KBRA Affirms Ratings for Heritage Commerce Corp Following Merger Announcement; Revises Outlook to Positive

KBRA affirms the senior unsecured debt rating of BBB+, the subordinated debt rating of BBB, and the short-term debt rating of K2 for San Jose, California-based Heritage Commerce Corp (NASDAQ: HTBK) (“Heritage” or “the company”) following the recently announced proposed merger agreement with CVB Financial Corp. (NASDAQ: CVBF; not currently rated by KBRA). In addition, KBRA affirms the deposit and senior unsecured debt ratings of A-, the subordinated debt rating of BBB+, and the short-term deposit and debt ratings of K2 for its main subsidiary, Heritage Bank of Commerce. The Outlook for all long-term ratings is revised to Positive from Stable.

On December 17, 2025, CVBF announced a proposed merger agreement with Heritage, in which Heritage Bank of Commerce will merge with and into CVBF’s bank subsidiary, Citizens Business Bank. The transaction, valued at approximately $811 million or 1.5x HTBK’s tangible book value at announcement, is expected to close in the second quarter of 2026, subject to customary regulatory approvals. The transaction is projected to create a $22 billion-asset institution with more than 80 locations across California. Leadership of the combined entity will be primarily drawn from CVBF’s executive team, though Clay Jones, Heritage’s current CEO, will join as President and two Heritage directors will join the CVBF Board. Heritage shareholders are expected to own approximately 23% of the pro forma company.

Key Credit Considerations

The Outlook revision to Positive reflects KBRA’s view that the proposed merger pairs two conservative, well-managed California business banks, and that the combined institution is expected to benefit from enhanced scale, and geographic diversification as it will create the fifth-largest deposit market share among locally headquartered banks in California. Further, we expect the merger to result in improved earnings power relative to Heritage's existing rating group, and very strong liquidity and capital positions. CVBF has a long history of top-tier profitability, disciplined expense control, and minimal credit losses, while Heritage brings a stable Bay Area franchise with a solid core deposit base. In KBRA’s view, the transaction also represents a logical strategic extension of CVBF’s commercially focused banking model. If integration proceeds effectively, which is key given the size of the transaction, and projected cost savings are realized, the pro forma institution would be positioned for positive rating momentum over time.

Both institutions maintain strong funding profiles, including high levels of noninterest-bearing deposits (~50% pro forma resulting in an average cost of deposits just above 1.0%) and minimal reliance on wholesale funding. CVBF has historically reflected a peer leading cost of deposits (86 bps as of 3Q25), driven by its focus on relationship-based business banking. Additionally, we note that the company demonstrated its funding strength during the regional banking crisis where deposit outflows were relatively benign with the company's loan-to-core deposits ratio topping out under 80% at 4Q23 and trending down from that point. We expect the combined entity to remain heavily core deposit funded which should support core earnings generation above Heritage's current levels.

On the lending side, CRE is expected to comprise approximately 76% of total loans – a slightly elevated concentration that warrants attention but is supported by both banks’ demonstrated credit discipline and low loss rates relative to geographic peers. Moreover, we note that this includes owner-occupied and multifamily properties in addition to investor CRE. With regard to collateral types, at both banks office and industrial properties together accounted for over half of total CRE as of 3Q25. We remain mindful around the office exposure, which will be above average compared to most rated banks, though take comfort in the fact that Heritage’s office book is largely composed of smaller suburban properties that have performed comparatively well post-pandemic. Moreover, CVBF’s portfolio is constructed in a similar fashion to Heritage's based on an average loan size of below $2.0 million. Based on management’s forecasts, the CRE concentration is expected to represent roughly 270% of total risk-based capital at closing, within a level KBRA considers manageable given strong historical performance. These risks are mitigated by both banks’ conservative underwriting cultures, reflected in average net charge-off ratios near zero over the past five years. CVBF also conducted extensive loan-level due diligence, reviewing approximately 70% of Heritage’s portfolio – including most of the CRE book – which further supports confidence around asset quality and integration planning.

Some balance-sheet repositioning is expected following the merger, including the sale of Heritage’s approximately $400 million purchased residential mortgage portfolio, reinforcing the combined entity’s commercial-banking focus. Following the sale – likely reinvested into securities – and continued disciplined balance-sheet management, the pro forma loan-to-deposit ratio is projected to remain well below peers at <70%.

From a pro forma financial standpoint, management projects an ROA of ~1.5% in 2027, following integration and realization of planned cost savings (estimated at 35% of Heritage’s expense base). The NIM should also benefit from meaningful purchase accounting accretion, including a 4.0% interest-rate mark applied to Heritage’s loans and securities and a 1.1% gross credit mark. That said, there is projected to be less revenue diversification, with the pro forma company remaining primarily spread-dependent – both banks historically generated less than 15% of total revenues from noninterest income. KBRA views the targeted cost savings as credible given both banks’ disciplined expense management and CVBF’s proven track record as a successful acquirer.

Importantly, capital levels are expected to remain strong despite the aforementioned marks, with a projected CET1 ratio of 14.6% at closing. Management anticipates maintaining a conservative balance-sheet posture while generating ample organic capital through retained earnings, providing meaningful capacity for continued shareholder returns through dividends and buybacks. Notably, KBRA expects capital to remain above average for similarly rated peers, even with accommodative capital return, consistent with both institutions’ long-standing practice of operating with higher capital buffers throughout recent operating history.

Rating Sensitivities

Given the Positive Outlook, there is potential for an upgrade of the ratings over the medium term. An upgrade could occur if the combined institution receives all required approvals for the anticipated merger, is effectively integrated, and achieves its pro forma earnings and capital expectations, while continuing to demonstrate a top-tier funding and liquidity profile and resilient credit performance — particularly within the CRE portfolio.

Conversely, the ratings Outlook could revert to Stable if financial projections are not met, if integration or operational execution challenges emerge, or if the combined management team adopts a meaningfully more aggressive posture toward capital or liquidity management. Additionally, if the merger were not to receive regulatory approval — an outcome KBRA views as unlikely given recent trends toward shorter approval timelines — the ratings would be revisited.

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