HTBK Heritage Commerce Corporation

SAN JOSE, Calif., April 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 first quarter 2024 net income was $10.2 million, or $0.17 per average diluted common share, compared to $18.9 million, or $0.31 per average diluted common share, for the first quarter of 2023, and $13.3 million, or $0.22 per average diluted common share, for the fourth quarter of 2023. All data are unaudited.

“Our first quarter 2024 earnings were solid, highlighted by total client deposits increasing over $66 million from the prior quarter and the loan portfolio increasing over $74 million, year-over-year,” said Clay Jones, President and Chief Executive Officer.  “First quarter earnings typically reflect increased seasonal expenses such as payroll taxes and other employee benefits, and this first quarter was no exception. While we benefit from higher yields on assets, we continue to see a modest impact on the increase cost of our deposits causing a slight compression in our net interest margin. The Bank’s credit quality remains strong, supported by sound reserves for potential credit losses.” 

“Heritage Bank of Commerce was honored to be recently recognized on Forbes’ List of World’s Best Banks and ranked 25th on S&P Global Market Intelligence's top 50 list of best-performing community banks. These prestigious recognitions underscore our commitment to excellence, sound financial management and our dedication to serving our client community,” added Mr. Jones.

“This year we celebrate the Bank’s 30th anniversary, a milestone that speaks to the dedication of our team members, the trust of our loyal clients, and our unwavering commitment to supporting our communities,” said Mr. Jones. "With this support, we have created a vibrant franchise, and remain optimistic about the future of our Company.”

First Quarter Ended March 31, 2024
Operating Results, Current Liquidity Position, Financial Condition, Credit Quality, and Capital Management

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

Operating Results:

• Diluted earnings per share were $0.17 for the first quarter of 2024, compared to $0.31 for the first quarter of 2023, and $0.22 for the fourth quarter of 2023.
• The following table indicates the ratios for the return on average tangible assets and the return on average tangible common equity for the periods indicated:

Net Interest Income:

• Net interest income decreased (19%) to $40.1 million for the first quarter of 2024, compared to $49.3 million for the first quarter of 2023. The fully tax equivalent (“FTE”) net interest margin contracted (75 basis points) to 3.34% for the first quarter of 2024, from 4.09% for the first quarter of 2023, primarily due to higher rates paid on customer deposits, a decrease in the average balances of noninterest-bearing demand deposits, a decrease in average interest earning assets, and decreases in average balances of higher yielding asset-based loans and Bay View Funding factored receivables, partially offset by an increase in the rate on overnight funds. 
• Net interest income decreased (5%) to $40.1 million for the first quarter of 2024, compared to $42.3 million for the fourth quarter of 2023.  The FTE net interest margin contracted (7 basis points) to 3.34% for the first quarter of 2024 from 3.41% for the fourth quarter of 2023, primarily due to higher rates paid on customer deposits, and a decrease in the average balances of noninterest-bearing demand deposits resulting in a lower average balance of overnight funds, partially offset by higher average yields on loans and overnight funds, and an increase in the 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 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 March 31, 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 first quarter of 2024, we recorded a provision for credit losses on loans of $184,000, compared to a $32,000 provision for credit losses on loans for the first quarter of 2023, and a provision for credit losses on loans of $289,000 for the fourth quarter of 2023.
  

Noninterest Income:

• Total noninterest income decreased (26%) to $2.0 million for the first quarter of 2024, compared to $2.8 million for the first quarter of 2023, primarily due to lower service charges and fees on deposit accounts during the first quarter of 2024. Total noninterest income remained relatively flat for the first quarter of 2024, compared to the fourth quarter of 2023.
  

Noninterest Expense:

• Total noninterest expense for the first quarter of 2024 increased to $27.5 million, compared to $25.4 million for the first quarter of 2023,  primarily due to higher salaries and employee benefits which are seasonal in nature, and higher marketing related expenses, insurance costs, regulatory assessments, information technology related expenses, and ICS/CDARS fee expense included in other noninterest expense. Total noninterest expense for the first quarter of 2024 increased to $27.5 million, compared to $25.5 million for the fourth quarter of 2023, primarily due to higher employee benefits.   
• Full time equivalent employees were 351 at March 31, 2024, and 339 at March 31, 2023, and 349 at December 31, 2023.  
• The efficiency ratio increased to 65.34% for the first quarter of 2024, compared to 48.83% for the first quarter of 2023, and 57.62% for the fourth quarter of 2023, primarily due to lower total revenue and higher noninterest expense during the first quarter of 2024.
  

Income Tax Expense:

• Income tax expense was $4.3 million for the first quarter of 2024, compared to $7.7 million for the first quarter of 2023, and $5.1 million for the fourth quarter of 2023. The effective tax rate for the first quarter of 2024 was 29.5%, compared to 28.9% for the first quarter of 2023, and 27.8% for the fourth quarter of 2023.
  

Current 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 March 31, 2024:
  

• Total assets declined (5%) to $5.26 billion at March 31, 2024, compared to $5.54 billion at March 31, 2023, and increased 1% from $5.19 billion at December 31, 2023.
  

Investment Securities:

• Investment securities totaled $1.04 billion at March 31, 2024, of which $404.5 million were in the securities available-for-sale portfolio (at fair value), and $636.2 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 $542.9 million at March 31, 2024.
• The following table shows the balances of securities available-for-sale, at fair value, and the related pre-tax unrealized (loss) for the periods indicated:

• The following table shows the balances of securities held-to-maturity, at amortized cost, and the related pre-tax unrecognized (loss) and allowance for credit losses for the periods indicated:
  

• The unrealized and unrecognized losses in both the available-for-sale and held-to-maturity portfolios were due to higher interest rates at March 31, 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 for the periods indicated:
  

• The following table presents the maturity distribution of the Company’s loans, excluding loans held-for-sale, as of March 31, 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 periods indicated:
  

• Classified assets totaled $35.4 million, or 0.67% of total assets, at March 31, 2024, compared to $26.8 million, or 0.48% of total assets, at March 31, 2023, and $31.8 million, or 0.61% of total assets, at December 31, 2023. The increase in classified assets during the first quarter of 2024 was primarily due to the downgrade of one CRE investor loan, which is well collateralized, fully leased, cash-flowing, and personally guaranteed by the principals.

Deposits:

• The following table summarizes the distribution of deposits and the percentage of distribution in each category for the periods 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 March 31, 2024, as reflected in the following table:
  

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

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

Forward-Looking Statement Disclaimer

Certain matters discussed in this press release constitute forward-looking statements within the meaning of 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 (“SEC”), Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, and the following: (1) factors that affect our liquidity and our ability to meet customer demands for deposit withdrawals, including our cash on hand and the availability of funds from our lines of credit; (2) 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 customers; (8) 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 customers, and which may increase the volatility of financial markets; (9) current and future economic and market conditions in the United States generally or in the communities we serve, including the effects of declines in property values and overall slowdowns in economic growth should these events occur; (10) inflationary pressures and changes in the interest rate environment that reduce our margins and yields, the fair value of financial instruments or our level of loan originations, or increase the level of defaults, losses and prepayments on loans to customers, whether held in the portfolio or in the secondary market; (11) 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; (12) volatility in credit and equity markets and its effect on the global economy; (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 customers, employees, businesses, liquidity, financial results and overall condition including severity and duration of the associated uncertainties in U.S. and global markets; (14) 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; (15) our ability to achieve loan growth and attract deposits in our market area; (16) risks associated with concentrations in real estate related loans; (17) 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; (18) 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; (19) regulatory limits and practical factors that affect Heritage Bank of Commerce’s ability to pay dividends to the Company; (20) operational issues stemming from, and/or capital spending necessitated by, the potential need to adapt to industry changes in information technology systems, on which we are highly dependent; (21) our inability to attract, recruit, and retain qualified officers and other personnel could harm our ability to implement our strategic plan, impair our relationships with customers and adversely affect our business, results of operations and growth prospects; (22) possible adjustment of the valuation of our deferred tax assets or of the goodwill associated with previous acquisitions; (23) our ability to keep pace with technological changes, including our ability to identify and address cyber-security risks, 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; (24) inability of our framework to manage risks associated with our business, including operational risk and credit risk; (25) risks of loss of funding of the Small Business Administration (“SBA”) or SBA loan programs, or changes in those programs; (26) compliance with applicable laws and governmental and regulatory requirements, including the Dodd-Frank Act and others relating to banking, consumer protection, securities, accounting and tax matters; (27) effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; (28) the expense and uncertain resolution of litigation matters whether occurring in the ordinary course of business or otherwise; (29) availability of and competition for acquisition opportunities; (30) geographic and sociopolitical factors that arise by virtue of the fact that substantially all of our operations are located in the San Francisco Bay Area of Northern California; (31) risks of natural disasters (including earthquakes, fires, and flooding) and other events beyond our control; (32) 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 (33) 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