Heritage Commerce Corp Earns $18.1 Million for the Third Quarter of 2022, and $45.8 Million for the First Nine Months of 2022

Rhea-AI Summary

Heritage Commerce Corp (HTBK) reported a robust third quarter 2022 with a net income of $18.1 million, or $0.30 per diluted share, marking a 32% increase from the same period last year. Year-to-date, net income reached $45.8 million, up 36% year-over-year. Key drivers include a 26% growth in net interest income, boosted by a rising net interest margin of 3.73%. Total deposits rose by $69.6 million from the previous quarter. Credit quality remains strong with a decline in nonperforming assets. However, noninterest expenses increased due to one-time costs related to executive retirement.

Positive

• Net income increased 32% year-over-year to $18.1 million.
• Net interest income rose 26% to $48 million, driven by higher yields.
• Net interest margin improved to 3.73%, up from 3.38% in the prior quarter.
• Loans increased 10% year-over-year, with strong growth in core banking loans.
• Total deposits grew by $69.6 million from the previous quarter.
• Credit quality remains favorable, with a decline in nonperforming assets.

Negative

• Noninterest expenses increased to $23.9 million due to one-time retirement costs.

SAN JOSE, Calif., Oct. 27, 2022 (GLOBE NEWSWIRE) -- Heritage Commerce Corp (Nasdaq: HTBK), the holding company (the “Company”) for Heritage Bank of Commerce (the “Bank”), today announced third quarter 2022 net income of $18.1 million, or $0.30 per average diluted common share, compared to $13.7 million, or $0.23 per average diluted common share, for the third quarter of 2021, and $14.8 million, or $0.24 per average diluted common share, for the second quarter of 2022. For the nine months ended September 30, 2022, net income was $45.8 million, or $0.75 per average diluted common share, compared to $33.7 million, or $0.56 per average diluted common share, for the nine months ended September 30, 2021. All results are unaudited.

“Our outstanding operating results reflect the continued successful implementation of our growth plan.   We delivered record third quarter and year-to-date 2022 earnings, fueled by higher net interest income and solid loan growth. Our net interest margin improved to 3.73% for the third quarter of 2022, compared to 3.38% from the preceding quarter, driven primarily by a shift in the mix of earning assets as the Company invested its excess liquidity into higher yielding loans and investment securities. Loans, excluding Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans and residential mortgages, increased 10% from a year earlier, and 3% from the preceding quarter. Total deposits increased $69.6 million from the linked quarter with noninterest-bearing deposits increasing 4% from a year ago,” said Clay Jones, President and Chief Executive Officer. “Net income increased 22% from the preceding quarter and 32% from the third quarter a year ago. The return on average tangible equity was 16.60%, the return on average tangible assets was 1.36% and our efficiency ratio improved to 47.02%, for the third quarter of 2022.”

“Our credit quality remains healthy as a result of our credit management, while we continue to be vigilant to the potential impact an uncertain economic future could have on our portfolio. Nonperforming assets (“NPAs”) declined $3.7 million at September 30, 2022 from September 30, 2021, and declined $1.7 million from June 30, 2022, with continued net recoveries throughout the first nine months of 2022,” said Mr. Jones. “Reflecting our strong loan growth, we recorded a $1.0 million provision for credit losses on loans during the third quarter of 2022.”

“Our noninterest income was also higher in the third quarter of 2022, compared to the preceding quarter, primarily due to the substantial increase in gain on sale of SBA loans and higher income on off-balance sheet deposits,” said Mr. Jones. Third quarter 2022 noninterest expense was elevated compared to the third quarter a year ago and to the preceding quarter, due to non-cash expenses related to the retirement of the previous President and Chief Executive Officer of the Company from the vesting of shares of restricted common stock. This one-time contractual event added $784,000 to salaries and employee benefits for the third quarter of 2022, which increased 13% from the third quarter of 2021, and 5% from the second quarter of 2022.

“These solid results are a direct result of our dedicated employees and their commitment and effort in supporting our clients, communities and shareholders,” said Mr. Jones. “Our strong liquidity continues to provide us with the opportunity for investment strategies that positively impact our net interest income.”

Third Quarter Ended September 30, 2022
Operating Results, Balance Sheet Review, Capital Management, and Credit Quality

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

Operating Results:

• Diluted earnings per share were $0.30 for the third quarter of 2022, compared to $0.23 for the third quarter of 2021, and $0.24 for the second quarter of 2022. Diluted earnings per share were $0.75 for the first nine months of 2022, compared to $0.56 for the first nine 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 Nine Months Ended
		September 30,					June 30,					September 30,					September 30,					September 30,
(unaudited)		2022					2022					2021					2022					2021
Return on average tangible assets			1.36		%			1.15		%			1.10		%			1.17		%			0.94		%
Return on average tangible equity			16.60		%			14.06		%			13.49		%			14.41		%			11.29		%

• Net interest income, before provision for credit losses on loans, increased 26% to $48.0 million for the third quarter of 2022, compared to $38.2 million for the third quarter of 2021. The fully tax equivalent (“FTE”) net interest margin increased 55 basis points to 3.73% for the third quarter of 2022, from 3.18% for the third quarter of 2021, primarily due to a shift in the mix of earning assets into higher yielding loans and investment securities, and higher average yield on overnight funds, partially offset by lower interest and fees on PPP loans, a decrease in the accretion of the loan purchase discount into interest income from acquired loans, lower prepayment fees, and a higher cost of funds.
  
  
  • Net interest income increased 15% to $48.0 million for the third quarter of 2022, compared to $41.9 million for the second quarter of 2022. The FTE net interest margin increased 35 basis points to 3.73% for the third quarter of 2022 from 3.38% for the second quarter of 2022, primarily due to a shift in the mix of earning assets as the Company invested its excess liquidity into higher yielding loans and investment securities, and higher average yields on overnight funds, partially offset by a decrease in the accretion of the loan purchase discount into interest income from acquired loans, lower prepayment fees, lower interest and fees on PPP loans, and a higher cost of funds.
    
    
  • Net interest income increased 19% to $128.1 million for the first nine months of 2022, compared to $108.0 million for the first nine months of 2021. For the first nine months of 2022, the FTE net interest margin increased 26 basis points to 3.39%, compared to 3.13% for the first nine months of 2021, primarily due to higher average balances of loans and investment securities, higher average yields on investment securities and overnight funds, partially offset by lower interest and fees on PPP loans, a decrease in the accretion of the loan purchase discount into interest income from acquired loans, and lower prepayment fees.
    
    
• The following table, as of September 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		$	33,788				16.2		%
+300		$	25,318				12.1		%
+200		$	16,899				8.1		%
+100		$	8,479				4.1		%
0			—				—
−100		$	(16,828	)			(8.1	)	%
−200		$	(35,111	)			(16.8	)	%
−300		$	(53,144	)			(25.5	)	%

____________________

(1)

Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results. Actual rates paid on deposits may differ from the hypothetical interest rates modeled due to competitive or market factors, which could reduce any actual impact on net interest income.

____________________

• The following tables present the average balance of loans outstanding, interest income, and the average yield for the periods indicated:
   
  • The average yield on the total loan portfolio increased to 4.90% for the third quarter of 2022, compared to 4.80% for the second quarter of 2022, primarily due to increases in the prime rate, partially offset by a decrease in the accretion of the loan purchase discount into interest income from acquired loans, lower prepayment fees, lower fees on PPP loans, and higher average balances of lower yielding purchased residential mortgage loans.
    

		For the Quarter Ended											For the Quarter Ended
		September 30, 2022											June 30, 2022
		Average				Interest				Average			Average				Interest				Average
(in $000’s, unaudited)		Balance				Income				Yield			Balance				Income				Yield
Loans, core bank		$	2,574,842			$	30,490			4.70		%	$	2,530,836			$	27,402			4.34		%
Prepayment fees			—				96			0.01		%		—				549			0.09		%
PPP loans			4,593				11			0.95		%		21,479				53			0.99		%
PPP fees, net			—				190			16.41		%		—				493			9.21		%
Asset-based lending			53,514				1,032			7.65		%		49,667				874			7.06		%
Bay View Funding factored receivables			62,623				3,201			20.28		%		64,085				3,129			19.58		%
Purchased residential mortgages			445,256				3,414			3.04		%		381,988				2,711			2.85		%
Purchased commercial real estate ("CRE") loans			8,337				83			3.95		%		8,425				77			3.67		%
Loan fair value mark / accretion			(5,178	)			353			0.05		%		(6,303	)			1,250			0.20		%
Total loans (includes loans held-for-sale)		$	3,143,987			$	38,870			4.90		%	$	3,050,177			$	36,538			4.80		%

•

The average yield on the total loan portfolio decreased to 4.90% for the third quarter of 2022, compared to 5.18% for the third quarter of 2021, primarily due to lower interest and fees on PPP loans, a decrease in the accretion of the loan purchase discount into interest income from acquired loans, lower prepayment fees, and higher average balances of lower yielding purchased residential mortgages, partially offset by increases in the prime rate.

		For the Quarter Ended											For the Quarter Ended
		September 30, 2022											September 30, 2021
		Average				Interest				Average			Average				Interest				Average
(in $000’s, unaudited)		Balance				Income				Yield			Balance				Income				Yield
Loans, core bank		$	2,574,842			$	30,490			4.70		%	$	2,317,985			$	25,476			4.36		%
Prepayment fees			—				96			0.01		%		—				1,282			0.22		%
PPP loans			4,593				11			0.95		%		218,098				548			1.00		%
PPP fees, net			—				190			16.41		%		—				2,508			4.56		%
Asset-based lending			53,514				1,032			7.65		%		43,457				586			5.35		%
Bay View Funding factored receivables			62,623				3,201			20.28		%		50,674				2,815			22.04		%
Purchased residential mortgages			445,256				3,414			3.04		%		141,073				1,019			2.87		%
Purchased CRE loans			8,337				83			3.95		%		9,177				91			3.93		%
Loan fair value mark / accretion			(5,178	)			353			0.05		%		(8,923	)			1,882			0.32		%
Total loans (includes loans held-for-sale)		$	3,143,987			$	38,870			4.90		%	$	2,771,541			$	36,207			5.18		%

•

The average yield on the total loan portfolio decreased to 4.81% for the nine months ended September 30, 2022, compared to 5.07% for the nine months ended September 30, 2021, primarily due to a decrease in interest and fees on PPP loans, a decrease in the accretion of the loan purchase discount into interest income from acquired loans, lower prepayment fees, and an increase in the average balance of lower yielding purchased residential mortgages.

		For the Nine Months Ended											For the Nine Months Ended
		September 30, 2022											September 30, 2021
		Average				Interest				Average			Average				Interest				Average
(in $000’s, unaudited)		Balance				Income				Yield			Balance				Income				Yield
Loans, core bank		$	2,530,130			$	83,988			4.44		%	$	2,254,435			$	75,205			4.46		%
Prepayment fees			—				1,155			0.06		%		—				2,303			0.14		%
PPP loans			28,575				210			0.98		%		290,253				2,163			1.00		%
PPP fees, net			—				2,029			9.49		%		—				7,784			3.59		%
Asset-based lending			57,540				2,857			6.64		%		35,376				1,424			5.38		%
Bay View Funding factored receivables			61,508				9,123			19.83		%		49,263				8,237			22.36		%
Purchased residential mortgages			394,618				8,553			2.90		%		96,761				2,118			2.93		%
Purchased CRE loans			8,424				237			3.76		%		13,618				372			3.65		%
Loan fair value mark / accretion			(6,121	)			2,357			0.12		%		(10,387	)			3,876			0.23		%
Total loans (includes loans held-for-sale)		$	3,074,674			$	110,509			4.81		%	$	2,729,319			$	103,482			5.07		%

•

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 $5.0 million at September 30, 2022.

• The average cost of total deposits was 0.13% for the third quarter of 2022, compared to 0.10% for both the third quarter of 2021 and the second quarter of 2022. The average cost of total deposits was 0.11% for both the nine months ended September 30, 2022 and September 30, 2021.
  
  
• During the third quarter of 2022, there was a provision for credit losses on loans of $1.0 million, compared to a $514,000 negative provision for credit losses on loans for the third quarter of 2021, and a negative provision for credit losses on loans of $181,000 for the second quarter of 2022. There was a provision for credit losses on loans of $258,000 for the nine months ended September 30, 2022, compared to a $2.5 million negative provision for credit losses on loans for the nine months ended September 30, 2021.
  
  
• Total noninterest income increased 15% to $2.8 million for the third quarter of 2022, compared to $2.4 million for the third quarter of 2021, primarily due to higher income on off-balance sheet deposits, partially offset by a lower gain on sale of SBA loans during the third quarter of 2022, and a gain on proceeds from company-owned life insurance during the third quarter of 2021. Total noninterest income increased 33% from $2.1 million for the second quarter of 2022, primarily due to higher service charges and fees on deposit accounts, and a higher gain on sale of SBA loans during the third quarter of 2022.

•

For the nine months ended September 30, 2022, total noninterest income increased 7% to $7.3 million, compared to $6.9 million for the nine months ended September 30, 2021, primarily due to higher income on off-balance sheet deposits, and a $669,000 gain on warrants, partially offset by a lower gain on sale of SBA loans and a lower gain on proceeds from company-owned life insurance during the first nine months of 2022.

• Total noninterest expense for the third quarter of 2022 increased to $23.9 million, compared to $21.8 million for the third quarter of 2021, and $23.2 million for the second quarter of 2022, primarily due to higher salaries and employee benefits, occupancy and equipment, and insurance expense during the third quarter of 2022. Salaries and employee benefits included $784,000 of restricted stock expense for vesting of restricted common stock held by the previous President and Chief Executive Officer of the Company who retired during the third quarter of 2022.
  
  
  • Noninterest expense for the nine months ended September 30, 2022 decreased to $70.3 million, compared to $70.9 million for the nine months ended September 30, 2021, primarily due to a reserve for a legal settlement during the first nine months of 2021, partially offset by higher salaries and employee benefits, occupancy and equipment, and insurance expense during the first nine months of 2022.
    
    
  • Full time equivalent employees were 327 at September 30, 2022, and 325 at September 30, 2021, and 332 at June 30, 2022.  
    
    
• The efficiency ratio was 47.02% for the third quarter of 2022, compared to 53.78% for the third quarter of 2021, and 52.73% for the second quarter of 2022. The efficiency ratio for the nine months ended September 30, 2022 was 51.92%, compared to 61.67% for the nine months ended September 30, 2021. The improvement in the efficiency ratio for the third quarter and first nine months of 2022 was primarily due to an increase in net interest income from the rising interest rate environment. The efficiency ratio for the nine months ended September 30, 2021 was negatively impacted by the $4.0 million reserve for a legal settlement. Excluding the $4.0 million reserve for a legal settlement, the efficiency ratio was 58.18% for the nine months ended September 30, 2021.
  
  
• Income tax expense was $7.8 million for the third quarter of 2022, compared to $5.6 million for the third quarter of 2021, and $6.1 million for the second quarter of 2022. The effective tax rate for the third quarter of 2022 was 30.3%, compared to 28.8% for the third quarter of 2021, and 29.3% for the second quarter of 2021. The increase in the effective tax rate was due to an adjustment from significantly higher earnings for the third quarter of 2022, compared to the first and second quarters of 2022. Income tax expense for the nine months ended September 30, 2022 was $19.1 million, compared to $12.8 million for the nine months ended September 30, 2021. The effective tax rate for the nine months ended September 30, 2022 was 29.5%, compared to 27.5% for the nine months ended September 30, 2021.
  

Balance Sheet Review, Capital Management and Credit Quality:

• Total assets decreased (1%) to $5.431 billion at September 30, 2022, compared to $5.463 billion at September 30, 2021, and increased 1% from $5.357 billion at June 30, 2022.  
  
  
• Securities available-for-sale, at fair value, totaled $478.5 million at September 30, 2022, compared to $121.0 million at September 30, 2021, and $332.1 million at June 30, 2022. At September 30, 2022, the Company’s securities available-for-sale portfolio was comprised of $405.4 million of U.S. Treasury securities and $73.1 million of agency mortgage-backed securities (all issued by U.S. Government sponsored entities).
  
  
  • The pre-tax unrealized loss on U.S. Treasury securities available-for-sale at September 30, 2022 was ($10.1) million, compared to a pre-tax unrealized gain of $11,000 at September 30, 2021, and a pre-tax unrealized loss of ($1.2) million at June 30, 2022. The pre-tax unrealized loss on mortgage-backed securities available-for-sale at September 30, 2022 was ($7.3) million, compared to a pre-tax unrealized gain of $4.0 million at September 30, 2021, and a pre-tax unrealized loss of ($2.9) million at June 30, 2022. The pre-tax unrealized loss on total securities available-for-sale at September 30, 2022 was ($17.4) million, compared to a pre-tax unrealized gain of $4.0 million at September 30, 2021, and a pre-tax unrealized loss of ($4.1) million at June 30, 2022. All other factors remaining the same, when market interest rates are increasing, the Company will experience a higher unrealized loss in the securities portfolio.
  • During the third quarter of 2022, the Company purchased $163.0 million of U.S. Treasury securities available-for-sale, with a book yield of 3.50% and an average life of 1.83 years. During the first nine months of 2022, the Company purchased $414.0 million of U.S. Treasury securities available-for-sale, with a book yield of 3.04% and an average life of 2.28 years.
• At September 30, 2022, securities held-to-maturity, at amortized cost, totaled $703.8 million, compared to $537.3 million at September 30, 2021, and $723.7 million at June 30, 2022. At September 30, 2022, the Company’s securities held-to-maturity portfolio was comprised of $665.7 million of agency mortgage-backed securities, and $38.1 million of tax-exempt municipal bonds.
  
  
  • The pre-tax unrealized loss on mortgage-backed securities held-to-maturity at September 30, 2022 was ($108.1) million, compared to a pre-tax unrealized gain of $1.1 million at September 30, 2021, and a pre-tax unrealized loss of ($72.5) million at June 30, 2022. The pre-tax unrealized loss on municipal bonds held-to-maturity at September 30, 2022 was ($2.1) million, compared to a pre-tax unrealized gain of $989,000 at September 30, 2021, and a pre-tax unrealized loss of ($436,000) at June 30, 2022. The pre-tax unrealized loss on total securities held-to-maturity at September 30, 2022 was ($110.2) million, compared to a pre-tax unrealized gain of $2.1 million at September 30, 2021, and a pre-tax unrealized loss of ($72.9) million at June 30, 2022.
  • There were no purchases of securities held-to-maturity during the third quarter of 2022. During the first nine 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 average life of the total investment securities portfolio was 5.18 years at September 30, 2022.
• The loan portfolio remains well-diversified as reflected in the following table which summarizes the distribution of loans, excluding loans held-for-sale, and the percentage of distribution in each category for the periods indicated:
  

LOANS		September 30, 2022							June 30, 2022							September 30, 2021
(in $000’s, unaudited)		Balance				% to Total			Balance				% to Total			Balance				% to Total
Commercial		$	541,215			17		%	$	523,268			17		%	$	578,944			20		%
PPP Loans(1)			1,614			0		%		8,153			0		%		164,506			6		%
Real estate:
CRE - owner occupied			612,241			19		%		597,521			19		%		580,624			20		%
CRE - non-owner occupied			1,023,405			32		%		993,621			32		%		829,022			29		%
Land and construction			167,439			5		%		155,389			5		%		141,277			5		%
Home equity			116,489			3		%		116,641			4		%		106,690			4		%
Multifamily			229,455			7		%		221,938			7		%		205,952			7		%
Residential mortgages			508,839			16		%		448,958			15		%		211,467			8		%
Consumer and other			16,620			1		%		18,354			1		%		20,106			1		%
Total Loans			3,217,317			100		%		3,083,843			100		%		2,838,588			100		%
Deferred loan costs (fees), net			(844	)		—				(1,391	)		—				(5,729	)		—
Loans, net of deferred costs and fees		$	3,216,473			100		%	$	3,082,452			100		%	$	2,832,859			100		%

 

____________________

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

____________________

• Loans, excluding loans held-for-sale, increased $383.6 million, or 14%, to $3.216 billion at September 30, 2022, compared to $2.833 billion at September 30, 2021, and increased $134.0 million, or 4%, from $3.082 billion at June 30, 2022.   Total loans at September 30, 2022 included $1.6 million of PPP loans, compared to $164.5 million at September 30, 2021 and $8.2 million at June 30, 2022.   Total loans at September 30, 2022 included $508.8 million of residential mortgages, compared to $211.5 million at September 30, 2021, and $449.0 million at June 30, 2022. Loans, excluding loans held-for-sale, PPP loans and residential mortgages, increased $244.9 million, or 10%, to $2.706 billion at September 30, 2022, compared to $2.461 billion at September 30, 2021, and increased $80.5 million, or 3%, from $2.626 billion at June 30, 2022.  
  
  
  • Commercial and industrial (“C&I”) line utilization was 29% at September 30, 2022, compared to 27% at September 30, 2021, and 28% at June 30, 2022.
    
    
  • At September 30, 2022, 37% of the CRE loan portfolio was secured by owner-occupied real estate, compared to 41% at September 30, 2021, and 38% at June 30, 2022.
    
  • At September 30, 2022, approximately 34% of the Company’s loan portfolio consisted of floating interest rate loans, compared to 42% at September 30, 2021, and 36% at June 30, 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 September 30, 2022, there were no remaining “Round 1” PPP loans. After accounting for loan payoffs and SBA loan forgiveness, “Round 2” PPP loans totaled $1.6 million at September 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 Nine Months Ended:
PPP LOANS		September 30,				June 30,				September 30,				September 30,				September 30,
(in $000’s, unaudited)		2022				2022				2021				2022				2021
Interest income		$	11			$	53			$	548			$	210			$	2,163
Fee income, net			190				493				2,508				2,029				7,784
Total		$	201			$	546			$	3,056			$	2,239			$	9,947
PPP loans outstanding at period end:
Round 1		$	—			$	43			$	5,795			$	—			$	5,795
Round 2			1,614				8,110				158,711				1,614				158,711
Total		$	1,614			$	8,153			$	164,506			$	1,614			$	164,506
Deferred fees outstanding at period end		$	(132	)		$	(337	)		$	(4,831	)		$	(132	)		$	(4,831	)
Deferred costs outstanding at period end			8				24				461				8				461
Total		$	(124	)		$	(313	)		$	(4,370	)		$	(124	)		$	(4,370	)

•

During the third quarter of 2022, the Company purchased single family residential mortgage loans totaling $73.5 million, tied to homes located in California, with average principal balances of approximately $1.0 million and a bond equivalent yield of approximately 5.24%, which uses the average life of the loan to recognize the discount into income. During the first nine months of 2022, the Company purchased single family residential mortgage loans totaling $148.0 million, tied to homes located in California, with average principal balances of approximately $915,000.

• The following table summarizes the allowance for credit losses on loans (“ACLL”) for the periods indicated:

		At or For the Quarter Ended:												For the Nine Months Ended
ALLOWANCE FOR CREDIT LOSSES ON LOANS		September 30,				June 30,				September 30,				September 30,				September 30,
(in $000’s, unaudited)		2022				2022				2021				2022				2021
Balance at beginning of period		$	45,490			$	42,788			$	43,956			$	43,290			$	44,400
Charge-offs during the period			(7	)			(355	)			(65	)			(378	)			(433	)
Recoveries during the period			432				3,238				303				3,751				2,232
Net recoveries (charge-offs) during the period			425				2,883				238				3,373				1,799
Provision for (recapture of) credit losses on loans during the period			1,006				(181	)			(514	)			258				(2,519	)
Balance at end of period		$	46,921			$	45,490			$	43,680			$	46,921			$	43,680
Total loans, net of deferred fees		$	3,216,473			$	3,082,452			$	2,832,859			$	3,216,473			$	2,832,859
Total nonperforming loans		$	1,036			$	2,715			$	4,733			$	1,036			$	4,733
ACLL to total loans			1.46		%		1.48		%		1.54		%		1.46		%		1.54		%
ACLL to total nonperforming loans			4,529.05		%		1,675.51		%		922.88		%		4,529.05		%		922.88		%

•

The ACLL was 1.46% of total loans at September 30, 2022 while the ACLL to total nonperforming loans was 4,529.05%. The ACLL was 1.54% of total loans and the ACLL to nonperforming loans was 922.88% at September 30, 2021. The ACLL was 1.48% of total loans and the ACLL to total nonperforming loans was 1,675.51% at June 30, 2022.

• The following table shows the drivers of change in ACLL under the current expected credit losses (“CECL”) methodology for the first nine months of 2022:

DRIVERS OF CHANGE IN ACLL UNDER CECL
(in $000’s, unaudited)
ACLL at December 31, 2021		$	43,290
Portfolio changes during the first quarter of 2022 including net recoveries			(33	)
Qualitative and quantitative changes during the first
quarter of 2022 including changes in economic forecasts			(469	)
ACLL at March 31, 2022			42,788
Portfolio changes during the second quarter of 2022 including net recoveries			1,383
Qualitative and quantitative changes during the second
quarter of 2022 including changes in economic forecasts			1,319
ACLL at June 30, 2022			45,490
Portfolio changes during the third quarter of 2022 including net recoveries			2,009
Qualitative and quantitative changes during the third
quarter of 2022 including changes in economic forecasts			(578	)
ACLL at September 30, 2022		$	46,921

•

Net recoveries totaled $425,000 for the third quarter of 2022, compared to net recoveries of $238,000 for the third quarter of 2021, and net recoveries of $2.9 million for the second quarter of 2022.   Net recoveries totaled $3.4 million during the first nine months of 2022, compared to net recoveries of $1.8 million for the first nine months of 2021.

• The following is a breakout of NPAs at the periods indicated:

NONPERFORMING ASSETS		September 30, 2022							June 30, 2022							September 30, 2021
(in $000’s, unaudited)		Balance				% of Total			Balance				% of Total			Balance				% of Total
Restructured and loans over 90 days past due and still accruing		$	545			53		%	$	981			36		%	$	642			13		%
Commercial loans			491			47		%		640			24		%		1,330			28		%
CRE loans			—			—		%		1,094			40		%		2,260			48		%
Home equity loans			—			—		%		—			—		%		94			2		%
Consumer and other loans			—			—		%		—			—		%		407			9		%
Total nonperforming assets		$	1,036			100		%	$	2,715			100		%	$	4,733			100		%

	•	NPAs totaled $1.0 million, or 0.02% of total assets, at September 30, 2022, compared to $4.7 million, or 0.09% of total assets, at September 30, 2021, $2.7 million, or 0.05% of total assets, at June 30, 2022.
	•	There were no foreclosed assets on the balance sheet at September 30, 2022, September 30, 2021, or June 30, 2022.
	•	Classified assets decreased to $28.6 million, or 0.53% of total assets, at September 30, 2022, compared to $31.9 million, or 0.58% of total assets, at September 30, 2021, and $28.9 million, or 0.54% of total assets, at June 30, 2022.

• The following table summarizes the distribution of deposits and the percentage of distribution in each category for the periods indicated:

DEPOSITS		September 30, 2022							June 30, 2022							September 30, 2021
(in $000’s, unaudited)		Balance				% to Total			Balance				% to Total			Balance				% to Total
Demand, noninterest-bearing		$	1,883,574			40		%	$	1,846,365			40		%	$	1,804,965			38		%
Demand, interest-bearing			1,154,403			24		%		1,218,538			26		%		1,141,944			24		%
Savings and money market			1,487,400			32		%		1,387,003			30		%		1,600,754			34		%
Time deposits — under $250			34,728			1		%		36,691			1		%		39,628			1		%
Time deposits — $250 and over			93,263			2		%		98,760			2		%		103,046			2		%
CDARS — interest-bearing demand, money market and time deposits			29,897			1		%		26,287			1		%		36,044			1		%
Total deposits		$	4,683,265			100		%	$	4,613,644			100		%	$	4,726,381			100		%

	•	Total deposits decreased ($43.1) million, or (1%), to $4.683 billion at September 30, 2022, compared to $4.726 billion at September 30, 2021, and increased $69.6 million, or 2%, from $4.614 billion at June 30, 2022.
	•	Deposits, excluding all time deposits and CDARS deposits, decreased ($22.3) million to $4.525 billion at September 30, 2022, compared to $4.548 billion at September 30, 2021, and increased $73.5 million, or 2%, compared to $4.452 billion at June 30, 2022.

• The Company’s consolidated capital ratios exceeded regulatory guidelines and the Bank’s capital ratios exceeded regulatory guidelines under the Basel III prompt corrective action (“PCA”) regulatory guidelines for a well-capitalized financial institution, and the Basel III minimum regulatory requirements at September 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		14.5		%		14.0		%		10.0		%		10.5		%
Tier 1 Capital		12.4		%		12.9		%		8.0		%		8.5		%
Common Equity Tier 1 Capital		12.4		%		12.9		%		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		September 30,				June 30,				September 30,
(in $000’s, unaudited)		2022				2022				2021
Unrealized (loss) gain on securities available-for-sale		$	(12,398	)		$	(3,036	)		$	2,435
Remaining unamortized unrealized gain on securities available-for-sale transferred to held-to-maturity			—				—				234
Split dollar insurance contracts liability			(5,511	)			(5,501	)			(6,143	)
Supplemental executive retirement plan liability			(7,428	)			(7,508	)			(8,411	)
Unrealized gain on interest-only strip from SBA loans			125				127				179
Total accumulated other comprehensive loss		$	(25,212	)		$	(15,918	)		$	(11,706	)

• Tangible equity was $430.2 million at September 30, 2022, compared to $408.1 million at September 30, 2021, and $427.2 million at June 30, 2022. Tangible book value per share was $7.09 at September 30, 2022, compared to $6.77 at September 30, 2021, and $7.04 at June 30, 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 impact of the COVID-19 pandemic, and other infectious illness outbreaks that may arise in the future, 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) operational issues stemming from, and/or capital spending necessitated by, the potential need to adapt to industry changes in information technology systems, on which we are highly dependent; (16) our inability to attract, recruit, and retain qualified officers and other personnel could harm our ability to implement our strategic plan, impair our relationships with customers and adversely affect our business, results of operations and growth prospects; (17) possible adjustment of the valuation of our deferred tax assets; (18) our ability to keep pace with technological changes, including our ability to identify and address cyber-security risks such as data security breaches, “denial of service” attacks, “hacking” and identity theft; (19) inability of our framework to manage risks associated with our business, including operational risk and credit risk; (20) risks of loss of funding of SBA or SBA loan programs, or changes in those programs; (21) compliance with applicable laws and governmental and regulatory requirements, including the Dodd-Frank Act and others relating to banking, consumer protection, securities, accounting and tax matters; (22) effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; (23) the expense and uncertain resolution of litigation matters whether occurring in the ordinary course of business or otherwise; (24) availability of and competition for acquisition opportunities; (25) risks resulting from domestic terrorism; (26) risks resulting from social unrest and protests; (27) risks of natural disasters (including earthquakes, fires, and flooding) and other events beyond our control; (28) our success in managing the risks involved in the foregoing factors.

Member FDIC

For additional information, contact:
Debbie Reuter
EVP, Corporate Secretary
Direct: (408) 494-4542
Debbie.Reuter@herbank.com

		For the Quarter Ended:												Percent Change From:							For the Nine Months Ended:
CONSOLIDATED INCOME STATEMENTS		September 30,				June 30,				September 30,				June 30,			September 30,				September 30,				September 30,				Percent
(in $000’s, unaudited)		2022				2022				2021				2022			2021				2022				2021				Change
Interest income		$	50,174			$	43,556			$	39,907			15		%	26		%		$	133,636			$	113,300			18		%
Interest expense			2,133				1,677				1,725			27		%	24		%			5,495				5,284			4		%
Net interest income before provision for credit losses on loans			48,041				41,879				38,182			15		%	26		%			128,141				108,016			19		%
Provision for (recapture of) credit losses on loans			1,006				(181	)			(514	)		656		%	296		%			258				(2,519	)		110		%
Net interest income after provision for credit losses on loans			47,035				42,060				38,696			12		%	22		%			127,883				110,535			16		%
Noninterest income:
Service charges and fees on deposit accounts			1,360				867				584			57		%	133		%			2,839				1,844			54		%
Increase in cash surrender value of life insurance			484				480				470			1		%	3		%			1,444				1,384			4		%
Gain on sales of SBA loans			308				27				594			1041		%	(48	)	%			491				1,227			(60	)	%
Servicing income			125				139				129			(10	)	%	(3	)	%			370				415			(11	)	%
Gain on warrants			32				—				—			N/A			N/A					669				—			N/A
Termination fees			16				45				32			(64	)	%	(50	)	%			61				179			(66	)	%
Gain on proceeds from company-owned life insurance			—				27				109			(100	)	%	(100	)	%			27				571			(95	)	%
Other			456				513				490			(11	)	%	(7	)	%			1,438				1,258			14		%
Total noninterest income			2,781				2,098				2,408			33		%	15		%			7,339				6,878			7		%
Noninterest expense:
Salaries and employee benefits			14,119				13,476				12,461			5		%	13		%			41,416				38,991			6		%
Occupancy and equipment			2,415				2,277				2,151			6		%	12		%			7,129				6,672			7		%
Professional fees			1,230				1,291				1,211			(5	)	%	2		%			3,601				4,701			(23	)	%
Other			6,135				6,146				6,008			0		%	2		%			18,195				20,486			(11	)	%
Total noninterest expense			23,899				23,190				21,831			3		%	9		%			70,341				70,850			(1	)	%
Income before income taxes			25,917				20,968				19,273			24		%	34		%			64,881				46,563			39		%
Income tax expense			7,848				6,147				5,555			28		%	41		%			19,125				12,828			49		%
Net income		$	18,069			$	14,821			$	13,718			22		%	32		%		$	45,756			$	33,735			36		%
PER COMMON SHARE DATA
(unaudited)
Basic earnings per share		$	0.30			$	0.24			$	0.23			25		%	30		%		$	0.76			$	0.56			36		%
Diluted earnings per share		$	0.30			$	0.24			$	0.23			25		%	30		%		$	0.75			$	0.56			34		%
Weighted average shares outstanding - basic			60,686,992				60,542,170				60,220,717			0		%	1		%			60,541,015				60,078,953			1		%
Weighted average shares outstanding - diluted			61,123,801				60,969,154				60,760,189			0		%	1		%			61,004,840				60,635,304			1		%
Common shares outstanding at period-end			60,716,794				60,666,794				60,266,316			0		%	1		%			60,716,794				60,266,316			1		%
Dividend per share		$	0.13			$	0.13			$	0.13			0		%	0		%		$	0.39			$	0.39			0		%
Book value per share		$	10.04			$	10.01			$	9.79			0		%	3		%		$	10.04			$	9.79			3		%
Tangible book value per share		$	7.09			$	7.04			$	6.77			1		%	5		%		$	7.09			$	6.77			5		%
KEY FINANCIAL RATIOS
(unaudited)
Annualized return on average equity			11.72		%		9.86		%		9.29		%	19		%	26		%			10.12		%		7.74		%	31		%
Annualized return on average tangible equity			16.60		%		14.06		%		13.49		%	18		%	23		%			14.41		%		11.29		%	28		%
Annualized return on average assets			1.31		%		1.11		%		1.06		%	18		%	24		%			1.13		%		0.90		%	26		%
Annualized return on average tangible assets			1.36		%		1.15		%		1.10		%	18		%	24		%			1.17		%		0.94		%	24		%
Net interest margin (FTE)			3.73		%		3.38		%		3.18		%	10		%	17		%			3.39		%		3.13		%	8		%
Efficiency ratio			47.02		%		52.73		%		53.78		%	(11	)	%	(13	)	%			51.92		%		61.67		%	(16	)	%
AVERAGE BALANCES
(in $000’s, unaudited)
Average assets		$	5,466,330			$	5,334,636			$	5,139,239			2		%	6		%		$	5,414,820			$	4,988,076			9		%
Average tangible assets		$	5,286,591			$	5,154,245			$	4,956,738			3		%	7		%		$	5,234,427			$	4,804,814			9		%
Average earning assets		$	5,117,373			$	4,985,611			$	4,778,574			3		%	7		%		$	5,065,698			$	4,626,853			9		%
Average loans held-for-sale		$	3,282			$	1,824			$	4,810			80		%	(32	)	%		$	2,201			$	4,112			(46	)	%
Average total loans		$	3,140,705			$	3,048,353			$	2,766,731			3		%	14		%		$	3,072,473			$	2,725,207			13		%
Average deposits		$	4,712,044			$	4,579,436			$	4,396,315			3		%	7		%		$	4,662,926			$	4,252,214			10		%
Average demand deposits - noninterest-bearing		$	1,910,748			$	1,836,350			$	1,835,219			4		%	4		%		$	1,868,283			$	1,786,035			5		%
Average interest-bearing deposits		$	2,801,296			$	2,743,086			$	2,561,096			2		%	9		%		$	2,794,643			$	2,466,179			13		%
Average interest-bearing liabilities		$	2,840,611			$	2,791,527			$	2,601,002			2		%	9		%		$	2,837,219			$	2,506,025			13		%
Average equity		$	611,707			$	603,182			$	586,012			1		%	4		%		$	604,794			$	582,751			4		%
Average tangible equity		$	431,968			$	422,791			$	403,511			2		%	7		%		$	424,401			$	399,489			6		%

		For the Quarter Ended:
CONSOLIDATED INCOME STATEMENTS		September 30,				June 30,				March 31,				December 31,				September 30,
(in $000’s, unaudited)		2022				2022				2022				2021				2021
Interest income		$	50,174			$	43,556			$	39,906			$	39,956			$	39,907
Interest expense			2,133				1,677				1,685				1,847				1,725
Net interest income before provision for credit losses on loans			48,041				41,879				38,221				38,109				38,182
Provision for (recapture of) credit losses on loans			1,006				(181	)			(567	)			(615	)			(514	)
Net interest income after provision for credit losses on loans			47,035				42,060				38,788				38,724				38,696
Noninterest income:
Service charges and fees on deposit accounts			1,360				867				612				644				584
Increase in cash surrender value of life insurance			484				480				480				454				470
Gain on sales of SBA loans			308				27				156				491				594
Servicing income			125				139				106				138				129
Gain on warrants			32				—				637				—				—
Termination fees			16				45				—				618				32
Gain on proceeds from company-owned life insurance			—				27				—				104				109
Other			456				513				469				361				490
Total noninterest income			2,781				2,098				2,460				2,810				2,408
Noninterest expense:
Salaries and employee benefits			14,119				13,476				13,821				12,871				12,461
Occupancy and equipment			2,415				2,277				2,437				2,366				2,151
Professional fees			1,230				1,291				1,080				1,200				1,211
Other			6,135				6,146				5,914				5,790				6,008
Total noninterest expense			23,899				23,190				23,252				22,227				21,831
Income before income taxes			25,917				20,968				17,996				19,307				19,273
Income tax expense			7,848				6,147				5,130				5,342				5,555
Net income		$	18,069			$	14,821			$	12,866			$	13,965			$	13,718
PER COMMON SHARE DATA
(unaudited)
Basic earnings per share		$	0.30			$	0.24			$	0.21			$	0.23			$	0.23
Diluted earnings per share		$	0.30			$	0.24			$	0.21			$	0.23			$	0.23
Weighted average shares outstanding - basic			60,686,992				60,542,170				60,393,883				60,298,424				60,220,717
Weighted average shares outstanding - diluted			61,123,801				60,969,154				60,921,835				60,844,221				60,760,189
Common shares outstanding at period-end			60,716,794				60,666,794				60,407,846				60,339,837				60,266,316
Dividend per share		$	0.13			$	0.13			$	0.13			$	0.13			$	0.13
Book value per share		$	10.04			$	10.01			$	9.95			$	9.91			$	9.79
Tangible book value per share		$	7.09			$	7.04			$	6.96			$	6.91			$	6.77
KEY FINANCIAL RATIOS
(unaudited)
Annualized return on average equity			11.72		%		9.86		%		8.71		%		9.35		%		9.29		%
Annualized return on average tangible equity			16.60		%		14.06		%		12.47		%		13.50		%		13.49		%
Annualized return on average assets			1.31		%		1.11		%		0.96		%		0.97		%		1.06		%
Annualized return on average tangible assets			1.36		%		1.15		%		0.99		%		1.00		%		1.10		%
Net interest margin (FTE)			3.73		%		3.38		%		3.05		%		2.84		%		3.18		%
Efficiency ratio			47.02		%		52.73		%		57.16		%		54.32		%		53.78		%
AVERAGE BALANCES
(in $000’s, unaudited)
Average assets		$	5,466,330			$	5,334,636			$	5,443,240			$	5,695,136			$	5,139,239
Average tangible assets		$	5,286,591			$	5,154,245			$	5,262,175			$	5,513,359			$	4,956,738
Average earning assets		$	5,117,373			$	4,985,611			$	5,093,851			$	5,336,129			$	4,778,574
Average loans held-for-sale		$	3,282			$	1,824			$	1,478			$	4,047			$	4,810
Average total loans		$	3,140,705			$	3,048,353			$	3,027,111			$	2,872,074			$	2,766,731
Average deposits		$	4,712,044			$	4,579,436			$	4,697,136			$	4,945,204			$	4,396,315
Average demand deposits - noninterest-bearing		$	1,910,748			$	1,836,350			$	1,857,164			$	1,979,940			$	1,835,219
Average interest-bearing deposits		$	2,801,296			$	2,743,086			$	2,839,972			$	2,965,264			$	2,561,096
Average interest-bearing liabilities		$	2,840,611			$	2,791,527			$	2,879,952			$	3,005,212			$	2,601,002
Average equity		$	611,707			$	603,182			$	599,355			$	592,291			$	586,012
Average tangible equity		$	431,968			$	422,791			$	418,290			$	410,514			$	403,511

		End of Period:												Percent Change From:
CONSOLIDATED BALANCE SHEETS		September 30,				June 30,				September 30,				June 30,			September 30,
(in $000’s, unaudited)		2022				2022				2021				2022			2021
ASSETS
Cash and due from banks		$	40,500			$	35,764			$	33,013			13		%	23		%
Other investments and interest-bearing deposits in other financial institutions			641,251				840,821				1,588,334			(24	)	%	(60	)	%
Securities available-for-sale, at fair value			478,534				332,129				121,000			44		%	295		%
Securities held-to-maturity, at amortized cost			703,794				723,716				537,285			(3	)	%	31		%
Loans held-for-sale - SBA, including deferred costs			2,081				2,281				3,678			(9	)	%	(43	)	%
Loans:
Commercial			541,215				523,268				578,944			3		%	(7	)	%
PPP loans			1,614				8,153				164,506			(80	)	%	(99	)	%
Real estate:
CRE - owner occupied			612,241				597,521				580,624			2		%	5		%
CRE - non-owner occupied			1,023,405				993,621				829,022			3		%	23		%
Land and construction			167,439				155,389				141,277			8		%	19		%
Home equity			116,489				116,641				106,690			0		%	9		%
Multifamily			229,455				221,938				205,952			3		%	11		%
Residential mortgages			508,839				448,958				211,467			13		%	141		%
Consumer and other			16,620				18,354				20,106			(9	)	%	(17	)	%
Loans			3,217,317				3,083,843				2,838,588			4		%	13		%
Deferred loan fees, net			(844	)			(1,391	)			(5,729	)		(39	)	%	(85	)	%
Total loans, net of deferred costs and fees			3,216,473				3,082,452				2,832,859			4		%	14		%
Allowance for credit losses on loans			(46,921	)			(45,490	)			(43,680	)		3		%	7		%
Loans, net			3,169,552				3,036,962				2,789,179			4		%	14		%
Company-owned life insurance			78,456				77,972				77,509			1		%	1		%
Premises and equipment, net			9,428				9,593				9,821			(2	)	%	(4	)	%
Goodwill			167,631				167,631				167,631			0		%	0		%
Other intangible assets			11,692				12,351				14,423			(5	)	%	(19	)	%
Accrued interest receivable and other assets			128,343				117,621				121,129			9		%	6		%
Total assets		$	5,431,262			$	5,356,841			$	5,463,002			1		%	(1	)	%
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand, noninterest-bearing		$	1,883,574			$	1,846,365			$	1,804,965			2		%	4		%
Demand, interest-bearing			1,154,403				1,218,538				1,141,944			(5	)	%	1		%
Savings and money market			1,487,400				1,387,003				1,600,754			7		%	(7	)	%
Time deposits - under $250			34,728				36,691				39,628			(5	)	%	(12	)	%
Time deposits - $250 and over			93,263				98,760				103,046			(6	)	%	(9	)	%
CDARS - money market and time deposits			29,897				26,287				36,044			14		%	(17	)	%
Total deposits			4,683,265				4,613,644				4,726,381			2		%	(1	)	%
Subordinated debt, net of issuance costs			39,312				39,274				39,878			0		%	(1	)	%
Accrued interest payable and other liabilities			99,168				96,699				106,625			3		%	(7	)	%
Total liabilities			4,821,745				4,749,617				4,872,884			2		%	(1	)	%
Shareholders’ Equity:
Common stock			501,240				499,832				496,622			0		%	1		%
Retained earnings			133,489				123,310				105,202			8		%	27		%
Accumulated other comprehensive loss			(25,212	)			(15,918	)			(11,706	)		(58	)	%	(115	)	%
Total shareholders' equity			609,517				607,224				590,118			0		%	3		%
Total liabilities and shareholders’ equity		$	5,431,262			$	5,356,841			$	5,463,002			1		%	(1	)	%

		End of Period:
CONSOLIDATED BALANCE SHEETS		September 30,				June 30,				March 31,				December 31,				September 30,
(in $000’s, unaudited)		2022				2022				2022				2021				2021
ASSETS
Cash and due from banks		$	40,500			$	35,764			$	29,729			$	15,703			$	33,013
Other investments and interest-bearing deposits in other financial institutions			641,251				840,821				1,187,436				1,290,513				1,588,334
Securities available-for-sale, at fair value			478,534				332,129				111,217				102,252				121,000
Securities held-to-maturity, at amortized cost			703,794				723,716				736,823				658,397				537,285
Loans held-for-sale - SBA, including deferred costs			2,081				2,281				831				2,367				3,678
Loans:
Commercial			541,215				523,268				568,053				594,108				578,944
PPP loans			1,614				8,153				37,393				88,726				164,506
Real estate:
CRE - owner occupied			612,241				597,521				597,542				595,934				580,624
CRE - non-owner occupied			1,023,405				993,621				928,220				902,326				829,022
Land and construction			167,439				155,389				153,323				147,855				141,277
Home equity			116,489				116,641				111,609				109,579				106,690
Multifamily			229,455				221,938				221,767				218,856				205,952
Residential mortgages			508,839				448,958				391,171				416,660				211,467
Consumer and other			16,620				18,354				17,110				16,744				20,106
Loans			3,217,317				3,083,843				3,026,188				3,090,788				2,838,588
Deferred loan fees, net			(844	)			(1,391	)			(2,124	)			(3,462	)			(5,729	)
Total loans, net of deferred fees			3,216,473				3,082,452				3,024,064				3,087,326				2,832,859
Allowance for credit losses on loans			(46,921	)			(45,490	)			(42,788	)			(43,290	)			(43,680	)
Loans, net			3,169,552				3,036,962				2,981,276				3,044,036				2,789,179
Company-owned life insurance			78,456				77,972				78,069				77,589				77,509
Premises and equipment, net			9,428				9,593				9,580				9,639				9,821
Goodwill			167,631				167,631				167,631				167,631				167,631
Other intangible assets			11,692				12,351				13,009				13,668				14,423
Accrued interest receivable and other assets			128,343				117,621				111,797				117,614				121,129
Total assets		$	5,431,262			$	5,356,841			$	5,427,398			$	5,499,409			$	5,463,002
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand, noninterest-bearing		$	1,883,574			$	1,846,365			$	1,811,943			$	1,903,768			$	1,804,965
Demand, interest-bearing			1,154,403				1,218,538				1,268,942				1,308,114				1,141,944
Savings and money market			1,487,400				1,387,003				1,447,434				1,375,825				1,600,754
Time deposits - under $250			34,728				36,691				38,417				38,734				39,628
Time deposits - $250 and over			93,263				98,760				93,161				94,700				103,046
CDARS - money market and time deposits			29,897				26,287				30,008				38,271				36,044
Total deposits			4,683,265				4,613,644				4,689,905				4,759,412				4,726,381
Subordinated debt, net of issuance costs			39,312				39,274				39,987				39,925				39,878
Accrued interest payable and other liabilities			99,168				96,699				96,450				102,044				106,625
Total liabilities			4,821,745				4,749,617				4,826,342				4,901,381				4,872,884
Shareholders’ Equity:
Common stock			501,240				499,832				498,763				497,695				496,622
Retained earnings			133,489				123,310				116,347				111,329				105,202
Accumulated other comprehensive loss			(25,212	)			(15,918	)			(14,054	)			(10,996	)			(11,706	)
Total shareholders' equity			609,517				607,224				601,056				598,028				590,118
Total liabilities and shareholders’ equity		$	5,431,262			$	5,356,841			$	5,427,398			$	5,499,409			$	5,463,002

		At or For the Quarter Ended:												Percent Change From:
CREDIT QUALITY DATA		September 30,				June 30,				September 30,				June 30,				September 30,
(in $000’s, unaudited)		2022				2022				2021				2022				2021
Nonaccrual loans - held-for-investment		$	491			$	1,734			$	4,091				(72	)	%		(88	)	%
Restructured and loans over 90 days past due and still accruing			545				981				642				(44	)	%		(15	)	%
Total nonperforming loans			1,036				2,715				4,733				(62	)	%		(78	)	%
Foreclosed assets			—				—				—				N/A				N/A
Total nonperforming assets		$	1,036			$	2,715			$	4,733				(62	)	%		(78	)	%
Other restructured loans still accruing		$	93			$	113			$	90				(18	)	%		3		%
Net charge-offs (recoveries) during the quarter		$	(425	)		$	(2,883	)		$	(238	)			85		%		(79	)	%
Provision for (recapture of) credit losses on loans during the quarter		$	1,006			$	(181	)		$	(514	)			656		%		296		%
Allowance for credit losses on loans		$	46,921			$	45,490			$	43,680				3		%		7		%
Classified assets		$	28,570			$	28,929			$	31,937				(1	)	%		(11	)	%
Allowance for credit losses on loans to total loans			1.46		%		1.48		%		1.54		%		(1	)	%		(5	)	%
Allowance for credit losses on loans to total nonperforming loans			4,529.05		%		1,675.51		%		922.88		%		170		%		391		%
Nonperforming assets to total assets			0.02		%		0.05		%		0.09		%		(60	)	%		(78	)	%
Nonperforming loans to total loans			0.03		%		0.09		%		0.17		%		(67	)	%		(82	)	%
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			5		%		6		%		7		%		(17	)	%		(29	)	%
OTHER PERIOD-END STATISTICS
(in $000’s, unaudited)
Heritage Commerce Corp:
Tangible common equity (1)		$	430,194			$	427,242			$	408,064				1		%		5		%
Shareholders’ equity / total assets			11.22		%		11.34		%		10.80		%		(1	)	%		4		%
Tangible common equity / tangible assets (2)			8.19		%		8.25		%		7.73		%		(1	)	%		6		%
Loan to deposit ratio			68.68		%		66.81		%		59.94		%		3		%		15		%
Noninterest-bearing deposits / total deposits			40.22		%		40.02		%		38.19		%		0		%		5		%
Total capital ratio			14.5		%		14.6		%		15.1		%		(1	)	%		(4	)	%
Tier 1 capital ratio			12.4		%		12.5		%		12.9		%		(1	)	%		(4	)	%
Common Equity Tier 1 capital ratio			12.4		%		12.5		%		12.9		%		(1	)	%		(4	)	%
Tier 1 leverage ratio			8.7		%		8.7		%		8.6		%		0		%		1		%
Heritage Bank of Commerce:
Total capital ratio			14.0		%		14.1		%		14.5		%		(1	)	%		(3	)	%
Tier 1 capital ratio			12.9		%		13.0		%		13.5		%		(1	)	%		(4	)	%
Common Equity Tier 1 capital ratio			12.9		%		13.0		%		13.5		%		(1	)	%		(4	)	%
Tier 1 leverage ratio			9.0		%		9.0		%		9.0		%		0		%		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		September 30,				June 30,				March 31,				December 31,				September 30,
(in $000’s, unaudited)		2022				2022				2022				2021				2021
Nonaccrual loans - held-for-investment		$	491			$	1,734			$	3,303			$	3,460			$	4,091
Restructured and loans over 90 days past due and still accruing			545				981				527				278				642
Total nonperforming loans			1,036				2,715				3,830				3,738				4,733
Foreclosed assets			—				—				—				—				—
Total nonperforming assets		$	1,036			$	2,715			$	3,830			$	3,738			$	4,733
Other restructured loans still accruing		$	93			$	113			$	125			$	125			$	90
Net charge-offs (recoveries) during the quarter		$	(425	)		$	(2,883	)		$	(65	)		$	(225	)		$	(238	)
Provision for (recapture of) credit losses on loans during the quarter		$	1,006			$	(181	)		$	(567	)		$	(615	)		$	(514	)
Allowance for credit losses on loans		$	46,921			$	45,490			$	42,788			$	43,290			$	43,680
Classified assets		$	28,570			$	28,929			$	30,579			$	33,719			$	31,937
Allowance for credit losses on loans to total loans			1.46		%		1.48		%		1.41		%		1.40		%		1.54		%
Allowance for credit losses on loans to total nonperforming loans			4,529.05		%		1,675.51		%		1,117.18		%		1,158.11		%		922.88		%
Nonperforming assets to total assets			0.02		%		0.05		%		0.07		%		0.07		%		0.09		%
Nonperforming loans to total loans			0.03		%		0.09		%		0.13		%		0.12		%		0.17		%
Classified assets to Heritage Commerce Corp
Tier 1 capital plus allowance for credit losses on loans			6		%		6		%		6		%		7		%		7		%
Classified assets to Heritage Bank of Commerce
Tier 1 capital plus allowance for credit losses on loans			5		%		6		%		6		%		7		%		7		%
OTHER PERIOD-END STATISTICS
(in $000’s, unaudited)
Heritage Commerce Corp:
Tangible common equity (1)		$	430,194			$	427,242			$	420,416			$	416,729			$	408,064
Shareholders’ equity / total assets			11.22		%		11.34		%		11.07		%		10.87		%		10.80		%
Tangible common equity / tangible assets (2)			8.19		%		8.25		%		8.01		%		7.84		%		7.73		%
Loan to deposit ratio			68.68		%		66.81		%		64.48		%		64.87		%		59.94		%
Noninterest-bearing deposits / total deposits			40.22		%		40.02		%		38.63		%		40.00		%		38.19		%
Total capital ratio			14.5		%		14.6		%		14.6		%		14.4		%		15.1		%
Tier 1 capital ratio			12.4		%		12.5		%		12.4		%		12.3		%		12.9		%
Common Equity Tier 1 capital ratio			12.4		%		12.5		%		12.4		%		12.3		%		12.9		%
Tier 1 leverage ratio			8.7		%		8.7		%		8.3		%		7.9		%		8.6		%
Heritage Bank of Commerce:
Total capital ratio			14.0		%		14.1		%		13.9		%		13.8		%		14.5		%
Tier 1 capital ratio			12.9		%		13.0		%		12.9		%		12.8		%		13.5		%
Common Equity Tier 1 capital ratio			12.9		%		13.0		%		12.9		%		12.8		%		13.5		%
Tier 1 leverage ratio			9.0		%		9.0		%		8.7		%		8.2		%		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
		September 30, 2022											September 30, 2021
						Interest				Average							Interest				Average
NET INTEREST INCOME AND NET INTEREST MARGIN (in $000’s, unaudited)		Average				Income/				Yield/			Average				Income/				Yield/
		Balance				Expense				Rate			Balance				Expense				Rate
Assets:
Loans, gross (1)(2)		$	3,143,987				38,870			4.90		%	$	2,771,541			$	36,207			5.18		%
Securities - taxable			1,076,742				5,874			2.16		%		557,890				2,320			1.65		%
Securities - exempt from Federal tax (3)			38,733				329			3.37		%		58,679				485			3.28		%
Other investments and interest-bearing deposits in other financial institutions			857,911				5,170			2.39		%		1,390,464				998			0.28		%
Total interest earning assets (3)			5,117,373				50,243			3.90		%		4,778,574				40,010			3.32		%
Cash and due from banks			37,961											37,963
Premises and equipment, net			9,591											9,962
Goodwill and other intangible assets			179,739											182,501
Other assets			121,666											130,239
Total assets		$	5,466,330										$	5,139,239
Liabilities and shareholders’ equity:
Deposits:
Demand, noninterest-bearing		$	1,910,748										$	1,835,219
Demand, interest-bearing			1,205,937				543			0.18		%		1,142,762				473			0.16		%
Savings and money market			1,429,055				925			0.26		%		1,234,109				513			0.16		%
Time deposits - under $100			12,329				5			0.16		%		14,721				7			0.19		%
Time deposits - $100 and over			123,458				121			0.39		%		132,247				147			0.44		%
CDARS - money market and time deposits			30,517				1			0.01		%		37,257				1			0.01		%
Total interest-bearing deposits			2,801,296				1,595			0.23		%		2,561,096				1,141			0.18		%
Total deposits			4,712,044				1,595			0.13		%		4,396,315				1,141			0.10		%
Subordinated debt, net of issuance costs			39,288				538			5.43		%		39,851				583			5.80		%
Short-term borrowings			27				—			0.00		%		55				1			7.21		%
Total interest-bearing liabilities			2,840,611				2,133			0.30		%		2,601,002				1,725			0.26		%
Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds			4,751,359				2,133			0.18		%		4,436,221				1,725			0.15		%
Other liabilities			103,264											117,006
Total liabilities			4,854,623											4,553,227
Shareholders’ equity			611,707											586,012
Total liabilities and shareholders’ equity		$	5,466,330										$	5,139,239
Net interest income (3) / margin							48,110			3.73		%						38,285			3.18		%
Less tax equivalent adjustment (3)							(69	)										(103	)
Net interest income						$	48,041										$	38,182

____________________

	(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 $507,000 for the third quarter of 2022 (of which $190,000 was from PPP loans), compared to $2,809,000 for the third quarter of 2021 (of which $2,508,000 was from PPP loans). Prepayment fees totaled $96,000 for the third quarter of 2022, compared to $1,282,000 for the third 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
		September 30, 2022											June 30, 2022
						Interest				Average							Interest				Average
NET INTEREST INCOME AND NET INTEREST MARGIN (in $000’s, unaudited)		Average				Income/				Yield/			Average				Income/				Yield/
		Balance				Expense				Rate			Balance				Expense				Rate
Assets:
Loans, gross (1)(2)		$	3,143,987			$	38,870			4.90		%	$	3,050,177				36,538			4.80		%
Securities - taxable			1,076,742				5,874			2.16		%		912,408				4,407			1.94		%
Securities - exempt from Federal tax (3)			38,733				329			3.37		%		40,447				343			3.40		%
Other investments and interest-bearing deposits in other financial institutions			857,911				5,170			2.39		%		982,579				2,340			0.96		%
Total interest earning assets (3)			5,117,373				50,243			3.90		%		4,985,611				43,628			3.51		%
Cash and due from banks			37,961											37,172
Premises and equipment, net			9,591											9,666
Goodwill and other intangible assets			179,739											180,391
Other assets			121,666											121,796
Total assets		$	5,466,330										$	5,334,636
Liabilities and shareholders’ equity:
Deposits:
Demand, noninterest-bearing		$	1,910,748										$	1,836,350
Demand, interest-bearing			1,205,937				543			0.18		%		1,249,875				468			0.15		%
Savings and money market			1,429,055				925			0.26		%		1,327,665				558			0.17		%
Time deposits - under $100			12,329				5			0.16		%		12,643				4			0.13		%
Time deposits - $100 and over			123,458				121			0.39		%		125,258				114			0.37		%
CDARS - money market and time deposits			30,517				1			0.01		%		27,645				2			0.03		%
Total interest-bearing deposits			2,801,296				1,595			0.23		%		2,743,086				1,146			0.17		%
Total deposits			4,712,044				1,595			0.13		%		4,579,436				1,146			0.10		%
Subordinated debt, net of issuance costs			39,288				538			5.43		%		48,425				531			4.40		%
Short-term borrowings			27				—			0.00		%		16				—			0.00		%
Total interest-bearing liabilities			2,840,611				2,133			0.30		%		2,791,527				1,677			0.24		%
Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds			4,751,359				2,133			0.18		%		4,627,877				1,677			0.15		%
Other liabilities			103,264											103,577
Total liabilities			4,854,623											4,731,454
Shareholders’ equity			611,707											603,182
Total liabilities and shareholders’ equity		$	5,466,330										$	5,334,636
Net interest income (3) / margin							48,110			3.73		%						41,951			3.38		%
Less tax equivalent adjustment (3)							(69	)										(72	)
Net interest income						$	48,041										$	41,879

____________________

	(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 $507,000 for the third quarter of 2022 (of which $190,000 was from PPP loans), compared to $816,000 for the second quarter of 2022 (of which $493,000 was from PPP loans). Prepayment fees totaled $96,000 for the third quarter of 2022, compared to $549,000 for the second quarter of 2022.
	(3)	Reflects the FTE adjustment for Federal tax-exempt income based on a 21% tax rate.

		For the Nine Months Ended											For the Nine Months Ended
		September 30, 2022											September 30, 2021
						Interest				Average							Interest				Average
NET INTEREST INCOME AND NET INTEREST MARGIN (in $000’s, unaudited)		Average				Income/				Yield/			Average				Income/				Yield/
		Balance				Expense				Rate			Balance				Expense				Rate
Assets:
Loans, gross (1)(2)		$	3,074,674				110,509			4.81		%	$	2,729,319			$	103,482			5.07		%
Securities - taxable			924,694				13,725			1.98		%		491,832				5,992			1.63		%
Securities - exempt from Federal tax (3)			41,328				1,048			3.39		%		62,454				1,538			3.29		%
Other investments, interest-bearing deposits in other financial institutions and Federal funds sold			1,025,002				8,574			1.12		%		1,343,248				2,611			0.26		%
Total interest earning assets (3)			5,065,698				133,856			3.53		%		4,626,853				113,623			3.28		%
Cash and due from banks			37,589											40,401
Premises and equipment, net			9,621											10,158
Goodwill and other intangible assets			180,393											183,262
Other assets			121,519											127,402
Total assets		$	5,414,820										$	4,988,076
Liabilities and shareholders’ equity:
Deposits:
Demand, noninterest-bearing		$	1,868,283										$	1,786,035
Demand, interest-bearing			1,244,996				1,470			0.16		%		1,103,114				1,429			0.17		%
Savings and money market			1,383,944				2,026			0.20		%		1,184,108				1,613			0.18		%
Time deposits - under $100			12,732				14			0.15		%		15,315				24			0.21		%
Time deposits - $100 and over			122,615				341			0.37		%		132,347				482			0.49		%
CDARS - money market and time deposits			30,356				4			0.02		%		31,295				4			0.02		%
Total interest-bearing deposits			2,794,643				3,855			0.18		%		2,466,179				3,552			0.19		%
Total deposits			4,662,926				3,855			0.11		%		4,252,214				3,552			0.11		%
Subordinated debt, net of issuance costs			42,552				1,640			5.15		%		39,804				1,731			5.81		%
Short-term borrowings			24				—			0.00		%		42				1			3.18		%
Total interest-bearing liabilities			2,837,219				5,495			0.26		%		2,506,025				5,284			0.28		%
Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds			4,705,502				5,495			0.16		%		4,292,060				5,284			0.16		%
Other liabilities			104,524											113,265
Total liabilities			4,810,026											4,405,325
Shareholders’ equity			604,794											582,751
Total liabilities and shareholders’ equity		$	5,414,820										$	4,988,076
Net interest income (3) / margin							128,361			3.39		%						108,339			3.13		%
Less tax equivalent adjustment (3)							(220	)										(323	)
Net interest income						$	128,141										$	108,016

____________________

	(1)	Includes loans held-for-sale. Nonaccrual loans are included in average balances.
	(2)	Yield amounts earned on loans include fees and costs. The accretion of net deferred loan fees into loan interest income was $3,111,000 for the first nine months of 2022 (of which $2,029,000 was from PPP loans), compared to $8,690,000 for the first nine months of 2021 (of which $7,784,000 was from PPP loans). Prepayment fees totaled $1,155,000 for the first nine months of 2022, compared to $2,303,000 for the first nine 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 Q3 2022?

Heritage Commerce Corp reported net income of $18.1 million for Q3 2022.

How much did net interest income grow in Q3 2022 for HTBK?

Net interest income for HTBK increased by 26% to $48 million in Q3 2022.

What is the net interest margin for HTBK for Q3 2022?

The net interest margin for HTBK improved to 3.73% in Q3 2022.

How did total deposits change for HTBK in Q3 2022?

Total deposits for HTBK increased by $69.6 million from the previous quarter.

What is the year-over-year increase in net income for HTBK?

HTBK's net income increased by 32% year-over-year.