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

Rhea-AI Summary

Heritage Commerce Corp (HTBK) reported strong second quarter 2022 results, netting $14.8 million, or $0.24 per diluted share, up from $8.8 million, or $0.15 per share, year-over-year. Year-to-date, net income rose to $27.7 million, a 39% increase from $20.0 million in 2021. Core deposits supported a 12% loan growth excluding PPP loans, while net interest income spiked 20% to $41.9 million. The efficiency ratio improved significantly to 52.73%. Nonperforming assets dropped 56% year-over-year. The bank opened a new office in Oakland, boosting its growth prospects.

Positive

• Second quarter 2022 net income rose 68% to $14.8 million, $0.24 per share.
• Year-to-date net income increased 39% to $27.7 million.
• Core deposit growth supported strong organic loan growth, with loans up 12% from last year.
• Net interest income surged 20% to $41.9 million.
• Efficiency ratio improved to 52.73%, signaling better cost management.
• Nonperforming assets fell 56% year-over-year, enhancing credit quality.

Negative

• Total deposits decreased by $76.3 million or 2% from the previous quarter.
• Net interest margin was still lower compared to previous years.

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	%

___________________

(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

___________________

(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.

FAQ

What were Heritage Commerce Corp's earnings for Q2 2022?

Heritage Commerce Corp reported a net income of $14.8 million for Q2 2022, which is $0.24 per diluted share.

How did the net income of HTBK change compared to the previous year?

Net income for HTBK increased by 68% in Q2 2022 compared to Q2 2021.

What is the loan growth percentage for HTBK in Q2 2022?

Loans, excluding PPP loans, grew by 12% year-over-year as of Q2 2022.

What is the efficiency ratio reported by HTBK for Q2 2022?

The efficiency ratio for HTBK in Q2 2022 improved to 52.73%.

What is the status of nonperforming assets for HTBK?

Nonperforming assets for HTBK decreased by 56% year-over-year.