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Heritage Commerce Corp Earns Record $20.8 Million for the Fourth Quarter of 2022, and Record $66.6 Million for Full Year 2022
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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.
Provision for (recapture of) credit losses on loans
508
1,006
(615
)
(50
)
%
183
%
766
(3,134
)
124
%
Net interest income after provision
for credit losses on loans
51,231
47,035
38,724
9
%
32
%
179,114
149,259
20
%
Noninterest income:
Service charges and fees on deposit
accounts
1,801
1,360
644
32
%
180
%
4,640
2,488
86
%
Increase in cash surrender value of
life insurance
481
484
454
(1
)
%
6
%
1,925
1,838
5
%
Servicing income
138
125
138
10
%
0
%
508
553
(8
)
%
Gain on sales of SBA loans
—
308
491
(100
)
%
(100
)
%
491
1,718
(71
)
%
Gain on warrants
—
32
—
(100
)
%
N/A
669
11
5982
%
Termination fees
—
16
618
(100
)
%
(100
)
%
61
797
(92
)
%
Gain on proceeds from company-owned
life insurance
—
—
104
N/A
(100
)
%
27
675
(96
)
%
Other
352
456
361
(23
)
%
(2
)
%
1,790
1,608
11
%
Total noninterest income
2,772
2,781
2,810
0
%
(1
)
%
10,111
9,688
4
%
Noninterest expense:
Salaries and employee benefits
13,915
14,119
12,871
(1
)
%
8
%
55,331
51,862
7
%
Occupancy and equipment
2,510
2,415
2,366
4
%
6
%
9,639
9,038
7
%
Professional fees
1,414
1,230
1,200
15
%
18
%
5,015
5,901
(15
)
%
Other
6,679
6,135
5,790
9
%
15
%
24,874
26,276
(5
)
%
Total noninterest expense
24,518
23,899
22,227
3
%
10
%
94,859
93,077
2
%
Income before income taxes
29,485
25,917
19,307
14
%
53
%
94,366
65,870
43
%
Income tax expense
8,686
7,848
5,342
11
%
63
%
27,811
18,170
53
%
Net income
$
20,799
$
18,069
$
13,965
15
%
49
%
$
66,555
$
47,700
40
%
PER COMMON SHARE DATA
(unaudited)
Basic earnings per share
$
0.34
$
0.30
$
0.23
13
%
48
%
$
1.10
$
0.79
39
%
Diluted earnings per share
$
0.34
$
0.30
$
0.23
13
%
48
%
$
1.09
$
0.79
38
%
Weighted average shares outstanding - basic
60,788,803
60,686,992
60,298,424
0
%
1
%
60,602,962
60,133,821
1
%
Weighted average shares outstanding - diluted
61,357,023
61,123,801
60,844,221
0
%
1
%
61,090,290
60,689,062
1
%
Common shares outstanding at period-end
60,852,723
60,716,794
60,339,837
0
%
1
%
60,852,723
60,339,837
1
%
Dividend per share
$
0.13
$
0.13
$
0.13
0
%
0
%
$
0.52
$
0.52
0
%
Book value per share
$
10.39
$
10.04
$
9.91
3
%
5
%
$
10.39
$
9.91
5
%
Tangible book value per share
$
7.46
$
7.09
$
6.91
5
%
8
%
$
7.46
$
6.91
8
%
KEY FINANCIAL RATIOS
(unaudited)
Annualized return on average equity
13.40
%
11.72
%
9.35
%
14
%
43
%
10.95
%
8.15
%
34
%
Annualized return on average tangible common equity
18.89
%
16.60
%
13.50
%
14
%
40
%
15.57
%
11.86
%
31
%
Annualized return on average assets
1.54
%
1.31
%
0.97
%
18
%
59
%
1.23
%
0.92
%
34
%
Annualized return on average tangible assets
1.59
%
1.36
%
1.00
%
17
%
59
%
1.27
%
0.96
%
32
%
Net interest margin (FTE)
4.10
%
3.73
%
2.84
%
10
%
44
%
3.57
%
3.05
%
17
%
Efficiency ratio
44.98
%
47.02
%
54.32
%
(4
)
%
(17
)
%
49.93
%
59.74
%
(16
)
%
AVERAGE BALANCES
(in $000’s, unaudited)
Average assets
$
5,360,867
$
5,466,330
$
5,695,136
(2
)
%
(6
)
%
$
5,401,220
$
5,166,294
5
%
Average tangible assets
$
5,181,793
$
5,286,591
$
5,513,359
(2
)
%
(6
)
%
$
5,221,159
$
4,983,407
5
%
Average earning assets
$
5,009,578
$
5,117,373
$
5,336,129
(2
)
%
(6
)
%
$
5,051,552
$
4,805,630
5
%
Average loans held-for-sale
$
2,346
$
3,282
$
4,047
(29
)
%
(42
)
%
$
2,238
$
4,095
(45
)
%
Average total loans
$
3,248,210
$
3,140,705
$
2,872,074
3
%
13
%
$
3,116,768
$
2,762,226
13
%
Average deposits
$
4,600,533
$
4,712,044
$
4,945,204
(2
)
%
(7
)
%
$
4,647,200
$
4,426,885
5
%
Average demand deposits - noninterest-bearing
$
1,851,003
$
1,910,748
$
1,979,940
(3
)
%
(7
)
%
$
1,863,928
$
1,834,909
2
%
Average interest-bearing deposits
$
2,749,530
$
2,801,296
$
2,965,264
(2
)
%
(7
)
%
$
2,783,272
$
2,591,976
7
%
Average interest-bearing liabilities
$
2,788,880
$
2,840,611
$
3,005,212
(2
)
%
(7
)
%
$
2,825,035
$
2,631,848
7
%
Average equity
$
615,941
$
611,707
$
592,291
1
%
4
%
$
607,603
$
585,156
4
%
Average tangible common equity
$
436,867
$
431,968
$
410,514
1
%
6
%
$
427,542
$
402,269
6
%
For the Quarter Ended:
CONSOLIDATED INCOME STATEMENTS
December 31,
September 30,
June 30,
March 31,
December 31,
(in $000’s, unaudited)
2022
2022
2022
2022
2021
Interest income
$
55,192
$
50,174
$
43,556
$
39,906
$
39,956
Interest expense
3,453
2,133
1,677
1,685
1,847
Net interest income before provision
for credit losses on loans
51,739
48,041
41,879
38,221
38,109
Provision for (recapture of) credit losses on loans
508
1,006
(181
)
(567
)
(615
)
Net interest income after provision
for credit losses on loans
51,231
47,035
42,060
38,788
38,724
Noninterest income:
Service charges and fees on deposit
accounts
1,801
1,360
867
612
644
Increase in cash surrender value of
life insurance
481
484
480
480
454
Servicing income
138
125
139
106
138
Gain on sales of SBA loans
—
308
27
156
491
Gain on warrants
—
32
—
637
—
Termination fees
—
16
45
—
618
Gain on proceeds from company-owned
life insurance
—
—
27
—
104
Other
352
456
513
469
361
Total noninterest income
2,772
2,781
2,098
2,460
2,810
Noninterest expense:
Salaries and employee benefits
13,915
14,119
13,476
13,821
12,871
Occupancy and equipment
2,510
2,415
2,277
2,437
2,366
Professional fees
1,414
1,230
1,291
1,080
1,200
Other
6,679
6,135
6,146
5,914
5,790
Total noninterest expense
24,518
23,899
23,190
23,252
22,227
Income before income taxes
29,485
25,917
20,968
17,996
19,307
Income tax expense
8,686
7,848
6,147
5,130
5,342
Net income
$
20,799
$
18,069
$
14,821
$
12,866
$
13,965
PER COMMON SHARE DATA
(unaudited)
Basic earnings per share
$
0.34
$
0.30
$
0.24
$
0.21
$
0.23
Diluted earnings per share
$
0.34
$
0.30
$
0.24
$
0.21
$
0.23
Weighted average shares outstanding - basic
60,788,803
60,686,992
60,542,170
60,393,883
60,298,424
Weighted average shares outstanding - diluted
61,357,023
61,123,801
60,969,154
60,921,835
60,844,221
Common shares outstanding at period-end
60,852,723
60,716,794
60,666,794
60,407,846
60,339,837
Dividend per share
$
0.13
$
0.13
$
0.13
$
0.13
$
0.13
Book value per share
$
10.39
$
10.04
$
10.01
$
9.95
$
9.91
Tangible book value per share
$
7.46
$
7.09
$
7.04
$
6.96
$
6.91
KEY FINANCIAL RATIOS
(unaudited)
Annualized return on average equity
13.40
%
11.72
%
9.86
%
8.71
%
9.35
%
Annualized return on average tangible common equity
18.89
%
16.60
%
14.06
%
12.47
%
13.50
%
Annualized return on average assets
1.54
%
1.31
%
1.11
%
0.96
%
0.97
%
Annualized return on average tangible assets
1.59
%
1.36
%
1.15
%
0.99
%
1.00
%
Net interest margin (FTE)
4.10
%
3.73
%
3.38
%
3.05
%
2.84
%
Efficiency ratio
44.98
%
47.02
%
52.73
%
57.16
%
54.32
%
AVERAGE BALANCES
(in $000’s, unaudited)
Average assets
$
5,360,867
$
5,466,330
$
5,334,636
$
5,443,240
$
5,695,136
Average tangible assets
$
5,181,793
$
5,286,591
$
5,154,245
$
5,262,175
$
5,513,359
Average earning assets
$
5,009,578
$
5,117,373
$
4,985,611
$
5,093,851
$
5,336,129
Average loans held-for-sale
$
2,346
$
3,282
$
1,824
$
1,478
$
4,047
Average total loans
$
3,248,210
$
3,140,705
$
3,048,353
$
3,027,111
$
2,872,074
Average deposits
$
4,600,533
$
4,712,044
$
4,579,436
$
4,697,136
$
4,945,204
Average demand deposits - noninterest-bearing
$
1,851,003
$
1,910,748
$
1,836,350
$
1,857,164
$
1,979,940
Average interest-bearing deposits
$
2,749,530
$
2,801,296
$
2,743,086
$
2,839,972
$
2,965,264
Average interest-bearing liabilities
$
2,788,880
$
2,840,611
$
2,791,527
$
2,879,952
$
3,005,212
Average equity
$
615,941
$
611,707
$
603,182
$
599,355
$
592,291
Average tangible common equity
$
436,867
$
431,968
$
422,791
$
418,290
$
410,514
End of Period:
Percent Change From:
CONSOLIDATED BALANCE SHEETS
December 31,
September 30,
December 31,
September 30,
December 31,
(in $000’s, unaudited)
2022
2022
2021
2022
2021
ASSETS
Cash and due from banks
$
27,595
$
40,500
$
15,703
(32
)
%
76
%
Other investments and interest-bearing deposits
in other financial institutions
279,008
641,251
1,290,513
(56
)
%
(78
)
%
Securities available-for-sale, at fair value
489,596
478,534
102,252
2
%
379
%
Securities held-to-maturity, at amortized cost
714,990
703,794
658,397
2
%
9
%
Loans held-for-sale - SBA, including deferred costs
2,456
2,081
2,367
18
%
4
%
Loans:
Commercial
532,749
541,215
594,108
(2
)
%
(10
)
%
PPP loans
1,166
1,614
88,726
(28
)
%
(99
)
%
Real estate:
CRE - owner occupied
614,663
612,241
595,934
0
%
3
%
CRE - non-owner occupied
1,066,368
1,023,405
902,326
4
%
18
%
Land and construction
163,577
167,439
147,855
(2
)
%
11
%
Home equity
120,724
116,489
109,579
4
%
10
%
Multifamily
244,882
229,455
218,856
7
%
12
%
Residential mortgages
537,905
508,839
416,660
6
%
29
%
Consumer and other
17,033
16,620
16,744
2
%
2
%
Loans
3,299,067
3,217,317
3,090,788
3
%
7
%
Deferred loan fees, net
(517
)
(844
)
(3,462
)
(39
)
%
(85
)
%
Total loans, net of deferred costs and fees
3,298,550
3,216,473
3,087,326
3
%
7
%
Allowance for credit losses on loans
(47,512
)
(46,921
)
(43,290
)
1
%
10
%
Loans, net
3,251,038
3,169,552
3,044,036
3
%
7
%
Company-owned life insurance
78,945
78,456
77,589
1
%
2
%
Premises and equipment, net
9,301
9,428
9,639
(1
)
%
(4
)
%
Goodwill
167,631
167,631
167,631
0
%
0
%
Other intangible assets
11,033
11,692
13,668
(6
)
%
(19
)
%
Accrued interest receivable and other assets
122,631
128,343
117,614
(4
)
%
4
%
Total assets
$
5,154,224
$
5,431,262
$
5,499,409
(5
)
%
(6
)
%
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand, noninterest-bearing
$
1,736,722
$
1,883,574
$
1,903,768
(8
)
%
(9
)
%
Demand, interest-bearing
1,196,427
1,154,403
1,308,114
4
%
(9
)
%
Savings and money market
1,285,444
1,487,400
1,375,825
(14
)
%
(7
)
%
Time deposits - under $250
32,445
34,728
38,734
(7
)
%
(16
)
%
Time deposits - $250 and over
108,192
93,263
94,700
16
%
14
%
CDARS - money market and time deposits
30,374
29,897
38,271
2
%
(21
)
%
Total deposits
4,389,604
4,683,265
4,759,412
(6
)
%
(8
)
%
Subordinated debt, net of issuance costs
39,350
39,312
39,925
0
%
(1
)
%
Accrued interest payable and other liabilities
92,814
99,168
102,044
(6
)
%
(9
)
%
Total liabilities
4,521,768
4,821,745
4,901,381
(6
)
%
(8
)
%
Shareholders’ Equity:
Common stock
502,923
501,240
497,695
0
%
1
%
Retained earnings
146,389
133,489
111,329
10
%
31
%
Accumulated other comprehensive loss
(16,856
)
(25,212
)
(10,996
)
33
%
(53
)
%
Total shareholders’ equity
632,456
609,517
598,028
4
%
6
%
Total liabilities and shareholders’ equity
$
5,154,224
$
5,431,262
$
5,499,409
(5
)
%
(6
)
%
End of Period:
CONSOLIDATED BALANCE SHEETS
December 31,
September 30,
June 30,
March 31,
December 31,
(in $000’s, unaudited)
2022
2022
2022
2022
2021
ASSETS
Cash and due from banks
$
27,595
$
40,500
$
35,764
$
29,729
$
15,703
Other investments and interest-bearing deposits
in other financial institutions
279,008
641,251
840,821
1,187,436
1,290,513
Securities available-for-sale, at fair value
489,596
478,534
332,129
111,217
102,252
Securities held-to-maturity, at amortized cost
714,990
703,794
723,716
736,823
658,397
Loans held-for-sale - SBA, including deferred costs
2,456
2,081
2,281
831
2,367
Loans:
Commercial
532,749
541,215
523,268
568,053
594,108
PPP loans
1,166
1,614
8,153
37,393
88,726
Real estate:
CRE - owner occupied
614,663
612,241
597,521
597,542
595,934
CRE - non-owner occupied
1,066,368
1,023,405
993,621
928,220
902,326
Land and construction
163,577
167,439
155,389
153,323
147,855
Home equity
120,724
116,489
116,641
111,609
109,579
Multifamily
244,882
229,455
221,938
221,767
218,856
Residential mortgages
537,905
508,839
448,958
391,171
416,660
Consumer and other
17,033
16,620
18,354
17,110
16,744
Loans
3,299,067
3,217,317
3,083,843
3,026,188
3,090,788
Deferred loan fees, net
(517
)
(844
)
(1,391
)
(2,124
)
(3,462
)
Total loans, net of deferred fees
3,298,550
3,216,473
3,082,452
3,024,064
3,087,326
Allowance for credit losses on loans
(47,512
)
(46,921
)
(45,490
)
(42,788
)
(43,290
)
Loans, net
3,251,038
3,169,552
3,036,962
2,981,276
3,044,036
Company-owned life insurance
78,945
78,456
77,972
78,069
77,589
Premises and equipment, net
9,301
9,428
9,593
9,580
9,639
Goodwill
167,631
167,631
167,631
167,631
167,631
Other intangible assets
11,033
11,692
12,351
13,009
13,668
Accrued interest receivable and other assets
122,631
128,343
117,621
111,797
117,614
Total assets
$
5,154,224
$
5,431,262
$
5,356,841
$
5,427,398
$
5,499,409
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand, noninterest-bearing
$
1,736,722
$
1,883,574
$
1,846,365
$
1,811,943
$
1,903,768
Demand, interest-bearing
1,196,427
1,154,403
1,218,538
1,268,942
1,308,114
Savings and money market
1,285,444
1,487,400
1,387,003
1,447,434
1,375,825
Time deposits - under $250
32,445
34,728
36,691
38,417
38,734
Time deposits - $250 and over
108,192
93,263
98,760
93,161
94,700
CDARS - money market and time deposits
30,374
29,897
26,287
30,008
38,271
Total deposits
4,389,604
4,683,265
4,613,644
4,689,905
4,759,412
Subordinated debt, net of issuance costs
39,350
39,312
39,274
39,987
39,925
Accrued interest payable and other liabilities
92,814
99,168
96,699
96,450
102,044
Total liabilities
4,521,768
4,821,745
4,749,617
4,826,342
4,901,381
Shareholders’ Equity:
Common stock
502,923
501,240
499,832
498,763
497,695
Retained earnings
146,389
133,489
123,310
116,347
111,329
Accumulated other comprehensive loss
(16,856
)
(25,212
)
(15,918
)
(14,054
)
(10,996
)
Total shareholders’ equity
632,456
609,517
607,224
601,056
598,028
Total liabilities and shareholders’ equity
$
5,154,224
$
5,431,262
$
5,356,841
$
5,427,398
$
5,499,409
At or For the Quarter Ended:
Percent Change From:
CREDIT QUALITY DATA
December 31,
September 30,
December 31,
September 30,
December 31,
(in $000’s, unaudited)
2022
2022
2021
2022
2021
Nonaccrual loans - held-for-investment
$
740
$
491
$
3,460
51
%
(79
)
%
Restructured and loans over 90 days past due
and still accruing
1,685
545
278
209
%
506
%
Total nonperforming loans
2,425
1,036
3,738
134
%
(35
)
%
Foreclosed assets
—
—
—
N/A
N/A
Total nonperforming assets
$
2,425
$
1,036
$
3,738
134
%
(35
)
%
Other restructured loans still accruing
$
171
$
93
$
125
84
%
37
%
Net charge-offs (recoveries) during the quarter
$
(83
)
$
(425
)
$
(225
)
80
%
63
%
Provision for (recapture of) credit losses on loans during the quarter
$
508
$
1,006
$
(615
)
(50
)
%
183
%
Allowance for credit losses on loans
$
47,512
$
46,921
$
43,290
1
%
10
%
Classified assets
$
14,544
$
28,570
$
33,719
(49
)
%
(57
)
%
Allowance for credit losses on loans to total loans
1.44
%
1.46
%
1.40
%
(1
)
%
3
%
Allowance for credit losses on loans to total nonperforming loans
1,959.26
%
4,529.05
%
1,158.11
%
(57
)
%
69
%
Nonperforming assets to total assets
0.05
%
0.02
%
0.07
%
150
%
(29
)
%
Nonperforming loans to total loans
0.07
%
0.03
%
0.12
%
133
%
(42
)
%
Classified assets to Heritage Commerce Corp
Tier 1 capital plus allowance for credit losses on loans
3
%
6
%
7
%
(50
)
%
(57
)
%
Classified assets to Heritage Bank of Commerce
Tier 1 capital plus allowance for credit losses on loans
3
%
5
%
7
%
(40
)
%
(57
)
%
OTHER PERIOD-END STATISTICS
(in $000’s, unaudited)
Heritage Commerce Corp:
Tangible common equity (1)
$
453,792
$
430,194
$
416,729
5
%
9
%
Shareholders’ equity / total assets
12.27
%
11.22
%
10.87
%
9
%
13
%
Tangible common equity / tangible assets (2)
9.12
%
8.19
%
7.84
%
11
%
16
%
Loan to deposit ratio
75.14
%
68.68
%
64.87
%
9
%
16
%
Noninterest-bearing deposits / total deposits
39.56
%
40.22
%
40.00
%
(2
)
%
(1
)
%
Total capital ratio
14.8
%
14.5
%
14.4
%
2
%
3
%
Tier 1 capital ratio
12.7
%
12.4
%
12.3
%
2
%
3
%
Common Equity Tier 1 capital ratio
12.7
%
12.4
%
12.3
%
2
%
3
%
Tier 1 leverage ratio
9.2
%
8.7
%
7.9
%
6
%
16
%
Heritage Bank of Commerce:
Total capital ratio
14.2
%
14.0
%
13.8
%
1
%
3
%
Tier 1 capital ratio
13.2
%
12.9
%
12.8
%
2
%
3
%
Common Equity Tier 1 capital ratio
13.2
%
12.9
%
12.8
%
2
%
3
%
Tier 1 leverage ratio
9.5
%
9.0
%
8.2
%
6
%
16
%
(1) Represents shareholders’ equity minus goodwill and other intangible assets (2) Represents shareholders’ equity minus goodwill and other intangible assets divided by total assets minus goodwill and other intangible assets
At or For the Quarter Ended:
CREDIT QUALITY DATA
December 31,
September 30,
June 30,
March 31,
December 31,
(in $000’s, unaudited)
2022
2022
2022
2022
2021
Nonaccrual loans - held-for-investment
$
740
$
491
$
1,734
$
3,303
$
3,460
Restructured and loans over 90 days past due
and still accruing
1,685
545
981
527
278
Total nonperforming loans
2,425
1,036
2,715
3,830
3,738
Foreclosed assets
—
—
—
—
—
Total nonperforming assets
$
2,425
$
1,036
$
2,715
$
3,830
$
3,738
Other restructured loans still accruing
$
171
$
93
$
113
$
125
$
125
Net charge-offs (recoveries) during the quarter
$
(83
)
$
(425
)
$
(2,883
)
$
(65
)
$
(225
)
Provision for (recapture of) credit losses on loans during the quarter
$
508
$
1,006
$
(181
)
$
(567
)
$
(615
)
Allowance for credit losses on loans
$
47,512
$
46,921
$
45,490
$
42,788
$
43,290
Classified assets
$
14,544
$
28,570
$
28,929
$
30,579
$
33,719
Allowance for credit losses on loans to total loans
1.44
%
1.46
%
1.48
%
1.41
%
1.40
%
Allowance for credit losses on loans to total nonperforming loans
1,959.26
%
4,529.05
%
1,675.51
%
1,117.18
%
1,158.11
%
Nonperforming assets to total assets
0.05
%
0.02
%
0.05
%
0.07
%
0.07
%
Nonperforming loans to total loans
0.07
%
0.03
%
0.09
%
0.13
%
0.12
%
Classified assets to Heritage Commerce Corp
Tier 1 capital plus allowance for credit losses on loans
3
%
6
%
6
%
6
%
7
%
Classified assets to Heritage Bank of Commerce
Tier 1 capital plus allowance for credit losses on loans
3
%
5
%
6
%
6
%
7
%
OTHER PERIOD-END STATISTICS
(in $000’s, unaudited)
Heritage Commerce Corp:
Tangible common equity (1)
$
453,792
$
430,194
$
427,242
$
420,416
$
416,729
Shareholders’ equity / total assets
12.27
%
11.22
%
11.34
%
11.07
%
10.87
%
Tangible common equity / tangible assets (2)
9.12
%
8.19
%
8.25
%
8.01
%
7.84
%
Loan to deposit ratio
75.14
%
68.68
%
66.81
%
64.48
%
64.87
%
Noninterest-bearing deposits / total deposits
39.56
%
40.22
%
40.02
%
38.63
%
40.00
%
Total capital ratio
14.8
%
14.5
%
14.6
%
14.6
%
14.4
%
Tier 1 capital ratio
12.7
%
12.4
%
12.5
%
12.4
%
12.3
%
Common Equity Tier 1 capital ratio
12.7
%
12.4
%
12.5
%
12.4
%
12.3
%
Tier 1 leverage ratio
9.2
%
8.7
%
8.7
%
8.3
%
7.9
%
Heritage Bank of Commerce:
Total capital ratio
14.2
%
14.0
%
14.1
%
13.9
%
13.8
%
Tier 1 capital ratio
13.2
%
12.9
%
13.0
%
12.9
%
12.8
%
Common Equity Tier 1 capital ratio
13.2
%
12.9
%
13.0
%
12.9
%
12.8
%
Tier 1 leverage ratio
9.5
%
9.0
%
9.0
%
8.7
%
8.2
%
(1) Represents shareholders’ equity minus goodwill and other intangible assets (2) Represents shareholders’ equity minus goodwill and other intangible assets divided by total assets minus goodwill and other intangible assets
For the Quarter Ended
For the Quarter Ended
December 31, 2022
December 31, 2021
Interest
Average
Interest
Average
NET INTEREST INCOME AND NET INTEREST MARGIN
Average
Income/
Yield/
Average
Income/
Yield/
(in $000’s, unaudited)
Balance
Expense
Rate
Balance
Expense
Rate
Assets:
Loans, gross (1)(2)
$
3,250,556
$
42,501
5.19
%
$
2,876,121
$
35,762
4.93
%
Securities - taxable
1,156,563
6,941
2.38
%
660,663
2,686
1.61
%
Securities - exempt from Federal tax (3)
37,958
324
3.39
%
54,965
457
3.30
%
Other investments and interest-bearing deposits
in other financial institutions
564,501
5,494
3.86
%
1,744,380
1,147
0.26
%
Total interest earning assets (3)
5,009,578
55,260
4.38
%
5,336,129
40,052
2.98
%
Cash and due from banks
36,392
38,178
Premises and equipment, net
9,436
9,755
Goodwill and other intangible assets
179,074
181,777
Other assets
126,387
129,297
Total assets
$
5,360,867
$
5,695,136
Liabilities and shareholders’ equity:
Deposits:
Demand, noninterest-bearing
$
1,851,003
$
1,979,940
Demand, interest-bearing
1,164,378
945
0.32
%
1,346,878
559
0.16
%
Savings and money market
1,424,964
1,694
0.47
%
1,451,230
582
0.16
%
Time deposits - under $100
12,157
7
0.23
%
13,766
5
0.14
%
Time deposits - $100 and over
120,246
268
0.88
%
118,089
116
0.39
%
CDARS - money market and time deposits
27,785
1
0.01
%
35,301
2
0.02
%
Total interest-bearing deposits
2,749,530
2,915
0.42
%
2,965,264
1,264
0.17
%
Total deposits
4,600,533
2,915
0.25
%
4,945,204
1,264
0.10
%
Subordinated debt, net of issuance costs
39,326
538
5.43
%
39,896
583
5.80
%
Short-term borrowings
24
—
0.00
%
52
—
0.00
%
Total interest-bearing liabilities
2,788,880
3,453
0.49
%
3,005,212
1,847
0.24
%
Total interest-bearing liabilities and demand,
noninterest-bearing / cost of funds
4,639,883
3,453
0.30
%
4,985,152
1,847
0.15
%
Other liabilities
105,043
117,693
Total liabilities
4,744,926
5,102,845
Shareholders’ equity
615,941
592,291
Total liabilities and shareholders’ equity
$
5,360,867
$
5,695,136
Net interest income (3) / margin
51,807
4.10
%
38,205
2.84
%
Less tax equivalent adjustment (3)
(68
)
(96
)
Net interest income
$
51,739
$
38,109
(1) Includes loans held-for-sale. Nonaccrual loans are included in average balances. (2) Yield amounts earned on loans include fees and costs. The accretion of net deferred loan fees into loan interest income was $326,000 for the fourth quarter of 2022 (of which $25,000 was from PPP loans), compared to $2,567,000 for the fourth quarter of 2021 (of which $2,211,000 was from PPP loans). Prepayment fees totaled $123,000 for the fourth quarter of 2022, compared to $397,000 for the fourth quarter of 2021. (3) Reflects the FTE adjustment for Federal tax-exempt income based on a 21% tax rate.
For the Quarter Ended
For the Quarter Ended
December 31, 2022
September 30, 2022
Interest
Average
Interest
Average
NET INTEREST INCOME AND NET INTEREST MARGIN
Average
Income/
Yield/
Average
Income/
Yield/
(in $000’s, unaudited)
Balance
Expense
Rate
Balance
Expense
Rate
Assets:
Loans, gross (1)(2)
$
3,250,556
$
42,501
5.19
%
$
3,143,987
$
38,870
4.90
%
Securities - taxable
1,156,563
6,941
2.38
%
1,076,742
5,874
2.16
%
Securities - exempt from Federal tax (3)
37,958
324
3.39
%
38,733
329
3.37
%
Other investments and interest-bearing deposits
in other financial institutions
564,501
5,494
3.86
%
857,911
5,170
2.39
%
Total interest earning assets (3)
5,009,578
55,260
4.38
%
5,117,373
50,243
3.90
%
Cash and due from banks
36,392
37,961
Premises and equipment, net
9,436
9,591
Goodwill and other intangible assets
179,074
179,739
Other assets
126,387
121,666
Total assets
$
5,360,867
$
5,466,330
Liabilities and shareholders’ equity:
Deposits:
Demand, noninterest-bearing
$
1,851,003
$
1,910,748
Demand, interest-bearing
1,164,378
945
0.32
%
1,205,937
543
0.18
%
Savings and money market
1,424,964
1,694
0.47
%
1,429,055
925
0.26
%
Time deposits - under $100
12,157
7
0.23
%
12,329
5
0.16
%
Time deposits - $100 and over
120,246
268
0.88
%
123,458
121
0.39
%
CDARS - money market and time deposits
27,785
1
0.01
%
30,517
1
0.01
%
Total interest-bearing deposits
2,749,530
2,915
0.42
%
2,801,296
1,595
0.23
%
Total deposits
4,600,533
2,915
0.25
%
4,712,044
1,595
0.13
%
Subordinated debt, net of issuance costs
39,326
538
5.43
%
39,288
538
5.43
%
Short-term borrowings
24
—
0.00
%
27
—
0.00
%
Total interest-bearing liabilities
2,788,880
3,453
0.49
%
2,840,611
2,133
0.30
%
Total interest-bearing liabilities and demand,
noninterest-bearing / cost of funds
4,639,883
3,453
0.30
%
4,751,359
2,133
0.18
%
Other liabilities
105,043
103,264
Total liabilities
4,744,926
4,854,623
Shareholders’ equity
615,941
611,707
Total liabilities and shareholders’ equity
$
5,360,867
$
5,466,330
Net interest income (3) / margin
51,807
4.10
%
48,110
3.73
%
Less tax equivalent adjustment (3)
(68
)
(69
)
Net interest income
$
51,739
$
48,041
(1) Includes loans held-for-sale. Nonaccrual loans are included in average balances. (2) Yield amounts earned on loans include fees and costs. The accretion of net deferred loan fees into loan interest income was $326,000 for the fourth quarter of 2022 (of which $25,000 was from PPP loans), compared to $507,000 for the third quarter of 2022 (of which $190,000 was from PPP loans). Prepayment fees totaled $123,000 for the fourth quarter of 2022, compared to $96,000 for the third quarter of 2022. (3) Reflects the FTE adjustment for Federal tax-exempt income based on a 21% tax rate.
For the Year Ended
For the Year Ended
December 31, 2022
December 31, 2021
Interest
Average
Interest
Average
NET INTEREST INCOME AND NET INTEREST MARGIN
Average
Income/
Yield/
Average
Income/
Yield/
(in $000’s, unaudited)
Balance
Expense
Rate
Balance
Expense
Rate
Assets:
Loans, gross (1)(2)
$
3,119,006
$
153,010
4.91
%
$
2,766,321
$
139,244
5.03
%
Securities - taxable
983,137
20,666
2.10
%
534,387
8,678
1.62
%
Securities - exempt from Federal tax (3)
40,478
1,372
3.39
%
60,566
1,995
3.29
%
Other investments, interest-bearing deposits in other
financial institutions and Federal funds sold
908,931
14,068
1.55
%
1,444,356
3,758
0.26
%
Total interest earning assets (3)
5,051,552
189,116
3.74
%
4,805,630
153,675
3.20
%
Cash and due from banks
37,287
39,841
Premises and equipment, net
9,574
10,056
Goodwill and other intangible assets
180,061
182,887
Other assets
122,746
127,880
Total assets
$
5,401,220
$
5,166,294
Liabilities and shareholders’ equity:
Deposits:
Demand, noninterest-bearing
$
1,863,928
$
1,834,909
Demand, interest-bearing
1,224,676
2,415
0.20
%
1,164,556
1,988
0.17
%
Savings and money market
1,394,283
3,720
0.27
%
1,251,438
2,195
0.18
%
Time deposits - under $100
12,587
21
0.17
%
14,924
29
0.19
%
Time deposits - $100 and over
122,018
609
0.50
%
128,753
598
0.46
%
CDARS - money market and time deposits
29,708
5
0.02
%
32,305
6
0.02
%
Total interest-bearing deposits
2,783,272
6,770
0.24
%
2,591,976
4,816
0.19
%
Total deposits
4,647,200
6,770
0.15
%
4,426,885
4,816
0.11
%
Subordinated debt, net of issuance costs
41,739
2,178
5.22
%
39,827
2,314
5.81
%
Short-term borrowings
24
—
0.00
%
45
1
2.22
%
Total interest-bearing liabilities
2,825,035
8,948
0.32
%
2,631,848
7,131
0.27
%
Total interest-bearing liabilities and demand,
noninterest-bearing / cost of funds
4,688,963
8,948
0.19
%
4,466,757
7,131
0.16
%
Other liabilities
104,654
114,381
Total liabilities
4,793,617
4,581,138
Shareholders’ equity
607,603
585,156
Total liabilities and shareholders’ equity
$
5,401,220
$
5,166,294
Net interest income (3) / margin
180,168
3.57
%
146,544
3.05
%
Less tax equivalent adjustment (3)
(288
)
(419
)
Net interest income
$
179,880
$
146,125
(1) Includes loans held-for-sale. Nonaccrual loans are included in average balances. (2) Yield amounts earned on loans include fees and costs. The accretion of net deferred loan fees into loan interest income was $3,437,000 for the year ended December 31, 2022 (of which $2,054,000 was from PPP loans), compared to $11,257,000 for the year ended December 31, 2021 (of which $9,995,000 was from PPP loans). Prepayment fees totaled $1,278,000 for the year ended December 31, 2022, compared to $2,700,000 for the year ended December 31, 2021. (3) Reflects the FTE adjustment for Federal tax-exempt income based on a 21% tax rate.