
46.3
%
23
%
39.6
%
Industrial
19
%
39.1
%
2.46
34
%
43.7
%
23
%
40.9
%
Mixed-Use, Special
Purpose and Other
18
%
41.6
%
1.91
34
%
40.7
%
22
%
41.2
%
Office
20
%
41.8
%
1.82
16
%
44.3
%
19
%
42.5
%
Multifamily
17
%
42.6
%
1.95
0
%
0.0
%
13
%
42.6
%
Hotel/Motel
< 1
%
16.4
%
1.32
0
%
0.0
%
< 1
%
16.4
%
Total
100
%
40.3
%
1.99
100
%
43.2
%
100
%
41.1
%
•
The following table presents the weighted average LTV and DSCR by county for CRE loans at September 30, 2024:
CRE - Non-owner Occupied
CRE - Owner Occupied
Total CRE
COUNTY
Outstanding
LTV
DSCR
Outstanding
LTV
Outstanding
LTV
Alameda
25
%
44.3
%
1.93
18
%
45.6
%
23
%
44.6
%
Contra Costa
7
%
41.8
%
1.79
8
%
47.8
%
7
%
43.5
%
Marin
7
%
46.3
%
2.02
1
%
52.4
%
5
%
46.8
%
Monterey
2
%
43.8
%
1.85
2
%
41.1
%
2
%
43.0
%
Napa
< 1
%
30.0
%
1.73
1
%
52.0
%
1
%
36.3
%
Out of Area
8
%
42.3
%
2.06
9
%
49.0
%
9
%
44.3
%
San Benito
1
%
35.1
%
2.00
3
%
39.7
%
2
%
37.5
%
San Francisco
9
%
37.5
%
1.48
4
%
39.8
%
8
%
37.8
%
San Mateo
11
%
37.5
%
2.20
15
%
40.0
%
12
%
38.3
%
Santa Clara
24
%
37.4
%
2.25
34
%
41.1
%
26
%
38.8
%
Santa Cruz
2
%
33.1
%
1.74
1
%
49.2
%
2
%
36.2
%
Solano
1
%
32.1
%
1.95
2
%
37.8
%
1
%
33.8
%
Sonoma
3
%
39.7
%
2.22
2
%
43.1
%
2
%
40.5
%
Total
100
%
40.3
%
1.99
100
%
43.2
%
100
%
41.1
%
The following table presents the maturity distribution of the Company’s loans, excluding loans held-for-sale, as of September 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.
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
$
375,424
44
%
$
227,201
27
%
$
247,622
29
%
$
850,247
Loans with fixed interest rates
141,906
6
%
767,930
30
%
1,650,480
64
%
2,560,316
Loans
$
517,330
15
%
$
995,131
29
%
$
1,898,102
56
%
$
3,410,563
•
At September 30, 2024, approximately 25% of the Company’s loan portfolio consisted of floating interest rate loans, compared to 27% at both June 30, 2024 and September 30, 2023.
Credit Quality:
The following table summarizes the allowance for credit losses on loans (“ACLL”) for the periods indicated:
At or For the Quarter Ended:
At or For the Nine Months Ended:
ALLOWANCE FOR CREDIT LOSSES ON LOANS
September 30,
June 30,
September 30,
September 30,
September 30,
(in $000’s, unaudited)
2024
2024
2023
2024
2023
Balance at beginning of period
$
47,954
$
47,888
$
47,803
$
47,958
$
47,512
Charge-offs during the period
(474
)
(510
)
(447
)
(1,342
)
(851
)
Recoveries during the period
186
105
178
395
581
Net (charge-offs) recoveries during the period
(288
)
(405
)
(269
)
(947
)
(270
)
Provision for credit losses on loans during the period
153
471
168
808
460
Balance at end of period
$
47,819
$
47,954
$
47,702
$
47,819
$
47,702
Total loans, net of deferred fees
$
3,410,236
$
3,379,793
$
3,285,461
$
3,410,236
$
3,285,461
Total nonperforming loans
$
7,158
$
6,030
$
5,484
$
7,158
$
5,484
ACLL to total loans
1.40
%
1.42
%
1.45
%
1.40
%
1.45
%
ACLL to total nonperforming loans
668.05
%
795.26
%
869.84
%
668.05
%
869.84
%
•
The following table shows the drivers of change in ACLL for the first, second, and third quarters of 2024:
DRIVERS OF CHANGE IN ACLL
(in $000’s, unaudited)
ACLL at December 31, 2023
$
47,958
Portfolio changes during the first quarter of 2024
(234
)
Qualitative and quantitative changes during the first quarter of 2024 including changes in economic forecasts
164
ACLL at March 31, 2024
47,888
Portfolio changes during the second quarter of 2024
616
Qualitative and quantitative changes during the second quarter of 2024 including changes in economic forecasts
(550
)
ACLL at June 30, 2024
47,954
Portfolio changes during the third quarter of 2024
599
Qualitative and quantitative changes during the third quarter of 2024 including changes in economic forecasts
(734
)
ACLL at September 30, 2024
$
47,819
The following is a breakout of nonperforming assets (“NPAs”) at the dates indicated:
NONPERFORMING ASSETS
September 30, 2024
June 30, 2024
September 30, 2023
(in $000’s, unaudited)
Balance
% of Total
Balance
% of Total
Balance
% of Total
Land and construction loans
$
5,862
82
%
$
4,774
79
%
$
—
0
%
Commercial loans
752
11
%
900
15
%
1,712
31
%
Loans over 90 days past due and still accruing
460
6
%
248
4
%
1,966
36
%
Home equity and other loans
84
1
%
108
2
%
90
2
%
Residential mortgages
—
0
%
—
0
%
1,716
31
%
CRE loans
—
0
%
—
0
%
—
0
%
Total nonperforming assets
$
7,158
100
%
$
6,030
100
%
$
5,484
100
%
There were 10 borrowers included in NPAs totaling $7.2 million, or 0.13% of total assets, at September 30, 2024, compared to 10 borrowers totaling $6.0 million, or 0.11% of total assets at June 30, 2024, and 11 borrowers totaling $5.5 million, or 0.10% of total assets, at September 30, 2023. The increase in NPAs at September 30, 2024, was primarily due to the downgrade of a loan to one customer totaling $1.1 million, which is well collateralized and there were no specific reserves for the loan. This increase in NPAs was partially offset by pay-offs of loan previously included in NPAs.
•
There were no CRE loans included in NPAs at September 30, 2024, June 30, 2024, or September 30, 2023.
•
There were no foreclosed assets on the balance sheet at September 30, 2024, June 30, 2024, or September 30, 2023.
•
There were no Shared National Credits (“SNCs”) or material purchased participations included in NPAs or total loans at September 30, 2024, June 30, 2024, or September 30, 2023.
Classified assets totaled $32.6 million, or 0.59% of total assets, at September 30, 2024, compared to $33.6 million, or 0.64% of total assets, at June 30, 2024, and $31.1 million, or 0.57% of total assets, at September 30, 2023.
Deposits:
The following table summarizes the distribution of deposits and the percentage of distribution in each category at the dates indicated:
DEPOSITS
September 30, 2024
June 30, 2024
September 30, 2023
(in $000’s, unaudited)
Balance
% to Total
Balance
% to Total
Balance
% to Total
Demand, noninterest-bearing
$
1,272,139
27
%
$
1,187,320
27
%
$
1,243,501
27
%
Demand, interest-bearing
913,910
19
%
928,246
21
%
1,004,185
22
%
Savings and money market
1,309,676
28
%
1,126,520
25
%
1,110,640
24
%
Time deposits — under $250
39,060
1
%
39,046
1
%
43,906
1
%
Time deposits — $250 and over
196,945
4
%
203,886
4
%
252,001
6
%
ICS/CDARS — interest-bearing demand, money market and time deposits
997,803
21
%
959,592
22
%
921,224
20
%
Total deposits
$
4,729,533
100
%
$
4,444,610
100
%
$
4,575,457
100
%
•
Total deposits increased $284.9 million, or 6%, to $4.7 billion at September 30, 2024 compared to $4.4 billion at June 30, 2024, and increased $154.1 million, or 3% from $4.6 billion at September 30, 2023.
•
Migration of client deposits into interest-bearing accounts resulted in an increase in ICS/CDARS deposits to $997.8 million at September 30, 2024, compared to $959.6 million at June 30, 2024, and $921.2 million at September 30, 2023.
•
The Company had 25,373 deposit accounts at September 30, 2024, with an average balance of $186,000. At June 30, 2024, the Company had 25,033 deposit accounts, with an average balance of $178,000. At September 30, 2023, the Company had 24,769 deposit accounts, with an average balance of $186,000.
•
Deposits from the Bank’s top 100 client relationships, representing 22% of the total number of accounts, totaled $2.2 billion, representing 47% of total deposits, with an average account size of $394,000 at September 30, 2024. At June 30, 2024, deposits from the Bank’s top 100 client relationships, representing 21% of the total number of accounts, totaled $2.1 billion, representing 47% of total deposits, with an average account size of $388,000. At September 30, 2023, deposits from the Bank’s top 100 client relationships, representing 22% of the total number of accounts, totaled $2.2 billion, representing 48% of total deposits, with an average account size of $408,000.
•
The Bank’s uninsured deposits were approximately $2.2 billion, or 47% of the Company’s total deposits, at September 30, 2024, compared to $2.0 billion, or 45% of the Company’s total deposits, at June 30, 2024, and $2.1 billion, or 46% of the Company’s total deposits, at September 30, 2023.
Capital Management:
In July 2024, the Company announced that its Board of Directors adopted a share repurchase program under which the Company is authorized to repurchase up to $15 million of the Company’s shares of its issued and outstanding common stock. The Company did not repurchase any of its common stock during the third quarter of 2024.
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 September 30, 2024, as reflected in the following table:
Well-capitalized
Financial
Institution
Basel III
Heritage
Heritage
PCA
Minimum
Commerce
Bank of
Regulatory
Regulatory
CAPITAL RATIOS (unaudited)
Corp
Commerce
Guidelines
Requirements (1)
Total Capital
15.6
%
15.1
%
10.0
%
10.5
%
Tier 1 Capital
13.4
%
13.9
%
8.0
%
8.5
%
Common Equity Tier 1 Capital
13.4
%
13.9
%
6.5
%
7.0
%
Tier 1 Leverage
10.0
%
10.4
%
5.0
%
4.0
%
Tangible common equity / tangible assets (2)
9.5
%
9.9
%
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 Tier 1 Leverage ratio.
(2)
This is a non-GAAP financial measure that 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, at the dates indicated:
ACCUMULATED OTHER COMPREHENSIVE LOSS
September 30,
June 30,
September 30,
(in $000’s, unaudited)
2024
2024
2023
Unrealized loss on securities available-for-sale
$
(3,161
)
$
(6,022
)
$
(11,985
)
Split dollar insurance contracts liability
(2,965
)
(2,913
)
(3,234
)
Supplemental executive retirement plan liability
(2,838
)
(2,856
)
(2,343
)
Unrealized gain on interest-only strip from SBA loans
72
76
93
Total accumulated other comprehensive loss
$
(8,892
)
$
(11,715
)
$
(17,469
)
Tangible common equity was $510.8 million at September 30, 2024, compared to $504.0 million at June 30, 2024, and $485.1 million at September 30, 2023. Tangible book value per share was $8.33 at September 30, 2024, compared to $8.22 at June 30, 2024, and $7.94 at September 30, 2023. Tangible common equity and tangible book value per share are non-GAAP financial measures.
Recent Events:
On October 2, 2024, the Company announced the appointment of Thomas A. Sa as the Chief Operating Officer (“COO”) of the Company and the Bank. As COO, Mr. Sa will have primary responsibility for banking operations, risk management, information technology systems, audit administration, and will help shape strategic decisioning of the Company. Mr. Sa has more than thirty years’ experience in a variety of increasingly responsible positions in California-based community and regional banks, most recently serving as President, Chief Operating Officer and Chief Financial Officer of California BanCorp and its subsidiary, California Bank of Commerce, which merged with Southern California Bancorp in July 2024.
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 form 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 is 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 June 30, 2024, and the following: (1) cybersecurity risks that may affect us directly or may impact us indirectly by virtue of their effects on our clients, markets or vendors, including our ability to identify and address cybersecurity 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, our clients, and our third party vendors and service providers; (2) 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; (3) factors that affect our liquidity and our ability to meet client demands for withdrawals from deposit accounts and undrawn lines of credit, including our cash on hand and the availability of funds from our own lines of credit; (4) market fluctuations that affect the costs we pay for sources of funding, including the interest we pay on deposits and on our borrowings; (5) media items and consumer confidence as those factors affect our clients’ confidence in the banking system generally and in our bank specifically; (6) factors that affect the value and liquidity of our investment portfolios, particularly the values of securities available-for-sale; (7) 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; (8) our ability to estimate accurately, and to establish adequate reserves against, the risk of loss associated with our loan and lease portfolio and our factoring business; (9) events and circumstances that affect our borrowers' and guarantors’ 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; (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 fluctuations in economic growth; (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) 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; (14) 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; (15) increased capital requirements for our continual growth or as imposed by banking regulators, which may require us to raise capital at a time when capital is not available on favorable terms or at all; (16) regulatory limits and practical factors that affect Heritage Bank of Commerce’s ability to pay dividends to the Company; (17) operational issues stemming from, and/or capital spending necessitated by, the potential need to adapt to industry changes in information technology systems, on which we are highly dependent; (18) events that affect our ability to attract, recruit, and retain qualified officers and other personnel to implement our strategic plan, and that enable current and future personnel to protect and develop our relationships with clients, and to promote our business, results of operations and growth prospects; (19) factors that affect the carrying value of the goodwill associated with our previous acquisitions; (20) 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; (21) the expense and uncertain resolution of litigation matters whether occurring in the ordinary course of business or otherwise, particularly including but not limited to the effects of recent and ongoing developments in California labor and employment laws, regulations and court decisions; (22) 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, including the particular risks of natural disasters (including earthquakes, fires, and flooding) and other events that disproportionately affect that region; (23) 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 (24) our success in managing the risks involved in the foregoing factors.
Net interest income before provision for credit losses on loans
39,915
39,455
45,372
1
%
(12
)
%
119,463
140,923
(15
)
%
Provision for credit losses on loans
153
471
168
(68
)
%
(9
)
%
808
460
76
%
Net interest income after provision for credit losses on loans
39,762
38,984
45,204
2
%
(12
)
%
118,655
140,463
(16
)
%
Noninterest income:
Service charges and fees on deposit accounts
908
891
859
2
%
6
%
2,676
3,503
(24
)
%
Increase in cash surrender value of life insurance
530
521
517
2
%
3
%
1,569
1,512
4
%
Servicing income
108
90
62
20
%
74
%
288
297
(3
)
%
Gain on sales of SBA loans
94
76
207
24
%
(55
)
%
348
482
(28
)
%
Termination fees
46
100
118
(54
)
%
(61
)
%
159
129
23
%
Gain on proceeds from company-owned life insurance
—
219
100
(100
)
%
(100
)
%
219
100
119
%
Other
554
379
353
46
%
57
%
1,304
1,033
26
%
Total noninterest income
2,240
2,276
2,216
(2
)
%
1
%
6,563
7,056
(7
)
%
Noninterest expense:
Salaries and employee benefits
15,673
15,794
14,147
(1
)
%
11
%
46,976
42,943
9
%
Occupancy and equipment
2,599
2,689
2,301
(3
)
%
13
%
7,731
7,123
9
%
Professional fees
1,306
1,072
717
22
%
82
%
3,705
3,265
13
%
Other
7,977
8,633
8,006
(8
)
%
0
%
24,867
22,232
12
%
Total noninterest expense
27,555
28,188
25,171
(2
)
%
9
%
83,279
75,563
10
%
Income before income taxes
14,447
13,072
22,249
11
%
(35
)
%
41,939
71,956
(42
)
%
Income tax expense
3,940
3,838
6,454
3
%
(39
)
%
12,032
20,841
(42
)
%
Net income
$
10,507
$
9,234
$
15,795
14
%
(33
)
%
$
29,907
$
51,115
(41
)
%
PER COMMON SHARE DATA
(unaudited)
Basic earnings per share
$
0.17
$
0.15
$
0.26
13
%
(35
)
%
$
0.49
$
0.84
(42
)
%
Diluted earnings per share
$
0.17
$
0.15
$
0.26
13
%
(35
)
%
$
0.49
$
0.83
(41
)
%
Weighted average shares outstanding - basic
61,295,877
61,279,914
61,093,289
0
%
0
%
61,254,138
61,012,315
0
%
Weighted average shares outstanding - diluted
61,546,157
61,438,088
61,436,240
0
%
0
%
61,497,927
61,284,590
0
%
Common shares outstanding at period-end
61,297,344
61,292,094
61,099,155
0
%
0
%
61,297,344
61,099,155
0
%
Dividend per share
$
0.13
$
0.13
$
0.13
0
%
0
%
$
0.39
$
0.39
0
%
Book value per share
$
11.18
$
11.08
$
10.83
1
%
3
%
$
11.18
$
10.83
3
%
Tangible book value per share(1)
$
8.33
$
8.22
$
7.94
1
%
5
%
$
8.33
$
7.94
5
%
KEY FINANCIAL RATIOS
(unaudited)
Annualized return on average equity
6.14
%
5.50
%
9.54
%
12
%
(36
)
%
5.91
%
10.54
%
(44
)
%
Annualized return on average tangible common equity(1)
8.27
%
7.43
%
13.06
%
11
%
(37
)
%
7.98
%
14.52
%
(45
)
%
Annualized return on average assets
0.78
%
0.71
%
1.16
%
10
%
(33
)
%
0.76
%
1.29
%
(41
)
%
Annualized return on average tangible assets(1)
0.81
%
0.74
%
1.20
%
9
%
(33
)
%
0.79
%
1.33
%
(41
)
%
Net interest margin (FTE)(1)
3.17
%
3.26
%
3.57
%
(3
)
%
(11
)
%
3.26
%
3.80
%
(14
)
%
Efficiency ratio(1)
65.37
%
67.55
%
52.89
%
(3
)
%
24
%
66.08
%
51.06
%
29
%
AVERAGE BALANCES
(in $000’s, unaudited)
Average assets
$
5,352,067
$
5,213,171
$
5,399,930
3
%
(1
)
%
$
5,248,338
$
5,316,447
(1
)
%
Average tangible assets(1)
$
5,177,114
$
5,037,673
$
5,222,692
3
%
(1
)
%
$
5,072,843
$
5,138,610
(1
)
%
Average earning assets
$
5,011,865
$
4,872,449
$
5,051,710
3
%
(1
)
%
$
4,909,240
$
4,965,613
(1
)
%
Average loans held-for-sale
$
1,493
$
1,503
$
2,765
(1
)
%
(46
)
%
$
1,913
$
3,229
(41
)
%
Average total loans
$
3,359,647
$
3,328,358
$
3,254,715
1
%
3
%
$
3,328,529
$
3,252,146
2
%
Average deposits
$
4,525,946
$
4,394,545
$
4,573,621
3
%
(1
)
%
$
4,427,242
$
4,471,783
(1
)
%
Average demand deposits - noninterest-bearing
$
1,172,304
$
1,127,145
$
1,302,606
4
%
(10
)
%
$
1,158,891
$
1,444,744
(20
)
%
Average interest-bearing deposits
$
3,353,642
$
3,267,400
$
3,271,015
3
%
3
%
$
3,268,351
$
3,027,039
8
%
Average interest-bearing liabilities
$
3,393,264
$
3,306,972
$
3,310,485
3
%
3
%
$
3,307,926
$
3,102,723
7
%
Average equity
$
680,404
$
675,108
$
656,973
1
%
4
%
$
675,951
$
648,341
4
%
Average tangible common equity(1)
$
505,451
$
499,610
$
479,735
1
%
5
%
$
500,456
$
470,504
6
%
(1)
This is a non-GAAP financial measure.
For the Quarter Ended:
CONSOLIDATED INCOME STATEMENTS
September 30,
June 30,
March 31,
December 31,
September 30,
(in $000’s, unaudited)
2024
2024
2024
2023
2023
Interest income
$
61,438
$
59,077
$
57,551
$
58,892
$
60,791
Interest expense
21,523
19,622
17,458
16,591
15,419
Net interest income before provision for credit losses on loans
39,915
39,455
40,093
42,301
45,372
Provision for credit losses on loans
153
471
184
289
168
Net interest income after provision for credit losses on loans
39,762
38,984
39,909
42,012
45,204
Noninterest income:
Service charges and fees on deposit accounts
908
891
877
838
859
Increase in cash surrender value of life insurance
530
521
518
519
517
Servicing income
108
90
90
103
62
Gain on sales of SBA loans
94
76
178
—
207
Termination fees
46
100
13
25
118
Gain on proceeds from company-owned life insurance
—
219
—
25
100
Other
554
379
371
432
353
Total noninterest income
2,240
2,276
2,047
1,942
2,216
Noninterest expense:
Salaries and employee benefits
15,673
15,794
15,509
13,919
14,147
Occupancy and equipment
2,599
2,689
2,443
2,367
2,301
Professional fees
1,306
1,072
1,327
1,085
717
Other
7,977
8,633
8,257
8,120
8,006
Total noninterest expense
27,555
28,188
27,536
25,491
25,171
Income before income taxes
14,447
13,072
14,420
18,463
22,249
Income tax expense
3,940
3,838
4,254
5,135
6,454
Net income
$
10,507
$
9,234
$
10,166
$
13,328
$
15,795
PER COMMON SHARE DATA
(unaudited)
Basic earnings per share
$
0.17
$
0.15
$
0.17
$
0.22
$
0.26
Diluted earnings per share
$
0.17
$
0.15
$
0.17
$
0.22
$
0.26
Weighted average shares outstanding - basic
61,295,877
61,279,914
61,186,623
61,118,485
61,093,289
Weighted average shares outstanding - diluted
61,546,157
61,438,088
61,470,552
61,412,816
61,436,240
Common shares outstanding at period-end
61,297,344
61,292,094
61,253,625
61,146,835
61,099,155
Dividend per share
$
0.13
$
0.13
$
0.13
$
0.13
$
0.13
Book value per share
$
11.18
$
11.08
$
11.04
$
11.00
$
10.83
Tangible book value per share(1)
$
8.33
$
8.22
$
8.17
$
8.12
$
7.94
KEY FINANCIAL RATIOS
(unaudited)
Annualized return on average equity
6.14
%
5.50
%
6.08
%
7.96
%
9.54
%
Annualized return on average tangible common equity(1)
8.27
%
7.43
%
8.24
%
10.84
%
13.06
%
Annualized return on average assets
0.78
%
0.71
%
0.79
%
1.00
%
1.16
%
Annualized return on average tangible assets(1)
0.81
%
0.74
%
0.82
%
1.04
%
1.20
%
Net interest margin (FTE)(1)
3.17
%
3.26
%
3.34
%
3.41
%
3.57
%
Efficiency ratio(1)
65.37
%
67.55
%
65.34
%
57.62
%
52.89
%
AVERAGE BALANCES
(in $000’s, unaudited)
Average assets
$
5,352,067
$
5,213,171
$
5,178,636
$
5,264,905
$
5,399,930
Average tangible assets(1)
$
5,177,114
$
5,037,673
$
5,002,597
$
5,088,264
$
5,222,692
Average earning assets
$
5,011,865
$
4,872,449
$
4,842,279
$
4,923,582
$
5,051,710
Average loans held-for-sale
$
1,493
$
1,503
$
2,749
$
1,612
$
2,765
Average total loans
$
3,359,647
$
3,328,358
$
3,297,240
$
3,280,817
$
3,254,715
Average deposits
$
4,525,946
$
4,394,545
$
4,360,150
$
4,454,750
$
4,573,621
Average demand deposits - noninterest-bearing
$
1,172,304
$
1,127,145
$
1,177,078
$
1,243,222
$
1,302,606
Average interest-bearing deposits
$
3,353,642
$
3,267,400
$
3,183,072
$
3,211,528
$
3,271,015
Average interest-bearing liabilities
$
3,393,264
$
3,306,972
$
3,222,603
$
3,251,034
$
3,310,485
Average equity
$
680,404
$
675,108
$
672,292
$
664,638
$
656,973
Average tangible common equity(1)
$
505,451
$
499,610
$
496,253
$
487,997
$
479,735
(1)
This is a non-GAAP financial measure.
End of Period:
Percent Change From:
CONSOLIDATED BALANCE SHEETS
September 30,
June 30,
September 30,
June 30,
September 30,
(in $000’s, unaudited)
2024
2024
2023
2024
2023
ASSETS
Cash and due from banks
$
49,722
$
37,497
$
40,076
33
%
24
%
Other investments and interest-bearing deposits in other financial institutions
906,588
610,763
605,476
48
%
50
%
Securities available-for-sale, at fair value
237,612
273,043
457,194
(13
)
%
(48
)
%
Securities held-to-maturity, at amortized cost
604,193
621,178
664,681
(3
)
%
(9
)
%
Loans held-for-sale - SBA, including deferred costs
1,649
1,899
841
(13
)
%
96
%
Loans:
Commercial
481,266
477,929
430,664
1
%
12
%
Real estate:
CRE - owner occupied
602,062
594,504
589,751
1
%
2
%
CRE - non-owner occupied
1,310,578
1,283,323
1,208,324
2
%
8
%
Land and construction
125,761
125,374
158,138
0
%
(20
)
%
Home equity
124,090
126,562
124,477
(2
)
%
0
%
Multifamily
273,103
268,968
253,129
2
%
8
%
Residential mortgages
479,524
484,809
503,006
(1
)
%
(5
)
%
Consumer and other
14,179
18,758
18,526
(24
)
%
(23
)
%
Loans
3,410,563
3,380,227
3,286,015
1
%
4
%
Deferred loan fees, net
(327
)
(434
)
(554
)
(25
)
%
(41
)
%
Total loans, net of deferred costs and fees
3,410,236
3,379,793
3,285,461
1
%
4
%
Allowance for credit losses on loans
(47,819
)
(47,954
)
(47,702
)
0
%
0
%
Loans, net
3,362,417
3,331,839
3,237,759
1
%
4
%
Company-owned life insurance
80,682
80,153
79,607
1
%
1
%
Premises and equipment, net
10,398
10,310
9,707
1
%
7
%
Goodwill
167,631
167,631
167,631
0
%
0
%
Other intangible assets
6,966
7,521
9,229
(7
)
%
(25
)
%
Accrued interest receivable and other assets
123,738
121,190
131,106
2
%
(6
)
%
Total assets
$
5,551,596
$
5,263,024
$
5,403,307
5
%
3
%
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand, noninterest-bearing
$
1,272,139
$
1,187,320
$
1,243,501
7
%
2
%
Demand, interest-bearing
913,910
928,246
1,004,185
(2
)
%
(9
)
%
Savings and money market
1,309,676
1,126,520
1,110,640
16
%
18
%
Time deposits - under $250
39,060
39,046
43,906
0
%
(11
)
%
Time deposits - $250 and over
196,945
203,886
252,001
(3
)
%
(22
)
%
ICS/CDARS - interest-bearing demand, money market and time deposits
997,803
959,592
921,224
4
%
8
%
Total deposits
4,729,533
4,444,610
4,575,457
6
%
3
%
Subordinated debt, net of issuance costs
39,615
39,577
39,463
0
%
0
%
Accrued interest payable and other liabilities
97,096
99,638
126,457
(3
)
%
(23
)
%
Total liabilities
4,866,244
4,583,825
4,741,377
6
%
3
%
Shareholders’ Equity:
Common stock
509,134
508,343
505,692
0
%
1
%
Retained earnings
185,110
182,571
173,707
1
%
7
%
Accumulated other comprehensive loss
(8,892
)
(11,715
)
(17,469
)
(24
)
%
(49
)
%
Total shareholders' equity
685,352
679,199
661,930
1
%
4
%
Total liabilities and shareholders’ equity
$
5,551,596
$
5,263,024
$
5,403,307
5
%
3
%
End of Period:
CONSOLIDATED BALANCE SHEETS
September 30,
June 30,
March 31,
December 31,
September 30,
(in $000’s, unaudited)
2024
2024
2024
2023
2023
ASSETS
Cash and due from banks
$
49,722
$
37,497
$
32,543
$
41,592
$
40,076
Other investments and interest-bearing deposits in other financial institutions
906,588
610,763
508,816
366,537
605,476
Securities available-for-sale, at fair value
237,612
273,043
404,474
442,636
457,194
Securities held-to-maturity, at amortized cost
604,193
621,178
636,249
650,565
664,681
Loans held-for-sale - SBA, including deferred costs
1,649
1,899
1,946
2,205
841
Loans:
Commercial
481,266
477,929
452,231
463,778
430,664
Real estate:
CRE - owner occupied
602,062
594,504
585,031
583,253
589,751
CRE - non-owner occupied
1,310,578
1,283,323
1,271,184
1,256,590
1,208,324
Land and construction
125,761
125,374
129,712
140,513
158,138
Home equity
124,090
126,562
122,794
119,125
124,477
Multifamily
273,103
268,968
269,263
269,734
253,129
Residential mortgages
479,524
484,809
490,035
496,961
503,006
Consumer and other
14,179
18,758
16,439
20,919
18,526
Loans
3,410,563
3,380,227
3,336,689
3,350,873
3,286,015
Deferred loan fees, net
(327
)
(434
)
(587
)
(495
)
(554
)
Total loans, net of deferred fees
3,410,236
3,379,793
3,336,102
3,350,378
3,285,461
Allowance for credit losses on loans
(47,819
)
(47,954
)
(47,888
)
(47,958
)
(47,702
)
Loans, net
3,362,417
3,331,839
3,288,214
3,302,420
3,237,759
Company-owned life insurance
80,682
80,153
80,007
79,489
79,607
Premises and equipment, net
10,398
10,310
9,986
9,857
9,707
Goodwill
167,631
167,631
167,631
167,631
167,631
Other intangible assets
6,966
7,521
8,074
8,627
9,229
Accrued interest receivable and other assets
123,738
121,190
118,134
122,536
131,106
Total assets
$
5,551,596
$
5,263,024
$
5,256,074
$
5,194,095
$
5,403,307
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand, noninterest-bearing
$
1,272,139
$
1,187,320
$
1,242,059
$
1,292,486
$
1,243,501
Demand, interest-bearing
913,910
928,246
925,100
914,066
1,004,185
Savings and money market
1,309,676
1,126,520
1,124,900
1,087,518
1,110,640
Time deposits - under $250
39,060
39,046
38,105
38,055
43,906
Time deposits - $250 and over
196,945
203,886
200,739
192,228
252,001
ICS/CDARS - interest-bearing demand, money market and time deposits
997,803
959,592
913,757
854,105
921,224
Total deposits
4,729,533
4,444,610
4,444,660
4,378,458
4,575,457
Other short-term borrowings
—
—
—
—
—
Subordinated debt, net of issuance costs
39,615
39,577
39,539
39,502
39,463
Accrued interest payable and other liabilities
97,096
99,638
95,579
103,234
126,457
Total liabilities
4,866,244
4,583,825
4,579,778
4,521,194
4,741,377
Shareholders’ Equity:
Common stock
509,134
508,343
507,578
506,539
505,692
Retained earnings
185,110
182,571
181,306
179,092
173,707
Accumulated other comprehensive loss
(8,892
)
(11,715
)
(12,588
)
(12,730
)
(17,469
)
Total shareholders' equity
685,352
679,199
676,296
672,901
661,930
Total liabilities and shareholders’ equity
$
5,551,596
$
5,263,024
$
5,256,074
$
5,194,095
$
5,403,307
At or For the Quarter Ended:
Percent Change From:
CREDIT QUALITY DATA
September 30,
June 30,
September 30,
June 30,
September 30,
(in $000’s, unaudited)
2024
2024
2023
2024
2023
Nonaccrual loans - held-for-investment
$
6,698
$
5,782
$
3,518
16
%
90
%
Loans over 90 days past due and still accruing
460
248
1,966
85
%
(77
)
%
Total nonperforming loans
7,158
6,030
5,484
19
%
31
%
Foreclosed assets
—
—
—
N/A
N/A
Total nonperforming assets
$
7,158
$
6,030
$
5,484
19
%
31
%
Net charge-offs (recoveries) during the quarter
$
288
$
405
$
269
(29
)
%
7
%
Provision for credit losses on loans during the quarter
$
153
$
471
$
168
(68
)
%
(9
)
%
Allowance for credit losses on loans
$
47,819
$
47,954
$
47,702
0
%
0
%
Classified assets
$
32,609
$
33,605
$
31,062
(3
)
%
5
%
Allowance for credit losses on loans to total loans
1.40
%
1.42
%
1.45
%
(1
)
%
(3
)
%
Allowance for credit losses on loans to total nonperforming loans
668.05
%
795.26
%
869.84
%
(16
)
%
(23
)
%
Nonperforming assets to total assets
0.13
%
0.11
%
0.10
%
18
%
30
%
Nonperforming loans to total loans
0.21
%
0.18
%
0.17
%
17
%
24
%
Classified assets to Heritage Commerce Corp
Tier 1 capital plus allowance for credit losses on loans
6
%
6
%
6
%
0
%
0
%
Classified assets to Heritage Bank of Commerce
Tier 1 capital plus allowance for credit losses on loans
6
%
6
%
5
%
0
%
20
%
OTHER PERIOD-END STATISTICS
(in $000’s, unaudited)
Heritage Commerce Corp:
Tangible common equity (1)
$
510,755
$
504,047
$
485,070
1
%
5
%
Shareholders’ equity / total assets
12.35
%
12.91
%
12.25
%
(4
)
%
1
%
Tangible common equity / tangible assets (2)
9.50
%
9.91
%
9.28
%
(4
)
%
2
%
Loan to deposit ratio
72.11
%
76.04
%
71.81
%
(5
)
%
0
%
Noninterest-bearing deposits / total deposits
26.90
%
26.71
%
27.18
%
1
%
(1
)
%
Total capital ratio
15.6
%
15.6
%
15.6
%
0
%
0
%
Tier 1 capital ratio
13.4
%
13.4
%
13.4
%
0
%
0
%
Common Equity Tier 1 capital ratio
13.4
%
13.4
%
13.4
%
0
%
0
%
Tier 1 leverage ratio
10.0
%
10.2
%
9.6
%
(2
)
%
4
%
Heritage Bank of Commerce:
Tangible common equity / tangible assets (2)
9.86
%
10.28
%
9.62
%
(4
)
%
2
%
Total capital ratio
15.1
%
15.1
%
15.0
%
0
%
1
%
Tier 1 capital ratio
13.9
%
13.9
%
13.9
%
0
%
0
%
Common Equity Tier 1 capital ratio
13.9
%
13.9
%
13.9
%
0
%
0
%
Tier 1 leverage ratio
10.4
%
10.6
%
10.0
%
(2
)
%
4
%
(1)
This is a non-GAAP financial measure that represents shareholders' equity minus goodwill and other intangible assets.
(2)
This is a non-GAAP financial measure that represents shareholders' equity minus goodwill and other intangible assets divided by total assets minus goodwill and other intangible assets.
At or For the Quarter Ended:
CREDIT QUALITY DATA
September 30,
June 30,
March 31,
December 31,
September 30,
(in $000’s, unaudited)
2024
2024
2024
2023
2023
Nonaccrual loans - held-for-investment
$
6,698
$
5,782
$
5,920
$
6,818
$
3,518
Loans over 90 days past due and still accruing
460
248
1,951
889
1,966
Total nonperforming loans
7,158
6,030
7,871
7,707
5,484
Foreclosed assets
—
—
—
—
—
Total nonperforming assets
$
7,158
$
6,030
$
7,871
$
7,707
$
5,484
Net charge-offs (recoveries) during the quarter
$
288
$
405
$
254
$
33
$
269
Provision for credit losses on loans during the quarter
$
153
$
471
$
184
$
289
$
168
Allowance for credit losses on loans
$
47,819
$
47,954
$
47,888
$
47,958
$
47,702
Classified assets
$
32,609
$
33,605
$
35,392
$
31,763
$
31,062
Allowance for credit losses on loans to total loans
1.40
%
1.42
%
1.44
%
1.43
%
1.45
%
Allowance for credit losses on loans to total nonperforming loans
668.05
%
795.26
%
608.41
%
622.27
%
869.84
%
Nonperforming assets to total assets
0.13
%
0.11
%
0.15
%
0.15
%
0.10
%
Nonperforming loans to total loans
0.21
%
0.18
%
0.24
%
0.23
%
0.17
%
Classified assets to Heritage Commerce Corp
Tier 1 capital plus allowance for credit losses on loans
6
%
6
%
6
%
6
%
6
%
Classified assets to Heritage Bank of Commerce
Tier 1 capital plus allowance for credit losses on loans