Heritage Commerce Corp Earns $14.8 Million for the Second Quarter of 2022, and $27.7 Million for the First Six Months of 2022

| Source: Heritage Commerce Corp Heritage Commerce Corp

SAN JOSE, Calif., July 28, 2022 (GLOBE NEWSWIRE) -- Heritage Commerce Corp (Nasdaq: HTBK), the holding company (the “Company”) for Heritage Bank of Commerce (the “Bank”), today announced second quarter 2022 net income of $14.8 million, or $0.24 per average diluted common share, compared to $8.8 million, or $0.15 per average diluted common share, for the second quarter of 2021, and $12.9 million, or $0.21 per average diluted common share, for the first quarter of 2022. For the six months ended June 30, 2022, net income was $27.7 million, or $0.45 per average diluted common share, compared to $20.0 million, or $0.33 per average diluted common share, for the six months ended June 30, 2021. All results are unaudited.

“Our second quarter of 2022 results were stellar, generating record earnings for the quarter and for the first half of 2022,” said Walter Kaczmarek, President and Chief Executive Officer. “Year-over-year core deposit growth was solid, supporting strong organic loan growth. Loans, excluding Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans and residential mortgages, increased 12% from a year earlier. Additionally, our strong liquidity provides us with the opportunity for investment strategies that positively impact our net interest income.”

“We continue to deliver solid profitability metrics, including an annualized return on average tangible equity of 14.06% and an efficiency ratio of 52.73% for the second quarter of 2022,” said Mr. Kaczmarek. “Our excellent credit quality further improved during the second quarter of 2022 with nonperforming assets declining 56% from a year ago and down 29% from the linked quarter. Our allowance for credit losses on loans to total loans increased to 1.48%, or $45.5 million, at June 30, 2022, from 1.41%, or $42.8 million, at March 31, 2022, despite having a negative provision for credit losses on loans, due to net loan recoveries on previously charged off loans of $2.9 million during the second quarter of 2022. The net interest margin improved to 3.38% for the second quarter 2022, compared to 3.05% for the first quarter of 2022.”

“Our franchise is growing as we continue to look for opportunities to expand in the San Francisco Bay area. We recently opened a new banking office in Oakland, at 1111 Broadway, Suite 1650, offering a full range of commercial banking services to small and medium-sized businesses and their owners, managers and employees. We will continue to focus on deepening our existing customer relationships while cultivating new customer relationships,” said Mr. Kaczmarek. “Going forward, our balance sheet remains well positioned to benefit from rising interest rates. Together with our strong liquidity and capital levels, earnings capacity and dedicated employees, we are well positioned for further success as we head into the second half of the year.”

Second Quarter Ended June 30, 2022
Operating Results, Balance Sheet Review, Capital Management, and Credit Quality

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

Operating Results:

  • Diluted earnings per share were $0.24 for the second quarter of 2022, compared to $0.15 for the second quarter of 2021, and $0.21 for the first quarter of 2022. Diluted earnings per share were $0.45 for the first six months of 2022, compared to $0.33 for the first six months of 2021.

  • The following table indicates the ratios for the return on average tangible assets and the return on average tangible equity for the periods indicated:
  For the Quarter Ended: For the Six Months Ended
  June 30,  March 31,  June 30,  June 30,  June 30, 
(unaudited) 2022 2022 2021 2022 2021
Return on average tangible assets 1.15%  0.99%  0.73%  1.07%  0.85% 
Return on average tangible equity 14.06%  12.47%  8.84%  13.28%  10.16% 
                     
  • Net interest income, before provision for credit losses on loans, increased 20% to $41.9 million for the second quarter of 2022, compared to $34.9 million for the second quarter of 2021, primarily due to higher average balances of loans and investment securities, higher average yields on investment securities and overnight funds, an increase in the accretion of the loan purchase discount into interest income from acquired loans, and a lower cost of funds, partially offset by lower interest and fees on PPP loans. Net interest income increased 10% for the second quarter of 2022, compared to $38.2 million for the first quarter of 2022, primarily due to higher average balances of loans and investment securities, higher average yields on loans, investment securities and overnight funds, an increase in the accretion of the loan purchase discount into interest income from acquired loans, partially offset by lower interest and fees on PPP loans. Net interest income increased 15% to $80.1 million for the first six months of 2022, compared to $69.8 million for the first six months of 2021, primarily due to higher average balances of loans and investment securities, higher average yields on investment securities and overnight funds, and a lower cost of funds, partially offset by lower interest and fees on PPP loans.

    • The fully tax equivalent (“FTE”) net interest margin increased 33 basis points to 3.38% for the second quarter of 2022 from 3.05% for the first 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, higher average yield on overnight funds, and an increase in the accretion of the loan purchase discount into interest income from acquired loans, partially offset by lower interest and fees on PPP loans.

    • The FTE net interest margin increased 38 basis points to 3.38% for the second quarter of 2022, from 3.00% for the second quarter of 2021, primarily due to a shift in the mix of earning assets into higher yielding loans and investment securities, higher average yield on overnight funds, and an increase in the accretion of the loan purchase discount into interest income from acquired loans, and a decline in the cost of funds, partially offset by lower interest and fees on PPP loans.

    • For the first six months of 2022, the FTE net interest margin increased 11 basis points to 3.21%, compared to 3.10% for the first six months of 2021, primarily due to higher average balances of loans and investment securities, higher average yields on investment securities and overnight funds, and a lower cost of funds, partially offset by lower interest and fees on PPP loans.

  • The following table, as of June 30, 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 
  (Dollars in thousands) 
Change in Interest Rates (basis points)      
+400 $40,591  22.7%
+300 $30,388  17.0%
+200 $20,241  11.3%
+100 $10,153  5.7%
0  —  — 
−100 $(19,568) (11.0)%
−200 $(36,408) (20.4)%

___________________

(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 4.80% for the second quarter of 2022, compared to 4.70% for the first quarter of 2022, primarily due to increases in the prime rate, an increase in the accretion of the loan purchase discount into interest income from acquired loans, 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 
  June 30, 2022 March 31, 2022 
  Average Interest Average Average Interest Average 
(in $000’s, unaudited) Balance Income Yield Balance Income Yield 
Loans, core bank $2,530,836  $27,402 4.34%$2,483,708  $26,097 4.26%
Prepayment fees  —   549 0.09% —   510 0.08%
PPP loans  21,479   53 0.99% 60,264   146 0.98%
PPP fees, net  —   493 9.21% —   1,346 9.06%
Asset-based lending  49,667   874 7.06% 69,617   950 5.53%
Bay View Funding factored receivables  64,085   3,129 19.58% 57,761   2,793 19.61%
Purchased residential mortgages  381,988   2,711 2.85% 355,626   2,428 2.77%
Purchased commercial real estate ("CRE") loans  8,425   77 3.67% 8,514   77 3.67%
Loan fair value mark / accretion  (6,303)  1,250 0.20% (6,901)  754 0.12%
Total loans (includes loans held-for-sale) $3,050,177  $36,538 4.80%$3,028,589  $35,101 4.70%
                    
  • The average yield on the total loan portfolio remained flat at 4.80% for both the second quarter of 2022 and the second quarter of 2021, as an increase in the accretion of the loan purchase discount into interest income from acquired loans and higher yields on the asset-based lending portfolio, was offset by lower interest and fees on PPP loans, higher average balances of lower yielding purchased residential mortgages, declines in the average yields of the core bank loans and Bay View Funding factored receivables.
  For the Quarter Ended For the Quarter Ended 
  June 30, 2022 June 30, 2021 
  Average Interest Average Average Interest Average 
(in $000’s, unaudited) Balance Income Yield Balance Income Yield 
Loans, core bank $2,530,836  $27,402 4.34%$2,246,030  $25,036 4.47%
Prepayment fees  —   549 0.09% —   504 0.09%
PPP loans  21,479   53 0.99% 334,604   831 1.00%
PPP fees, net  —   493 9.21% —   1,876 2.25%
Asset-based lending  49,667   874 7.06% 35,125   464 5.30%
Bay View Funding factored receivables  64,085   3,129 19.58% 48,993   2,772 22.69%
Purchased residential mortgages  381,988   2,711 2.85% 125,710   981 3.13%
Purchased CRE loans  8,425   77 3.67% 14,602   110 3.02%
Loan fair value mark / accretion  (6,303)  1,250 0.20% (10,643)  865 0.15%
Total loans (includes loans held-for-sale) $3,050,177  $36,538 4.80%$2,794,421  $33,439 4.80%


 •The average yield on the total loan portfolio decreased to 4.75% for the six months ended June 30, 2022, compared to 5.01% for the six months ended June 30, 2021, primarily due to an increase in the average balance of lower yielding purchased residential mortgages, and a decrease in interest and fees on PPP loans.


  For the Six Months Ended  For the Six Months Ended  
  June 30, 2022 June 30, 2021 
  Average Interest Average Average Interest Average 
(in $000’s, unaudited) Balance Income Yield Balance Income Yield 
Loans, core bank $2,507,403  $53,498 4.30%$2,222,135  $49,729 4.51%
Prepayment fees  —   1,059 0.09% —   1,021 0.09%
PPP loans  40,764   199 0.98% 326,928   1,615 1.00%
PPP fees, net  —   1,839 9.10% —   5,276 3.25%
Asset-based lending  59,587   1,825 6.18% 31,268   838 5.40%
Bay View Funding factored receivables  60,940   5,922 19.60% 48,546   5,422 22.52%
Purchased residential mortgages  368,880   5,139 2.81% 74,238   1,099 2.99%
Purchased CRE loans  8,469   154 3.67% 15,875   281 3.57%
Loan fair value mark / accretion  (6,600)  2,004 0.16% (11,132)  1,994 0.18%
Total loans (includes loans held-for-sale) $3,039,443  $71,639 4.75%$2,707,858  $67,275 5.01%


 •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 $5.3 million at June 30, 2022.
  • The average cost of total deposits was 0.10% for both the second and first quarters of 2022, compared to 0.11% for the second quarter of 2021. The average cost of total deposits was 0.10% for the six months ended June 30, 2022, compared to 0.12% for the six months ended June 30, 2021.
  • During the second quarter of 2022, there was a negative provision for credit losses on loans of $181,000, compared to a $493,000 negative provision for credit losses on loans for the second quarter of 2021, and a $567,000 negative provision for credit losses on loans for the first quarter of 2022. There was a negative provision for credit losses on loans of $748,000 for the six months ended June 30, 2022, compared to a $2.0 million negative provision for credit losses on loans for the six months ended June 30, 2021.
  • Total noninterest income remained relatively flat at $2.1 million for the second quarter of 2022, compared to $2.2 million for the second quarter of 2021, mostly due to a lower gain on proceeds from company-owned life insurance, partially offset by higher service charges and fees on deposit accounts during the second quarter of 2022. Total noninterest income decreased from $2.5 million for the first quarter of 2022, primarily due to a $637,000 gain on warrants and a higher gain on sale of SBA loans during the first quarter of 2022, partially offset by higher service charges and fees on deposit accounts during the second quarter of 2022.

    • For the six months ended June 30, 2022, total noninterest income remained relatively flat at $4.6 million, compared to $4.5 million for the six months ended June 30, 2021, primarily due to a $637,000 gain on warrants and higher service charges and fees on deposit accounts during the first six months of 2022, partially offset by a lower gain on proceeds from company-owned life insurance and a lower gain on sale of SBA loans during the first six months of 2022.
  • Total noninterest expense for the second quarter of 2022 decreased to $23.2 million, compared to $25.8 million for the second quarter of 2021, primarily due to a $4.0 million reserve for a legal settlement during the second quarter of 2021, partially offset by higher salaries and employee benefits, insurance expense and Federal Deposit Insurance Corporation (“FDIC”) assessments during the second quarter of 2022. Noninterest expense for the second quarter of 2022 remained relatively flat compared to $23.3 million for the first quarter of 2022.

    • Noninterest expense for the six months ended June 30, 2022 decreased to $46.4 million, compared to $49.0 million for the six months ended June 30, 2021, primarily due to a reserve for a legal settlement during the first six months of 2021, partially offset by higher salaries and employee benefits, insurance expense and FDIC assessments during the first six months of 2022.

    • Full time equivalent employees was 332 at June 30, 2022, and 330 at June 30, 2021, and 325 at March 31, 2022.

  • The efficiency ratio was 52.73% for the second quarter of 2022, compared to 69.58% for the second quarter of 2021, and 57.16% for the first quarter of 2022. The efficiency ratio for the six months ended June 30, 2022 was 54.86%, compared to 65.97% for the six months ended June 30, 2021. Excluding the $4.0 million reserve for a legal settlement, the efficiency ratio was 58.78% for the second quarter of 2021, and 60.59% for the first six months of 2021.
  • Income tax expense was $6.1 million for the second quarter of 2022, compared to $3.0 million for the second quarter of 2021, and $5.1 million for the first quarter of 2022. The effective tax rate for the second quarter of 2022 was 29.3%, compared to 25.1% for the second quarter of 2021, and 28.5% for the first quarter of 2021. Income tax expense for the six months ended June 30, 2022 was $11.3 million, compared to $7.3 million for the six months ended June 30, 2021. The effective tax rate for the six months ended June 30, 2022 was 28.9%, compared to 26.7% for the six months ended June 30, 2021.

    • The difference in the effective tax rate for the periods reported compared to the combined Federal and state statutory tax rate of 29.6% was primarily the result of the Company’s investment in life insurance policies whose earnings are not subject to taxes, tax credits related to investments in low-income housing limited partnerships (net of low-income housing investment losses), and tax-exempt interest income earned on municipal bonds.

Balance Sheet Review, Capital Management and Credit Quality:

  • Total assets increased 6% to $5.357 billion at June 30, 2022, compared to $5.073 billion at June 30, 2021, and decreased (1%) from $5.427 billion at March 31, 2022.
  • Securities available-for-sale, at fair value, totaled $332.1 million at June 30, 2022, compared to $146.0 million at June 30, 2021, and $111.2 million at March 31, 2022. At June 30, 2022, the Company’s securities available-for-sale portfolio was comprised of $250.1 million of U.S. Treasury securities and $82.0 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 June 30, 2022 was ($1.2) million, compared to a pre-tax unrealized gain of $94,000 at June 30, 2021, and a pre-tax unrealized loss of ($94,000) at March 31, 2022. The pre-tax unrealized loss on mortgage-backed securities available-for-sale at June 30, 2022 was ($2.9) million, compared to a pre-tax unrealized gain of $4.2 million at June 30, 2021, and a pre-tax unrealized loss of ($1.4) million at March 31, 2022. The pre-tax unrealized loss on total securities available-for-sale at June 30, 2022 was ($4.1) million, compared to a pre-tax unrealized gain of $4.3 million at June 30, 2021, and a pre-tax unrealized loss of ($1.5) million at March 31, 2022. All other factors remaining the same, when market interest rates are increasing, the Company will experience a higher unrealized loss on the securities portfolio.
    • During the second quarter of 2022, the Company purchased $229.3 million of U.S. Treasury securities available-for-sale, with a book yield of 2.80% and an average life of 2.58 years. During the first six months of 2022, the Company purchased $251.0 million of U.S. Treasury securities available-for-sale, with a book yield of 2.75% and an average life of 2.57 years.
  • At June 30, 2022, securities held-to-maturity, at amortized cost, totaled $723.7 million, compared to $421.3 million at June 30, 2021, and $736.8 million at March 31, 2022. At June 30, 2022, the Company’s securities held-to-maturity portfolio was comprised of $683.7 million of agency mortgage-backed securities, and $40.0 million of tax-exempt municipal bonds.

    • The pre-tax unrealized loss on mortgage-backed securities held-to-maturity at June 30, 2022 was ($72.5) million, compared to a pre-tax unrealized gain of $4.2 million at June 30, 2021, and a pre-tax unrealized loss of ($46.2) million at March 31, 2022. The pre-tax unrealized loss on municipal bonds held-to-maturity at June 30, 2022 was ($436,000), compared to a pre-tax unrealized gain of $1.2 million at June 30, 2021, and a pre-tax unrealized gain of $148,000 at March 31, 2022. The pre-tax unrealized loss on total securities held-to-maturity at June 30, 2022 was ($72.9) million, compared to a pre-tax unrealized gain of $5.4 million at June 30, 2021, and a pre-tax unrealized loss of ($46.1) million at March 31, 2021.
    • During the second quarter of 2022, the Company purchased $9.8 million of agency mortgage-backed securities held-to-maturity, with a book yield of 3.26% and an average life of 6.92 years. During the first six months of 2022, the Company purchased $119.4 million of agency mortgage-backed securities held-to-maturity, with a book yield of 2.21% and an average life of 6.55 years.
  • 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  June 30, 2022 March 31, 2022 June 30, 2021 
(in $000’s, unaudited) Balance  % to Total Balance  % to Total Balance  % to Total 
Commercial $523,268  17%$568,053  19%$557,686  20%
PPP Loans(1)  8,153  0% 37,393  1% 286,461  10%
Real estate:                
CRE - owner occupied  597,521  19% 597,542  20% 583,091  21%
CRE - non-owner occupied  993,621  32% 928,220  31% 742,135  26%
Land and construction  155,389  5% 153,323  5% 129,426  4%
Home equity  116,641  4% 111,609  3% 107,873  4%
Multifamily  221,938  7% 221,767  7% 198,771  7%
Residential mortgages  448,958  15% 391,171  13% 205,904  7%
Consumer and other  18,354  1% 17,110  1% 21,519  1%
Total Loans  3,083,843  100% 3,026,188  100% 2,832,866  100%
Deferred loan costs (fees), net  (1,391) —  (2,124) —  (8,070) — 
Loans, net of deferred costs and fees $3,082,452  100%$3,024,064  100%$2,824,796  100%

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(1)   Less than 1% at June 30, 2022.

 •Loans, excluding loans held-for-sale, increased $257.7 million, or 9%, to $3.082 billion at June 30, 2022, compared to $2.825 billion at June 30, 2021, and increased $58.4 million, or 2%, from $3.024 billion at March 31, 2022. Total loans at June 30, 2022 included $8.2 million of PPP loans, compared to $286.5 million at June 30, 2021 and $37.4 million at March 31, 2022. Total loans at June 30, 2022 included $449.0 million of residential mortgages, compared to $205.9 million at June 30, 2021, and $391.2 million at March 31, 2022. Loans, excluding loans held-for-sale, PPP loans and residential mortgages, increased $286.3 million, or 12%, to $2.626 billion at June 30, 2022, compared to $2.339 billion at June 30, 2021, and increased $29.3 million, or 1%, from $2.596 billion at March 31, 2022.
   
 •Commercial and industrial (“C&I”) line utilization was 28% at June 30, 2022, compared to 27% at June 30, 2021, and 31% at March 31, 2022.
   
 •At June 30, 2022, 38% of the CRE loan portfolio was secured by owner-occupied real estate, compared to 44% at June 30, 2021, and 39% at March 31, 2022.
   
 •At June 30, 2022, approximately 36% of the Company’s loan portfolio consisted of floating interest rate loans, compared to 44% at June 30, 2021, and 38% at March 31, 2022.
   
 •In response to economic stimulus laws passed by Congress in 2020 and 2021, the Bank funded two rounds of PPP loans totaling $530.8 million. At June 30, 2022, after accounting for loan payoffs and SBA loan forgiveness, “Round 1” PPP loans were $43,000 and “Round 2” PPP loans were $8.1 million. In total, the Bank had $8.2 million in outstanding PPP loan balances at June 30, 2022. The following table shows interest income, fee income and deferred origination costs generated by the PPP loans, outstanding PPP loan balances and related deferred fees and costs for the periods indicated:


  At or For the Quarter Ended: At or For the Six Months Ended:
PPP LOANS June 30,  March 31,  June 30,  June 30,  June 30, 
(in $000’s, unaudited) 2022
 2022
 2021
 2022
 2021
Interest income $53  $146  $831  $199  $1,615 
Fee income, net  493   1,346   1,876   1,839   5,276 
Total $546  $1,492  $2,707  $2,038  $6,891 
                
PPP loans outstanding at period end:               
Round 1 $43  $1,186  $91,849  $43  $91,849 
Round 2  8,110   36,207   194,612   8,110   194,612 
Total $8,153  $37,393  $286,461  $8,153  $286,461 
                
Deferred fees outstanding at period end $(337) $(876) $(7,747) $(337) $(7,747)
Deferred costs outstanding at period end  24   69   869   24   869 
Total $(313) $(807) $(6,878) $(313) $(6,878)


 •During the second quarter of 2022, the Company purchased single family residential mortgage loans totaling $74.5 million, tied to homes all located in California, with average principal balances of approximately $821,000 and a weighted average yield of approximately 3.14%. During the second quarter of 2021, the Company purchased single family residential mortgage loans totaling $140.0 million, tied to homes all located in California, with average principal balances of approximately $585,000 and a weighted average yield of approximately 3.39% (excluding servicing costs, which are netted against interest income contributing to a lower overall average yield).
  • The following table summarizes the allowance for credit losses on loans (“ACLL”) for the periods indicated:
  At or For the Quarter Ended: For the Six Months Ended  
ALLOWANCE FOR CREDIT LOSSES ON LOANS June 30,  March 31,  June 30,  June 30,  June 30,  
(in $000’s, unaudited) 2022
 2022
 2021
 2022
 2021
 
Balance at beginning of period $42,788  $43,290  $44,296  $43,290  $44,400  
Charge-offs during the period  (355)  (16)  (105)  (371)  (368) 
Recoveries during the period  3,238   81   258   3,319   1,929  
Net recoveries (charge-offs) during the period  2,883   65   153   2,948   1,561  
Provision for (recapture of) credit losses on loans during the period  (181)  (567)  (493)  (748)  (2,005) 
Balance at end of period $45,490  $42,788  $43,956  $45,490  $43,956  
                 
Total loans, net of deferred fees $3,082,454  $3,024,064  $2,824,796  $3,082,454  $2,824,796  
Total nonperforming loans $2,715  $3,830  $6,180  $2,715  $6,180  
ACLL to total loans  1.48 % 1.41 % 1.56 % 1.48 % 1.56 %
ACLL to total nonperforming loans  1,675.51 % 1,117.18 % 711.26 % 1,675.51 % 711.26 %


 •The ACLL was 1.48% of total loans at June 30, 2022 while the ACLL to total nonperforming loans was 1,675.51%. The ACLL was 1.56% of total loans and the ACLL to nonperforming loans was 711.26% at June 30, 2021. The ACLL was 1.41% of total loans and the ACLL to total nonperforming loans was 1,117.18% at March 31, 2022.
   
 •The following table shows the drivers of change in ACLL under the current expected credit losses (“CECL”) methodology for the second quarter 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 
  • Net recoveries totaled $2.9 million for the second quarter of 2022, compared to net recoveries of $153,000 for the second quarter of 2021, and net recoveries of $65,000 for the first quarter of 2022. Net recoveries totaled $2.9 million during both the second quarter and the first six months of 2022, primarily due to recoveries of a couple of larger loans that were previously charged off.
  • The following is a breakout of nonperforming assets (“NPAs”) at the periods indicated:
NONPERFORMING ASSETS June 30, 2022 March 31, 2022 June 30, 2021 
(in $000’s, unaudited) Balance % of Total Balance % of Total Balance % of Total 
CRE loans $1,094 40%$2,233 58%$2,923 47%
Restructured and loans over 90 days past due and still accruing  981 36% 527 14% 889 14%
Commercial loans  640 24% 997 26% 1,793 29%
Home equity loans  — —% 73 2% 407 7%
Consumer and other loans  — —% — —% 168 3%
Total nonperforming assets $2,715 100%$3,830 100%$6,180 100%


 •NPAs totaled $2.7 million, or 0.05% of total assets, at June 30, 2022, compared to $6.2 million, or 0.12% of total assets, at June 30, 2021, $3.8 million, or 0.07% of total assets, at March 31, 2022.
   
 •There were no foreclosed assets on the balance sheet at June 30, 2022, June 30, 2021, or March 31, 2022.
   
 •Classified assets decreased to $28.9 million, or 0.54% of total assets, at June 30, 2022, compared to $32.4 million, or 0.64% of total assets, at June 30, 2021, and $30.6 million, or 0.56% of total assets, at March 31, 2022.
  • The following table summarizes the distribution of deposits and the percentage of distribution in each category for the periods indicated:
DEPOSITS June 30, 2022 March 31, 2022 June 30, 2021 
(in $000’s, unaudited) Balance % to Total Balance % to Total Balance % to Total 
Demand, noninterest-bearing $1,846,365 40%$1,811,943 38%$1,840,516 42%
Demand, interest-bearing  1,218,538 26% 1,268,942 27% 1,140,867 26%
Savings and money market  1,387,003 30% 1,447,434 31% 1,174,587 27%
Time deposits — under $250  36,691 1% 38,417 1% 42,118 1%
Time deposits — $250 and over  98,760 2% 93,161 2% 110,111 3%
CDARS — interest-bearing demand,                
money market and time deposits  26,287 1% 30,008 1% 36,273 1%
Total deposits $4,613,644 100%$4,689,905 100%$4,344,472 100%


 •Total deposits increased $269.2 million, or 6%, to $4.614 billion at June 30, 2022, compared to $4.344 billion at June 30, 2021, and decreased ($76.3) million, or (2%), from $4.690 billion at March 31, 2022. The decrease in total deposits at June 30, 2022, compared to March 31, 2022, was primarily due to a decline in temporary deposits from two customers. The deposits from those two customers decreased ($61.2) million to $149.3 million at June 30, 2022, compared to $210.5 million at March 31, 2022.
   
 •Deposits, excluding all time deposits and CDARS deposits, increased $295.9 million, or 7%, to $4.452 billion at June 30, 2022, compared to $4.156 billion at June 30, 2021, and decreased ($76.4) million, or (2%), compared to $4.528 billion at March 31, 2022.
  • During the second quarter of 2022, the Company completed a private placement offering of $40.0 million aggregate principal amount of its 5.00% fixed-to-floating rate subordinated notes due May 15, 2032 (“Sub Debt due 2032”). The Company used the net proceeds of the Sub Debt due 2032 for general corporate purposes, including the repayment on June 1, 2022 of the Company’s $40.0 million aggregate principal amount of 5.25% fixed-to-floating rate subordinated notes due June 1, 2027. The Sub Debt due 2032, net of unamortized issuance costs of $726,000, totaled $39,274,000 at June 30, 2022, and qualifies as Tier 2 capital for the Company under the guidelines established by the Federal Reserve Bank.
  • 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 June 30, 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 14.6% 14.1% 10.0% 10.5%
Tier 1 Capital 12.5% 13.0% 8.0% 8.5%
Common Equity Tier 1 Capital 12.5% 13.0% 6.5% 7.0%
Tier 1 Leverage 8.7% 9.0% 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 June 30, March 31, June 30,
(in $000’s, unaudited) 2022 2022
 2021
Unrealized (loss) gain on securities available-for-sale $(3,037) $(1,127) $2,674 
Remaining unamortized unrealized gain on securities         
available-for-sale transferred to held-to-maturity  —   —   243 
Split dollar insurance contracts liability  (5,501)  (5,491)  (6,142)
Supplemental executive retirement plan liability  (7,507)  (7,588)  (8,506)
Unrealized gain on interest-only strip from SBA loans  127   152   199 
Total accumulated other comprehensive loss $(15,918) $(14,054) $(11,532)
  • Tangible equity was $427.2 million at June 30, 2022, compared to $400.6 million at June 30, 2021, and $420.4 million at March 31, 2022. Tangible book value per share was $7.04 at June 30, 2022, compared to $6.65 at June 30, 2021, and $6.96 at March 31, 2022.

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 prices and commodity prices, and increase the volatility of financial markets; (2) conditions related to the COVID-19 pandemic, and other infectious illness outbreaks that may arise in the future, on our customers, employees, businesses, liquidity, and financial results and overall condition including severity and duration of the associated uncertainties in U.S. and global markets; (3) 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; (4) 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; (5) inflationary pressures and changes in the interest rate environment that reduce our margin and yields, the fair value of financial instruments or our level of loan originations, or increase in the level of defaults, losses and prepayments on loans we have made and make; (6) 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; (7) volatility in credit and equity markets and its effect on the global economy; (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; (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) changes in our capital management policies, including those regarding business combinations, dividends, and share repurchases; (16) 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; (17) 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; (18) possible adjustment of the valuation of our deferred tax assets; (19) 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; (20) inability of our framework to manage risks associated with our business, including operational risk and credit risk; (21) risks of loss of funding of SBA or SBA loan programs, or changes in those programs; (22) 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; (23) 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; (24) the expense and uncertain resolution of litigation matters whether occurring in the ordinary course of business or otherwise; (25) availability of and competition for acquisition opportunities; (26) risks resulting from domestic terrorism; (27) risks resulting from social unrest and protests; (28) risks of natural disasters (including earthquakes and flooding) and other events beyond our control; (29) our participation as a lender in the SBA PPP and similar programs and its effect on our liquidity, financial results, businesses and customers, including the ability of customers to comply with requirements and otherwise perform with respect to loans obtained under such programs; (30) 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 Six Months Ended:
CONSOLIDATED INCOME STATEMENTS June 30, March 31, June 30, March 31, June 30,  June 30, June 30, Percent 
(in $000’s, unaudited) 2022
 2022
 2021
 2022 2021  2022
 2021
 Change 
Interest income $43,556  $39,906  $36,632  9 %19 % $83,462  $73,393  14 %
Interest expense  1,677   1,685   1,756  0 %(4)%  3,362   3,559  (6)%
Net interest income before provision                       
for credit losses on loans  41,879   38,221   34,876  10 %20 %  80,100   69,834  15 %
Provision for (recapture of) credit losses on loans  (181)  (567)  (493) 68 %63 %  (748)  (2,005) 63 %
Net interest income after provision                       
for credit losses on loans  42,060   38,788   35,369  8 %19 %  80,848   71,839  13 %
Noninterest income:                       
Service charges and fees on deposit accounts  867   612   659  42 %32 %  1,479   1,260  17 %
Increase in cash surrender value of                       
life insurance  480   480   458  0 %5 %  960   914  5 %
Servicing income  139   106   104  31 %34 %  245   286  (14)%
Termination fees  45   —   57  N/A (21)%  45   147  (69)%
Gain on sales of SBA loans  27   156   83  (83)%(67)%  183   633  (71)%
Gain on proceeds from company owned life insurance  27   —   396  N/A (93)%  27   462  (94)%
Gain on warrants  —   637   —  (100)%N/A   637   —  N/A 
Other  513   469   412  9 %25 %  982   768  28 %
Total noninterest income  2,098   2,460   2,169  (15)%(3)%  4,558   4,470  2 %
Noninterest expense:                       
Salaries and employee benefits  13,476   13,821   12,572  (2)%7 %  27,297   26,530  3 %
Occupancy and equipment  2,277   2,437   2,247  (7)%1 %  4,714   4,521  4 %
Professional fees  1,291   1,080   1,771  20 %(27)%  2,371   3,490  (32)%
Other  6,146   5,914   9,185  4 %(33)%  12,060   14,478  (17)%
Total noninterest expense  23,190   23,252   25,775  0 %(10)%  46,442   49,019  (5)%
Income before income taxes  20,968   17,996   11,763  17 %78 %  38,964   27,290  43 %
Income tax expense  6,147   5,130   2,950  20 %108 %  11,277   7,273  55 %
Net income $ 14,821  $ 12,866  $ 8,813  15 %68 % $ 27,687  $ 20,017  38 %
                        
PER COMMON SHARE DATA                       
(unaudited)                       
Basic earnings per share $0.24  $0.21  $0.15  14 %60 % $0.46  $0.33  39 %
Diluted earnings per share $0.24  $0.21  $0.15  14 %60 % $0.45  $0.33  36 %
Weighted average shares outstanding - basic  60,542,170   60,393,883   60,089,327  0 %1 %  60,468,027   60,008,071  1 %
Weighted average shares outstanding - diluted  60,969,154   60,921,835   60,730,141  0 %0 %  60,945,711   60,572,457  1 %
Common shares outstanding at period-end  60,666,794   60,407,846   60,202,766  0 %1 %  60,666,794   60,202,766  1 %
Dividend per share $0.13  $0.13  $0.13  0 %0 % $0.26  $0.26  0 %
Book value per share $10.01  $9.95  $9.69  1 %3 % $10.01  $9.69  3 %
Tangible book value per share $7.04  $6.96  $6.65  1 %6 % $7.04  $6.65  6 %
                        
KEY FINANCIAL RATIOS                       
(unaudited)                       
Annualized return on average equity  9.86 % 8.71 % 6.06 %13 %63 %  9.29 % 6.95 %34 %
Annualized return on average tangible equity  14.06 % 12.47 % 8.84 %13 %59 %  13.28 % 10.16 %31 %
Annualized return on average assets  1.11 % 0.96 % 0.70 %16 %59 %  1.04 % 0.82 %27 %
Annualized return on average tangible assets  1.15 % 0.99 % 0.73 %16 %58 %  1.07 % 0.85 %26 %
Net interest margin (FTE)  3.38 % 3.05 % 3.00 %11 %13 %  3.21 % 3.10 %4 %
Efficiency ratio  52.73 % 57.16 % 69.58 %(8)%(24)%  54.86 % 65.97 %(17)%
                        
AVERAGE BALANCES                       
(in $000’s, unaudited)                       
Average assets $5,334,636  $5,443,240  $5,047,097  (2)%6 % $5,388,638  $4,911,242  10 %
Average tangible assets $5,154,245  $5,262,175  $4,863,814  (2)%6 % $5,207,912  $4,727,594  10 %
Average earning assets $4,985,611  $5,093,851  $4,678,084  (2)%7 % $5,039,432  $4,549,736  11 %
Average loans held-for-sale $1,824  $1,478  $4,053  23 %(55)% $1,652  $3,757  (56)%
Average total loans $3,048,353  $3,027,111  $2,790,368  1 %9 % $3,037,791  $2,704,101  12 %
Average deposits $4,579,436  $4,697,136  $4,307,555  (3)%6 % $4,637,960  $4,178,968  11 %
Average demand deposits - noninterest-bearing $1,836,350  $1,857,164  $1,808,638  (1)%2 % $1,846,699  $1,761,035  5 %
Average interest-bearing deposits $2,743,086  $2,839,972  $2,498,917  (3)%10 % $2,791,261  $2,417,933  15 %
Average interest-bearing liabilities $2,791,527  $2,879,952  $2,538,747  (3)%10 % $2,835,495  $2,457,749  15 %
Average equity $603,182  $599,355  $583,009  1 %3 % $601,279  $581,094  3 %
Average tangible equity $422,791  $418,290  $399,726  1 %6 % $420,553  $397,446  6 %


                 
  For the Quarter Ended: 
CONSOLIDATED INCOME STATEMENTS June 30, March 31, December 31, September 30, June 30, 
(in $000’s, unaudited) 2022
 2022
 2021
 2021
 2021
 
Interest income $43,556  $39,906  $39,956  $39,907  $36,632  
Interest expense  1,677   1,685   1,847   1,725   1,756  
Net interest income before provision                
for credit losses on loans  41,879   38,221   38,109   38,182   34,876  
Provision for (recapture of) credit losses on loans  (181)  (567)  (615)  (514)  (493) 
Net interest income after provision                
for credit losses on loans  42,060   38,788   38,724   38,696   35,369  
Noninterest income:                
Service charges and fees on deposit accounts  867   612   644   584   659  
Increase in cash surrender value of                
life insurance  480   480   454   470   458  
Servicing income  139   106   138   129   104  
Termination fees  45   —   618   32   57  
Gain on sales of SBA loans  27   156   491   594   83  
Gain on proceeds from company owned life insurance  27   —   104   109   396  
Gain on warrants  —   637   —   —   —  
Other  513   469   361   490   412  
Total noninterest income  2,098   2,460   2,810   2,408   2,169  
Noninterest expense:                
Salaries and employee benefits  13,476   13,821   12,871   12,461   12,572  
Occupancy and equipment  2,277   2,437   2,366   2,151   2,247  
Professional fees  1,291   1,080   1,200   1,211   1,771  
Other  6,146   5,914   5,790   6,008   9,185  
Total noninterest expense  23,190   23,252   22,227   21,831   25,775  
Income before income taxes  20,968   17,996   19,307   19,273   11,763  
Income tax expense  6,147   5,130   5,342   5,555   2,950  
Net income $ 14,821  $ 12,866  $ 13,965  $ 13,718  $ 8,813  
                 
PER COMMON SHARE DATA                
(unaudited)                
Basic earnings per share $0.24  $0.21  $0.23  $0.23  $0.15  
Diluted earnings per share $0.24  $0.21  $0.23  $0.23  $0.15  
Weighted average shares outstanding - basic  60,542,170   60,393,883   60,298,424   60,220,717   60,089,327  
Weighted average shares outstanding - diluted  60,969,154   60,921,835   60,844,221   60,760,189   60,730,141  
Common shares outstanding at period-end  60,666,794   60,407,846   60,339,837   60,266,316   60,202,766  
Dividend per share $0.13  $0.13  $0.13  $0.13  $0.13  
Book value per share $10.01  $9.95  $9.91  $9.79  $9.69  
Tangible book value per share $7.04  $6.96  $6.91  $6.77  $6.65  
                 
KEY FINANCIAL RATIOS                
(unaudited)                
Annualized return on average equity  9.86 % 8.71 % 9.35 % 9.29 % 6.06 %
Annualized return on average tangible equity  14.06 % 12.47 % 13.50 % 13.49 % 8.84 %
Annualized return on average assets  1.11 % 0.96 % 0.97 % 1.06 % 0.70 %
Annualized return on average tangible assets  1.15 % 0.99 % 1.00 % 1.10 % 0.73 %
Net interest margin (FTE)  3.38 % 3.05 % 2.84 % 3.18 % 3.00 %
Efficiency ratio  52.73 % 57.16 % 54.32 % 53.78 % 69.58 %
                 
AVERAGE BALANCES                
(in $000’s, unaudited)                
Average assets $5,334,636  $5,443,240  $5,695,136  $5,139,239  $5,047,097  
Average tangible assets $5,154,245  $5,262,175  $5,513,359  $4,956,738  $4,863,814  
Average earning assets $4,985,611  $5,093,851  $5,336,129  $4,778,574  $4,678,084  
Average loans held-for-sale $1,824  $1,478  $4,047  $4,810  $4,053  
Average total loans $3,048,353  $3,027,111  $2,872,074  $2,766,731  $2,790,368  
Average deposits $4,579,436  $4,697,136  $4,945,204  $4,396,315  $4,307,555  
Average demand deposits - noninterest-bearing $1,836,350  $1,857,164  $1,979,940  $1,835,219  $1,808,638  
Average interest-bearing deposits $2,743,086  $2,839,972  $2,965,264  $2,561,096  $2,498,917  
Average interest-bearing liabilities $2,791,527  $2,879,952  $3,005,212  $2,601,002  $2,538,747  
Average equity $603,182  $599,355  $592,291  $586,012  $583,009  
Average tangible equity $422,791  $418,290  $410,514  $403,511  $399,726  


               
  End of Period: Percent Change From: 
CONSOLIDATED BALANCE SHEETS June 30, March 31, June 30, March 31, June 30, 
(in $000’s, unaudited) 2022
 2022
 2021
 2022 2021 
ASSETS              
Cash and due from banks $35,764  $29,729  $41,904  20 %(15)%
Other investments and interest-bearing deposits              
in other financial institutions  840,821   1,187,436   1,286,418  (29)%(35)%
Securities available-for-sale, at fair value  332,129   111,217   145,955  199 %128 %
Securities held-to-maturity, at amortized cost  723,716   736,823   421,286  (2)%72 %
Loans held-for-sale - SBA, including deferred costs  2,281   831   4,344  174 %(47)%
Loans:              
Commercial  523,268   568,053   557,686  (8)%(6)%
PPP loans  8,153   37,393   286,461  (78)%(97)%
Real estate:              
CRE - owner occupied  597,521   597,542   583,091  0 %2 %
CRE - non-owner occupied  993,621   928,220   742,135  7 %34 %
Land and construction  155,389   153,323   129,426  1 %20 %
Home equity  116,641   111,609   107,873  5 %8 %
Multifamily  221,938   221,767   198,771  0 %12 %
Residential mortgages  448,958   391,171   205,904  15 %118 %
Consumer and other  18,354   17,110   21,519  7 %(15)%
Loans  3,083,843   3,026,188   2,832,866  2 %9 %
Deferred loan fees, net  (1,391)  (2,124)  (8,070) (35)%(83)%
Total loans, net of deferred costs and fees  3,082,452   3,024,064   2,824,796  2 %9 %
Allowance for credit losses on loans  (45,490)  (42,788)  (43,956) 6 %3 %
Loans, net  3,036,962   2,981,276   2,780,840  2 %9 %
Company-owned life insurance  77,972   78,069   77,393  0 %1 %
Premises and equipment, net  9,593   9,580   10,040  0 %(4)%
Goodwill  167,631   167,631   167,631  0 %0 %
Other intangible assets  12,351   13,009   15,177  (5)%(19)%
Accrued interest receivable and other assets  117,621   111,797   121,887  5 %(3)%
Total assets $5,356,841  $5,427,398  $5,072,875  (1)%6 %
               
LIABILITIES AND SHAREHOLDERS’ EQUITY              
Liabilities:              
Deposits:              
Demand, noninterest-bearing $1,846,365  $1,811,943  $1,840,516  2 %0 %
Demand, interest-bearing  1,218,538   1,268,942   1,140,867  (4)%7 %
Savings and money market  1,387,003   1,447,434   1,174,587  (4)%18 %
Time deposits - under $250  36,691   38,417   42,118  (4)%(13)%
Time deposits - $250 and over  98,760   93,161   110,111  6 %(10)%
CDARS - money market and time deposits  26,287   30,008   36,273  (12)%(28)%
Total deposits  4,613,644   4,689,905   4,344,472  (2)%6 %
Subordinated debt, net of issuance costs  39,274   39,987   39,832  (2)%(1)%
Accrued interest payable and other liabilities  96,699   96,450   105,127  0 %(8)%
Total liabilities  4,749,617   4,826,342   4,489,431  (2)%6 %
               
Shareholders’ Equity:              
Common stock  499,832   498,763   495,665  0 %1 %
Retained earnings  123,310   116,347   99,311  6 %24 %
Accumulated other comprehensive loss  (15,918)  (14,054)  (11,532) (13)%(38)%
Total shareholders’ equity  607,224   601,056   583,444  1 %4 %
Total liabilities and shareholders’ equity $5,356,841  $5,427,398  $5,072,875  (1)%6 %


                
  End of Period:
CONSOLIDATED BALANCE SHEETS June 30, March 31, December 31, September 30, June 30,
(in $000’s, unaudited) 2022
 2022
 2021
 2021
 2021
ASSETS               
Cash and due from banks $35,764  $29,729  $15,703  $33,013  $41,904 
Other investments and interest-bearing deposits               
in other financial institutions  840,821   1,187,436   1,290,513   1,588,334   1,286,418 
Securities available-for-sale, at fair value  332,129   111,217   102,252   121,000   145,955 
Securities held-to-maturity, at amortized cost  723,716   736,823   658,397   537,285   421,286 
Loans held-for-sale - SBA, including deferred costs  2,281   831   2,367   3,678   4,344 
Loans:               
Commercial  523,268   568,053   594,108   578,944   557,686 
PPP loans  8,153   37,393   88,726   164,506   286,461 
Real estate:               
CRE - owner occupied  597,521   597,542   595,934   580,624   583,091 
CRE - non-owner occupied  993,621   928,220   902,326   829,022   742,135 
Land and construction  155,389   153,323   147,855   141,277   129,426 
Home equity  116,641   111,609   109,579   106,690   107,873 
Multifamily  221,938   221,767   218,856   205,952   198,771 
Residential mortgages  448,958   391,171   416,660   211,467   205,904 
Consumer and other  18,354   17,110   16,744   20,106   21,519 
Loans  3,083,843   3,026,188   3,090,788   2,838,588   2,832,866 
Deferred loan fees, net  (1,391)  (2,124)  (3,462)  (5,729)  (8,070)
Total loans, net of deferred fees  3,082,452   3,024,064   3,087,326   2,832,859   2,824,796 
Allowance for credit losses on loans  (45,490)  (42,788)  (43,290)  (43,680)  (43,956)
Loans, net  3,036,962   2,981,276   3,044,036   2,789,179   2,780,840 
Company-owned life insurance  77,972   78,069   77,589   77,509   77,393 
Premises and equipment, net  9,593   9,580   9,639   9,821   10,040 
Goodwill  167,631   167,631   167,631   167,631   167,631 
Other intangible assets  12,351   13,009   13,668   14,423   15,177 
Accrued interest receivable and other assets  117,621   111,797   117,614   121,129   121,887 
Total assets $ 5,356,841  $ 5,427,398  $ 5,499,409  $ 5,463,002  $ 5,072,875 
                
LIABILITIES AND SHAREHOLDERS’ EQUITY               
Liabilities:               
Deposits:               
Demand, noninterest-bearing $1,846,365  $1,811,943  $1,903,768  $1,804,965  $1,840,516 
Demand, interest-bearing  1,218,538   1,268,942   1,308,114   1,141,944   1,140,867 
Savings and money market  1,387,003   1,447,434   1,375,825   1,600,754   1,174,587 
Time deposits - under $250  36,691   38,417   38,734   39,628   42,118 
Time deposits - $250 and over  98,760   93,161   94,700   103,046   110,111 
CDARS - money market and time deposits  26,287   30,008   38,271   36,044   36,273 
Total deposits  4,613,644   4,689,905   4,759,412   4,726,381   4,344,472 
Subordinated debt, net of issuance costs  39,274   39,987   39,925   39,878   39,832 
Accrued interest payable and other liabilities  96,699   96,450   102,044   106,625   105,127 
Total liabilities  4,749,617   4,826,342   4,901,381   4,872,884   4,489,431 
                
Shareholders’ Equity:               
Common stock  499,832   498,763   497,695   496,622   495,665 
Retained earnings  123,310   116,347   111,329   105,202   99,311 
Accumulated other comprehensive loss  (15,918)  (14,054)  (10,996)  (11,706)  (11,532)
Total shareholders’ equity  607,224   601,056   598,028   590,118   583,444 
Total liabilities and shareholders’ equity $ 5,356,841  $ 5,427,398  $ 5,499,409  $ 5,463,002  $ 5,072,875 


               
  At or For the Quarter Ended: Percent Change From: 
CREDIT QUALITY DATA June 30, March 31, June 30, March 31, June 30, 
(in $000’s, unaudited) 2022
 2022
 2021
 2022 2021 
Nonaccrual loans - held-for-investment $1,734  $3,303  $5,291  (48)%(67)%
Restructured and loans over 90 days past due              
and still accruing  981   527   889  86 %10 %
Total nonperforming loans  2,715   3,830   6,180  (29)%(56)%
Foreclosed assets  —   —   —  N/A N/A 
Total nonperforming assets $2,715  $3,830  $6,180  (29)%(56)%
Other restructured loans still accruing $113  $125  $93  (10)%22 %
Net charge-offs (recoveries) during the quarter $(2,883) $(65) $(153) (4,335)%(1,784)%
Provision for (recapture of) credit losses on loans during the quarter $(181) $(567) $(493) 68 %63 %
Allowance for credit losses on loans $45,490  $42,788  $43,956  6 %3 %
Classified assets $28,929  $30,579  $32,402  (5)%(11)%
Allowance for credit losses on loans to total loans  1.48 % 1.41 % 1.56 %5 %(5)%
Allowance for credit losses on loans to total nonperforming loans  1,675.51 % 1,117.18 % 711.26 %50 %136 %
Nonperforming assets to total assets  0.05 % 0.07 % 0.12 %(29)%(58)%
Nonperforming loans to total loans  0.09 % 0.13 % 0.22 %(31)%(59)%
Classified assets to Heritage Commerce Corp              
Tier 1 capital plus allowance for credit losses on loans  6 % 6 % 7 %0 %(14)%
Classified assets to Heritage Bank of Commerce              
Tier 1 capital plus allowance for credit losses on loans  6 % 6 % 7 %0 %(14)%
               
OTHER PERIOD-END STATISTICS              
(in $000’s, unaudited)              
Heritage Commerce Corp:              
Tangible common equity (1) $427,242  $420,416  $400,636  2 %7 %
Shareholders’ equity / total assets  11.34 % 11.07 % 11.50 %2 %(1)%
Tangible common equity / tangible assets (2)  8.25 % 8.01 % 8.19 %3 %1 %
Loan to deposit ratio  66.81 % 64.48 % 65.02 %4 %3 %
Noninterest-bearing deposits / total deposits  40.02 % 38.63 % 42.36 %4 %(6)%
Total capital ratio  14.6 % 14.6 % 15.6 %0 %(6)%
Tier 1 capital ratio  12.5 % 12.4 % 13.3 %1 %(6)%
Common Equity Tier 1 capital ratio  12.5 % 12.4 % 13.3 %1 %(6)%
Tier 1 leverage ratio  8.7 % 8.3 % 8.6 %5 %1 %
Heritage Bank of Commerce:              
Total capital ratio  14.1 % 13.9 % 15.0 %1 %(6)%
Tier 1 capital ratio  13.0 % 12.9 % 13.9 %1 %(6)%
Common Equity Tier 1 capital ratio  13.0 % 12.9 % 13.9 %1 %(6)%
Tier 1 leverage ratio  9.0 % 8.7 % 9.0 %3 %0 %

___________________

(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 June 30, March 31, December 31, September 30, June 30, 
(in $000’s, unaudited) 2022
 2022
 2021
 2021
 2021
 
Nonaccrual loans - held-for-investment $1,734  $3,303  $3,460  $4,091  $5,291  
Restructured and loans over 90 days past due                
and still accruing  981   527   278   642   889  
Total nonperforming loans  2,715   3,830   3,738   4,733   6,180  
Foreclosed assets  —   —   —   —   —  
Total nonperforming assets $2,715  $3,830  $3,738  $4,733  $6,180  
Other restructured loans still accruing $113  $125  $125  $90  $93  
Net charge-offs (recoveries) during the quarter $(2,883) $(65) $(225) $(238) $(153) 
Provision for (recapture of) credit losses on loans during the quarter $(181) $(567) $(615) $(514) $(493) 
Allowance for credit losses on loans $45,490  $42,788  $43,290  $43,680  $43,956  
Classified assets $28,929  $30,579  $33,719  $31,937  $32,402  
Allowance for credit losses on loans to total loans  1.48 % 1.41 % 1.40 % 1.54 % 1.56 %
Allowance for credit losses on loans to total nonperforming loans  1,675.51 % 1,117.18 % 1,158.11 % 922.88 % 711.26 %
Nonperforming assets to total assets  0.05 % 0.07 % 0.07 % 0.09 % 0.12 %
Nonperforming loans to total loans  0.09 % 0.13 % 0.12 % 0.17 % 0.22 %
Classified assets to Heritage Commerce Corp                
Tier 1 capital plus allowance for credit losses on loans  6 % 6 % 7 % 7 % 7 %
Classified assets to Heritage Bank of Commerce                
Tier 1 capital plus allowance for credit losses on loans  6 % 6 % 7 % 7 % 7 %
                 
OTHER PERIOD-END STATISTICS                
(in $000’s, unaudited)                
Heritage Commerce Corp:                
Tangible common equity (1) $427,242  $420,416  $416,729  $408,064  $400,636  
Shareholders’ equity / total assets  11.34 % 11.07 % 10.87 % 10.80 % 11.50 %
Tangible common equity / tangible assets (2)  8.25 % 8.01 % 7.84 % 7.73 % 8.19 %
Loan to deposit ratio  66.81 % 64.48 % 64.87 % 59.94 % 65.02 %
Noninterest-bearing deposits / total deposits  40.02 % 38.63 % 40.00 % 38.19 % 42.36 %
Total capital ratio  14.6 % 14.6 % 14.4 % 15.1 % 15.6 %
Tier 1 capital ratio  12.5 % 12.4 % 12.3 % 12.9 % 13.3 %
Common Equity Tier 1 capital ratio  12.5 % 12.4 % 12.3 % 12.9 % 13.3 %
Tier 1 leverage ratio  8.7 % 8.3 % 7.9 % 8.6 % 8.6 %
Heritage Bank of Commerce:                
Total capital ratio  14.1 % 13.9 % 13.8 % 14.5 % 15.0 %
Tier 1 capital ratio  13.0 % 12.9 % 12.8 % 13.5 % 13.9 %
Common Equity Tier 1 capital ratio  13.0 % 12.9 % 12.8 % 13.5 % 13.9 %
Tier 1 leverage ratio  9.0 % 8.7 % 8.2 % 9.0 % 9.0 %

 ___________________

(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 
  June 30, 2022 June 30, 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) $3,050,177  36,538  4.80%$2,794,421 $33,439  4.80%
Securities - taxable  912,408  4,407  1.94% 479,419  1,944  1.63%
Securities - exempt from Federal tax (3)  40,447  343  3.40% 62,257  511  3.29%
Other investments and interest-bearing deposits                 
in other financial institutions  982,579  2,340  0.96% 1,341,987  845  0.25%
Total interest earning assets (3)  4,985,611  43,628  3.51% 4,678,084  36,739  3.15%
Cash and due from banks  37,172       42,449      
Premises and equipment, net  9,666       10,147      
Goodwill and other intangible assets  180,391       183,283      
Other assets  121,796       133,134      
Total assets $5,334,636      $5,047,097      
                  
Liabilities and shareholders’ equity:                 
Deposits:                 
Demand, noninterest-bearing $1,836,350      $1,808,638      
                  
Demand, interest-bearing  1,249,875  468  0.15% 1,139,090  477  0.17%
Savings and money market  1,327,665  558  0.17% 1,179,321  528  0.18%
Time deposits - under $100  12,643  4  0.13% 15,335  8  0.21%
Time deposits - $100 and over  125,258  114  0.37% 133,935  164  0.49%
CDARS - money market and time deposits  27,645  2  0.03% 31,236  2  0.03%
Total interest-bearing deposits  2,743,086  1,146  0.17% 2,498,917  1,179  0.19%
Total deposits  4,579,436  1,146  0.10% 4,307,555  1,179  0.11%
                  
Subordinated debt, net of issuance costs  48,425  531  4.40% 39,802  577  5.81%
Short-term borrowings  16  —  0.00% 28  —  0.00%
Total interest-bearing liabilities  2,791,527  1,677  0.24% 2,538,747  1,756  0.28%
Total interest-bearing liabilities and demand,                 
noninterest-bearing / cost of funds  4,627,877  1,677  0.15% 4,347,385  1,756  0.16%
Other liabilities  103,577       116,703      
Total liabilities  4,731,454       4,464,088      
Shareholders’ equity  603,182       583,009      
Total liabilities and shareholders’ equity $5,334,636      $5,047,097      
                  
Net interest income (3) / margin     41,951  3.38%    34,983  3.00%
Less tax equivalent adjustment (3)     (72)       (107)   
Net interest income    $41,879       $34,876    

___________________

(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 $816,000 for the second quarter of 2022 (of which $493,000 was from PPP loans), compared to $2,192,000 for the second quarter of 2021 (of which $1,876,000 was from PPP loans). Prepayment fees totaled $549,000 for the second quarter of 2022, compared to $504,000 for the second 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 
  June 30, 2022 March 31, 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) $3,050,177 $36,538  4.80%$3,028,589 $35,101  4.70%
Securities - taxable  912,408  4,407  1.94% 781,689  3,444  1.79%
Securities - exempt from Federal tax (3)  40,447  343  3.40% 44,871  376  3.40%
Other investments and interest-bearing deposits                 
in other financial institutions  982,579  2,340  0.96% 1,238,702  1,064  0.35%
Total interest earning assets (3)  4,985,611  43,628  3.51% 5,093,851  39,985  3.18%
Cash and due from banks  37,172       37,630      
Premises and equipment, net  9,666       9,605      
Goodwill and other intangible assets  180,391       181,065      
Other assets  121,796       121,089      
Total assets $5,334,636      $5,443,240      
                  
Liabilities and shareholders’ equity:                 
Deposits:                 
Demand, noninterest-bearing $1,836,350      $1,857,164      
                  
Demand, interest-bearing  1,249,875  468  0.15% 1,279,989  459  0.15%
Savings and money market  1,327,665  558  0.17% 1,394,734  543  0.16%
Time deposits - under $100  12,643  4  0.13% 13,235  5  0.15%
Time deposits - $100 and over  125,258  114  0.37% 119,082  106  0.36%
CDARS - money market and time deposits  27,645  2  0.03% 32,932  1  0.01%
Total interest-bearing deposits  2,743,086  1,146  0.17% 2,839,972  1,114  0.16%
Total deposits  4,579,436  1,146  0.10% 4,697,136  1,114  0.10%
                  
Subordinated debt, net of issuance costs  48,425  531  4.40% 39,951  571  5.80%
Short-term borrowings  16  —  0.00% 29  —  0.00%
Total interest-bearing liabilities  2,791,527  1,677  0.24% 2,879,952  1,685  0.24%
Total interest-bearing liabilities and demand,                 
noninterest-bearing / cost of funds  4,627,877  1,677  0.15% 4,737,116  1,685  0.14%
Other liabilities  103,577       106,769      
Total liabilities  4,731,454       4,843,885      
Shareholders’ equity  603,182       599,355      
Total liabilities and shareholders’ equity $5,334,636      $5,443,240      
                  
Net interest income (3) / margin     41,951  3.38%    38,300  3.05%
Less tax equivalent adjustment (3)     (72)       (79)   
Net interest income    $41,879       $38,221    
                  

___________________

(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 $816,000 for the second quarter of 2022 (of which $493,000 was from PPP loans), compared to $1,788,000 for the first quarter of 2022 (of which $1,346,000 was from PPP loans). Prepayment fees totaled $549,000 for the second quarter of 2022, compared to $510,000 for the first quarter of 2021.
(3)   Reflects the FTE adjustment for Federal tax-exempt income based on a 21% tax rate.


                  
  For the Six Months Ended For the Six Months Ended 
  June 30, 2022 June 30, 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) $3,039,443  71,639  4.75%$2,707,858 $67,275  5.01%
Securities - taxable  847,409  7,851  1.87% 458,256  3,672  1.62%
Securities - exempt from Federal tax (3)  42,647  719  3.40% 64,373  1,053  3.30%
Other investments, interest-bearing deposits in other                 
financial institutions and Federal funds sold  1,109,933  3,404  0.62% 1,319,249  1,613  0.25%
Total interest earning assets (3)  5,039,432  83,613  3.35% 4,549,736  73,613  3.26%
Cash and due from banks  37,400       41,640      
Premises and equipment, net  9,636       10,257      
Goodwill and other intangible assets  180,726       183,648      
Other assets  121,444       125,961      
Total assets $5,388,638      $4,911,242      
                  
Liabilities and shareholders’ equity:                 
Deposits:                 
Demand, noninterest-bearing $1,846,699      $1,761,035      
                  
Demand, interest-bearing  1,264,849  927  0.15% 1,082,962  956  0.18%
Savings and money market  1,361,014  1,101  0.16% 1,158,693  1,100  0.19%
Time deposits - under $100  12,937  9  0.14% 15,616  17  0.22%
Time deposits - $100 and over  122,187  220  0.36% 132,397  335  0.51%
CDARS - money market and time deposits  30,274  3  0.02% 28,265  3  0.02%
Total interest-bearing deposits  2,791,261  2,260  0.16% 2,417,933  2,411  0.20%
Total deposits  4,637,960  2,260  0.10% 4,178,968  2,411  0.12%
                  
Subordinated debt, net of issuance costs  44,211  1,102  5.03% 39,780  1,148  5.82%
Short-term borrowings  23  —  0.00% 36  —  0.00%
Total interest-bearing liabilities  2,835,495  3,362  0.24% 2,457,749  3,559  0.29%
Total interest-bearing liabilities and demand,                 
noninterest-bearing / cost of funds  4,682,194  3,362  0.14% 4,218,784  3,559  0.17%
Other liabilities  105,165       111,364      
Total liabilities  4,787,359       4,330,148      
Shareholders’ equity  601,279       581,094      
Total liabilities and shareholders’ equity $5,388,638      $4,911,242      
                  
Net interest income (3) / margin     80,251  3.21%    70,054  3.10%
Less tax equivalent adjustment (3)     (151)       (220)   
Net interest income    $80,100       $69,834    

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(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 $2,604,000 for the first six months of 2022 (of which $1,839,000 was from PPP loans), compared to $5,881,000 for the first six months of 2021 (of which $5,277,000 was from PPP loans). Prepayment fees totaled $1,059,000 for the first six months of 2022, compared to $1,021,000 for the first six months of 2021.
(3)   Reflects the FTE adjustment for Federal tax-exempt income based on a 21% tax rate.


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