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Heritage Commerce Corp Earns Record $20.8 Million for the Fourth Quarter of 2022, and Record $66.6 Million for Full Year 2022
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Heritage Commerce Corp Earns Record $20.8 Million for the Fourth Quarter of 2022, and Record $66.6 Million for Full Year 2022

SAN JOSE, Calif., Jan. 26, 2023 (GLOBE NEWSWIRE) — Heritage Commerce Corp (Nasdaq: HTBK), the holding company (the “Company”) for Heritage Bank of Commerce (the “Bank”), today announced fourth quarter 2022 net income increased 49% to $20.8 million, or $0.34 per average diluted common share, compared to $14.0 million, or $0.23 per average diluted common share, for the fourth quarter of 2021, and increased 15% from $18.1 million, or $0.30 per average diluted common share, for the third quarter of 2022. For the year ended December 31, 2022, net income increased 40% to $66.6 million, or $1.09 per average diluted common share, compared to $47.7 million, or $0.79 per average diluted common share, for the year ended December 31, 2021. All results are unaudited.

“Our quarterly results were a strong end to what was a record year on several measures,” said Clay Jones, President and Chief Executive Officer. “We achieved record net income for the fourth quarter and the year ended December 31, 2022 with a 23% increase in net interest income year-over-year, supported by solid loan growth both year-over-year and from the linked quarter. Performance metrics for the fourth quarter of 2022 were highlighted by a return on average tangible common equity of 18.89%, a return on average tangible assets of 1.59%, and net interest margin of 4.10%. Our efficiency ratio also improved to 44.98% for the fourth quarter and 49.93% for the year ended December 31, 2022.”

“Total deposits declined (6%) from the linked quarter and (8%) from 2021,” Mr. Jones stated. “The year-over-year decline was primarily related to the decrease in balances (of approximately $170 million) from two large depositors who had temporary high balances at December 31, 2021. Additional declines in deposits were related to the decrease in balances from the distribution of proceeds from the sale of client businesses and real estate, and to a lesser extent, clients moving funds to seek higher rates. We continue to foster our loyal client relationships as we focus on growing our Company in the Greater San Francisco Bay Area.”  

“Our credit metrics remained strong in the fourth quarter of 2022. Nonperforming assets declined ($1.3) million from the fourth quarter a year ago, and classified assets decreased (57%) year-over-year and declined (49%) over the preceding quarter,” said Mr. Jones. “We recorded a $508,000 provision for credit losses on loans during the current quarter to support our growing loan portfolio, which resulted in an allowance for credit losses on loans to total loans of 1.44% at December 31, 2022. We continue to focus on maintaining a healthy balance sheet with strong capital. I want to thank our employees for their efforts this and every year, and for their unwavering commitment to our clients, communities and shareholders.”

Fourth Quarter Ended December 31, 2022
Operating Results, Balance Sheet Review, Capital Management, and Credit Quality

(as of, or for the periods ended December 31, 2022, compared to December 31, 2021, and September 30, 2022, except as noted):

Operating Results:

  • Diluted earnings per share were $0.34 for the fourth quarter of 2022, compared to $0.23 for the fourth quarter of 2021, and $0.30 for the third quarter of 2022. Diluted earnings per share were $1.09 for the year ended December 31, 2022, compared to $0.79 for the year ended December 31, 2021.
  • The following table indicates the ratios for the return on average tangible common assets and the return on average tangible common equity for the periods indicated:
    For the Quarter Ended:   For the Year Ended:
    December 31,    September 30,    December 31,    December 31,    December 31, 
(unaudited)   2022   2022   2021   2022   2021
Return on average tangible assets   1.59 %     1.36 %     1.00 %     1.27 %     0.96 %
Return on average tangible common equity   18.89 %     16.60 %     13.50 %     15.57 %     11.86 %
                                       
  • Net interest income, before provision for credit losses on loans, increased 36% to $51.7 million for the fourth quarter of 2022, compared to $38.1 million for the fourth quarter of 2021. The fully tax equivalent (“FTE”) net interest margin increased 126 basis points to 4.10% for the fourth quarter of 2022, from 2.84% for the fourth quarter of 2021, primarily due to increases in the prime rate and the rate on overnight funds, a shift in the mix of earning assets into higher yielding loans and investment securities, and higher average yield on overnight funds, partially offset by lower interest and fees on Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans, a decrease in the accretion of the loan purchase discount into interest income from acquired loans, lower prepayment fees, and a higher cost of funds.
    • Net interest income increased 8% to $51.7 million for the fourth quarter of 2022, compared to $48.0 million for the third quarter of 2022. The FTE net interest margin increased 37 basis points to 4.10% for the fourth quarter of 2022 from 3.73% for the third quarter of 2022, primarily due to a shift in the mix of earning assets as the Company invested its excess liquidity into higher yielding loans and investment securities, and higher average yields on overnight funds, partially offset by a higher cost of funds.
    • Net interest income increased 23% to $179.9 million for the year ended December 31, 2022, compared to $146.1 million for the year ended December 31, 2021. For the year ended December 31, 2022, the FTE net interest margin increased 52 basis points to 3.57%, compared to 3.05% for the year ended December 31, 2021, primarily due to higher average balances of loans and investment securities, higher average yields on investment securities and overnight funds, partially offset by lower interest and fees on PPP loans, a decrease in the accretion of the loan purchase discount into interest income from acquired loans, lower prepayment fees, a lower yield on the Bay View Funding factoring portfolio, and a higher cost of funds.
  • The following table, as of December 31, 2022, sets forth the estimated changes in the Company’s annual net interest income that would result from the designated instantaneous parallel shift in interest rates from the base rate:
    Increase/(Decrease) in  
    Estimated Net  
    Interest Income(1)  
    Amount   Percent  
       
Change in Interest Rates (basis points) (in $000’s, unaudited)            
+400   $ 20,274     9.4   %
+300   $ 15,183     7.1   %
+200   $ 10,119     4.7   %
+100   $ 5,090     2.4   %
0            
−100   $ (10,250 )   (4.8 ) %
−200   $ (24,753 )   (11.5 ) %
−300   $ (39,082 )   (18.2 ) %
−400   $ (52,586 )   (24.5 ) %
                 
  • (1)   Computations of prospective effects of hypothetical interest rate changes 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. Actual rates paid on deposits may differ from the hypothetical interest rates modeled due to competitive or market factors, which could reduce 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 increased to 5.19% for the fourth quarter of 2022, compared to 4.90% for the third quarter of 2022, primarily due to increases in the prime rate, partially offset by lower fees on PPP loans, and higher average balances of lower yielding purchased residential mortgage loans.
    For the Quarter Ended   For the Quarter Ended  
    December 31, 2022   September 30, 2022  
    Average   Interest   Average   Average   Interest   Average  
(in $000’s, unaudited)   Balance   Income   Yield   Balance   Income   Yield  
Loans, core bank   $ 2,654,311     $ 33,594   5.02 % $ 2,573,908     $ 30,490   4.70 %
Prepayment fees           123   0.02 %         96   0.01 %
PPP loans     1,255       3   0.95 %   4,593       11   0.95 %
PPP fees, net           25   7.90 %         190   16.41 %
Asset-based lending     35,519       756   8.44 %   53,514       1,032   7.65 %
Bay View Funding factored receivables     71,789       3,696   20.43 %   62,623       3,201   20.28 %
Purchased residential mortgages     485,149       3,842   3.14 %   446,190       3,414   3.04 %
Purchased commercial real estate ("CRE") loans     7,307       80   4.34 %   8,337       83   3.95 %
Loan fair value mark / accretion     (4,774 )     382   0.06 %   (5,178 )     353   0.05 %
Total loans (includes loans held-for-sale)   $ 3,250,556     $ 42,501   5.19 % $ 3,143,987     $ 38,870   4.90 %
                                       
  • The average yield on the total loan portfolio increased to 5.19% for the fourth quarter of 2022, compared to 4.93% for the fourth quarter of 2021, primarily due to increases in the prime rate, partially offset by lower interest and fees on PPP loans, 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.
    For the Quarter Ended   For the Quarter Ended  
    December 31, 2022   December 31, 2021  
    Average   Interest   Average   Average   Interest   Average  
(in $000’s, unaudited)   Balance   Income   Yield   Balance   Income   Yield  
Loans, core bank   $ 2,654,311     $ 33,594   5.02 % $ 2,432,700     $ 26,484   4.32 %
Prepayment fees           123   0.02 %         397   0.06 %
PPP loans     1,255       3   0.95 %   127,592       318   0.99 %
PPP fees, net           25   7.90 %         2,211   6.87 %
Asset-based lending     35,519       756   8.44 %   52,918       683   5.12 %
Bay View Funding factored receivables     71,789       3,696   20.43 %   62,571       3,248   20.59 %
Purchased residential mortgages     485,149       3,842   3.14 %   199,139       1,437   2.86 %
Purchased CRE loans     7,307       80   4.34 %   8,929       69   3.07 %
Loan fair value mark / accretion     (4,774 )     382   0.06 %   (7,728 )     915   0.15 %
Total loans (includes loans held-for-sale)   $ 3,250,556     $ 42,501   5.19 % $ 2,876,121     $ 35,762   4.93 %
                                   
  • The average yield on the total loan portfolio decreased to 4.91% for the year ended December 31, 2022, compared to 5.03% for the year ended December 31, 2021, primarily due to a decrease in interest and fees on PPP loans, a decrease in the accretion of the loan purchase discount into interest income from acquired loans, lower prepayment fees, and an increase in the average balance of lower yielding purchased residential mortgages.
    For the Year Ended   For the Year Ended  
    December 31, 2022   December 31, 2021  
    Average   Interest   Average   Average   Interest   Average  
(in $000’s, unaudited)   Balance   Income   Yield   Balance   Income   Yield  
Loans, core bank   $ 2,561,195     $ 117,582   4.59 % $ 2,299,367     $ 101,690   4.42 %
Prepayment fees           1,278   0.05 %         2,700   0.12 %
PPP loans     21,689       213   0.98 %   249,253       2,481   1.00 %
PPP fees, net           2,054   9.47 %         9,995   4.01 %
Asset-based lending     51,990       3,613   6.95 %   39,798       2,106   5.29 %
Bay View Funding factored receivables     64,099       12,819   20.00 %   52,618       11,485   21.83 %
Purchased residential mortgages     417,672       12,395   2.97 %   122,566       3,555   2.90 %
Purchased CRE loans     8,143       317   3.89 %   12,436       441   3.55 %
Loan fair value mark / accretion     (5,782 )     2,739   0.11 %   (9,717 )     4,791   0.21 %
Total loans (includes loans held-for-sale)   $ 3,119,006     $ 153,010   4.91 % $ 2,766,321     $ 139,244   5.03 %
                                       
  • In aggregate, the remaining net purchase discount on total loans acquired from Focus Business Bank, Tri-Valley Bank, United American Bank, and Presidio Bank was $4.6 million at December 31, 2022.
  • The average cost of total deposits was 0.25% for the fourth quarter of 2022, compared to 0.10% for the fourth quarter of 2021, and 0.13% for the third quarter of 2022. The average cost of total deposits was 0.15% for the year ended December 31, 2022, compared to 0.11% for the year ended December 31, 2021.  
  • During the fourth quarter of 2022, there was a provision for credit losses on loans of $508,000, compared to a $615,000 negative provision for credit losses on loans for the fourth quarter of 2021, and a provision for credit losses on loans of $1.0 million for the third quarter of 2022. There was a provision for credit losses on loans of $766,000 for the year ended December 31, 2022, compared to a $3.1 million negative provision for credit losses on loans for the year ended December 31, 2021.
  • Total noninterest income remained relatively flat at $2.8 million for both the fourth quarter of 2022 and 2021. The fourth quarter of 2022 included higher income on off-balance sheet deposits. The fourth quarter of 2021 included termination fees, a gain on sales of SBA loans, and a gain on proceeds from company-owned life insurance. Total noninterest income remained relatively flat at $2.8 million for both the fourth and third quarters of 2022, as higher service charges and fees on deposit accounts was offset by a lower gain on sales of SBA loans during the fourth quarter of 2022.
  • For the year ended December 31, 2022, total noninterest income increased 4% to $10.1 million, compared to $9.7 million for the year ended December 31, 2021, primarily due to higher income on off-balance sheet deposits, and a $669,000 gain on warrants, partially offset by a lower gain on sales of SBA loans and a lower gain on proceeds from company-owned life insurance during the year ended December 31, 2022.
  • Total noninterest expense for the fourth quarter of 2022 increased to $24.5 million, compared to $22.2 million for the fourth quarter of 2021, primarily due to higher salaries and employee benefits, higher rent included in occupancy and equipment expense, higher professional fees, and higher insurance and information technology related expenses included in other noninterest expense during the fourth quarter of 2022.
    • Total noninterest expense for the fourth quarter of 2022 increased to $24.5 million, compared to $23.9 million for the third quarter of 2022, primarily due to approximately $900,000 in additional expense as a result of higher bonuses, professional fees, insurance and information technology related expenses incurred during the fourth quarter of 2022. The higher salaries and employee benefits during the third quarter of 2022 included $784,000 of restricted stock expense for vesting of restricted common stock held by the previous President and Chief Executive Officer of the Company, which was partially offset by a higher bonus accrual during the fourth quarter of 2022.
    • Noninterest expense for the year ended December 31, 2022 increased to $94.9 million, compared to $93.1 million for the year ended December 31, 2021, primarily due to higher salaries and employee benefits, higher rent included in occupancy and equipment expense, and higher insurance and information technology related expenses during the year ended December 31, 2022. These increases were partially offset by higher legal fees included in professional fees and a reserve for a legal settlement included in other noninterest expense during the year ended December 31, 2021.
    • Full time equivalent employees were 331 at December 31, 2022, and 326 at December 31, 2021, and 327 at September 30, 2022.
  • The efficiency ratio was 44.98% for the fourth quarter of 2022, compared to 54.32% for the fourth quarter of 2021, and 47.02% for the third quarter of 2022. The efficiency ratio for the year ended December 31, 2022 was 49.93%, compared to 59.74% for the year ended December 31, 2021. The improvement in the efficiency ratio for the fourth quarter of 2022 and the year ended December 31, 2022 was primarily due to an increase in net interest income from the rising interest rate environment.
  • Income tax expense was $8.7 million for the fourth quarter of 2022, compared to $5.3 million for the fourth quarter of 2021, and $7.8 million for the third quarter of 2022. The effective tax rate for the fourth quarter of 2022 was 29.5%, compared to 27.7% for the fourth quarter of 2021, and 30.3% for the third quarter of 2022. Income tax expense for the year ended December 31, 2022 was $27.8 million, compared to $18.2 million for the year ended December 31, 2021. The effective tax rate for the year ended December 31, 2022 was 29.5%, compared to 27.6% for the year ended December 31, 2021.

Balance Sheet Review, Capital Management and Credit Quality:

  • Total assets decreased (6%) to $5.154 billion at December 31, 2022, compared to $5.499 billion at December 31, 2021, and decreased (5%) from $5.431 billion at September 30, 2022.  
  • Securities available-for-sale, at fair value, totaled $489.6 million at December 31, 2022, compared to $102.3 million at December 31, 2021, and $478.5 million at September 30, 2022. At December 31, 2022, the Company’s securities available-for-sale portfolio was comprised of $418.5 million of U.S. Treasury securities and $71.1 million of agency mortgage-backed securities (all issued by U.S. Government sponsored entities).
    • The pre-tax unrealized loss on U.S. Treasury securities available-for-sale at December 31, 2022 was ($10.3) million, compared to a pre-tax unrealized loss of ($10.1) million at September 30, 2022. There were no U.S. Treasury securities available-for-sale at December 31, 2021. The pre-tax unrealized loss on mortgage-backed securities available-for-sale at December 31, 2022 was ($5.8) million, compared to a pre-tax unrealized gain of $2.9 million at December 31, 2021, and a pre-tax unrealized loss of ($7.3) million at September 30, 2022. The pre-tax unrealized loss on total securities available-for-sale at December 31, 2022 was ($16.1) million, compared to a pre-tax unrealized gain of $2.9 million at December 31, 2021, and a pre-tax unrealized loss of ($17.4) million at September 30, 2022. All other factors remaining the same, when market interest rates are increasing, the Company will experience a higher unrealized loss in the securities portfolio.
    • During the fourth quarter of 2022, the Company purchased $11.7 million of U.S. Treasury securities available-for-sale, with a book yield of 4.53% and an average life of 1.28 years. During the year ended December 31, 2022, the Company purchased $425.7 million of U.S. Treasury securities available-for-sale, with a book yield of 3.08% and an average life of 2.25 years.
  • At December 31, 2022, securities held-to-maturity, at amortized cost, totaled $715.0 million, compared to $658.4 million at December 31, 2021, and $703.8 million at September 30, 2022. At December 31, 2022, the Company’s securities held-to-maturity portfolio was comprised of $677.4 million of agency mortgage-backed securities, and $37.6 million of tax-exempt municipal bonds.
    • The pre-tax unrealized loss on mortgage-backed securities held-to-maturity at December 31, 2022 was ($99.7) million, compared to a pre-tax unrealized loss of ($1.6) million at December 31, 2021, and a pre-tax unrealized loss of ($108.1) million at September 30, 2022. The pre-tax unrealized loss on municipal bonds held-to-maturity at December 31, 2022 was ($810,000), compared to a pre-tax unrealized gain of $805,000 at December 31, 2021, and a pre-tax unrealized loss of ($2.1) million at September 30, 2022. The pre-tax unrealized loss on total securities held-to-maturity at December 31, 2022 was ($100.6) million, compared to a pre-tax unrealized loss of ($790,000) at December 31, 2021, and a pre-tax unrealized loss of ($110.2) million at September 30, 2022.
    • During the fourth quarter of 2022, the Company purchased $27.1 million of agency mortgage-backed securities held-to-maturity, with a book yield of 5.13% and an average life of 8.56 years. During the year ended December 31, 2022, the Company purchased $146.6 million of agency mortgage-backed securities held-to-maturity, with a book yield of 2.75% and an average life of 6.92 years.
  • The average life of the total investment securities portfolio was 4.93 years at December 31, 2022.
  • The loan portfolio remains well-diversified as reflected in the following table which summarizes the distribution of loans, excluding loans held-for-sale, and the percentage of distribution in each category for the periods indicated:
LOANS   December 31, 2022   September 30, 2022   December 31, 2021  
(in $000’s, unaudited)   Balance   % to Total   Balance   % to Total   Balance   % to Total  
Commercial   $ 532,749     16 % $ 541,215     17 % $ 594,108     19 %
PPP Loans(1)     1,166     0 %   1,614     0 %   88,726     3 %
Real estate:                                
CRE – owner occupied     614,663     19 %   612,241     19 %   595,934     19 %
CRE – non-owner occupied     1,066,368     32 %   1,023,405     32 %   902,326     29 %
Land and construction     163,577     5 %   167,439     5 %   147,855     5 %
Home equity     120,724     4 %   116,489     3 %   109,579     4 %
Multifamily     244,882     7 %   229,455     7 %   218,856     7 %
Residential mortgages     537,905     16 %   508,839     16 %   416,660     13 %
Consumer and other     17,033     1 %   16,620     1 %   16,744     1 %
Total Loans     3,299,067     100 %   3,217,317     100 %   3,090,788     100 %
Deferred loan costs (fees), net     (517 )       (844 )       (3,462 )    
Loans, net of deferred costs and fees   $ 3,298,550     100 % $ 3,216,473     100 % $ 3,087,326     100 %


(1)   Less than 1% at December 31, 2022 and September 30, 2022.

  • Loans, excluding loans held-for-sale, increased $211.2 million, or 7%, to $3.299 billion at December 31, 2022, compared to $3.087 billion at December 31, 2021, and increased $82.1 million, or 3%, from $3.216 billion at September 30, 2022. Total loans at December 31, 2022 included $1.2 million of PPP loans, compared to $88.7 million at December 31, 2021 and $1.6 million at September 30, 2022. Total loans at December 31, 2022 included $537.9 million of residential mortgages, compared to $416.7 million at December 31, 2021, and $508.8 million at September 30, 2022. Loans, excluding loans held-for-sale, PPP loans and residential mortgages, increased $175.5 million, or 7%, to $2.760 billion at December 31, 2022, compared to $2.584 billion at December 31, 2021, and increased $53.4 million, or 2%, from $2.706 billion at September 30, 2022.  
    • Commercial and industrial (“C&I”) line utilization was 29% at both December 31, 2022 and September 30, 2022, compared to 31% at December 31, 2021.
    • At both December 31, 2022 and September 30, 2022, there was 37% of the CRE loan portfolio secured by owner-occupied real estate, compared to 40% at December 31, 2021.
    • At December 31, 2022, approximately 33% of the Company’s loan portfolio consisted of floating interest rate loans, compared to 38% at December 31, 2021, and 34% at September 30, 2022.
  • During the fourth quarter of 2022, the Company purchased single family residential mortgage loans totaling $37.4 million, tied to homes located in California, with average principal balances of approximately $1.0 million and a bond equivalent yield of approximately 5.22%, which uses the average life of the loan to recognize the discount into income. During the year ended December 31, 2022, the Company purchased single family residential mortgage loans totaling $185.4 million, tied to homes located in California, with average principal balances of approximately $934,000.
  • The following table summarizes the allowance for credit losses on loans (“ACLL”) for the periods indicated:
    At or For the Quarter Ended:   For the Year Ended:  
ALLOWANCE FOR CREDIT LOSSES ON LOANS   December 31,    September 30,    December 31,    December 31,    December 31,   
(in $000’s, unaudited)   2022
  2022
  2021
  2022
  2021
 
Balance at beginning of period   $ 46,921     $ 45,490     $ 43,680     $ 43,290     $ 44,400    
Charge-offs during the period     (56 )     (7 )     (87 )     (434 )     (520 )  
Recoveries during the period     139       432       312       3,890       2,544    
Net recoveries (charge-offs) during the period     83       425       225       3,456       2,024    
Provision for (recapture of) credit losses on loans during the period     508       1,006       (615 )     766       (3,134 )  
Balance at end of period   $ 47,512     $ 46,921     $ 43,290     $ 47,512     $ 43,290    
                                 
Total loans, net of deferred fees   $ 3,298,550     $ 3,216,473     $ 3,087,326     $ 3,298,550     $ 3,087,326    
Total nonperforming loans   $ 2,425     $ 1,036     $ 3,738     $ 2,425     $ 3,738    
ACLL to total loans     1.44   %   1.46   %   1.40   %   1.44   %   1.40   %
ACLL to total nonperforming loans     1,959.26   %   4,529.05   %   1,158.11   %   1,959.26   %   1,158.11   %
                                           
  • The following table shows the drivers of change in ACLL under the current expected credit losses (“CECL”) methodology for the full year of 2022:
DRIVERS OF CHANGE IN ACLL UNDER CECL    
(in $000’s, unaudited)    
ACLL at December 31, 2021   $ 43,290  
Portfolio changes during the first quarter of 2022 including net recoveries     (33 )
Qualitative and quantitative changes during the first      
quarter of 2022 including changes in economic forecasts     (469 )
ACLL at March 31, 2022     42,788  
Portfolio changes during the second quarter of 2022 including net recoveries     1,383  
Qualitative and quantitative changes during the second      
quarter of 2022 including changes in economic forecasts     1,319  
ACLL at June 30, 2022     45,490  
Portfolio changes during the third quarter of 2022 including net recoveries     2,009  
Qualitative and quantitative changes during the third      
quarter of 2022 including changes in economic forecasts     (578 )
ACLL at September 30, 2022     46,921  
Portfolio changes during the fourth quarter of 2022 including net recoveries     1,316  
Qualitative and quantitative changes during the fourth      
quarter of 2022 including changes in economic forecasts     (725 )
ACLL at December 31, 2022   $ 47,512  
         
  • The following is a breakout of nonperforming assets (“NPAs”) at the periods indicated:
                                 
NONPERFORMING ASSETS   December 31, 2022   September 30, 2022   December 31, 2021  
(in $000’s, unaudited)      Balance      % of Total      Balance      % of Total      Balance      % of Total  
Restructured and loans over 90 days past due                                
and still accruing   $ 1,685   70 % $ 545   53 % $ 278   8 %
Commercial loans     642   26 %   491   47 %   1,122   30 %
Home equity loans     98   4 %     %   84   2 %
CRE loans       %     %   2,254   60 %
Total nonperforming assets   $ 2,425   100 % $ 1,036   100 % $ 3,738   100 %
                                 

  NPAs totaled $2.4 million, or 0.05% of total assets, at December 31, 2022, compared to $3.7 million, or 0.07% of total assets, at December 31, 2021, and $1.0 million, or 0.02% of total assets, at September 30, 2022.
     
  There were no foreclosed assets on the balance sheet at December 31, 2022, December 31, 2021, or September 30, 2022.  
     
   Classified assets decreased to $14.5 million, or 0.28% of total assets, at December 31, 2022, compared to $33.7 million, or 0.61% of total assets, at December 31, 2021, and $28.6 million, or 0.53% of total assets, at September 30, 2022.
     
  • The following table summarizes the distribution of deposits and the percentage of distribution in each category for the periods indicated:
DEPOSITS   December 31, 2022   September 30, 2022   December 31, 2021  
(in $000’s, unaudited)      Balance      % to Total    Balance      % to Total    Balance      % to Total  
Demand, noninterest-bearing   $ 1,736,722   40 %   $ 1,883,574   40 %   $ 1,903,768   40 %  
Demand, interest-bearing     1,196,427   27 %     1,154,403   24 %     1,308,114   27 %  
Savings and money market     1,285,444   29 %     1,487,400   32 %     1,375,825   29 %  
Time deposits — under $250     32,445   1 %     34,728   1 %     38,734   1 %  
Time deposits — $250 and over     108,192   2 %     93,263   2 %     94,700   2 %  
CDARS — interest-bearing demand,                                
money market and time deposits     30,374   1 %     29,897   1 %     38,271   1 %  
Total deposits   $ 4,389,604   100 %   $ 4,683,265   100 %   $ 4,759,412   100 %  
                                 

  Total deposits decreased ($369.8) million, or (8%), to $4.390 billion at December 31, 2022, compared to $4.759 billion at December 31, 2021, and decreased ($293.7) million, or (6%), from $4.683 billion at September 30, 2022.
     
  Deposits, excluding all time deposits and CDARS deposits, decreased ($369.2) million, or (8%), to $4.219 billion at December 31, 2022, compared to $4.588 billion at December 31, 2021, and decreased ($306.8) million, or (7%), compared to $4.525 billion at September 30, 2022.
     
  Off-balance sheet deposits increased $9.4 million, or 4%, to $254.4 million at December 31, 2022, compared to $245.0 million at December 31, 2021, and increased $3.9 million, or 2%, from $250.5 million at September 30, 2022.
     
  • The Company’s consolidated capital ratios exceeded regulatory guidelines and the Bank’s capital ratios exceeded regulatory guidelines under the Basel III prompt corrective action (“PCA”) regulatory guidelines for a well-capitalized financial institution, and the Basel III minimum regulatory requirements at December 31, 2022, as reflected in the following table:
                               Well-capitalized    
                Financial    
                Institution   Basel III
    Heritage   Heritage   Basel III PCA   Minimum
    Commerce   Bank of   Regulatory   Regulatory
CAPITAL RATIOS (unaudited)   Corp   Commerce   Guidelines   Requirement (1)
Total Capital   14.8 %   14.2 %   10.0 %   10.5 %
Tier 1 Capital   12.7 %   13.2 %   8.0 %   8.5 %
Common Equity Tier 1 Capital   12.7 %   13.2 %   6.5 %   7.0 %
Tier 1 Leverage   9.2 %   9.5 %   5.0 %   4.0 %


(1)   Basel III minimum regulatory requirements for both the Company and the Bank include a 2.5% capital conservation buffer, except the leverage ratio.

  • The following table reflects the components of accumulated other comprehensive loss, net of taxes, for the periods indicated:
                   
ACCUMULATED OTHER COMPREHENSIVE LOSS   December 31,    September 30,    December 31, 
(in $000’s, unaudited)   2022
  2022
  2021
Unrealized (loss) gain on securities available-for-sale   $ (11,506 )   $ (12,398 )   $ 1,991  
Split dollar insurance contracts liability     (3,091 )     (5,511 )     (5,480 )
Supplemental executive retirement plan liability     (2,371 )     (7,428 )     (7,669 )
Unrealized gain on interest-only strip from SBA loans     112       125       162  
Total accumulated other comprehensive loss   $ (16,856 )   $ (25,212 )   $ (10,996 )
                   

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, Sunnyvale, 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.

Forward-Looking Statement Disclaimer

Certain matters discussed in this press release constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to various risks and uncertainties that may be outside our control and our actual results could differ materially from our projected results. 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, 2021, and the following: (1) geopolitical and domestic political developments that can increase levels of political and economic unpredictability, contribute to rising energy and commodity prices, and increase the volatility of financial markets; (2) 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; (3) 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; (4) 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 we have made and make; (5) 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; (6) volatility in credit and equity markets and its effect on the global economy; (7) conditions relating to the impact of the COVID-19 pandemic, and other infectious illness outbreaks that may arise in the future, our customers, employees, businesses, liquidity, financial results and overall condition including severity and duration of the associated uncertainties in U.S. and global markets; (8) our ability to effectively compete with other banks and financial services companies and the effects of competition in the financial services industry on our business; (9) our ability to achieve loan growth and attract deposits in our market area, the impact of the cost of deposits and our ability to retain deposits; (10) risks associated with concentrations in real estate related loans; (11) the relative strength or weakness of the commercial and real estate markets where our borrowers are located, including related asset and market prices; (12) credit related impairment charges to our securities portfolio; (13) 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; (14) regulatory limits on Heritage Bank of Commerce’s ability to pay dividends to the Company; (15) 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; (16) 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; (17) possible adjustment of the valuation of our deferred tax assets; (18) our ability to keep pace with technological changes, including our ability to identify and address cyber-security risks such as data security breaches, “denial of service” attacks, “hacking” and identity theft; (19) inability of our framework to manage risks associated with our business, including operational risk and credit risk; (20) risks of loss of funding of Small Business Administration (“SBA”) or SBA loan programs, or changes in those programs; (21) 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; (22) 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; (23) the expense and uncertain resolution of litigation matters whether occurring in the ordinary course of business or otherwise; (24) availability of and competition for acquisition opportunities; (25) risks resulting from domestic terrorism; (26) risks resulting from social unrest and protests; (27) risks of natural disasters (including earthquakes, fires, and flooding) and other events beyond our control; and (28) 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

    For the Quarter Ended:   Percent Change From:     For the Year Ended:
CONSOLIDATED INCOME STATEMENTS      December 31,       September 30,       December 31,       September 30,       December 31,         December 31,       December 31,       Percent  
(in $000’s, unaudited)   2022   2022   2021
  2022   2021     2022   2021
  Change  
Interest income   $ 55,192   $ 50,174   $ 39,956     10   % 38   %   $ 188,828   $ 153,256     23   %
Interest expense     3,453     2,133     1,847     62   % 87   %     8,948     7,131     25   %
Net interest income before provision                                              
for credit losses on loans     51,739     48,041     38,109     8   % 36   %     179,880     146,125     23   %
Provision for (recapture of) credit losses on loans     508     1,006     (615 )   (50 ) % 183   %     766     (3,134 )   124   %
Net interest income after provision                                              
for credit losses on loans     51,231     47,035     38,724     9   % 32   %     179,114     149,259     20   %
Noninterest income:                                              
Service charges and fees on deposit                                              
accounts     1,801     1,360     644     32   % 180   %     4,640     2,488     86   %
Increase in cash surrender value of                                              
life insurance     481     484     454     (1 ) % 6   %     1,925     1,838     5   %
Servicing income     138     125     138     10   % 0   %     508     553     (8 ) %
Gain on sales of SBA loans         308     491     (100 ) % (100 ) %     491     1,718     (71 ) %
Gain on warrants         32         (100 ) % N/A       669     11     5982   %
Termination fees         16     618     (100 ) % (100 ) %     61     797     (92 ) %
Gain on proceeds from company-owned                                              
life insurance             104     N/A   (100 ) %     27     675     (96 ) %
Other     352     456     361     (23 ) % (2 ) %     1,790     1,608     11   %
Total noninterest income     2,772     2,781     2,810     0   % (1 ) %     10,111     9,688     4   %
Noninterest expense:                                              
Salaries and employee benefits     13,915     14,119     12,871     (1 ) % 8   %     55,331     51,862     7   %
Occupancy and equipment     2,510     2,415     2,366     4   % 6   %     9,639     9,038     7   %
Professional fees     1,414     1,230     1,200     15   % 18   %     5,015     5,901     (15 ) %
Other     6,679     6,135     5,790     9   % 15   %     24,874     26,276     (5 ) %
Total noninterest expense     24,518     23,899     22,227     3   % 10   %     94,859     93,077     2   %
Income before income taxes     29,485     25,917     19,307     14   % 53   %     94,366     65,870     43   %
Income tax expense     8,686     7,848     5,342     11   % 63   %     27,811     18,170     53   %
Net income   $ 20,799   $ 18,069   $ 13,965     15   % 49   %   $ 66,555   $ 47,700     40   %
                                               
PER COMMON SHARE DATA                                                 
(unaudited)                                                  
Basic earnings per share   $ 0.34   $ 0.30   $ 0.23     13   % 48   %   $ 1.10   $ 0.79     39   %
Diluted earnings per share   $ 0.34   $ 0.30   $ 0.23     13   % 48   %   $ 1.09   $ 0.79     38   %
Weighted average shares outstanding – basic     60,788,803     60,686,992     60,298,424     0   % 1   %     60,602,962     60,133,821     1   %
Weighted average shares outstanding – diluted     61,357,023     61,123,801     60,844,221     0   % 1   %     61,090,290     60,689,062     1   %
Common shares outstanding at period-end     60,852,723     60,716,794     60,339,837     0   % 1   %     60,852,723     60,339,837     1   %
Dividend per share   $ 0.13   $ 0.13   $ 0.13     0   % 0   %   $ 0.52   $ 0.52     0   %
Book value per share   $ 10.39   $ 10.04   $ 9.91     3   % 5   %   $ 10.39   $ 9.91     5   %
Tangible book value per share   $ 7.46   $ 7.09   $ 6.91     5   % 8   %   $ 7.46   $ 6.91     8   %
                                               
KEY FINANCIAL RATIOS                                                      
(unaudited)                                                      
Annualized return on average equity     13.40 %   11.72 %   9.35   % 14   % 43   %     10.95 %   8.15   % 34   %
Annualized return on average tangible common equity     18.89 %   16.60 %   13.50   % 14   % 40   %     15.57 %   11.86   % 31   %
Annualized return on average assets     1.54 %   1.31 %   0.97   % 18   % 59   %     1.23 %   0.92   % 34   %
Annualized return on average tangible assets     1.59 %   1.36 %   1.00   % 17   % 59   %     1.27 %   0.96   % 32   %
Net interest margin (FTE)     4.10 %   3.73 %   2.84   % 10   % 44   %     3.57 %   3.05   % 17   %
Efficiency ratio     44.98 %   47.02 %   54.32   % (4 ) % (17 ) %     49.93 %   59.74   % (16 ) %
                                               
AVERAGE BALANCES                                                     
(in $000’s, unaudited)                                                      
Average assets   $ 5,360,867   $ 5,466,330   $ 5,695,136     (2 ) % (6 ) %   $ 5,401,220   $ 5,166,294     5   %
Average tangible assets   $ 5,181,793   $ 5,286,591   $ 5,513,359     (2 ) % (6 ) %   $ 5,221,159   $ 4,983,407     5   %
Average earning assets   $ 5,009,578   $ 5,117,373   $ 5,336,129     (2 ) % (6 ) %   $ 5,051,552   $ 4,805,630     5   %
Average loans held-for-sale   $ 2,346   $ 3,282   $ 4,047     (29 ) % (42 ) %   $ 2,238   $ 4,095     (45 ) %
Average total loans   $ 3,248,210   $ 3,140,705   $ 2,872,074     3   % 13   %   $ 3,116,768   $ 2,762,226     13   %
Average deposits   $ 4,600,533   $ 4,712,044   $ 4,945,204     (2 ) % (7 ) %   $ 4,647,200   $ 4,426,885     5   %
Average demand deposits – noninterest-bearing   $ 1,851,003   $ 1,910,748   $ 1,979,940     (3 ) % (7 ) %   $ 1,863,928   $ 1,834,909     2   %
Average interest-bearing deposits   $ 2,749,530   $ 2,801,296   $ 2,965,264     (2 ) % (7 ) %   $ 2,783,272   $ 2,591,976     7   %
Average interest-bearing liabilities   $ 2,788,880   $ 2,840,611   $ 3,005,212     (2 ) % (7 ) %   $ 2,825,035   $ 2,631,848     7   %
Average equity   $ 615,941   $ 611,707   $ 592,291     1   % 4   %   $ 607,603   $ 585,156     4   %
Average tangible common equity   $ 436,867   $ 431,968   $ 410,514     1   % 6   %   $ 427,542   $ 402,269     6   %

                                 
    For the Quarter Ended:  
CONSOLIDATED INCOME STATEMENTS      December 31,       September 30,       June 30,      March 31,      December 31,  
(in $000’s, unaudited)   2022   2022   2022
  2022
  2021
 
Interest income   $ 55,192   $ 50,174   $ 43,556     $ 39,906     $ 39,956    
Interest expense     3,453     2,133     1,677       1,685       1,847    
Net interest income before provision                                
for credit losses on loans     51,739     48,041     41,879       38,221       38,109    
Provision for (recapture of) credit losses on loans     508     1,006     (181 )     (567 )     (615 )  
Net interest income after provision                                
for credit losses on loans     51,231     47,035     42,060       38,788       38,724    
Noninterest income:                                
Service charges and fees on deposit                                
accounts     1,801     1,360     867       612       644    
Increase in cash surrender value of                                
life insurance     481     484     480       480       454    
Servicing income     138     125     139       106       138    
Gain on sales of SBA loans         308     27       156       491    
Gain on warrants         32           637          
Termination fees         16     45             618    
Gain on proceeds from company-owned                                
life insurance             27             104    
Other     352     456     513       469       361    
Total noninterest income     2,772     2,781     2,098       2,460       2,810    
Noninterest expense:                                
Salaries and employee benefits     13,915     14,119     13,476       13,821       12,871    
Occupancy and equipment     2,510     2,415     2,277       2,437       2,366    
Professional fees     1,414     1,230     1,291       1,080       1,200    
Other     6,679     6,135     6,146       5,914       5,790    
Total noninterest expense     24,518     23,899     23,190       23,252       22,227    
Income before income taxes     29,485     25,917     20,968       17,996       19,307    
Income tax expense     8,686     7,848     6,147       5,130       5,342    
Net income   $ 20,799   $ 18,069   $ 14,821     $ 12,866     $ 13,965    
                                 
PER COMMON SHARE DATA                                
(unaudited)                                   
Basic earnings per share   $ 0.34   $ 0.30   $ 0.24     $ 0.21     $ 0.23    
Diluted earnings per share   $ 0.34   $ 0.30   $ 0.24     $ 0.21     $ 0.23    
Weighted average shares outstanding – basic     60,788,803     60,686,992     60,542,170       60,393,883       60,298,424    
Weighted average shares outstanding – diluted     61,357,023     61,123,801     60,969,154       60,921,835       60,844,221    
Common shares outstanding at period-end     60,852,723     60,716,794     60,666,794       60,407,846       60,339,837    
Dividend per share   $ 0.13   $ 0.13   $ 0.13     $ 0.13     $ 0.13    
Book value per share   $ 10.39   $ 10.04   $ 10.01     $ 9.95     $ 9.91    
Tangible book value per share   $ 7.46   $ 7.09   $ 7.04     $ 6.96     $ 6.91    
                                 
KEY FINANCIAL RATIOS                                 
(unaudited)                                     
Annualized return on average equity     13.40 %   11.72 %   9.86   %   8.71   %   9.35   %
Annualized return on average tangible common equity     18.89 %   16.60 %   14.06   %   12.47   %   13.50   %
Annualized return on average assets     1.54 %   1.31 %   1.11   %   0.96   %   0.97   %
Annualized return on average tangible assets     1.59 %   1.36 %   1.15   %   0.99   %   1.00   %
Net interest margin (FTE)     4.10 %   3.73 %   3.38   %   3.05   %   2.84   %
Efficiency ratio     44.98 %   47.02 %   52.73   %   57.16   %   54.32   %
                                 
AVERAGE BALANCES                                     
(in $000’s, unaudited)                                     
Average assets   $ 5,360,867   $ 5,466,330   $ 5,334,636     $ 5,443,240     $ 5,695,136    
Average tangible assets   $ 5,181,793   $ 5,286,591   $ 5,154,245     $ 5,262,175     $ 5,513,359    
Average earning assets   $ 5,009,578   $ 5,117,373   $ 4,985,611     $ 5,093,851     $ 5,336,129    
Average loans held-for-sale   $ 2,346   $ 3,282   $ 1,824     $ 1,478     $ 4,047    
Average total loans   $ 3,248,210   $ 3,140,705   $ 3,048,353     $ 3,027,111     $ 2,872,074    
Average deposits   $ 4,600,533   $ 4,712,044   $ 4,579,436     $ 4,697,136     $ 4,945,204    
Average demand deposits – noninterest-bearing   $ 1,851,003   $ 1,910,748   $ 1,836,350     $ 1,857,164     $ 1,979,940    
Average interest-bearing deposits   $ 2,749,530   $ 2,801,296   $ 2,743,086     $ 2,839,972     $ 2,965,264    
Average interest-bearing liabilities   $ 2,788,880   $ 2,840,611   $ 2,791,527     $ 2,879,952     $ 3,005,212    
Average equity   $ 615,941   $ 611,707   $ 603,182     $ 599,355     $ 592,291    
Average tangible common equity   $ 436,867   $ 431,968   $ 422,791     $ 418,290     $ 410,514    

                             
    End of Period:   Percent Change From:  
CONSOLIDATED BALANCE SHEETS      December 31,       September 30,       December 31,       September 30,       December 31,   
(in $000’s, unaudited)   2022
  2022
  2021
  2022   2021  
ASSETS                            
Cash and due from banks   $ 27,595     $ 40,500     $ 15,703     (32 ) % 76   %
Other investments and interest-bearing deposits                            
in other financial institutions     279,008       641,251       1,290,513     (56 ) % (78 ) %
Securities available-for-sale, at fair value     489,596       478,534       102,252     2   % 379   %
Securities held-to-maturity, at amortized cost     714,990       703,794       658,397     2   % 9   %
Loans held-for-sale – SBA, including deferred costs     2,456       2,081       2,367     18   % 4   %
Loans:                            
Commercial     532,749       541,215       594,108     (2 ) % (10 ) %
PPP loans     1,166       1,614       88,726     (28 ) % (99 ) %
Real estate:                            
CRE – owner occupied     614,663       612,241       595,934     0   % 3   %
CRE – non-owner occupied     1,066,368       1,023,405       902,326     4   % 18   %
Land and construction     163,577       167,439       147,855     (2 ) % 11   %
Home equity     120,724       116,489       109,579     4   % 10   %
Multifamily     244,882       229,455       218,856     7   % 12   %
Residential mortgages     537,905       508,839       416,660     6   % 29   %
Consumer and other     17,033       16,620       16,744     2   % 2   %
Loans     3,299,067       3,217,317       3,090,788     3   % 7   %
Deferred loan fees, net     (517 )     (844 )     (3,462 )   (39 ) % (85 ) %
Total loans, net of deferred costs and fees     3,298,550       3,216,473       3,087,326     3   % 7   %
Allowance for credit losses on loans     (47,512 )     (46,921 )     (43,290 )   1   % 10   %
Loans, net     3,251,038       3,169,552       3,044,036     3   % 7   %
Company-owned life insurance     78,945       78,456       77,589     1   % 2   %
Premises and equipment, net     9,301       9,428       9,639     (1 ) % (4 ) %
Goodwill     167,631       167,631       167,631     0   % 0   %
Other intangible assets     11,033       11,692       13,668     (6 ) % (19 ) %
Accrued interest receivable and other assets     122,631       128,343       117,614     (4 ) % 4   %
Total assets   $ 5,154,224     $ 5,431,262     $ 5,499,409     (5 ) % (6 ) %
                             
LIABILITIES AND SHAREHOLDERS’ EQUITY                            
Liabilities:                            
Deposits:                            
Demand, noninterest-bearing   $ 1,736,722     $ 1,883,574     $ 1,903,768     (8 ) % (9 ) %
Demand, interest-bearing     1,196,427       1,154,403       1,308,114     4   % (9 ) %
Savings and money market     1,285,444       1,487,400       1,375,825     (14 ) % (7 ) %
Time deposits – under $250     32,445       34,728       38,734     (7 ) % (16 ) %
Time deposits – $250 and over     108,192       93,263       94,700     16   % 14   %
CDARS – money market and time deposits     30,374       29,897       38,271     2   % (21 ) %
Total deposits     4,389,604       4,683,265       4,759,412     (6 ) % (8 ) %
Subordinated debt, net of issuance costs     39,350       39,312       39,925     0   % (1 ) %
Accrued interest payable and other liabilities     92,814       99,168       102,044     (6 ) % (9 ) %
Total liabilities     4,521,768       4,821,745       4,901,381     (6 ) % (8 ) %
                             
Shareholders’ Equity:                            
Common stock     502,923       501,240       497,695     0   % 1   %
Retained earnings     146,389       133,489       111,329     10   % 31   %
Accumulated other comprehensive loss     (16,856 )     (25,212 )     (10,996 )   33   % (53 ) %
Total shareholders’ equity     632,456       609,517       598,028     4   % 6   %
Total liabilities and shareholders’ equity   $ 5,154,224     $ 5,431,262     $ 5,499,409     (5 ) % (6 ) %

                               
    End of Period:
CONSOLIDATED BALANCE SHEETS      December 31,       September 30,       June 30,      March 31,      December 31,
(in $000’s, unaudited)   2022
  2022
  2022
  2022
  2021
ASSETS                              
Cash and due from banks   $ 27,595     $ 40,500     $ 35,764     $ 29,729     $ 15,703  
Other investments and interest-bearing deposits                              
in other financial institutions     279,008       641,251       840,821       1,187,436       1,290,513  
Securities available-for-sale, at fair value     489,596       478,534       332,129       111,217       102,252  
Securities held-to-maturity, at amortized cost     714,990       703,794       723,716       736,823       658,397  
Loans held-for-sale – SBA, including deferred costs     2,456       2,081       2,281       831       2,367  
Loans:                              
Commercial     532,749       541,215       523,268       568,053       594,108  
PPP loans     1,166       1,614       8,153       37,393       88,726  
Real estate:                              
CRE – owner occupied     614,663       612,241       597,521       597,542       595,934  
CRE – non-owner occupied     1,066,368       1,023,405       993,621       928,220       902,326  
Land and construction     163,577       167,439       155,389       153,323       147,855  
Home equity     120,724       116,489       116,641       111,609       109,579  
Multifamily     244,882       229,455       221,938       221,767       218,856  
Residential mortgages     537,905       508,839       448,958       391,171       416,660  
Consumer and other     17,033       16,620       18,354       17,110       16,744  
Loans     3,299,067       3,217,317       3,083,843       3,026,188       3,090,788  
Deferred loan fees, net     (517 )     (844 )     (1,391 )     (2,124 )     (3,462 )
Total loans, net of deferred fees     3,298,550       3,216,473       3,082,452       3,024,064       3,087,326  
Allowance for credit losses on loans     (47,512 )     (46,921 )     (45,490 )     (42,788 )     (43,290 )
Loans, net     3,251,038       3,169,552       3,036,962       2,981,276       3,044,036  
Company-owned life insurance     78,945       78,456       77,972       78,069       77,589  
Premises and equipment, net     9,301       9,428       9,593       9,580       9,639  
Goodwill     167,631       167,631       167,631       167,631       167,631  
Other intangible assets     11,033       11,692       12,351       13,009       13,668  
Accrued interest receivable and other assets     122,631       128,343       117,621       111,797       117,614  
Total assets   $ 5,154,224     $ 5,431,262     $ 5,356,841     $ 5,427,398     $ 5,499,409  
                               
LIABILITIES AND SHAREHOLDERS’ EQUITY                              
Liabilities:                              
Deposits:                              
Demand, noninterest-bearing   $ 1,736,722     $ 1,883,574     $ 1,846,365     $ 1,811,943     $ 1,903,768  
Demand, interest-bearing     1,196,427       1,154,403       1,218,538       1,268,942       1,308,114  
Savings and money market     1,285,444       1,487,400       1,387,003       1,447,434       1,375,825  
Time deposits – under $250     32,445       34,728       36,691       38,417       38,734  
Time deposits – $250 and over     108,192       93,263       98,760       93,161       94,700  
CDARS – money market and time deposits     30,374       29,897       26,287       30,008       38,271  
Total deposits     4,389,604       4,683,265       4,613,644       4,689,905       4,759,412  
Subordinated debt, net of issuance costs     39,350       39,312       39,274       39,987       39,925  
Accrued interest payable and other liabilities     92,814       99,168       96,699       96,450       102,044  
Total liabilities     4,521,768       4,821,745       4,749,617       4,826,342       4,901,381  
                               
Shareholders’ Equity:                              
Common stock     502,923       501,240       499,832       498,763       497,695  
Retained earnings     146,389       133,489       123,310       116,347       111,329  
Accumulated other comprehensive loss     (16,856 )     (25,212 )     (15,918 )     (14,054 )     (10,996 )
Total shareholders’ equity     632,456       609,517       607,224       601,056       598,028  
Total liabilities and shareholders’ equity   $ 5,154,224     $ 5,431,262     $ 5,356,841     $ 5,427,398     $ 5,499,409  

                             
    At or For the Quarter Ended:   Percent Change From:  
CREDIT QUALITY DATA      December 31,       September 30,       December 31,       September 30,       December 31,   
(in $000’s, unaudited)   2022
  2022
  2021
  2022   2021  
Nonaccrual loans – held-for-investment   $ 740     $ 491     $ 3,460     51   % (79 ) %
Restructured and loans over 90 days past due                            
and still accruing     1,685       545       278     209   % 506   %
Total nonperforming loans     2,425       1,036       3,738     134   % (35 ) %
Foreclosed assets                     N/A   N/A  
Total nonperforming assets   $ 2,425     $ 1,036     $ 3,738     134   % (35 ) %
Other restructured loans still accruing   $ 171     $ 93     $ 125     84   % 37   %
Net charge-offs (recoveries) during the quarter   $ (83 )   $ (425 )   $ (225 )   80   % 63   %
Provision for (recapture of) credit losses on loans during the quarter   $ 508     $ 1,006     $ (615 )   (50 ) % 183   %
Allowance for credit losses on loans   $ 47,512     $ 46,921     $ 43,290     1   % 10   %
Classified assets   $ 14,544     $ 28,570     $ 33,719     (49 ) % (57 ) %
Allowance for credit losses on loans to total loans     1.44   %   1.46   %   1.40   % (1 ) % 3   %
Allowance for credit losses on loans to total nonperforming loans     1,959.26   %   4,529.05   %   1,158.11   % (57 ) % 69   %
Nonperforming assets to total assets     0.05   %   0.02   %   0.07   % 150   % (29 ) %
Nonperforming loans to total loans     0.07   %   0.03   %   0.12   % 133   % (42 ) %
Classified assets to Heritage Commerce Corp                            
Tier 1 capital plus allowance for credit losses on loans     3   %   6   %   7   % (50 ) % (57 ) %
Classified assets to Heritage Bank of Commerce                            
Tier 1 capital plus allowance for credit losses on loans     3   %   5   %   7   % (40 ) % (57 ) %
                             
OTHER PERIOD-END STATISTICS                                 
(in $000’s, unaudited)                                 
Heritage Commerce Corp:                            
Tangible common equity (1)   $ 453,792     $ 430,194     $ 416,729     5   % 9   %
Shareholders’ equity / total assets     12.27   %   11.22   %   10.87   % 9   % 13   %
Tangible common equity / tangible assets (2)     9.12   %   8.19   %   7.84   % 11   % 16   %
Loan to deposit ratio     75.14   %   68.68   %   64.87   % 9   % 16   %
Noninterest-bearing deposits / total deposits     39.56   %   40.22   %   40.00   % (2 ) % (1 ) %
Total capital ratio     14.8   %   14.5   %   14.4   % 2   % 3   %
Tier 1 capital ratio     12.7   %   12.4   %   12.3   % 2   % 3   %
Common Equity Tier 1 capital ratio     12.7   %   12.4   %   12.3   % 2   % 3   %
Tier 1 leverage ratio     9.2   %   8.7   %   7.9   % 6   % 16   %
Heritage Bank of Commerce:                            
Total capital ratio     14.2   %   14.0   %   13.8   % 1   % 3   %
Tier 1 capital ratio     13.2   %   12.9   %   12.8   % 2   % 3   %
Common Equity Tier 1 capital ratio     13.2   %   12.9   %   12.8   % 2   % 3   %
Tier 1 leverage ratio     9.5   %   9.0   %   8.2   % 6   % 16   %


(1)   Represents shareholders’ equity minus goodwill and other intangible assets
(2)   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      December 31,       September 30,       June 30,      March 31,      December 31,   
(in $000’s, unaudited)   2022
  2022
  2022
  2022
  2021
 
Nonaccrual loans – held-for-investment   $ 740     $ 491     $ 1,734     $ 3,303     $ 3,460    
Restructured and loans over 90 days past due                                
and still accruing     1,685       545       981       527       278    
Total nonperforming loans     2,425       1,036       2,715       3,830       3,738    
Foreclosed assets                                
Total nonperforming assets   $ 2,425     $ 1,036     $ 2,715     $ 3,830     $ 3,738    
Other restructured loans still accruing   $ 171     $ 93     $ 113     $ 125     $ 125    
Net charge-offs (recoveries) during the quarter   $ (83 )   $ (425 )   $ (2,883 )   $ (65 )   $ (225 )  
Provision for (recapture of) credit losses on loans during the quarter   $ 508     $ 1,006     $ (181 )   $ (567 )   $ (615 )  
Allowance for credit losses on loans   $ 47,512     $ 46,921     $ 45,490     $ 42,788     $ 43,290    
Classified assets   $ 14,544     $ 28,570     $ 28,929     $ 30,579     $ 33,719    
Allowance for credit losses on loans to total loans     1.44   %   1.46   %   1.48   %   1.41   %   1.40   %
Allowance for credit losses on loans to total nonperforming loans     1,959.26   %   4,529.05   %   1,675.51   %   1,117.18   %   1,158.11   %
Nonperforming assets to total assets     0.05   %   0.02   %   0.05   %   0.07   %   0.07   %
Nonperforming loans to total loans     0.07   %   0.03   %   0.09   %   0.13   %   0.12   %
Classified assets to Heritage Commerce Corp                                
Tier 1 capital plus allowance for credit losses on loans     3   %   6   %   6   %   6   %   7   %
Classified assets to Heritage Bank of Commerce                                
Tier 1 capital plus allowance for credit losses on loans     3   %   5   %   6   %   6   %   7   %
                                 
OTHER PERIOD-END STATISTICS                                     
(in $000’s, unaudited)                                     
Heritage Commerce Corp:                                
Tangible common equity (1)   $ 453,792     $ 430,194     $ 427,242     $ 420,416     $ 416,729    
Shareholders’ equity / total assets     12.27   %   11.22   %   11.34   %   11.07   %   10.87   %
Tangible common equity / tangible assets (2)     9.12   %   8.19   %   8.25   %   8.01   %   7.84   %
Loan to deposit ratio     75.14   %   68.68   %   66.81   %   64.48   %   64.87   %
Noninterest-bearing deposits / total deposits     39.56   %   40.22   %   40.02   %   38.63   %   40.00   %
Total capital ratio     14.8   %   14.5   %   14.6   %   14.6   %   14.4   %
Tier 1 capital ratio     12.7   %   12.4   %   12.5   %   12.4   %   12.3   %
Common Equity Tier 1 capital ratio     12.7   %   12.4   %   12.5   %   12.4   %   12.3   %
Tier 1 leverage ratio     9.2   %   8.7   %   8.7   %   8.3   %   7.9   %
Heritage Bank of Commerce:                                
Total capital ratio     14.2   %   14.0   %   14.1   %   13.9   %   13.8   %
Tier 1 capital ratio     13.2   %   12.9   %   13.0   %   12.9   %   12.8   %
Common Equity Tier 1 capital ratio     13.2   %   12.9   %   13.0   %   12.9   %   12.8   %
Tier 1 leverage ratio     9.5   %   9.0   %   9.0   %   8.7   %   8.2   %


(1)   Represents shareholders’ equity minus goodwill and other intangible assets
(2)   Represents shareholders’ equity minus goodwill and other intangible assets divided by total assets minus goodwill and other intangible assets

    For the Quarter Ended   For the Quarter Ended  
    December 31, 2022   December 31, 2021  
                Interest      Average               Interest      Average  
NET INTEREST INCOME AND NET INTEREST MARGIN   Average   Income/   Yield/   Average   Income/   Yield/  
(in $000’s, unaudited)   Balance   Expense   Rate   Balance   Expense   Rate  
Assets:                                  
Loans, gross (1)(2)   $ 3,250,556   $ 42,501     5.19 % $ 2,876,121   $ 35,762     4.93 %
Securities – taxable     1,156,563     6,941     2.38 %   660,663     2,686     1.61 %
Securities – exempt from Federal tax (3)     37,958     324     3.39 %   54,965     457     3.30 %
Other investments and interest-bearing deposits                                  
in other financial institutions     564,501     5,494     3.86 %   1,744,380     1,147     0.26 %
Total interest earning assets (3)     5,009,578     55,260     4.38 %   5,336,129     40,052     2.98 %
Cash and due from banks     36,392               38,178            
Premises and equipment, net     9,436               9,755            
Goodwill and other intangible assets     179,074               181,777            
Other assets     126,387               129,297            
Total assets   $ 5,360,867             $ 5,695,136            
                                   
Liabilities and shareholders’ equity:                                  
Deposits:                                  
Demand, noninterest-bearing   $ 1,851,003             $ 1,979,940            
                                   
Demand, interest-bearing     1,164,378     945     0.32 %   1,346,878     559     0.16 %
Savings and money market     1,424,964     1,694     0.47 %   1,451,230     582     0.16 %
Time deposits – under $100     12,157     7     0.23 %   13,766     5     0.14 %
Time deposits – $100 and over     120,246     268     0.88 %   118,089     116     0.39 %
CDARS – money market and time deposits     27,785     1     0.01 %   35,301     2     0.02 %
Total interest-bearing deposits     2,749,530     2,915     0.42 %   2,965,264     1,264     0.17 %
Total deposits     4,600,533     2,915     0.25 %   4,945,204     1,264     0.10 %
                                   
Subordinated debt, net of issuance costs     39,326     538     5.43 %   39,896     583     5.80 %
Short-term borrowings     24         0.00 %   52         0.00 %
Total interest-bearing liabilities     2,788,880     3,453     0.49 %   3,005,212     1,847     0.24 %
Total interest-bearing liabilities and demand,                                  
noninterest-bearing / cost of funds     4,639,883     3,453     0.30 %   4,985,152     1,847     0.15 %
Other liabilities     105,043               117,693            
Total liabilities     4,744,926               5,102,845            
Shareholders’ equity     615,941               592,291            
Total liabilities and shareholders’ equity   $ 5,360,867             $ 5,695,136            
                                   
Net interest income (3) / margin           51,807     4.10 %         38,205     2.84 %
Less tax equivalent adjustment (3)           (68 )               (96 )      
Net interest income         $ 51,739               $ 38,109        


(1)   Includes loans held-for-sale. Nonaccrual loans are included in average balances.
(2)   Yield amounts earned on loans include fees and costs. The accretion of net deferred loan fees into loan interest income was $326,000 for the fourth quarter of 2022 (of which $25,000 was from PPP loans), compared to $2,567,000 for the fourth quarter of 2021 (of which $2,211,000 was from PPP loans). Prepayment fees totaled $123,000 for the fourth quarter of 2022, compared to $397,000 for the fourth quarter of 2021.
(3)   Reflects the FTE adjustment for Federal tax-exempt income based on a 21% tax rate.

    For the Quarter Ended   For the Quarter Ended  
    December 31, 2022   September 30, 2022  
                Interest      Average               Interest      Average  
NET INTEREST INCOME AND NET INTEREST MARGIN   Average   Income/   Yield/   Average   Income/   Yield/  
(in $000’s, unaudited)   Balance   Expense   Rate   Balance   Expense   Rate  
Assets:                                  
Loans, gross (1)(2)   $ 3,250,556   $ 42,501     5.19 % $ 3,143,987   $ 38,870     4.90 %
Securities – taxable     1,156,563     6,941     2.38 %   1,076,742     5,874     2.16 %
Securities – exempt from Federal tax (3)     37,958     324     3.39 %   38,733     329     3.37 %
Other investments and interest-bearing deposits                                  
in other financial institutions     564,501     5,494     3.86 %   857,911     5,170     2.39 %
Total interest earning assets (3)     5,009,578     55,260     4.38 %   5,117,373     50,243     3.90 %
Cash and due from banks     36,392               37,961            
Premises and equipment, net     9,436               9,591            
Goodwill and other intangible assets     179,074               179,739            
Other assets     126,387               121,666            
Total assets   $ 5,360,867             $ 5,466,330            
                                   
Liabilities and shareholders’ equity:                                  
Deposits:                                  
Demand, noninterest-bearing   $ 1,851,003             $ 1,910,748            
                                   
Demand, interest-bearing     1,164,378     945     0.32 %   1,205,937     543     0.18 %
Savings and money market     1,424,964     1,694     0.47 %   1,429,055     925     0.26 %
Time deposits – under $100     12,157     7     0.23 %   12,329     5     0.16 %
Time deposits – $100 and over     120,246     268     0.88 %   123,458     121     0.39 %
CDARS – money market and time deposits     27,785     1     0.01 %   30,517     1     0.01 %
Total interest-bearing deposits     2,749,530     2,915     0.42 %   2,801,296     1,595     0.23 %
Total deposits     4,600,533     2,915     0.25 %   4,712,044     1,595     0.13 %
                                   
Subordinated debt, net of issuance costs     39,326     538     5.43 %   39,288     538     5.43 %
Short-term borrowings     24         0.00 %   27         0.00 %
Total interest-bearing liabilities     2,788,880     3,453     0.49 %   2,840,611     2,133     0.30 %
Total interest-bearing liabilities and demand,                                  
noninterest-bearing / cost of funds     4,639,883     3,453     0.30 %   4,751,359     2,133     0.18 %
Other liabilities     105,043               103,264            
Total liabilities     4,744,926               4,854,623            
Shareholders’ equity     615,941               611,707            
Total liabilities and shareholders’ equity   $ 5,360,867             $ 5,466,330            
                                   
Net interest income (3) / margin           51,807     4.10 %         48,110     3.73 %
Less tax equivalent adjustment (3)           (68 )               (69 )      
Net interest income         $ 51,739               $ 48,041        


(1)   Includes loans held-for-sale. Nonaccrual loans are included in average balances.
(2)   Yield amounts earned on loans include fees and costs. The accretion of net deferred loan fees into loan interest income was $326,000 for the fourth quarter of 2022 (of which $25,000 was from PPP loans), compared to $507,000 for the third quarter of 2022 (of which $190,000 was from PPP loans). Prepayment fees totaled $123,000 for the fourth quarter of 2022, compared to $96,000 for the third quarter of 2022.
(3)   Reflects the FTE adjustment for Federal tax-exempt income based on a 21% tax rate.

                                   
    For the Year Ended   For the Year Ended  
    December 31, 2022   December 31, 2021  
                Interest      Average               Interest      Average  
NET INTEREST INCOME AND NET INTEREST MARGIN   Average   Income/   Yield/   Average   Income/   Yield/  
(in $000’s, unaudited)   Balance   Expense   Rate   Balance   Expense   Rate  
Assets:                                  
Loans, gross (1)(2)   $ 3,119,006   $ 153,010     4.91 % $ 2,766,321   $ 139,244     5.03 %
Securities – taxable     983,137     20,666     2.10 %   534,387     8,678     1.62 %
Securities – exempt from Federal tax (3)     40,478     1,372     3.39 %   60,566     1,995     3.29 %
Other investments, interest-bearing deposits in other                                  
financial institutions and Federal funds sold     908,931     14,068     1.55 %   1,444,356     3,758     0.26 %
Total interest earning assets (3)     5,051,552     189,116     3.74 %   4,805,630     153,675     3.20 %
Cash and due from banks     37,287               39,841            
Premises and equipment, net     9,574               10,056            
Goodwill and other intangible assets     180,061               182,887            
Other assets     122,746               127,880            
Total assets   $ 5,401,220             $ 5,166,294            
                                   
Liabilities and shareholders’ equity:                                  
Deposits:                                  
Demand, noninterest-bearing   $ 1,863,928             $ 1,834,909            
                                   
Demand, interest-bearing     1,224,676     2,415     0.20 %   1,164,556     1,988     0.17 %
Savings and money market     1,394,283     3,720     0.27 %   1,251,438     2,195     0.18 %
Time deposits – under $100     12,587     21     0.17 %   14,924     29     0.19 %
Time deposits – $100 and over     122,018     609     0.50 %   128,753     598     0.46 %
CDARS – money market and time deposits     29,708     5     0.02 %   32,305     6     0.02 %
Total interest-bearing deposits     2,783,272     6,770     0.24 %   2,591,976     4,816     0.19 %
Total deposits     4,647,200     6,770     0.15 %   4,426,885     4,816     0.11 %
                                   
Subordinated debt, net of issuance costs     41,739     2,178     5.22 %   39,827     2,314     5.81 %
Short-term borrowings     24         0.00 %   45     1     2.22 %
Total interest-bearing liabilities     2,825,035     8,948     0.32 %   2,631,848     7,131     0.27 %
Total interest-bearing liabilities and demand,                                  
noninterest-bearing / cost of funds     4,688,963     8,948     0.19 %   4,466,757     7,131     0.16 %
Other liabilities     104,654               114,381            
Total liabilities     4,793,617               4,581,138            
Shareholders’ equity     607,603               585,156            
Total liabilities and shareholders’ equity   $ 5,401,220             $ 5,166,294            
                                   
Net interest income (3) / margin           180,168     3.57 %         146,544     3.05 %
Less tax equivalent adjustment (3)           (288 )               (419 )      
Net interest income         $ 179,880               $ 146,125        


(1)   Includes loans held-for-sale. Nonaccrual loans are included in average balances.
(2)   Yield amounts earned on loans include fees and costs. The accretion of net deferred loan fees into loan interest income was $3,437,000 for the year ended December 31, 2022 (of which $2,054,000 was from PPP loans), compared to $11,257,000 for the year ended December 31, 2021 (of which $9,995,000 was from PPP loans). Prepayment fees totaled $1,278,000 for the year ended December 31, 2022, compared to $2,700,000 for the year ended December 31, 2021.
(3)   Reflects the FTE adjustment for Federal tax-exempt income based on a 21% tax rate.

 

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