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

Rhea-AI Summary

Heritage Commerce Corp (Nasdaq: HTBK) reported a robust fourth quarter of 2022, with net income rising 49% to $20.8 million, or $0.34 per diluted share. This marked an increase from $14.0 million year-over-year and a 15% rise from Q3 2022. For the full year, net income reached $66.6 million, up 40% from 2021. Key metrics include a return on average tangible common equity of 18.89% and a net interest margin of 4.10%. Despite a 6% decline in total deposits, the company maintained strong credit metrics, with nonperforming assets decreasing. Total loans increased 7% to $3.299 billion year-over-year, driven by solid loan growth.

Positive

• Net income increased 49% to $20.8 million in Q4 2022.
• Earnings per share rose to $0.34 from $0.23 year-over-year.
• Total loans grew 7% to $3.299 billion year-over-year.
• Return on average tangible common equity reached 18.89%.
• Net interest income before provision for credit losses grew 36% to $51.7 million in Q4 2022.

Negative

• Total deposits declined 6% from the previous quarter and 8% year-over-year.
• A decline in balances from two large depositors accounted for a significant part of the deposit decrease.
• Provision for credit losses on loans was recorded at $508,000 for the quarter.

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

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

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

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

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

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

Operating Results:

• Diluted earnings per share were $0.34 for the fourth quarter of 2022, compared to $0.23 for the fourth quarter of 2021, and $0.30 for the third quarter of 2022. Diluted earnings per share were $1.09 for the year ended December 31, 2022, compared to $0.79 for the year ended December 31, 2021.
  

• The following table indicates the ratios for the return on average tangible common assets and the return on average tangible common equity for the periods indicated:
  

		For the Quarter Ended:												For the Year Ended:
		December 31,				September 30,				December 31,				December 31,				December 31,
(unaudited)		2022				2022				2021				2022				2021
Return on average tangible assets		1.59	%			1.36	%			1.00	%			1.27	%			0.96	%
Return on average tangible common equity		18.89	%			16.60	%			13.50	%			15.57	%			11.86	%

• Net interest income, before provision for credit losses on loans, increased 36% to $51.7 million for the fourth quarter of 2022, compared to $38.1 million for the fourth quarter of 2021. The fully tax equivalent (“FTE”) net interest margin increased 126 basis points to 4.10% for the fourth quarter of 2022, from 2.84% for the fourth quarter of 2021, primarily due to increases in the prime rate and the rate on overnight funds, a shift in the mix of earning assets into higher yielding loans and investment securities, and higher average yield on overnight funds, partially offset by lower interest and fees on Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans, a decrease in the accretion of the loan purchase discount into interest income from acquired loans, lower prepayment fees, and a higher cost of funds.
  
  
  • Net interest income increased 8% to $51.7 million for the fourth quarter of 2022, compared to $48.0 million for the third quarter of 2022. The FTE net interest margin increased 37 basis points to 4.10% for the fourth quarter of 2022 from 3.73% for the third quarter of 2022, primarily due to a shift in the mix of earning assets as the Company invested its excess liquidity into higher yielding loans and investment securities, and higher average yields on overnight funds, partially offset by a higher cost of funds.
    
    
  • Net interest income increased 23% to $179.9 million for the year ended December 31, 2022, compared to $146.1 million for the year ended December 31, 2021. For the year ended December 31, 2022, the FTE net interest margin increased 52 basis points to 3.57%, compared to 3.05% for the year ended December 31, 2021, primarily due to higher average balances of loans and investment securities, higher average yields on investment securities and overnight funds, partially offset by lower interest and fees on PPP loans, a decrease in the accretion of the loan purchase discount into interest income from acquired loans, lower prepayment fees, a lower yield on the Bay View Funding factoring portfolio, and a higher cost of funds.
    

• The following table, as of December 31, 2022, sets forth the estimated changes in the Company’s annual net interest income that would result from the designated instantaneous parallel shift in interest rates from the base rate:
  

		Increase/(Decrease) in
		Estimated Net
		Interest Income(1)
		Amount				Percent
Change in Interest Rates (basis points) (in $000's, unaudited)
+400		$	20,274			9.4		%
+300		$	15,183			7.1		%
+200		$	10,119			4.7		%
+100		$	5,090			2.4		%
0			—			—
−100		$	(10,250	)		(4.8	)	%
−200		$	(24,753	)		(11.5	)	%
−300		$	(39,082	)		(18.2	)	%
−400		$	(52,586	)		(24.5	)	%

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

• The following tables present the average balance of loans outstanding, interest income, and the average yield for the periods indicated:
  
  
  • The average yield on the total loan portfolio increased to 5.19% for the fourth quarter of 2022, compared to 4.90% for the third quarter of 2022, primarily due to increases in the prime rate, partially offset by lower fees on PPP loans, and higher average balances of lower yielding purchased residential mortgage loans.

		For the Quarter Ended									For the Quarter Ended
		December 31, 2022									September 30, 2022
		Average				Interest			Average		Average				Interest			Average
(in $000’s, unaudited)		Balance				Income			Yield		Balance				Income			Yield
Loans, core bank		$	2,654,311			$	33,594		5.02	%	$	2,573,908			$	30,490		4.70	%
Prepayment fees			—				123		0.02	%		—				96		0.01	%
PPP loans			1,255				3		0.95	%		4,593				11		0.95	%
PPP fees, net			—				25		7.90	%		—				190		16.41	%
Asset-based lending			35,519				756		8.44	%		53,514				1,032		7.65	%
Bay View Funding factored receivables			71,789				3,696		20.43	%		62,623				3,201		20.28	%
Purchased residential mortgages			485,149				3,842		3.14	%		446,190				3,414		3.04	%
Purchased commercial real estate ("CRE") loans			7,307				80		4.34	%		8,337				83		3.95	%
Loan fair value mark / accretion			(4,774	)			382		0.06	%		(5,178	)			353		0.05	%
Total loans (includes loans held-for-sale)		$	3,250,556			$	42,501		5.19	%	$	3,143,987			$	38,870		4.90	%

• The average yield on the total loan portfolio increased to 5.19% for the fourth quarter of 2022, compared to 4.93% for the fourth quarter of 2021, primarily due to increases in the prime rate, partially offset by lower interest and fees on PPP loans, a decrease in the accretion of the loan purchase discount into interest income from acquired loans, lower prepayment fees, and higher average balances of lower yielding purchased residential mortgages.

		For the Quarter Ended									For the Quarter Ended
		December 31, 2022									December 31, 2021
		Average				Interest			Average		Average				Interest			Average
(in $000’s, unaudited)		Balance				Income			Yield		Balance				Income			Yield
Loans, core bank		$	2,654,311			$	33,594		5.02	%	$	2,432,700			$	26,484		4.32	%
Prepayment fees			—				123		0.02	%		—				397		0.06	%
PPP loans			1,255				3		0.95	%		127,592				318		0.99	%
PPP fees, net			—				25		7.90	%		—				2,211		6.87	%
Asset-based lending			35,519				756		8.44	%		52,918				683		5.12	%
Bay View Funding factored receivables			71,789				3,696		20.43	%		62,571				3,248		20.59	%
Purchased residential mortgages			485,149				3,842		3.14	%		199,139				1,437		2.86	%
Purchased CRE loans			7,307				80		4.34	%		8,929				69		3.07	%
Loan fair value mark / accretion			(4,774	)			382		0.06	%		(7,728	)			915		0.15	%
Total loans (includes loans held-for-sale)		$	3,250,556			$	42,501		5.19	%	$	2,876,121			$	35,762		4.93	%

• The average yield on the total loan portfolio decreased to 4.91% for the year ended December 31, 2022, compared to 5.03% for the year ended December 31, 2021, primarily due to a decrease in interest and fees on PPP loans, a decrease in the accretion of the loan purchase discount into interest income from acquired loans, lower prepayment fees, and an increase in the average balance of lower yielding purchased residential mortgages.

		For the Year Ended									For the Year Ended
		December 31, 2022									December 31, 2021
		Average				Interest			Average		Average				Interest			Average
(in $000’s, unaudited)		Balance				Income			Yield		Balance				Income			Yield
Loans, core bank		$	2,561,195			$	117,582		4.59	%	$	2,299,367			$	101,690		4.42	%
Prepayment fees			—				1,278		0.05	%		—				2,700		0.12	%
PPP loans			21,689				213		0.98	%		249,253				2,481		1.00	%
PPP fees, net			—				2,054		9.47	%		—				9,995		4.01	%
Asset-based lending			51,990				3,613		6.95	%		39,798				2,106		5.29	%
Bay View Funding factored receivables			64,099				12,819		20.00	%		52,618				11,485		21.83	%
Purchased residential mortgages			417,672				12,395		2.97	%		122,566				3,555		2.90	%
Purchased CRE loans			8,143				317		3.89	%		12,436				441		3.55	%
Loan fair value mark / accretion			(5,782	)			2,739		0.11	%		(9,717	)			4,791		0.21	%
Total loans (includes loans held-for-sale)		$	3,119,006			$	153,010		4.91	%	$	2,766,321			$	139,244		5.03	%

• In aggregate, the remaining net purchase discount on total loans acquired from Focus Business Bank, Tri-Valley Bank, United American Bank, and Presidio Bank was $4.6 million at December 31, 2022.
  

• The average cost of total deposits was 0.25% for the fourth quarter of 2022, compared to 0.10% for the fourth quarter of 2021, and 0.13% for the third quarter of 2022. The average cost of total deposits was 0.15% for the year ended December 31, 2022, compared to 0.11% for the year ended December 31, 2021.  
  

• During the fourth quarter of 2022, there was a provision for credit losses on loans of $508,000, compared to a $615,000 negative provision for credit losses on loans for the fourth quarter of 2021, and a provision for credit losses on loans of $1.0 million for the third quarter of 2022. There was a provision for credit losses on loans of $766,000 for the year ended December 31, 2022, compared to a $3.1 million negative provision for credit losses on loans for the year ended December 31, 2021.
  
• Total noninterest income remained relatively flat at $2.8 million for both the fourth quarter of 2022 and 2021. The fourth quarter of 2022 included higher income on off-balance sheet deposits. The fourth quarter of 2021 included termination fees, a gain on sales of SBA loans, and a gain on proceeds from company-owned life insurance. Total noninterest income remained relatively flat at $2.8 million for both the fourth and third quarters of 2022, as higher service charges and fees on deposit accounts was offset by a lower gain on sales of SBA loans during the fourth quarter of 2022.

• For the year ended December 31, 2022, total noninterest income increased 4% to $10.1 million, compared to $9.7 million for the year ended December 31, 2021, primarily due to higher income on off-balance sheet deposits, and a $669,000 gain on warrants, partially offset by a lower gain on sales of SBA loans and a lower gain on proceeds from company-owned life insurance during the year ended December 31, 2022.
  

• Total noninterest expense for the fourth quarter of 2022 increased to $24.5 million, compared to $22.2 million for the fourth quarter of 2021, primarily due to higher salaries and employee benefits, higher rent included in occupancy and equipment expense, higher professional fees, and higher insurance and information technology related expenses included in other noninterest expense during the fourth quarter of 2022.
  
  
  • Total noninterest expense for the fourth quarter of 2022 increased to $24.5 million, compared to $23.9 million for the third quarter of 2022, primarily due to approximately $900,000 in additional expense as a result of higher bonuses, professional fees, insurance and information technology related expenses incurred during the fourth quarter of 2022. The higher salaries and employee benefits during the third quarter of 2022 included $784,000 of restricted stock expense for vesting of restricted common stock held by the previous President and Chief Executive Officer of the Company, which was partially offset by a higher bonus accrual during the fourth quarter of 2022.
    
    
  • Noninterest expense for the year ended December 31, 2022 increased to $94.9 million, compared to $93.1 million for the year ended December 31, 2021, primarily due to higher salaries and employee benefits, higher rent included in occupancy and equipment expense, and higher insurance and information technology related expenses during the year ended December 31, 2022. These increases were partially offset by higher legal fees included in professional fees and a reserve for a legal settlement included in other noninterest expense during the year ended December 31, 2021.
    
    
  • Full time equivalent employees were 331 at December 31, 2022, and 326 at December 31, 2021, and 327 at September 30, 2022.

• The efficiency ratio was 44.98% for the fourth quarter of 2022, compared to 54.32% for the fourth quarter of 2021, and 47.02% for the third quarter of 2022. The efficiency ratio for the year ended December 31, 2022 was 49.93%, compared to 59.74% for the year ended December 31, 2021. The improvement in the efficiency ratio for the fourth quarter of 2022 and the year ended December 31, 2022 was primarily due to an increase in net interest income from the rising interest rate environment.
  

• Income tax expense was $8.7 million for the fourth quarter of 2022, compared to $5.3 million for the fourth quarter of 2021, and $7.8 million for the third quarter of 2022. The effective tax rate for the fourth quarter of 2022 was 29.5%, compared to 27.7% for the fourth quarter of 2021, and 30.3% for the third quarter of 2022. Income tax expense for the year ended December 31, 2022 was $27.8 million, compared to $18.2 million for the year ended December 31, 2021. The effective tax rate for the year ended December 31, 2022 was 29.5%, compared to 27.6% for the year ended December 31, 2021.
  

Balance Sheet Review, Capital Management and Credit Quality:

• Total assets decreased (6%) to $5.154 billion at December 31, 2022, compared to $5.499 billion at December 31, 2021, and decreased (5%) from $5.431 billion at September 30, 2022.  
  

• Securities available-for-sale, at fair value, totaled $489.6 million at December 31, 2022, compared to $102.3 million at December 31, 2021, and $478.5 million at September 30, 2022. At December 31, 2022, the Company’s securities available-for-sale portfolio was comprised of $418.5 million of U.S. Treasury securities and $71.1 million of agency mortgage-backed securities (all issued by U.S. Government sponsored entities).
  
  
  • The pre-tax unrealized loss on U.S. Treasury securities available-for-sale at December 31, 2022 was ($10.3) million, compared to a pre-tax unrealized loss of ($10.1) million at September 30, 2022. There were no U.S. Treasury securities available-for-sale at December 31, 2021. The pre-tax unrealized loss on mortgage-backed securities available-for-sale at December 31, 2022 was ($5.8) million, compared to a pre-tax unrealized gain of $2.9 million at December 31, 2021, and a pre-tax unrealized loss of ($7.3) million at September 30, 2022. The pre-tax unrealized loss on total securities available-for-sale at December 31, 2022 was ($16.1) million, compared to a pre-tax unrealized gain of $2.9 million at December 31, 2021, and a pre-tax unrealized loss of ($17.4) million at September 30, 2022. All other factors remaining the same, when market interest rates are increasing, the Company will experience a higher unrealized loss in the securities portfolio.
  • During the fourth quarter of 2022, the Company purchased $11.7 million of U.S. Treasury securities available-for-sale, with a book yield of 4.53% and an average life of 1.28 years. During the year ended December 31, 2022, the Company purchased $425.7 million of U.S. Treasury securities available-for-sale, with a book yield of 3.08% and an average life of 2.25 years.
• At December 31, 2022, securities held-to-maturity, at amortized cost, totaled $715.0 million, compared to $658.4 million at December 31, 2021, and $703.8 million at September 30, 2022. At December 31, 2022, the Company’s securities held-to-maturity portfolio was comprised of $677.4 million of agency mortgage-backed securities, and $37.6 million of tax-exempt municipal bonds.
  
  
  • The pre-tax unrealized loss on mortgage-backed securities held-to-maturity at December 31, 2022 was ($99.7) million, compared to a pre-tax unrealized loss of ($1.6) million at December 31, 2021, and a pre-tax unrealized loss of ($108.1) million at September 30, 2022. The pre-tax unrealized loss on municipal bonds held-to-maturity at December 31, 2022 was ($810,000), compared to a pre-tax unrealized gain of $805,000 at December 31, 2021, and a pre-tax unrealized loss of ($2.1) million at September 30, 2022. The pre-tax unrealized loss on total securities held-to-maturity at December 31, 2022 was ($100.6) million, compared to a pre-tax unrealized loss of ($790,000) at December 31, 2021, and a pre-tax unrealized loss of ($110.2) million at September 30, 2022.
  • During the fourth quarter of 2022, the Company purchased $27.1 million of agency mortgage-backed securities held-to-maturity, with a book yield of 5.13% and an average life of 8.56 years. During the year ended December 31, 2022, the Company purchased $146.6 million of agency mortgage-backed securities held-to-maturity, with a book yield of 2.75% and an average life of 6.92 years.
• The average life of the total investment securities portfolio was 4.93 years at December 31, 2022.
• The loan portfolio remains well-diversified as reflected in the following table which summarizes the distribution of loans, excluding loans held-for-sale, and the percentage of distribution in each category for the periods indicated:
  

LOANS		December 31, 2022						September 30, 2022						December 31, 2021
(in $000’s, unaudited)		Balance				% to Total		Balance				% to Total		Balance				% to Total
Commercial		$	532,749			16	%	$	541,215			17	%	$	594,108			19	%
PPP Loans(1)			1,166			0	%		1,614			0	%		88,726			3	%
Real estate:
CRE - owner occupied			614,663			19	%		612,241			19	%		595,934			19	%
CRE - non-owner occupied			1,066,368			32	%		1,023,405			32	%		902,326			29	%
Land and construction			163,577			5	%		167,439			5	%		147,855			5	%
Home equity			120,724			4	%		116,489			3	%		109,579			4	%
Multifamily			244,882			7	%		229,455			7	%		218,856			7	%
Residential mortgages			537,905			16	%		508,839			16	%		416,660			13	%
Consumer and other			17,033			1	%		16,620			1	%		16,744			1	%
Total Loans			3,299,067			100	%		3,217,317			100	%		3,090,788			100	%
Deferred loan costs (fees), net			(517	)		—			(844	)		—			(3,462	)		—
Loans, net of deferred costs and fees		$	3,298,550			100	%	$	3,216,473			100	%	$	3,087,326			100	%

---

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

• Loans, excluding loans held-for-sale, increased $211.2 million, or 7%, to $3.299 billion at December 31, 2022, compared to $3.087 billion at December 31, 2021, and increased $82.1 million, or 3%, from $3.216 billion at September 30, 2022. Total loans at December 31, 2022 included $1.2 million of PPP loans, compared to $88.7 million at December 31, 2021 and $1.6 million at September 30, 2022. Total loans at December 31, 2022 included $537.9 million of residential mortgages, compared to $416.7 million at December 31, 2021, and $508.8 million at September 30, 2022. Loans, excluding loans held-for-sale, PPP loans and residential mortgages, increased $175.5 million, or 7%, to $2.760 billion at December 31, 2022, compared to $2.584 billion at December 31, 2021, and increased $53.4 million, or 2%, from $2.706 billion at September 30, 2022.  
  
  
  • Commercial and industrial (“C&I”) line utilization was 29% at both December 31, 2022 and September 30, 2022, compared to 31% at December 31, 2021.
    
    
  • At both December 31, 2022 and September 30, 2022, there was 37% of the CRE loan portfolio secured by owner-occupied real estate, compared to 40% at December 31, 2021.
    
    
  • At December 31, 2022, approximately 33% of the Company’s loan portfolio consisted of floating interest rate loans, compared to 38% at December 31, 2021, and 34% at September 30, 2022.
    
    
• During the fourth quarter of 2022, the Company purchased single family residential mortgage loans totaling $37.4 million, tied to homes located in California, with average principal balances of approximately $1.0 million and a bond equivalent yield of approximately 5.22%, which uses the average life of the loan to recognize the discount into income. During the year ended December 31, 2022, the Company purchased single family residential mortgage loans totaling $185.4 million, tied to homes located in California, with average principal balances of approximately $934,000.

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

		At or For the Quarter Ended:												For the Year Ended:
ALLOWANCE FOR CREDIT LOSSES ON LOANS		December 31,				September 30,				December 31,				December 31,				December 31,
(in $000’s, unaudited)		2022				2022				2021				2022				2021
Balance at beginning of period		$	46,921			$	45,490			$	43,680			$	43,290			$	44,400
Charge-offs during the period			(56	)			(7	)			(87	)			(434	)			(520	)
Recoveries during the period			139				432				312				3,890				2,544
Net recoveries (charge-offs) during the period			83				425				225				3,456				2,024
Provision for (recapture of) credit losses on loans during the period			508				1,006				(615	)			766				(3,134	)
Balance at end of period		$	47,512			$	46,921			$	43,290			$	47,512			$	43,290
Total loans, net of deferred fees		$	3,298,550			$	3,216,473			$	3,087,326			$	3,298,550			$	3,087,326
Total nonperforming loans		$	2,425			$	1,036			$	3,738			$	2,425			$	3,738
ACLL to total loans			1.44		%		1.46		%		1.40		%		1.44		%		1.40		%
ACLL to total nonperforming loans			1,959.26		%		4,529.05		%		1,158.11		%		1,959.26		%		1,158.11		%

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

DRIVERS OF CHANGE IN ACLL UNDER CECL
(in $000’s, unaudited)
ACLL at December 31, 2021		$	43,290
Portfolio changes during the first quarter of 2022 including net recoveries			(33	)
Qualitative and quantitative changes during the first
quarter of 2022 including changes in economic forecasts			(469	)
ACLL at March 31, 2022			42,788
Portfolio changes during the second quarter of 2022 including net recoveries			1,383
Qualitative and quantitative changes during the second
quarter of 2022 including changes in economic forecasts			1,319
ACLL at June 30, 2022			45,490
Portfolio changes during the third quarter of 2022 including net recoveries			2,009
Qualitative and quantitative changes during the third
quarter of 2022 including changes in economic forecasts			(578	)
ACLL at September 30, 2022			46,921
Portfolio changes during the fourth quarter of 2022 including net recoveries			1,316
Qualitative and quantitative changes during the fourth
quarter of 2022 including changes in economic forecasts			(725	)
ACLL at December 31, 2022		$	47,512

• The following is a breakout of nonperforming assets (“NPAs”) at the periods indicated:
  

NONPERFORMING ASSETS		December 31, 2022					September 30, 2022					December 31, 2021
(in $000’s, unaudited)		Balance			% of Total		Balance			% of Total		Balance			% of Total
Restructured and loans over 90 days past due
and still accruing		$	1,685		70	%	$	545		53	%	$	278		8	%
Commercial loans			642		26	%		491		47	%		1,122		30	%
Home equity loans			98		4	%		—		—	%		84		2	%
CRE loans			—		—	%		—		—	%		2,254		60	%
Total nonperforming assets		$	2,425		100	%	$	1,036		100	%	$	3,738		100	%

	•	NPAs totaled $2.4 million, or 0.05% of total assets, at December 31, 2022, compared to $3.7 million, or 0.07% of total assets, at December 31, 2021, and $1.0 million, or 0.02% of total assets, at September 30, 2022.
	•	There were no foreclosed assets on the balance sheet at December 31, 2022, December 31, 2021, or September 30, 2022.
	•	Classified assets decreased to $14.5 million, or 0.28% of total assets, at December 31, 2022, compared to $33.7 million, or 0.61% of total assets, at December 31, 2021, and $28.6 million, or 0.53% of total assets, at September 30, 2022.

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

DEPOSITS		December 31, 2022					September 30, 2022					December 31, 2021
(in $000’s, unaudited)		Balance			% to Total		Balance			% to Total		Balance			% to Total
Demand, noninterest-bearing		$	1,736,722		40	%	$	1,883,574		40	%	$	1,903,768		40	%
Demand, interest-bearing			1,196,427		27	%		1,154,403		24	%		1,308,114		27	%
Savings and money market			1,285,444		29	%		1,487,400		32	%		1,375,825		29	%
Time deposits — under $250			32,445		1	%		34,728		1	%		38,734		1	%
Time deposits — $250 and over			108,192		2	%		93,263		2	%		94,700		2	%
CDARS — interest-bearing demand,
money market and time deposits			30,374		1	%		29,897		1	%		38,271		1	%
Total deposits		$	4,389,604		100	%	$	4,683,265		100	%	$	4,759,412		100	%

	•	Total deposits decreased ($369.8) million, or (8%), to $4.390 billion at December 31, 2022, compared to $4.759 billion at December 31, 2021, and decreased ($293.7) million, or (6%), from $4.683 billion at September 30, 2022.
	•	Deposits, excluding all time deposits and CDARS deposits, decreased ($369.2) million, or (8%), to $4.219 billion at December 31, 2022, compared to $4.588 billion at December 31, 2021, and decreased ($306.8) million, or (7%), compared to $4.525 billion at September 30, 2022.
	•	Off-balance sheet deposits increased $9.4 million, or 4%, to $254.4 million at December 31, 2022, compared to $245.0 million at December 31, 2021, and increased $3.9 million, or 2%, from $250.5 million at September 30, 2022.

• The Company’s consolidated capital ratios exceeded regulatory guidelines and the Bank’s capital ratios exceeded regulatory guidelines under the Basel III prompt corrective action (“PCA”) regulatory guidelines for a well-capitalized financial institution, and the Basel III minimum regulatory requirements at December 31, 2022, as reflected in the following table:

								Well-capitalized
								Financial
								Institution			Basel III
		Heritage			Heritage			Basel III PCA			Minimum
		Commerce			Bank of			Regulatory			Regulatory
CAPITAL RATIOS (unaudited)		Corp			Commerce			Guidelines			Requirement (1)
Total Capital		14.8	%		14.2	%		10.0	%		10.5	%
Tier 1 Capital		12.7	%		13.2	%		8.0	%		8.5	%
Common Equity Tier 1 Capital		12.7	%		13.2	%		6.5	%		7.0	%
Tier 1 Leverage		9.2	%		9.5	%		5.0	%		4.0	%

---

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

• The following table reflects the components of accumulated other comprehensive loss, net of taxes, for the periods indicated:
  

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

Heritage Commerce Corp, a bank holding company established in October 1997, is the parent company of Heritage Bank of Commerce, established in 1994 and headquartered in San Jose, CA with full-service branches in Danville, Fremont, Gilroy, Hollister, Livermore, Los Altos, Los Gatos, Morgan Hill, Oakland, Palo Alto, Pleasanton, Redwood City, San Francisco, San Jose, San Mateo, San Rafael, Sunnyvale, and Walnut Creek. Heritage Bank of Commerce is an SBA Preferred Lender. Bay View Funding, a subsidiary of Heritage Bank of Commerce, is based in San Jose, CA and provides business-essential working capital factoring financing to various industries throughout the United States. For more information, please visit www.heritagecommercecorp.com.

Forward-Looking Statement Disclaimer

Certain matters discussed in this press release constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to various risks and uncertainties that may be outside our control and our actual results could differ materially from our projected results. Risks and uncertainties that could cause our financial performance to differ materially from our goals, plans, expectations and projections expressed in forward-looking statements include those set forth in our filings with the Securities and Exchange Commission (“SEC”), Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, and the following: (1) geopolitical and domestic political developments that can increase levels of political and economic unpredictability, contribute to rising energy and commodity prices, and increase the volatility of financial markets; (2) current and future economic and market conditions in the United States generally or in the communities we serve, including the effects of declines in property values and overall slowdowns in economic growth should these events occur; (3) effects of and changes in trade, monetary and fiscal policies and laws, including the interest rate policies of the Federal Open Market Committee of the Federal Reserve Board; (4) inflationary pressures and changes in the interest rate environment that reduce our margins and yields, the fair value of financial instruments or our level of loan originations, or increase the level of defaults, losses and prepayments on loans we have made and make; (5) changes in the level of nonperforming assets and charge offs and other credit quality measures, and their impact on the adequacy of our allowance for credit losses and our provision for credit losses; (6) volatility in credit and equity markets and its effect on the global economy; (7) conditions relating to the impact of the COVID-19 pandemic, and other infectious illness outbreaks that may arise in the future, our customers, employees, businesses, liquidity, financial results and overall condition including severity and duration of the associated uncertainties in U.S. and global markets; (8) our ability to effectively compete with other banks and financial services companies and the effects of competition in the financial services industry on our business; (9) our ability to achieve loan growth and attract deposits in our market area, the impact of the cost of deposits and our ability to retain deposits; (10) risks associated with concentrations in real estate related loans; (11) the relative strength or weakness of the commercial and real estate markets where our borrowers are located, including related asset and market prices; (12) credit related impairment charges to our securities portfolio; (13) increased capital requirements for our continual growth or as imposed by banking regulators, which may require us to raise capital at a time when capital is not available on favorable terms or at all; (14) regulatory limits on Heritage Bank of Commerce’s ability to pay dividends to the Company; (15) operational issues stemming from, and/or capital spending necessitated by, the potential need to adapt to industry changes in information technology systems, on which we are highly dependent; (16) our inability to attract, recruit, and retain qualified officers and other personnel could harm our ability to implement our strategic plan, impair our relationships with customers and adversely affect our business, results of operations and growth prospects; (17) possible adjustment of the valuation of our deferred tax assets; (18) our ability to keep pace with technological changes, including our ability to identify and address cyber-security risks such as data security breaches, “denial of service” attacks, “hacking” and identity theft; (19) inability of our framework to manage risks associated with our business, including operational risk and credit risk; (20) risks of loss of funding of Small Business Administration (“SBA”) or SBA loan programs, or changes in those programs; (21) compliance with applicable laws and governmental and regulatory requirements, including the Dodd-Frank Act and others relating to banking, consumer protection, securities, accounting and tax matters; (22) effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; (23) the expense and uncertain resolution of litigation matters whether occurring in the ordinary course of business or otherwise; (24) availability of and competition for acquisition opportunities; (25) risks resulting from domestic terrorism; (26) risks resulting from social unrest and protests; (27) risks of natural disasters (including earthquakes, fires, and flooding) and other events beyond our control; and (28) our success in managing the risks involved in the foregoing factors.

Member FDIC

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

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

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

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

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

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

---

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

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

---

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

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

---

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

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

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

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

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

 

FAQ

What were the net income results for Heritage Commerce Corp in Q4 2022?

Heritage Commerce Corp reported a net income of $20.8 million for Q4 2022, a 49% increase from the same quarter in 2021.

How much did Heritage Commerce Corp's earnings per share increase in Q4 2022?

Earnings per share rose to $0.34 in Q4 2022, compared to $0.23 in Q4 2021.

What was the total loan growth for Heritage Commerce Corp in 2022?

Total loans increased by 7% to $3.299 billion at the end of 2022.

What was the net interest margin reported by Heritage Commerce Corp for Q4 2022?

The net interest margin for Q4 2022 was reported at 4.10%.

How did total deposits change for Heritage Commerce Corp in 2022?

Total deposits decreased by 8% year-over-year, dropping to $4.39 billion.