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Heritage Commerce Corp Earns $18.1 Million for the Third Quarter of 2022, and $45.8 Million for the First Nine Months of 2022
Source: Nasdaq GlobeNewswire / 27 Oct 2022 16:44:17 America/Chicago
SAN JOSE, Calif., Oct. 27, 2022 (GLOBE NEWSWIRE) -- Heritage Commerce Corp (Nasdaq: HTBK), the holding company (the “Company”) for Heritage Bank of Commerce (the “Bank”), today announced third quarter 2022 net income of $18.1 million, or $0.30 per average diluted common share, compared to $13.7 million, or $0.23 per average diluted common share, for the third quarter of 2021, and $14.8 million, or $0.24 per average diluted common share, for the second quarter of 2022. For the nine months ended September 30, 2022, net income was $45.8 million, or $0.75 per average diluted common share, compared to $33.7 million, or $0.56 per average diluted common share, for the nine months ended September 30, 2021. All results are unaudited.
“Our outstanding operating results reflect the continued successful implementation of our growth plan. We delivered record third quarter and year-to-date 2022 earnings, fueled by higher net interest income and solid loan growth. Our net interest margin improved to 3.73% for the third quarter of 2022, compared to 3.38% from the preceding quarter, driven primarily by a shift in the mix of earning assets as the Company invested its excess liquidity into higher yielding loans and investment securities. Loans, excluding Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans and residential mortgages, increased 10% from a year earlier, and 3% from the preceding quarter. Total deposits increased $69.6 million from the linked quarter with noninterest-bearing deposits increasing 4% from a year ago,” said Clay Jones, President and Chief Executive Officer. “Net income increased 22% from the preceding quarter and 32% from the third quarter a year ago. The return on average tangible equity was 16.60%, the return on average tangible assets was 1.36% and our efficiency ratio improved to 47.02%, for the third quarter of 2022.”
“Our credit quality remains healthy as a result of our credit management, while we continue to be vigilant to the potential impact an uncertain economic future could have on our portfolio. Nonperforming assets (“NPAs”) declined $3.7 million at September 30, 2022 from September 30, 2021, and declined $1.7 million from June 30, 2022, with continued net recoveries throughout the first nine months of 2022,” said Mr. Jones. “Reflecting our strong loan growth, we recorded a $1.0 million provision for credit losses on loans during the third quarter of 2022.”
“Our noninterest income was also higher in the third quarter of 2022, compared to the preceding quarter, primarily due to the substantial increase in gain on sale of SBA loans and higher income on off-balance sheet deposits,” said Mr. Jones. Third quarter 2022 noninterest expense was elevated compared to the third quarter a year ago and to the preceding quarter, due to non-cash expenses related to the retirement of the previous President and Chief Executive Officer of the Company from the vesting of shares of restricted common stock. This one-time contractual event added $784,000 to salaries and employee benefits for the third quarter of 2022, which increased 13% from the third quarter of 2021, and 5% from the second quarter of 2022.
“These solid results are a direct result of our dedicated employees and their commitment and effort in supporting our clients, communities and shareholders,” said Mr. Jones. “Our strong liquidity continues to provide us with the opportunity for investment strategies that positively impact our net interest income.”
Third Quarter Ended September 30, 2022
Operating Results, Balance Sheet Review, Capital Management, and Credit Quality(as of, or for the periods ended September 30, 2022, compared to September 30, 2021, and June 30, 2022, except as noted):
Operating Results:
- Diluted earnings per share were $0.30 for the third quarter of 2022, compared to $0.23 for the third quarter of 2021, and $0.24 for the second quarter of 2022. Diluted earnings per share were $0.75 for the first nine months of 2022, compared to $0.56 for the first nine months of 2021.
- The following table indicates the ratios for the return on average tangible assets and the return on average tangible equity for the periods indicated:
For the Quarter Ended: For the Nine Months Ended September 30, June 30, September 30, September 30, September 30, (unaudited) 2022 2022 2021 2022 2021 Return on average tangible assets 1.36 % 1.15 % 1.10 % 1.17 % 0.94 % Return on average tangible equity 16.60 % 14.06 % 13.49 % 14.41 % 11.29 % - Net interest income, before provision for credit losses on loans, increased 26% to $48.0 million for the third quarter of 2022, compared to $38.2 million for the third quarter of 2021. The fully tax equivalent (“FTE”) net interest margin increased 55 basis points to 3.73% for the third quarter of 2022, from 3.18% for the third quarter of 2021, primarily due to a shift in the mix of earning assets into higher yielding loans and investment securities, and higher average yield on overnight funds, partially offset by lower interest and fees on PPP loans, a decrease in the accretion of the loan purchase discount into interest income from acquired loans, lower prepayment fees, and a higher cost of funds.
- Net interest income increased 15% to $48.0 million for the third quarter of 2022, compared to $41.9 million for the second quarter of 2022. The FTE net interest margin increased 35 basis points to 3.73% for the third quarter of 2022 from 3.38% for the second quarter of 2022, primarily due to a shift in the mix of earning assets as the Company invested its excess liquidity into higher yielding loans and investment securities, and higher average yields on overnight funds, partially offset by a decrease in the accretion of the loan purchase discount into interest income from acquired loans, lower prepayment fees, lower interest and fees on PPP loans, and a higher cost of funds.
- Net interest income increased 19% to $128.1 million for the first nine months of 2022, compared to $108.0 million for the first nine months of 2021. For the first nine months of 2022, the FTE net interest margin increased 26 basis points to 3.39%, compared to 3.13% for the first nine months of 2021, primarily due to higher average balances of loans and investment securities, higher average yields on investment securities and overnight funds, partially offset by lower interest and fees on PPP loans, a decrease in the accretion of the loan purchase discount into interest income from acquired loans, and lower prepayment fees.
- Net interest income increased 15% to $48.0 million for the third quarter of 2022, compared to $41.9 million for the second quarter of 2022. The FTE net interest margin increased 35 basis points to 3.73% for the third quarter of 2022 from 3.38% for the second quarter of 2022, primarily due to a shift in the mix of earning assets as the Company invested its excess liquidity into higher yielding loans and investment securities, and higher average yields on overnight funds, partially offset by a decrease in the accretion of the loan purchase discount into interest income from acquired loans, lower prepayment fees, lower interest and fees on PPP loans, and a higher cost of funds.
- The following table, as of September 30, 2022, sets forth the estimated changes in the Company’s annual net interest income that would result from the designated instantaneous parallel shift in interest rates from the base rate:
Increase/(Decrease) in Estimated Net Interest Income(1) Amount Percent (Dollars in thousands) Change in Interest Rates (basis points) +400 $ 33,788 16.2 % +300 $ 25,318 12.1 % +200 $ 16,899 8.1 % +100 $ 8,479 4.1 % 0 — — −100 $ (16,828 ) (8.1 ) % −200 $ (35,111 ) (16.8 ) % −300 $ (53,144 ) (25.5 ) % ____________________
(1) Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results. Actual rates paid on deposits may differ from the hypothetical interest rates modeled due to competitive or market factors, which could reduce any actual impact on net interest income. ____________________
- The following tables present the average balance of loans outstanding, interest income, and the average yield for the periods indicated:
- The average yield on the total loan portfolio increased to 4.90% for the third quarter of 2022, compared to 4.80% for the second quarter of 2022, primarily due to increases in the prime rate, partially offset by a decrease in the accretion of the loan purchase discount into interest income from acquired loans, lower prepayment fees, lower fees on PPP loans, and higher average balances of lower yielding purchased residential mortgage loans.
- The average yield on the total loan portfolio increased to 4.90% for the third quarter of 2022, compared to 4.80% for the second quarter of 2022, primarily due to increases in the prime rate, partially offset by a decrease in the accretion of the loan purchase discount into interest income from acquired loans, lower prepayment fees, lower fees on PPP loans, and higher average balances of lower yielding purchased residential mortgage loans.
For the Quarter Ended For the Quarter Ended September 30, 2022 June 30, 2022 Average Interest Average Average Interest Average (in $000’s, unaudited) Balance Income Yield Balance Income Yield Loans, core bank $ 2,574,842 $ 30,490 4.70 % $ 2,530,836 $ 27,402 4.34 % Prepayment fees — 96 0.01 % — 549 0.09 % PPP loans 4,593 11 0.95 % 21,479 53 0.99 % PPP fees, net — 190 16.41 % — 493 9.21 % Asset-based lending 53,514 1,032 7.65 % 49,667 874 7.06 % Bay View Funding factored receivables 62,623 3,201 20.28 % 64,085 3,129 19.58 % Purchased residential mortgages 445,256 3,414 3.04 % 381,988 2,711 2.85 % Purchased commercial real estate ("CRE") loans 8,337 83 3.95 % 8,425 77 3.67 % Loan fair value mark / accretion (5,178 ) 353 0.05 % (6,303 ) 1,250 0.20 % Total loans (includes loans held-for-sale) $ 3,143,987 $ 38,870 4.90 % $ 3,050,177 $ 36,538 4.80 % • The average yield on the total loan portfolio decreased to 4.90% for the third quarter of 2022, compared to 5.18% for the third quarter of 2021, primarily due to lower interest and fees on PPP loans, a decrease in the accretion of the loan purchase discount into interest income from acquired loans, lower prepayment fees, and higher average balances of lower yielding purchased residential mortgages, partially offset by increases in the prime rate. For the Quarter Ended For the Quarter Ended September 30, 2022 September 30, 2021 Average Interest Average Average Interest Average (in $000’s, unaudited) Balance Income Yield Balance Income Yield Loans, core bank $ 2,574,842 $ 30,490 4.70 % $ 2,317,985 $ 25,476 4.36 % Prepayment fees — 96 0.01 % — 1,282 0.22 % PPP loans 4,593 11 0.95 % 218,098 548 1.00 % PPP fees, net — 190 16.41 % — 2,508 4.56 % Asset-based lending 53,514 1,032 7.65 % 43,457 586 5.35 % Bay View Funding factored receivables 62,623 3,201 20.28 % 50,674 2,815 22.04 % Purchased residential mortgages 445,256 3,414 3.04 % 141,073 1,019 2.87 % Purchased CRE loans 8,337 83 3.95 % 9,177 91 3.93 % Loan fair value mark / accretion (5,178 ) 353 0.05 % (8,923 ) 1,882 0.32 % Total loans (includes loans held-for-sale) $ 3,143,987 $ 38,870 4.90 % $ 2,771,541 $ 36,207 5.18 % • The average yield on the total loan portfolio decreased to 4.81% for the nine months ended September 30, 2022, compared to 5.07% for the nine months ended September 30, 2021, primarily due to a decrease in interest and fees on PPP loans, a decrease in the accretion of the loan purchase discount into interest income from acquired loans, lower prepayment fees, and an increase in the average balance of lower yielding purchased residential mortgages. For the Nine Months Ended For the Nine Months Ended September 30, 2022 September 30, 2021 Average Interest Average Average Interest Average (in $000’s, unaudited) Balance Income Yield Balance Income Yield Loans, core bank $ 2,530,130 $ 83,988 4.44 % $ 2,254,435 $ 75,205 4.46 % Prepayment fees — 1,155 0.06 % — 2,303 0.14 % PPP loans 28,575 210 0.98 % 290,253 2,163 1.00 % PPP fees, net — 2,029 9.49 % — 7,784 3.59 % Asset-based lending 57,540 2,857 6.64 % 35,376 1,424 5.38 % Bay View Funding factored receivables 61,508 9,123 19.83 % 49,263 8,237 22.36 % Purchased residential mortgages 394,618 8,553 2.90 % 96,761 2,118 2.93 % Purchased CRE loans 8,424 237 3.76 % 13,618 372 3.65 % Loan fair value mark / accretion (6,121 ) 2,357 0.12 % (10,387 ) 3,876 0.23 % Total loans (includes loans held-for-sale) $ 3,074,674 $ 110,509 4.81 % $ 2,729,319 $ 103,482 5.07 % • In aggregate, the remaining net purchase discount on total loans acquired from Focus Business Bank, Tri-Valley Bank, United American Bank, and Presidio Bank was $5.0 million at September 30, 2022. - The average cost of total deposits was 0.13% for the third quarter of 2022, compared to 0.10% for both the third quarter of 2021 and the second quarter of 2022. The average cost of total deposits was 0.11% for both the nine months ended September 30, 2022 and September 30, 2021.
- During the third quarter of 2022, there was a provision for credit losses on loans of $1.0 million, compared to a $514,000 negative provision for credit losses on loans for the third quarter of 2021, and a negative provision for credit losses on loans of $181,000 for the second quarter of 2022. There was a provision for credit losses on loans of $258,000 for the nine months ended September 30, 2022, compared to a $2.5 million negative provision for credit losses on loans for the nine months ended September 30, 2021.
- Total noninterest income increased 15% to $2.8 million for the third quarter of 2022, compared to $2.4 million for the third quarter of 2021, primarily due to higher income on off-balance sheet deposits, partially offset by a lower gain on sale of SBA loans during the third quarter of 2022, and a gain on proceeds from company-owned life insurance during the third quarter of 2021. Total noninterest income increased 33% from $2.1 million for the second quarter of 2022, primarily due to higher service charges and fees on deposit accounts, and a higher gain on sale of SBA loans during the third quarter of 2022.
• For the nine months ended September 30, 2022, total noninterest income increased 7% to $7.3 million, compared to $6.9 million for the nine months ended September 30, 2021, primarily due to higher income on off-balance sheet deposits, and a $669,000 gain on warrants, partially offset by a lower gain on sale of SBA loans and a lower gain on proceeds from company-owned life insurance during the first nine months of 2022. - Total noninterest expense for the third quarter of 2022 increased to $23.9 million, compared to $21.8 million for the third quarter of 2021, and $23.2 million for the second quarter of 2022, primarily due to higher salaries and employee benefits, occupancy and equipment, and insurance expense during the third quarter of 2022. Salaries and employee benefits included $784,000 of restricted stock expense for vesting of restricted common stock held by the previous President and Chief Executive Officer of the Company who retired during the third quarter of 2022.
- Noninterest expense for the nine months ended September 30, 2022 decreased to $70.3 million, compared to $70.9 million for the nine months ended September 30, 2021, primarily due to a reserve for a legal settlement during the first nine months of 2021, partially offset by higher salaries and employee benefits, occupancy and equipment, and insurance expense during the first nine months of 2022.
- Full time equivalent employees were 327 at September 30, 2022, and 325 at September 30, 2021, and 332 at June 30, 2022.
- Noninterest expense for the nine months ended September 30, 2022 decreased to $70.3 million, compared to $70.9 million for the nine months ended September 30, 2021, primarily due to a reserve for a legal settlement during the first nine months of 2021, partially offset by higher salaries and employee benefits, occupancy and equipment, and insurance expense during the first nine months of 2022.
- The efficiency ratio was 47.02% for the third quarter of 2022, compared to 53.78% for the third quarter of 2021, and 52.73% for the second quarter of 2022. The efficiency ratio for the nine months ended September 30, 2022 was 51.92%, compared to 61.67% for the nine months ended September 30, 2021. The improvement in the efficiency ratio for the third quarter and first nine months of 2022 was primarily due to an increase in net interest income from the rising interest rate environment. The efficiency ratio for the nine months ended September 30, 2021 was negatively impacted by the $4.0 million reserve for a legal settlement. Excluding the $4.0 million reserve for a legal settlement, the efficiency ratio was 58.18% for the nine months ended September 30, 2021.
- Income tax expense was $7.8 million for the third quarter of 2022, compared to $5.6 million for the third quarter of 2021, and $6.1 million for the second quarter of 2022. The effective tax rate for the third quarter of 2022 was 30.3%, compared to 28.8% for the third quarter of 2021, and 29.3% for the second quarter of 2021. The increase in the effective tax rate was due to an adjustment from significantly higher earnings for the third quarter of 2022, compared to the first and second quarters of 2022. Income tax expense for the nine months ended September 30, 2022 was $19.1 million, compared to $12.8 million for the nine months ended September 30, 2021. The effective tax rate for the nine months ended September 30, 2022 was 29.5%, compared to 27.5% for the nine months ended September 30, 2021.
Balance Sheet Review, Capital Management and Credit Quality:
- Total assets decreased (1%) to $5.431 billion at September 30, 2022, compared to $5.463 billion at September 30, 2021, and increased 1% from $5.357 billion at June 30, 2022.
- Securities available-for-sale, at fair value, totaled $478.5 million at September 30, 2022, compared to $121.0 million at September 30, 2021, and $332.1 million at June 30, 2022. At September 30, 2022, the Company’s securities available-for-sale portfolio was comprised of $405.4 million of U.S. Treasury securities and $73.1 million of agency mortgage-backed securities (all issued by U.S. Government sponsored entities).
- The pre-tax unrealized loss on U.S. Treasury securities available-for-sale at September 30, 2022 was ($10.1) million, compared to a pre-tax unrealized gain of $11,000 at September 30, 2021, and a pre-tax unrealized loss of ($1.2) million at June 30, 2022. The pre-tax unrealized loss on mortgage-backed securities available-for-sale at September 30, 2022 was ($7.3) million, compared to a pre-tax unrealized gain of $4.0 million at September 30, 2021, and a pre-tax unrealized loss of ($2.9) million at June 30, 2022. The pre-tax unrealized loss on total securities available-for-sale at September 30, 2022 was ($17.4) million, compared to a pre-tax unrealized gain of $4.0 million at September 30, 2021, and a pre-tax unrealized loss of ($4.1) million at June 30, 2022. All other factors remaining the same, when market interest rates are increasing, the Company will experience a higher unrealized loss in the securities portfolio.
- During the third quarter of 2022, the Company purchased $163.0 million of U.S. Treasury securities available-for-sale, with a book yield of 3.50% and an average life of 1.83 years. During the first nine months of 2022, the Company purchased $414.0 million of U.S. Treasury securities available-for-sale, with a book yield of 3.04% and an average life of 2.28 years.
- At September 30, 2022, securities held-to-maturity, at amortized cost, totaled $703.8 million, compared to $537.3 million at September 30, 2021, and $723.7 million at June 30, 2022. At September 30, 2022, the Company’s securities held-to-maturity portfolio was comprised of $665.7 million of agency mortgage-backed securities, and $38.1 million of tax-exempt municipal bonds.
- The pre-tax unrealized loss on mortgage-backed securities held-to-maturity at September 30, 2022 was ($108.1) million, compared to a pre-tax unrealized gain of $1.1 million at September 30, 2021, and a pre-tax unrealized loss of ($72.5) million at June 30, 2022. The pre-tax unrealized loss on municipal bonds held-to-maturity at September 30, 2022 was ($2.1) million, compared to a pre-tax unrealized gain of $989,000 at September 30, 2021, and a pre-tax unrealized loss of ($436,000) at June 30, 2022. The pre-tax unrealized loss on total securities held-to-maturity at September 30, 2022 was ($110.2) million, compared to a pre-tax unrealized gain of $2.1 million at September 30, 2021, and a pre-tax unrealized loss of ($72.9) million at June 30, 2022.
- There were no purchases of securities held-to-maturity during the third quarter of 2022. During the first nine months of 2022, the Company purchased $119.4 million of agency mortgage-backed securities held-to-maturity, with a book yield of 2.21% and an average life of 6.55 years.
- The average life of the total investment securities portfolio was 5.18 years at September 30, 2022.
- The loan portfolio remains well-diversified as reflected in the following table which summarizes the distribution of loans, excluding loans held-for-sale, and the percentage of distribution in each category for the periods indicated:
LOANS September 30, 2022 June 30, 2022 September 30, 2021 (in $000’s, unaudited) Balance % to Total Balance % to Total Balance % to Total Commercial $ 541,215 17 % $ 523,268 17 % $ 578,944 20 % PPP Loans(1) 1,614 0 % 8,153 0 % 164,506 6 % Real estate: CRE - owner occupied 612,241 19 % 597,521 19 % 580,624 20 % CRE - non-owner occupied 1,023,405 32 % 993,621 32 % 829,022 29 % Land and construction 167,439 5 % 155,389 5 % 141,277 5 % Home equity 116,489 3 % 116,641 4 % 106,690 4 % Multifamily 229,455 7 % 221,938 7 % 205,952 7 % Residential mortgages 508,839 16 % 448,958 15 % 211,467 8 % Consumer and other 16,620 1 % 18,354 1 % 20,106 1 % Total Loans 3,217,317 100 % 3,083,843 100 % 2,838,588 100 % Deferred loan costs (fees), net (844 ) — (1,391 ) — (5,729 ) — Loans, net of deferred costs and fees $ 3,216,473 100 % $ 3,082,452 100 % $ 2,832,859 100 % ____________________
(1) Less than 1% at September 30, 2022 and June 30, 2022. ____________________
- Loans, excluding loans held-for-sale, increased $383.6 million, or 14%, to $3.216 billion at September 30, 2022, compared to $2.833 billion at September 30, 2021, and increased $134.0 million, or 4%, from $3.082 billion at June 30, 2022. Total loans at September 30, 2022 included $1.6 million of PPP loans, compared to $164.5 million at September 30, 2021 and $8.2 million at June 30, 2022. Total loans at September 30, 2022 included $508.8 million of residential mortgages, compared to $211.5 million at September 30, 2021, and $449.0 million at June 30, 2022. Loans, excluding loans held-for-sale, PPP loans and residential mortgages, increased $244.9 million, or 10%, to $2.706 billion at September 30, 2022, compared to $2.461 billion at September 30, 2021, and increased $80.5 million, or 3%, from $2.626 billion at June 30, 2022.
- Commercial and industrial (“C&I”) line utilization was 29% at September 30, 2022, compared to 27% at September 30, 2021, and 28% at June 30, 2022.
- At September 30, 2022, 37% of the CRE loan portfolio was secured by owner-occupied real estate, compared to 41% at September 30, 2021, and 38% at June 30, 2022.
- At September 30, 2022, approximately 34% of the Company’s loan portfolio consisted of floating interest rate loans, compared to 42% at September 30, 2021, and 36% at June 30, 2022.
- Commercial and industrial (“C&I”) line utilization was 29% at September 30, 2022, compared to 27% at September 30, 2021, and 28% at June 30, 2022.
- In response to economic stimulus laws passed by Congress in 2020 and 2021, the Bank funded two rounds of PPP loans totaling $530.8 million. At September 30, 2022, there were no remaining “Round 1” PPP loans. After accounting for loan payoffs and SBA loan forgiveness, “Round 2” PPP loans totaled $1.6 million at September 30, 2022. The following table shows interest income, fee income and deferred origination costs generated by the PPP loans, outstanding PPP loan balances and related deferred fees and costs for the periods indicated:
At or For the Quarter Ended: At or For the Nine Months Ended: PPP LOANS September 30, June 30, September 30, September 30, September 30, (in $000’s, unaudited) 2022 2022 2021 2022 2021 Interest income $ 11 $ 53 $ 548 $ 210 $ 2,163 Fee income, net 190 493 2,508 2,029 7,784 Total $ 201 $ 546 $ 3,056 $ 2,239 $ 9,947 PPP loans outstanding at period end: Round 1 $ — $ 43 $ 5,795 $ — $ 5,795 Round 2 1,614 8,110 158,711 1,614 158,711 Total $ 1,614 $ 8,153 $ 164,506 $ 1,614 $ 164,506 Deferred fees outstanding at period end $ (132 ) $ (337 ) $ (4,831 ) $ (132 ) $ (4,831 ) Deferred costs outstanding at period end 8 24 461 8 461 Total $ (124 ) $ (313 ) $ (4,370 ) $ (124 ) $ (4,370 ) • During the third quarter of 2022, the Company purchased single family residential mortgage loans totaling $73.5 million, tied to homes located in California, with average principal balances of approximately $1.0 million and a bond equivalent yield of approximately 5.24%, which uses the average life of the loan to recognize the discount into income. During the first nine months of 2022, the Company purchased single family residential mortgage loans totaling $148.0 million, tied to homes located in California, with average principal balances of approximately $915,000. • The following table summarizes the allowance for credit losses on loans (“ACLL”) for the periods indicated:
At or For the Quarter Ended: For the Nine Months Ended ALLOWANCE FOR CREDIT LOSSES ON LOANS September 30, June 30, September 30, September 30, September 30, (in $000’s, unaudited) 2022 2022 2021 2022 2021 Balance at beginning of period $ 45,490 $ 42,788 $ 43,956 $ 43,290 $ 44,400 Charge-offs during the period (7 ) (355 ) (65 ) (378 ) (433 ) Recoveries during the period 432 3,238 303 3,751 2,232 Net recoveries (charge-offs) during the period 425 2,883 238 3,373 1,799 Provision for (recapture of) credit losses on loans during the period 1,006 (181 ) (514 ) 258 (2,519 ) Balance at end of period $ 46,921 $ 45,490 $ 43,680 $ 46,921 $ 43,680 Total loans, net of deferred fees $ 3,216,473 $ 3,082,452 $ 2,832,859 $ 3,216,473 $ 2,832,859 Total nonperforming loans $ 1,036 $ 2,715 $ 4,733 $ 1,036 $ 4,733 ACLL to total loans 1.46 % 1.48 % 1.54 % 1.46 % 1.54 % ACLL to total nonperforming loans 4,529.05 % 1,675.51 % 922.88 % 4,529.05 % 922.88 % • The ACLL was 1.46% of total loans at September 30, 2022 while the ACLL to total nonperforming loans was 4,529.05%. The ACLL was 1.54% of total loans and the ACLL to nonperforming loans was 922.88% at September 30, 2021. The ACLL was 1.48% of total loans and the ACLL to total nonperforming loans was 1,675.51% at June 30, 2022. • The following table shows the drivers of change in ACLL under the current expected credit losses (“CECL”) methodology for the first nine months of 2022:
DRIVERS OF CHANGE IN ACLL UNDER CECL (in $000’s, unaudited) ACLL at December 31, 2021 $ 43,290 Portfolio changes during the first quarter of 2022 including net recoveries (33 ) Qualitative and quantitative changes during the first quarter of 2022 including changes in economic forecasts (469 ) ACLL at March 31, 2022 42,788 Portfolio changes during the second quarter of 2022 including net recoveries 1,383 Qualitative and quantitative changes during the second quarter of 2022 including changes in economic forecasts 1,319 ACLL at June 30, 2022 45,490 Portfolio changes during the third quarter of 2022 including net recoveries 2,009 Qualitative and quantitative changes during the third quarter of 2022 including changes in economic forecasts (578 ) ACLL at September 30, 2022 $ 46,921 • Net recoveries totaled $425,000 for the third quarter of 2022, compared to net recoveries of $238,000 for the third quarter of 2021, and net recoveries of $2.9 million for the second quarter of 2022. Net recoveries totaled $3.4 million during the first nine months of 2022, compared to net recoveries of $1.8 million for the first nine months of 2021. • The following is a breakout of NPAs at the periods indicated:
NONPERFORMING ASSETS September 30, 2022 June 30, 2022 September 30, 2021 (in $000’s, unaudited) Balance % of Total Balance % of Total Balance % of Total Restructured and loans over 90 days past due and still accruing $ 545 53 % $ 981 36 % $ 642 13 % Commercial loans 491 47 % 640 24 % 1,330 28 % CRE loans — — % 1,094 40 % 2,260 48 % Home equity loans — — % — — % 94 2 % Consumer and other loans — — % — — % 407 9 % Total nonperforming assets $ 1,036 100 % $ 2,715 100 % $ 4,733 100 % • NPAs totaled $1.0 million, or 0.02% of total assets, at September 30, 2022, compared to $4.7 million, or 0.09% of total assets, at September 30, 2021, $2.7 million, or 0.05% of total assets, at June 30, 2022. • There were no foreclosed assets on the balance sheet at September 30, 2022, September 30, 2021, or June 30, 2022. • Classified assets decreased to $28.6 million, or 0.53% of total assets, at September 30, 2022, compared to $31.9 million, or 0.58% of total assets, at September 30, 2021, and $28.9 million, or 0.54% of total assets, at June 30, 2022. • The following table summarizes the distribution of deposits and the percentage of distribution in each category for the periods indicated:
DEPOSITS September 30, 2022 June 30, 2022 September 30, 2021 (in $000’s, unaudited) Balance % to Total Balance % to Total Balance % to Total Demand, noninterest-bearing $ 1,883,574 40 % $ 1,846,365 40 % $ 1,804,965 38 % Demand, interest-bearing 1,154,403 24 % 1,218,538 26 % 1,141,944 24 % Savings and money market 1,487,400 32 % 1,387,003 30 % 1,600,754 34 % Time deposits — under $250 34,728 1 % 36,691 1 % 39,628 1 % Time deposits — $250 and over 93,263 2 % 98,760 2 % 103,046 2 % CDARS — interest-bearing demand, money market and time deposits 29,897 1 % 26,287 1 % 36,044 1 % Total deposits $ 4,683,265 100 % $ 4,613,644 100 % $ 4,726,381 100 % • Total deposits decreased ($43.1) million, or (1%), to $4.683 billion at September 30, 2022, compared to $4.726 billion at September 30, 2021, and increased $69.6 million, or 2%, from $4.614 billion at June 30, 2022. • Deposits, excluding all time deposits and CDARS deposits, decreased ($22.3) million to $4.525 billion at September 30, 2022, compared to $4.548 billion at September 30, 2021, and increased $73.5 million, or 2%, compared to $4.452 billion at June 30, 2022. - The Company’s consolidated capital ratios exceeded regulatory guidelines and the Bank’s capital ratios exceeded regulatory guidelines under the Basel III prompt corrective action (“PCA”) regulatory guidelines for a well-capitalized financial institution, and the Basel III minimum regulatory requirements at September 30, 2022, as reflected in the following table:
Well-capitalized Financial Institution Basel III Heritage Heritage Basel III PCA Minimum Commerce Bank of Regulatory Regulatory CAPITAL RATIOS (unaudited) Corp Commerce Guidelines Requirement (1) Total Capital 14.5 % 14.0 % 10.0 % 10.5 % Tier 1 Capital 12.4 % 12.9 % 8.0 % 8.5 % Common Equity Tier 1 Capital 12.4 % 12.9 % 6.5 % 7.0 % Tier 1 Leverage 8.7 % 9.0 % 5.0 % 4.0 % ____________________
(1) Basel III minimum regulatory requirements for both the Company and the Bank include a 2.5% capital conservation buffer, except the leverage ratio. ____________________
- The following table reflects the components of accumulated other comprehensive loss, net of taxes, for the periods indicated:
ACCUMULATED OTHER COMPREHENSIVE LOSS September 30, June 30, September 30, (in $000’s, unaudited) 2022 2022 2021 Unrealized (loss) gain on securities available-for-sale $ (12,398 ) $ (3,036 ) $ 2,435 Remaining unamortized unrealized gain on securities available-for-sale transferred to held-to-maturity — — 234 Split dollar insurance contracts liability (5,511 ) (5,501 ) (6,143 ) Supplemental executive retirement plan liability (7,428 ) (7,508 ) (8,411 ) Unrealized gain on interest-only strip from SBA loans 125 127 179 Total accumulated other comprehensive loss $ (25,212 ) $ (15,918 ) $ (11,706 ) - Tangible equity was $430.2 million at September 30, 2022, compared to $408.1 million at September 30, 2021, and $427.2 million at June 30, 2022. Tangible book value per share was $7.09 at September 30, 2022, compared to $6.77 at September 30, 2021, and $7.04 at June 30, 2022.
Heritage Commerce Corp, a bank holding company established in October 1997, is the parent company of Heritage Bank of Commerce, established in 1994 and headquartered in San Jose, CA with full-service branches in Danville, Fremont, Gilroy, Hollister, Livermore, Los Altos, Los Gatos, Morgan Hill, Oakland, Palo Alto, Pleasanton, Redwood City, San Francisco, San Jose, San Mateo, San Rafael, Sunnyvale, and Walnut Creek. Heritage Bank of Commerce is an SBA Preferred Lender. Bay View Funding, a subsidiary of Heritage Bank of Commerce, is based in San Jose, CA and provides business-essential working capital factoring financing to various industries throughout the United States. For more information, please visit www.heritagecommercecorp.com.
Forward-Looking Statement Disclaimer
Certain matters discussed in this press release constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to various risks and uncertainties that may be outside our control and our actual results could differ materially from our projected results. Risks and uncertainties that could cause our financial performance to differ materially from our goals, plans, expectations and projections expressed in forward-looking statements include those set forth in our filings with the Securities and Exchange Commission (“SEC”), Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, and the following: (1) geopolitical and domestic political developments that can increase levels of political and economic unpredictability, contribute to rising energy prices and commodity prices, and increase the volatility of financial markets; (2) conditions related to the impact of the COVID-19 pandemic, and other infectious illness outbreaks that may arise in the future, our customers, employees, businesses, liquidity, and financial results and overall condition including severity and duration of the associated uncertainties in U.S. and global markets; (3) current and future economic and market conditions in the United States generally or in the communities we serve, including the effects of declines in property values and overall slowdowns in economic growth should these events occur; (4) effects of and changes in trade, monetary and fiscal policies and laws, including the interest rate policies of the Federal Open Market Committee of the Federal Reserve Board; (5) inflationary pressures and changes in the interest rate environment that reduce our margin and yields, the fair value of financial instruments or our level of loan originations, or increase in the level of defaults, losses and prepayments on loans we have made and make; (6) changes in the level of nonperforming assets and charge-offs and other credit quality measures, and their impact on the adequacy of our allowance for credit losses and our provision for credit losses; (7) volatility in credit and equity markets and its effect on the global economy; (8) our ability to effectively compete with other banks and financial services companies and the effects of competition in the financial services industry on our business; (9) our ability to achieve loan growth and attract deposits in our market area; (10) risks associated with concentrations in real estate related loans; (11) the relative strength or weakness of the commercial and real estate markets where our borrowers are located, including related asset and market prices; (12) credit related impairment charges to our securities portfolio; (13) increased capital requirements for our continual growth or as imposed by banking regulators, which may require us to raise capital at a time when capital is not available on favorable terms or at all; (14) regulatory limits on Heritage Bank of Commerce’s ability to pay dividends to the Company; (15) operational issues stemming from, and/or capital spending necessitated by, the potential need to adapt to industry changes in information technology systems, on which we are highly dependent; (16) our inability to attract, recruit, and retain qualified officers and other personnel could harm our ability to implement our strategic plan, impair our relationships with customers and adversely affect our business, results of operations and growth prospects; (17) possible adjustment of the valuation of our deferred tax assets; (18) our ability to keep pace with technological changes, including our ability to identify and address cyber-security risks such as data security breaches, “denial of service” attacks, “hacking” and identity theft; (19) inability of our framework to manage risks associated with our business, including operational risk and credit risk; (20) risks of loss of funding of SBA or SBA loan programs, or changes in those programs; (21) compliance with applicable laws and governmental and regulatory requirements, including the Dodd-Frank Act and others relating to banking, consumer protection, securities, accounting and tax matters; (22) effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; (23) the expense and uncertain resolution of litigation matters whether occurring in the ordinary course of business or otherwise; (24) availability of and competition for acquisition opportunities; (25) risks resulting from domestic terrorism; (26) risks resulting from social unrest and protests; (27) risks of natural disasters (including earthquakes, fires, and flooding) and other events beyond our control; (28) our success in managing the risks involved in the foregoing factors.
Member FDIC
For additional information, contact:
Debbie Reuter
EVP, Corporate Secretary
Direct: (408) 494-4542
Debbie.Reuter@herbank.comFor the Quarter Ended: Percent Change From: For the Nine Months Ended: CONSOLIDATED INCOME STATEMENTS September 30, June 30, September 30, June 30, September 30, September 30, September 30, Percent (in $000’s, unaudited) 2022 2022 2021 2022 2021 2022 2021 Change Interest income $ 50,174 $ 43,556 $ 39,907 15 % 26 % $ 133,636 $ 113,300 18 % Interest expense 2,133 1,677 1,725 27 % 24 % 5,495 5,284 4 % Net interest income before provision for credit losses on loans 48,041 41,879 38,182 15 % 26 % 128,141 108,016 19 % Provision for (recapture of) credit losses on loans 1,006 (181 ) (514 ) 656 % 296 % 258 (2,519 ) 110 % Net interest income after provision for credit losses on loans 47,035 42,060 38,696 12 % 22 % 127,883 110,535 16 % Noninterest income: Service charges and fees on deposit accounts 1,360 867 584 57 % 133 % 2,839 1,844 54 % Increase in cash surrender value of life insurance 484 480 470 1 % 3 % 1,444 1,384 4 % Gain on sales of SBA loans 308 27 594 1041 % (48 ) % 491 1,227 (60 ) % Servicing income 125 139 129 (10 ) % (3 ) % 370 415 (11 ) % Gain on warrants 32 — — N/A N/A 669 — N/A Termination fees 16 45 32 (64 ) % (50 ) % 61 179 (66 ) % Gain on proceeds from company-owned life insurance — 27 109 (100 ) % (100 ) % 27 571 (95 ) % Other 456 513 490 (11 ) % (7 ) % 1,438 1,258 14 % Total noninterest income 2,781 2,098 2,408 33 % 15 % 7,339 6,878 7 % Noninterest expense: Salaries and employee benefits 14,119 13,476 12,461 5 % 13 % 41,416 38,991 6 % Occupancy and equipment 2,415 2,277 2,151 6 % 12 % 7,129 6,672 7 % Professional fees 1,230 1,291 1,211 (5 ) % 2 % 3,601 4,701 (23 ) % Other 6,135 6,146 6,008 0 % 2 % 18,195 20,486 (11 ) % Total noninterest expense 23,899 23,190 21,831 3 % 9 % 70,341 70,850 (1 ) % Income before income taxes 25,917 20,968 19,273 24 % 34 % 64,881 46,563 39 % Income tax expense 7,848 6,147 5,555 28 % 41 % 19,125 12,828 49 % Net income $ 18,069 $ 14,821 $ 13,718 22 % 32 % $ 45,756 $ 33,735 36 % PER COMMON SHARE DATA (unaudited) Basic earnings per share $ 0.30 $ 0.24 $ 0.23 25 % 30 % $ 0.76 $ 0.56 36 % Diluted earnings per share $ 0.30 $ 0.24 $ 0.23 25 % 30 % $ 0.75 $ 0.56 34 % Weighted average shares outstanding - basic 60,686,992 60,542,170 60,220,717 0 % 1 % 60,541,015 60,078,953 1 % Weighted average shares outstanding - diluted 61,123,801 60,969,154 60,760,189 0 % 1 % 61,004,840 60,635,304 1 % Common shares outstanding at period-end 60,716,794 60,666,794 60,266,316 0 % 1 % 60,716,794 60,266,316 1 % Dividend per share $ 0.13 $ 0.13 $ 0.13 0 % 0 % $ 0.39 $ 0.39 0 % Book value per share $ 10.04 $ 10.01 $ 9.79 0 % 3 % $ 10.04 $ 9.79 3 % Tangible book value per share $ 7.09 $ 7.04 $ 6.77 1 % 5 % $ 7.09 $ 6.77 5 % KEY FINANCIAL RATIOS (unaudited) Annualized return on average equity 11.72 % 9.86 % 9.29 % 19 % 26 % 10.12 % 7.74 % 31 % Annualized return on average tangible equity 16.60 % 14.06 % 13.49 % 18 % 23 % 14.41 % 11.29 % 28 % Annualized return on average assets 1.31 % 1.11 % 1.06 % 18 % 24 % 1.13 % 0.90 % 26 % Annualized return on average tangible assets 1.36 % 1.15 % 1.10 % 18 % 24 % 1.17 % 0.94 % 24 % Net interest margin (FTE) 3.73 % 3.38 % 3.18 % 10 % 17 % 3.39 % 3.13 % 8 % Efficiency ratio 47.02 % 52.73 % 53.78 % (11 ) % (13 ) % 51.92 % 61.67 % (16 ) % AVERAGE BALANCES (in $000’s, unaudited) Average assets $ 5,466,330 $ 5,334,636 $ 5,139,239 2 % 6 % $ 5,414,820 $ 4,988,076 9 % Average tangible assets $ 5,286,591 $ 5,154,245 $ 4,956,738 3 % 7 % $ 5,234,427 $ 4,804,814 9 % Average earning assets $ 5,117,373 $ 4,985,611 $ 4,778,574 3 % 7 % $ 5,065,698 $ 4,626,853 9 % Average loans held-for-sale $ 3,282 $ 1,824 $ 4,810 80 % (32 ) % $ 2,201 $ 4,112 (46 ) % Average total loans $ 3,140,705 $ 3,048,353 $ 2,766,731 3 % 14 % $ 3,072,473 $ 2,725,207 13 % Average deposits $ 4,712,044 $ 4,579,436 $ 4,396,315 3 % 7 % $ 4,662,926 $ 4,252,214 10 % Average demand deposits - noninterest-bearing $ 1,910,748 $ 1,836,350 $ 1,835,219 4 % 4 % $ 1,868,283 $ 1,786,035 5 % Average interest-bearing deposits $ 2,801,296 $ 2,743,086 $ 2,561,096 2 % 9 % $ 2,794,643 $ 2,466,179 13 % Average interest-bearing liabilities $ 2,840,611 $ 2,791,527 $ 2,601,002 2 % 9 % $ 2,837,219 $ 2,506,025 13 % Average equity $ 611,707 $ 603,182 $ 586,012 1 % 4 % $ 604,794 $ 582,751 4 % Average tangible equity $ 431,968 $ 422,791 $ 403,511 2 % 7 % $ 424,401 $ 399,489 6 % For the Quarter Ended: CONSOLIDATED INCOME STATEMENTS September 30, June 30, March 31, December 31, September 30, (in $000’s, unaudited) 2022 2022 2022 2021 2021 Interest income $ 50,174 $ 43,556 $ 39,906 $ 39,956 $ 39,907 Interest expense 2,133 1,677 1,685 1,847 1,725 Net interest income before provision for credit losses on loans 48,041 41,879 38,221 38,109 38,182 Provision for (recapture of) credit losses on loans 1,006 (181 ) (567 ) (615 ) (514 ) Net interest income after provision for credit losses on loans 47,035 42,060 38,788 38,724 38,696 Noninterest income: Service charges and fees on deposit accounts 1,360 867 612 644 584 Increase in cash surrender value of life insurance 484 480 480 454 470 Gain on sales of SBA loans 308 27 156 491 594 Servicing income 125 139 106 138 129 Gain on warrants 32 — 637 — — Termination fees 16 45 — 618 32 Gain on proceeds from company-owned life insurance — 27 — 104 109 Other 456 513 469 361 490 Total noninterest income 2,781 2,098 2,460 2,810 2,408 Noninterest expense: Salaries and employee benefits 14,119 13,476 13,821 12,871 12,461 Occupancy and equipment 2,415 2,277 2,437 2,366 2,151 Professional fees 1,230 1,291 1,080 1,200 1,211 Other 6,135 6,146 5,914 5,790 6,008 Total noninterest expense 23,899 23,190 23,252 22,227 21,831 Income before income taxes 25,917 20,968 17,996 19,307 19,273 Income tax expense 7,848 6,147 5,130 5,342 5,555 Net income $ 18,069 $ 14,821 $ 12,866 $ 13,965 $ 13,718 PER COMMON SHARE DATA (unaudited) Basic earnings per share $ 0.30 $ 0.24 $ 0.21 $ 0.23 $ 0.23 Diluted earnings per share $ 0.30 $ 0.24 $ 0.21 $ 0.23 $ 0.23 Weighted average shares outstanding - basic 60,686,992 60,542,170 60,393,883 60,298,424 60,220,717 Weighted average shares outstanding - diluted 61,123,801 60,969,154 60,921,835 60,844,221 60,760,189 Common shares outstanding at period-end 60,716,794 60,666,794 60,407,846 60,339,837 60,266,316 Dividend per share $ 0.13 $ 0.13 $ 0.13 $ 0.13 $ 0.13 Book value per share $ 10.04 $ 10.01 $ 9.95 $ 9.91 $ 9.79 Tangible book value per share $ 7.09 $ 7.04 $ 6.96 $ 6.91 $ 6.77 KEY FINANCIAL RATIOS (unaudited) Annualized return on average equity 11.72 % 9.86 % 8.71 % 9.35 % 9.29 % Annualized return on average tangible equity 16.60 % 14.06 % 12.47 % 13.50 % 13.49 % Annualized return on average assets 1.31 % 1.11 % 0.96 % 0.97 % 1.06 % Annualized return on average tangible assets 1.36 % 1.15 % 0.99 % 1.00 % 1.10 % Net interest margin (FTE) 3.73 % 3.38 % 3.05 % 2.84 % 3.18 % Efficiency ratio 47.02 % 52.73 % 57.16 % 54.32 % 53.78 % AVERAGE BALANCES (in $000’s, unaudited) Average assets $ 5,466,330 $ 5,334,636 $ 5,443,240 $ 5,695,136 $ 5,139,239 Average tangible assets $ 5,286,591 $ 5,154,245 $ 5,262,175 $ 5,513,359 $ 4,956,738 Average earning assets $ 5,117,373 $ 4,985,611 $ 5,093,851 $ 5,336,129 $ 4,778,574 Average loans held-for-sale $ 3,282 $ 1,824 $ 1,478 $ 4,047 $ 4,810 Average total loans $ 3,140,705 $ 3,048,353 $ 3,027,111 $ 2,872,074 $ 2,766,731 Average deposits $ 4,712,044 $ 4,579,436 $ 4,697,136 $ 4,945,204 $ 4,396,315 Average demand deposits - noninterest-bearing $ 1,910,748 $ 1,836,350 $ 1,857,164 $ 1,979,940 $ 1,835,219 Average interest-bearing deposits $ 2,801,296 $ 2,743,086 $ 2,839,972 $ 2,965,264 $ 2,561,096 Average interest-bearing liabilities $ 2,840,611 $ 2,791,527 $ 2,879,952 $ 3,005,212 $ 2,601,002 Average equity $ 611,707 $ 603,182 $ 599,355 $ 592,291 $ 586,012 Average tangible equity $ 431,968 $ 422,791 $ 418,290 $ 410,514 $ 403,511 End of Period: Percent Change From: CONSOLIDATED BALANCE SHEETS September 30, June 30, September 30, June 30, September 30, (in $000’s, unaudited) 2022 2022 2021 2022 2021 ASSETS Cash and due from banks $ 40,500 $ 35,764 $ 33,013 13 % 23 % Other investments and interest-bearing deposits in other financial institutions 641,251 840,821 1,588,334 (24 ) % (60 ) % Securities available-for-sale, at fair value 478,534 332,129 121,000 44 % 295 % Securities held-to-maturity, at amortized cost 703,794 723,716 537,285 (3 ) % 31 % Loans held-for-sale - SBA, including deferred costs 2,081 2,281 3,678 (9 ) % (43 ) % Loans: Commercial 541,215 523,268 578,944 3 % (7 ) % PPP loans 1,614 8,153 164,506 (80 ) % (99 ) % Real estate: CRE - owner occupied 612,241 597,521 580,624 2 % 5 % CRE - non-owner occupied 1,023,405 993,621 829,022 3 % 23 % Land and construction 167,439 155,389 141,277 8 % 19 % Home equity 116,489 116,641 106,690 0 % 9 % Multifamily 229,455 221,938 205,952 3 % 11 % Residential mortgages 508,839 448,958 211,467 13 % 141 % Consumer and other 16,620 18,354 20,106 (9 ) % (17 ) % Loans 3,217,317 3,083,843 2,838,588 4 % 13 % Deferred loan fees, net (844 ) (1,391 ) (5,729 ) (39 ) % (85 ) % Total loans, net of deferred costs and fees 3,216,473 3,082,452 2,832,859 4 % 14 % Allowance for credit losses on loans (46,921 ) (45,490 ) (43,680 ) 3 % 7 % Loans, net 3,169,552 3,036,962 2,789,179 4 % 14 % Company-owned life insurance 78,456 77,972 77,509 1 % 1 % Premises and equipment, net 9,428 9,593 9,821 (2 ) % (4 ) % Goodwill 167,631 167,631 167,631 0 % 0 % Other intangible assets 11,692 12,351 14,423 (5 ) % (19 ) % Accrued interest receivable and other assets 128,343 117,621 121,129 9 % 6 % Total assets $ 5,431,262 $ 5,356,841 $ 5,463,002 1 % (1 ) % LIABILITIES AND SHAREHOLDERS’ EQUITY Liabilities: Deposits: Demand, noninterest-bearing $ 1,883,574 $ 1,846,365 $ 1,804,965 2 % 4 % Demand, interest-bearing 1,154,403 1,218,538 1,141,944 (5 ) % 1 % Savings and money market 1,487,400 1,387,003 1,600,754 7 % (7 ) % Time deposits - under $250 34,728 36,691 39,628 (5 ) % (12 ) % Time deposits - $250 and over 93,263 98,760 103,046 (6 ) % (9 ) % CDARS - money market and time deposits 29,897 26,287 36,044 14 % (17 ) % Total deposits 4,683,265 4,613,644 4,726,381 2 % (1 ) % Subordinated debt, net of issuance costs 39,312 39,274 39,878 0 % (1 ) % Accrued interest payable and other liabilities 99,168 96,699 106,625 3 % (7 ) % Total liabilities 4,821,745 4,749,617 4,872,884 2 % (1 ) % Shareholders’ Equity: Common stock 501,240 499,832 496,622 0 % 1 % Retained earnings 133,489 123,310 105,202 8 % 27 % Accumulated other comprehensive loss (25,212 ) (15,918 ) (11,706 ) (58 ) % (115 ) % Total shareholders' equity 609,517 607,224 590,118 0 % 3 % Total liabilities and shareholders’ equity $ 5,431,262 $ 5,356,841 $ 5,463,002 1 % (1 ) % End of Period: CONSOLIDATED BALANCE SHEETS September 30, June 30, March 31, December 31, September 30, (in $000’s, unaudited) 2022 2022 2022 2021 2021 ASSETS Cash and due from banks $ 40,500 $ 35,764 $ 29,729 $ 15,703 $ 33,013 Other investments and interest-bearing deposits in other financial institutions 641,251 840,821 1,187,436 1,290,513 1,588,334 Securities available-for-sale, at fair value 478,534 332,129 111,217 102,252 121,000 Securities held-to-maturity, at amortized cost 703,794 723,716 736,823 658,397 537,285 Loans held-for-sale - SBA, including deferred costs 2,081 2,281 831 2,367 3,678 Loans: Commercial 541,215 523,268 568,053 594,108 578,944 PPP loans 1,614 8,153 37,393 88,726 164,506 Real estate: CRE - owner occupied 612,241 597,521 597,542 595,934 580,624 CRE - non-owner occupied 1,023,405 993,621 928,220 902,326 829,022 Land and construction 167,439 155,389 153,323 147,855 141,277 Home equity 116,489 116,641 111,609 109,579 106,690 Multifamily 229,455 221,938 221,767 218,856 205,952 Residential mortgages 508,839 448,958 391,171 416,660 211,467 Consumer and other 16,620 18,354 17,110 16,744 20,106 Loans 3,217,317 3,083,843 3,026,188 3,090,788 2,838,588 Deferred loan fees, net (844 ) (1,391 ) (2,124 ) (3,462 ) (5,729 ) Total loans, net of deferred fees 3,216,473 3,082,452 3,024,064 3,087,326 2,832,859 Allowance for credit losses on loans (46,921 ) (45,490 ) (42,788 ) (43,290 ) (43,680 ) Loans, net 3,169,552 3,036,962 2,981,276 3,044,036 2,789,179 Company-owned life insurance 78,456 77,972 78,069 77,589 77,509 Premises and equipment, net 9,428 9,593 9,580 9,639 9,821 Goodwill 167,631 167,631 167,631 167,631 167,631 Other intangible assets 11,692 12,351 13,009 13,668 14,423 Accrued interest receivable and other assets 128,343 117,621 111,797 117,614 121,129 Total assets $ 5,431,262 $ 5,356,841 $ 5,427,398 $ 5,499,409 $ 5,463,002 LIABILITIES AND SHAREHOLDERS’ EQUITY Liabilities: Deposits: Demand, noninterest-bearing $ 1,883,574 $ 1,846,365 $ 1,811,943 $ 1,903,768 $ 1,804,965 Demand, interest-bearing 1,154,403 1,218,538 1,268,942 1,308,114 1,141,944 Savings and money market 1,487,400 1,387,003 1,447,434 1,375,825 1,600,754 Time deposits - under $250 34,728 36,691 38,417 38,734 39,628 Time deposits - $250 and over 93,263 98,760 93,161 94,700 103,046 CDARS - money market and time deposits 29,897 26,287 30,008 38,271 36,044 Total deposits 4,683,265 4,613,644 4,689,905 4,759,412 4,726,381 Subordinated debt, net of issuance costs 39,312 39,274 39,987 39,925 39,878 Accrued interest payable and other liabilities 99,168 96,699 96,450 102,044 106,625 Total liabilities 4,821,745 4,749,617 4,826,342 4,901,381 4,872,884 Shareholders’ Equity: Common stock 501,240 499,832 498,763 497,695 496,622 Retained earnings 133,489 123,310 116,347 111,329 105,202 Accumulated other comprehensive loss (25,212 ) (15,918 ) (14,054 ) (10,996 ) (11,706 ) Total shareholders' equity 609,517 607,224 601,056 598,028 590,118 Total liabilities and shareholders’ equity $ 5,431,262 $ 5,356,841 $ 5,427,398 $ 5,499,409 $ 5,463,002 At or For the Quarter Ended: Percent Change From: CREDIT QUALITY DATA September 30, June 30, September 30, June 30, September 30, (in $000’s, unaudited) 2022 2022 2021 2022 2021 Nonaccrual loans - held-for-investment $ 491 $ 1,734 $ 4,091 (72 ) % (88 ) % Restructured and loans over 90 days past due and still accruing 545 981 642 (44 ) % (15 ) % Total nonperforming loans 1,036 2,715 4,733 (62 ) % (78 ) % Foreclosed assets — — — N/A N/A Total nonperforming assets $ 1,036 $ 2,715 $ 4,733 (62 ) % (78 ) % Other restructured loans still accruing $ 93 $ 113 $ 90 (18 ) % 3 % Net charge-offs (recoveries) during the quarter $ (425 ) $ (2,883 ) $ (238 ) 85 % (79 ) % Provision for (recapture of) credit losses on loans during the quarter $ 1,006 $ (181 ) $ (514 ) 656 % 296 % Allowance for credit losses on loans $ 46,921 $ 45,490 $ 43,680 3 % 7 % Classified assets $ 28,570 $ 28,929 $ 31,937 (1 ) % (11 ) % Allowance for credit losses on loans to total loans 1.46 % 1.48 % 1.54 % (1 ) % (5 ) % Allowance for credit losses on loans to total nonperforming loans 4,529.05 % 1,675.51 % 922.88 % 170 % 391 % Nonperforming assets to total assets 0.02 % 0.05 % 0.09 % (60 ) % (78 ) % Nonperforming loans to total loans 0.03 % 0.09 % 0.17 % (67 ) % (82 ) % Classified assets to Heritage Commerce Corp Tier 1 capital plus allowance for credit losses on loans 6 % 6 % 7 % 0 % (14 ) % Classified assets to Heritage Bank of Commerce Tier 1 capital plus allowance for credit losses on loans 5 % 6 % 7 % (17 ) % (29 ) % OTHER PERIOD-END STATISTICS (in $000’s, unaudited) Heritage Commerce Corp: Tangible common equity (1) $ 430,194 $ 427,242 $ 408,064 1 % 5 % Shareholders’ equity / total assets 11.22 % 11.34 % 10.80 % (1 ) % 4 % Tangible common equity / tangible assets (2) 8.19 % 8.25 % 7.73 % (1 ) % 6 % Loan to deposit ratio 68.68 % 66.81 % 59.94 % 3 % 15 % Noninterest-bearing deposits / total deposits 40.22 % 40.02 % 38.19 % 0 % 5 % Total capital ratio 14.5 % 14.6 % 15.1 % (1 ) % (4 ) % Tier 1 capital ratio 12.4 % 12.5 % 12.9 % (1 ) % (4 ) % Common Equity Tier 1 capital ratio 12.4 % 12.5 % 12.9 % (1 ) % (4 ) % Tier 1 leverage ratio 8.7 % 8.7 % 8.6 % 0 % 1 % Heritage Bank of Commerce: Total capital ratio 14.0 % 14.1 % 14.5 % (1 ) % (3 ) % Tier 1 capital ratio 12.9 % 13.0 % 13.5 % (1 ) % (4 ) % Common Equity Tier 1 capital ratio 12.9 % 13.0 % 13.5 % (1 ) % (4 ) % Tier 1 leverage ratio 9.0 % 9.0 % 9.0 % 0 % 0 % ____________________
(1) Represents shareholders' equity minus goodwill and other intangible assets (2) Represents shareholders' equity minus goodwill and other intangible assets divided by total assets minus goodwill and other intangible assets At or For the Quarter Ended: CREDIT QUALITY DATA September 30, June 30, March 31, December 31, September 30, (in $000’s, unaudited) 2022 2022 2022 2021 2021 Nonaccrual loans - held-for-investment $ 491 $ 1,734 $ 3,303 $ 3,460 $ 4,091 Restructured and loans over 90 days past due and still accruing 545 981 527 278 642 Total nonperforming loans 1,036 2,715 3,830 3,738 4,733 Foreclosed assets — — — — — Total nonperforming assets $ 1,036 $ 2,715 $ 3,830 $ 3,738 $ 4,733 Other restructured loans still accruing $ 93 $ 113 $ 125 $ 125 $ 90 Net charge-offs (recoveries) during the quarter $ (425 ) $ (2,883 ) $ (65 ) $ (225 ) $ (238 ) Provision for (recapture of) credit losses on loans during the quarter $ 1,006 $ (181 ) $ (567 ) $ (615 ) $ (514 ) Allowance for credit losses on loans $ 46,921 $ 45,490 $ 42,788 $ 43,290 $ 43,680 Classified assets $ 28,570 $ 28,929 $ 30,579 $ 33,719 $ 31,937 Allowance for credit losses on loans to total loans 1.46 % 1.48 % 1.41 % 1.40 % 1.54 % Allowance for credit losses on loans to total nonperforming loans 4,529.05 % 1,675.51 % 1,117.18 % 1,158.11 % 922.88 % Nonperforming assets to total assets 0.02 % 0.05 % 0.07 % 0.07 % 0.09 % Nonperforming loans to total loans 0.03 % 0.09 % 0.13 % 0.12 % 0.17 % Classified assets to Heritage Commerce Corp Tier 1 capital plus allowance for credit losses on loans 6 % 6 % 6 % 7 % 7 % Classified assets to Heritage Bank of Commerce Tier 1 capital plus allowance for credit losses on loans 5 % 6 % 6 % 7 % 7 % OTHER PERIOD-END STATISTICS (in $000’s, unaudited) Heritage Commerce Corp: Tangible common equity (1) $ 430,194 $ 427,242 $ 420,416 $ 416,729 $ 408,064 Shareholders’ equity / total assets 11.22 % 11.34 % 11.07 % 10.87 % 10.80 % Tangible common equity / tangible assets (2) 8.19 % 8.25 % 8.01 % 7.84 % 7.73 % Loan to deposit ratio 68.68 % 66.81 % 64.48 % 64.87 % 59.94 % Noninterest-bearing deposits / total deposits 40.22 % 40.02 % 38.63 % 40.00 % 38.19 % Total capital ratio 14.5 % 14.6 % 14.6 % 14.4 % 15.1 % Tier 1 capital ratio 12.4 % 12.5 % 12.4 % 12.3 % 12.9 % Common Equity Tier 1 capital ratio 12.4 % 12.5 % 12.4 % 12.3 % 12.9 % Tier 1 leverage ratio 8.7 % 8.7 % 8.3 % 7.9 % 8.6 % Heritage Bank of Commerce: Total capital ratio 14.0 % 14.1 % 13.9 % 13.8 % 14.5 % Tier 1 capital ratio 12.9 % 13.0 % 12.9 % 12.8 % 13.5 % Common Equity Tier 1 capital ratio 12.9 % 13.0 % 12.9 % 12.8 % 13.5 % Tier 1 leverage ratio 9.0 % 9.0 % 8.7 % 8.2 % 9.0 % ____________________
(1) Represents shareholders' equity minus goodwill and other intangible assets (2) Represents shareholders' equity minus goodwill and other intangible assets divided by total assets minus goodwill and other intangible assets For the Quarter Ended For the Quarter Ended September 30, 2022 September 30, 2021 Interest Average Interest Average NET INTEREST INCOME AND NET INTEREST MARGIN
(in $000’s, unaudited)Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Assets: Loans, gross (1)(2) $ 3,143,987 38,870 4.90 % $ 2,771,541 $ 36,207 5.18 % Securities - taxable 1,076,742 5,874 2.16 % 557,890 2,320 1.65 % Securities - exempt from Federal tax (3) 38,733 329 3.37 % 58,679 485 3.28 % Other investments and interest-bearing deposits in other financial institutions 857,911 5,170 2.39 % 1,390,464 998 0.28 % Total interest earning assets (3) 5,117,373 50,243 3.90 % 4,778,574 40,010 3.32 % Cash and due from banks 37,961 37,963 Premises and equipment, net 9,591 9,962 Goodwill and other intangible assets 179,739 182,501 Other assets 121,666 130,239 Total assets $ 5,466,330 $ 5,139,239 Liabilities and shareholders’ equity: Deposits: Demand, noninterest-bearing $ 1,910,748 $ 1,835,219 Demand, interest-bearing 1,205,937 543 0.18 % 1,142,762 473 0.16 % Savings and money market 1,429,055 925 0.26 % 1,234,109 513 0.16 % Time deposits - under $100 12,329 5 0.16 % 14,721 7 0.19 % Time deposits - $100 and over 123,458 121 0.39 % 132,247 147 0.44 % CDARS - money market and time deposits 30,517 1 0.01 % 37,257 1 0.01 % Total interest-bearing deposits 2,801,296 1,595 0.23 % 2,561,096 1,141 0.18 % Total deposits 4,712,044 1,595 0.13 % 4,396,315 1,141 0.10 % Subordinated debt, net of issuance costs 39,288 538 5.43 % 39,851 583 5.80 % Short-term borrowings 27 — 0.00 % 55 1 7.21 % Total interest-bearing liabilities 2,840,611 2,133 0.30 % 2,601,002 1,725 0.26 % Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds 4,751,359 2,133 0.18 % 4,436,221 1,725 0.15 % Other liabilities 103,264 117,006 Total liabilities 4,854,623 4,553,227 Shareholders’ equity 611,707 586,012 Total liabilities and shareholders’ equity $ 5,466,330 $ 5,139,239 Net interest income (3) / margin 48,110 3.73 % 38,285 3.18 % Less tax equivalent adjustment (3) (69 ) (103 ) Net interest income $ 48,041 $ 38,182 ____________________
(1) Includes loans held-for-sale. Nonaccrual loans are included in average balances. (2) Yield amounts earned on loans include fees and costs. The accretion of net deferred loan fees into loan interest income was $507,000 for the third quarter of 2022 (of which $190,000 was from PPP loans), compared to $2,809,000 for the third quarter of 2021 (of which $2,508,000 was from PPP loans). Prepayment fees totaled $96,000 for the third quarter of 2022, compared to $1,282,000 for the third quarter of 2021. (3) Reflects the FTE adjustment for Federal tax-exempt income based on a 21% tax rate. For the Quarter Ended For the Quarter Ended September 30, 2022 June 30, 2022 Interest Average Interest Average NET INTEREST INCOME AND NET INTEREST MARGIN
(in $000’s, unaudited)Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Assets: Loans, gross (1)(2) $ 3,143,987 $ 38,870 4.90 % $ 3,050,177 36,538 4.80 % Securities - taxable 1,076,742 5,874 2.16 % 912,408 4,407 1.94 % Securities - exempt from Federal tax (3) 38,733 329 3.37 % 40,447 343 3.40 % Other investments and interest-bearing deposits in other financial institutions 857,911 5,170 2.39 % 982,579 2,340 0.96 % Total interest earning assets (3) 5,117,373 50,243 3.90 % 4,985,611 43,628 3.51 % Cash and due from banks 37,961 37,172 Premises and equipment, net 9,591 9,666 Goodwill and other intangible assets 179,739 180,391 Other assets 121,666 121,796 Total assets $ 5,466,330 $ 5,334,636 Liabilities and shareholders’ equity: Deposits: Demand, noninterest-bearing $ 1,910,748 $ 1,836,350 Demand, interest-bearing 1,205,937 543 0.18 % 1,249,875 468 0.15 % Savings and money market 1,429,055 925 0.26 % 1,327,665 558 0.17 % Time deposits - under $100 12,329 5 0.16 % 12,643 4 0.13 % Time deposits - $100 and over 123,458 121 0.39 % 125,258 114 0.37 % CDARS - money market and time deposits 30,517 1 0.01 % 27,645 2 0.03 % Total interest-bearing deposits 2,801,296 1,595 0.23 % 2,743,086 1,146 0.17 % Total deposits 4,712,044 1,595 0.13 % 4,579,436 1,146 0.10 % Subordinated debt, net of issuance costs 39,288 538 5.43 % 48,425 531 4.40 % Short-term borrowings 27 — 0.00 % 16 — 0.00 % Total interest-bearing liabilities 2,840,611 2,133 0.30 % 2,791,527 1,677 0.24 % Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds 4,751,359 2,133 0.18 % 4,627,877 1,677 0.15 % Other liabilities 103,264 103,577 Total liabilities 4,854,623 4,731,454 Shareholders’ equity 611,707 603,182 Total liabilities and shareholders’ equity $ 5,466,330 $ 5,334,636 Net interest income (3) / margin 48,110 3.73 % 41,951 3.38 % Less tax equivalent adjustment (3) (69 ) (72 ) Net interest income $ 48,041 $ 41,879 ____________________
(1) Includes loans held-for-sale. Nonaccrual loans are included in average balances. (2) Yield amounts earned on loans include fees and costs. The accretion of net deferred loan fees into loan interest income was $507,000 for the third quarter of 2022 (of which $190,000 was from PPP loans), compared to $816,000 for the second quarter of 2022 (of which $493,000 was from PPP loans). Prepayment fees totaled $96,000 for the third quarter of 2022, compared to $549,000 for the second quarter of 2022. (3) Reflects the FTE adjustment for Federal tax-exempt income based on a 21% tax rate. For the Nine Months Ended For the Nine Months Ended September 30, 2022 September 30, 2021 Interest Average Interest Average NET INTEREST INCOME AND NET INTEREST MARGIN
(in $000’s, unaudited)Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Assets: Loans, gross (1)(2) $ 3,074,674 110,509 4.81 % $ 2,729,319 $ 103,482 5.07 % Securities - taxable 924,694 13,725 1.98 % 491,832 5,992 1.63 % Securities - exempt from Federal tax (3) 41,328 1,048 3.39 % 62,454 1,538 3.29 % Other investments, interest-bearing deposits in other financial institutions and Federal funds sold 1,025,002 8,574 1.12 % 1,343,248 2,611 0.26 % Total interest earning assets (3) 5,065,698 133,856 3.53 % 4,626,853 113,623 3.28 % Cash and due from banks 37,589 40,401 Premises and equipment, net 9,621 10,158 Goodwill and other intangible assets 180,393 183,262 Other assets 121,519 127,402 Total assets $ 5,414,820 $ 4,988,076 Liabilities and shareholders’ equity: Deposits: Demand, noninterest-bearing $ 1,868,283 $ 1,786,035 Demand, interest-bearing 1,244,996 1,470 0.16 % 1,103,114 1,429 0.17 % Savings and money market 1,383,944 2,026 0.20 % 1,184,108 1,613 0.18 % Time deposits - under $100 12,732 14 0.15 % 15,315 24 0.21 % Time deposits - $100 and over 122,615 341 0.37 % 132,347 482 0.49 % CDARS - money market and time deposits 30,356 4 0.02 % 31,295 4 0.02 % Total interest-bearing deposits 2,794,643 3,855 0.18 % 2,466,179 3,552 0.19 % Total deposits 4,662,926 3,855 0.11 % 4,252,214 3,552 0.11 % Subordinated debt, net of issuance costs 42,552 1,640 5.15 % 39,804 1,731 5.81 % Short-term borrowings 24 — 0.00 % 42 1 3.18 % Total interest-bearing liabilities 2,837,219 5,495 0.26 % 2,506,025 5,284 0.28 % Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds 4,705,502 5,495 0.16 % 4,292,060 5,284 0.16 % Other liabilities 104,524 113,265 Total liabilities 4,810,026 4,405,325 Shareholders’ equity 604,794 582,751 Total liabilities and shareholders’ equity $ 5,414,820 $ 4,988,076 Net interest income (3) / margin 128,361 3.39 % 108,339 3.13 % Less tax equivalent adjustment (3) (220 ) (323 ) Net interest income $ 128,141 $ 108,016 ____________________
(1) Includes loans held-for-sale. Nonaccrual loans are included in average balances. (2) Yield amounts earned on loans include fees and costs. The accretion of net deferred loan fees into loan interest income was $3,111,000 for the first nine months of 2022 (of which $2,029,000 was from PPP loans), compared to $8,690,000 for the first nine months of 2021 (of which $7,784,000 was from PPP loans). Prepayment fees totaled $1,155,000 for the first nine months of 2022, compared to $2,303,000 for the first nine months of 2021. (3) Reflects the FTE adjustment for Federal tax-exempt income based on a 21% tax rate.
- Diluted earnings per share were $0.30 for the third quarter of 2022, compared to $0.23 for the third quarter of 2021, and $0.24 for the second quarter of 2022. Diluted earnings per share were $0.75 for the first nine months of 2022, compared to $0.56 for the first nine months of 2021.