Heritage Commerce : Q3 2024 Earnings Release

HTBK

Heritage Commerce Corp Reports Client Deposit Growth of 6% in the Third Quarter of 2024

San Jose, CA - October 24, 2024 - 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:

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-GAAPFinancial Measures" below.

1

Net Interest Income:

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)%

2

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).

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).

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).

3

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 %

Provision for Credit Losses on Loans:

Noninterest Income:

Noninterest Expense:

4

expenses, marketing related expenses, homeowner association vendor payments, regulatory assessments, and ICS/CDARS fee expense.

Income Tax Expense:

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

Liquidity and Available Lines of Credit:

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

Investment Securities:

SECURITIES AVAILABLE-FOR-SALE

September 30, June 30, September 30,

5

(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

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

Agency

Mortgage-

PROJECTED INVESTMENT SECURITIES

backed and

PAYDOWNS & MATURITIES

U.S.

Municipal

6

(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

Loans:

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

7

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 %

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 %

8

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

Credit Quality:

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 %

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

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

9

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.

Deposits:

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 %

Capital Management:

10

Disclaimer

Heritage Commerce Corporation published this content on October 26, 2024, and is solely responsible for the information contained herein. Distributed by Public, unedited and unaltered, on October 26, 2024 at 08:47:03.008.