Heritage Commerce Corp Earns $16.4 Million for the Second Quarter of 2023, and $35.3 Million for the First Six Months of 2023; Continued Deposit Growth

SAN JOSE, Calif., July 27, 2023 (GLOBE NEWSWIRE) -- Heritage Commerce Corp (Nasdaq: HTBK), the holding company (the “Company”) for Heritage Bank of Commerce (the “Bank”), today announced second quarter 2023 net income increased 11% to $16.4 million, or $0.27 per average diluted common share, compared to $14.8 million, or $0.24 per average diluted common share, for the second quarter of 2022, and decreased (13%) from $18.9 million, or $0.31 per average diluted common share, for the first quarter of 2023. For the six months ended June 30, 2023, net income increased 28% to $35.3 million, or $0.58 per average diluted common share, compared to $27.7 million, or $0.45 per average diluted common share, for the six months ended June 30, 2022. All results are unaudited.

"We are pleased to report excellent operating results for the second quarter of 2023, achieving record earnings not only for this quarter but also for the first six months of the year,” said Clay Jones, President and Chief Executive Officer. “Our profits have shown a notable 28% increase compared to the first six months of 2022. This growth is attributed to the expansion of our loan portfolio, increased deposits, higher net interest income, and improved efficiency."

Mr. Jones further acknowledged that as clients sought higher yields on their deposits, there was an anticipated shift towards interest-bearing deposits. While this shift affected margins during the period, it reflects the Bank's responsiveness to client preferences and demonstrates the commitment to meeting their financial needs.

“Our credit quality remains strong, with only a minor increase to nonperforming and classified assets.” said Mr. Jones. “We remain confident in our allowance for credit losses with respect to our loan portfolio, as our reserves represent 863% of nonperforming loans and 1.45% of total loans.”

"Looking ahead to the second half of the year, we remain confident in the Bank's well-positioned balance sheet, with an emphasis on strength, stability, and liquidity. With a well-diversified and stable deposit base, along with abundant alternative funding sources, we are successfully navigating the current challenges within the banking industry," stated Mr. Jones.

Mr. Jones conveyed his gratitude to the loyal clients, dedicated team members, community nonprofits, and the Company’s shareholders, recognizing their continuing support. Their trust and collaboration play a crucial role in the Company’s ongoing success and ability to provide exceptional financial services to our clients.

Current Financial Condition and Liquidity Position

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

Liquidity and Available Lines of Credit:

• The following table shows our liquidity and available lines of credit at June 30, 2023:
  

• The Company’s total liquidity and borrowing capacity was $3.113 billion, all of which remained available at June 30, 2023.
• The available liquidity and borrowing capacity was 69% of total deposits and approximately 145% of estimated uninsured deposits at June 30, 2023.
• The Bank increased its credit line availability from the FRB and the FHLB by $332.3 million to $2.354 billion at June 30, 2023, from $2.022 billion at March 31, 2023, and increased by $1.515 billion from $839.5 million at December 31, 2022.
• The Company borrowed $150.0 million on its line of credit with the FRB, and another $150.0 million on its line of credit with the FHLB during the first quarter of 2023, and both lines of credit were repaid in full on April 20, 2023. These short-term borrowings provided rapid, flexible liquidity during an uncertain time.
• The loan to deposit ratio was 73.07% at June 30, 2023, compared to 75.14% at December 31, 2022, and 73.39% at March 31, 2023.
  

Deposits:

• Total deposits increased $111.2 million, or 3%, to $4.501 billion at June 30, 2023 from $4.390 billion at December 31, 2022, and increased $56.2 million, or 1% from March 31, 2023.
• Migration of customer deposits resulted in an increase in Insured Cash Sweep (“ICS”)/Certificate of Deposit Account Registry Service (“CDARS”) deposits of $793.7 million to $824.1 million at June 30, 2023, compared to $30.4 million at December 31, 2022. ICS/CDARS deposits increased $520.0 million to $824.1 million at June 30, 2023 from $304.1 million at March 31, 2023.
• Noninterest-bearing demand deposits decreased ($416.9) million, or (24%), to $1.320 billion at June 30, 2023 from December 31, 2022, and decreased ($149.2) million, or (10%) from March 31, 2023, primarily due to clients seeking higher yields and moving noninterest-bearing deposits to the Bank’s interest-bearing and ICS deposits.
• The Company had 24,404 deposits accounts at June 30, 2023, with an average balance of $187,000, compared to 24,103 deposit accounts at March 31, 2023, with an average balance of $184,000. At December 31, 2023, the Company had 23,833 deposit accounts, with an average balance of $184,000.
• Deposits from the top 100 client relationships totaled $2.108 billion, representing 47% of total deposits, with an average account size of $401,000, representing 22% of the total number of accounts at June 30, 2023.
  

Investment Securities:

• Investment securities totaled $1.168 billion at June 30, 2023, of which $486.1 million were in the securities available-for-sale portfolio (at fair value), and $682.1 million were in the securities held-to-maturity portfolio (at amortized cost, net of allowance for credit losses of $13,000).
• The weighted average life of the total investment securities portfolio was 4.79 years at June 30, 2023.
• The following are the projected cash flows from paydowns and maturities in the investment securities portfolio for the periods indicated based on the current interest rate environment:
  

Loans:

• Loans, excluding loans held-for-sale, decreased ($9.8) million to $3.289 billion at June 30, 2023 from December 31, 2022, and increased $26.9 million, or 1%, from March 31, 2023.
• Commercial real estate (“CRE”) loans totaled $1.755 billion at June 30, 2023, of which 35% were owner occupied and 65% were investor CRE loans.
• During the second quarter of 2023, 41 new CRE loans were originated totaling $92 million with a weighted average loan-to-value and debt-service coverage for the non-owner occupied portfolio of 40% and 1.77 times, respectively
• The average loan size for all CRE loans was $1.6 million, and the average loan size for office CRE loans was $1.7 million.
• The Company has personal guarantees on 90% of its CRE portfolio. A substantial portion of the unguaranteed CRE loans were made to credit-worthy non-profit organizations.
• Total office exposure in the CRE portfolio was $397 million, including 30 loans totaling approximately $76 million, in San Jose, 17 loans totaling approximately $29 million in San Francisco, and 6 loans totaling approximately $11 million, in Oakland, at June 30, 2023. Non-owner occupied CRE with office exposure totaled $307 million at June 30, 2023.
• Of the $397 million of CRE loans with office exposure, approximately $35 million, or 9%, are situated in the Bay Area downtown business districts of San Jose and San Francisco, with an average balance of $2.3 million.
• At June 30, 2023, the weighted average loan-to-value and debt-service coverage for the entire non-owner occupied office portfolio were 43.6% and 1.87 times, respectively. For the 8 non-owner occupied office loans in San Francisco at June 30, 2023, the weighted average loan-to-value and debt-service coverage were 34% and 1.55 times, respectively.

Second Quarter Ended June 30, 2023
Operating Results, Balance Sheet Review, Capital Management, and Credit Quality

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

Operating Results:

• Diluted earnings per share were $0.27 for the second quarter of 2023, compared to $0.24 for the second quarter of 2022, and $0.31 for the first quarter of 2023. Diluted earnings per share were $0.58 for the first six months of 2023, compared to $0.45 for the first six months of 2022.
  
• The following table indicates the ratios for the return on average tangible assets and the return on average tangible common equity for the periods indicated:
  

• Net interest income increased 11% to $46.3 million for the second quarter of 2023, compared to $41.9 million for the second quarter of 2022. The fully tax equivalent (“FTE”) net interest margin increased 38 basis points to 3.76% for the second quarter of 2023, from 3.38% for the second quarter of 2022, primarily due to increases in the prime rate and the rate on overnight funds, partially offset by a higher cost of funds, a decrease in the average balances of noninterest bearing demand deposits and an increase in the average balances of short-term borrowings.
  
  • Net interest income decreased (6%) to $46.3 million for the second quarter of 2023, compared to $49.3 million for the first quarter of 2023. The FTE net interest margin decreased (33) basis points to 3.76% for the second quarter of 2023 from 4.09% for the first quarter of 2023, primarily due to a higher cost of funds, a decrease in the average balances of noninterest bearing demand deposits, and a decrease in the accretion of the loan purchase discount into interest income from acquired loans partially offset by increases in the prime rate and higher average yields on overnight funds.
    
  • For the first six months of 2023, the net interest income increased 19% to $95.6 million, compared to $80.1 million for the first six months of 2022. The FTE net interest margin increased 71 basis points to 3.92% for the first six months of 2023, from 3.21% for the first six months of 2022, primarily due to increases in the prime rate and the rate on overnight funds, partially offset by a higher cost of funds, a decrease in the average balances of noninterest bearing demand deposits, and an increase in the average balances of short-term borrowings.
    
• The following table, as of June 30, 2023, sets forth the estimated changes in the Company’s annual net interest income that would result from an instantaneous shift in interest rates from the base rate:

• The following tables present the average balance of loans outstanding, interest income, and the average yield for the periods indicated:
  
  
  • The average yield on the total loan portfolio increased to 5.47% for the second quarter of 2023, compared to 5.46% for the first quarter of 2023, primarily due to increases in the prime rate.

• The average yield on the total loan portfolio increased to 5.47% for the second quarter of 2023, compared to 4.80% for the second quarter of 2022, primarily due to increases in the prime rate, partially offset by a decrease in the accretion of the loan purchase discount into interest income from acquired loans, lower prepayment fees, and higher average balances of lower yielding purchased residential mortgages.

• The average yield on the total loan portfolio increased to 5.46% for the first six months of 2023, compared to 4.75% for the first six months of 2022, primarily due to increases in the prime rate, partially offset by a decrease in the accretion of the loan purchase discount into interest income from acquired loans, lower prepayment fees, and higher average balances of lower yielding purchased residential mortgages.