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

Heritage Commerce Corp

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

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

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

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

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

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

Operating Results:

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

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

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

• Net interest income, before provision for credit losses on loans, increased 36% to $51.7 million for the fourth quarter of 2022, compared to $38.1 million for the fourth quarter of 2021. The fully tax equivalent (“FTE”) net interest margin increased 126 basis points to 4.10% for the fourth quarter of 2022, from 2.84% for the fourth quarter of 2021, primarily due to increases in the prime rate and the rate on overnight funds, a shift in the mix of earning assets into higher yielding loans and investment securities, and higher average yield on overnight funds, partially offset by lower interest and fees on Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans, a decrease in the accretion of the loan purchase discount into interest income from acquired loans, lower prepayment fees, and a higher cost of funds.
  
  

  • Net interest income increased 8% to $51.7 million for the fourth quarter of 2022, compared to $48.0 million for the third quarter of 2022. The FTE net interest margin increased 37 basis points to 4.10% for the fourth quarter of 2022 from 3.73% for the third quarter of 2022, primarily due to a shift in the mix of earning assets as the Company invested its excess liquidity into higher yielding loans and investment securities, and higher average yields on overnight funds, partially offset by a higher cost of funds.
    
    

  • Net interest income increased 23% to $179.9 million for the year ended December 31, 2022, compared to $146.1 million for the year ended December 31, 2021. For the year ended December 31, 2022, the FTE net interest margin increased 52 basis points to 3.57%, compared to 3.05% for the year ended December 31, 2021, primarily due to higher average balances of loans and investment securities, higher average yields on investment securities and overnight funds, partially offset by lower interest and fees on PPP loans, a decrease in the accretion of the loan purchase discount into interest income from acquired loans, lower prepayment fees, a lower yield on the Bay View Funding factoring portfolio, and a higher cost of funds.
    

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

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

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

• The following tables present the average balance of loans outstanding, interest income, and the average yield for the periods indicated:
  
  

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

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

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

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

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

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

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

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

• During the fourth quarter of 2022, there was a provision for credit losses on loans of $508,000, compared to a $615,000 negative provision for credit losses on loans for the fourth quarter of 2021, and a provision for credit losses on loans of $1.0 million for the third quarter of 2022. There was a provision for credit losses on loans of $766,000 for the year ended December 31, 2022, compared to a $3.1 million negative provision for credit losses on loans for the year ended December 31, 2021.
  

• Total noninterest income remained relatively flat at $2.8 million for both the fourth quarter of 2022 and 2021. The fourth quarter of 2022 included higher income on off-balance sheet deposits. The fourth quarter of 2021 included termination fees, a gain on sales of SBA loans, and a gain on proceeds from company-owned life insurance. Total noninterest income remained relatively flat at $2.8 million for both the fourth and third quarters of 2022, as higher service charges and fees on deposit accounts was offset by a lower gain on sales of SBA loans during the fourth quarter of 2022.

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

• Total noninterest expense for the fourth quarter of 2022 increased to $24.5 million, compared to $22.2 million for the fourth quarter of 2021, primarily due to higher salaries and employee benefits, higher rent included in occupancy and equipment expense, higher professional fees, and higher insurance and information technology related expenses included in other noninterest expense during the fourth quarter of 2022.
  
  

  • Total noninterest expense for the fourth quarter of 2022 increased to $24.5 million, compared to $23.9 million for the third quarter of 2022, primarily due to approximately $900,000 in additional expense as a result of higher bonuses, professional fees, insurance and information technology related expenses incurred during the fourth quarter of 2022. The higher salaries and employee benefits during the third quarter of 2022 included $784,000 of restricted stock expense for vesting of restricted common stock held by the previous President and Chief Executive Officer of the Company, which was partially offset by a higher bonus accrual during the fourth quarter of 2022.
    
    

  • Noninterest expense for the year ended December 31, 2022 increased to $94.9 million, compared to $93.1 million for the year ended December 31, 2021, primarily due to higher salaries and employee benefits, higher rent included in occupancy and equipment expense, and higher insurance and information technology related expenses during the year ended December 31, 2022. These increases were partially offset by higher legal fees included in professional fees and a reserve for a legal settlement included in other noninterest expense during the year ended December 31, 2021.
    
    

  • Full time equivalent employees were 331 at December 31, 2022, and 326 at December 31, 2021, and 327 at September 30, 2022.

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

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

Balance Sheet Review, Capital Management and Credit Quality:

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

• Securities available-for-sale, at fair value, totaled $489.6 million at December 31, 2022, compared to $102.3 million at December 31, 2021, and $478.5 million at September 30, 2022. At December 31, 2022, the Company’s securities available-for-sale portfolio was comprised of $418.5 million of U.S. Treasury securities and $71.1 million of agency mortgage-backed securities (all issued by U.S. Government sponsored entities).
  
  

  • The pre-tax unrealized loss on U.S. Treasury securities available-for-sale at December 31, 2022 was ($10.3) million, compared to a pre-tax unrealized loss of ($10.1) million at September 30, 2022. There were no U.S. Treasury securities available-for-sale at December 31, 2021. The pre-tax unrealized loss on mortgage-backed securities available-for-sale at December 31, 2022 was ($5.8) million, compared to a pre-tax unrealized gain of $2.9 million at December 31, 2021, and a pre-tax unrealized loss of ($7.3) million at September 30, 2022. The pre-tax unrealized loss on total securities available-for-sale at December 31, 2022 was ($16.1) million, compared to a pre-tax unrealized gain of $2.9 million at December 31, 2021, and a pre-tax unrealized loss of ($17.4) million at September 30, 2022. All other factors remaining the same, when market interest rates are increasing, the Company will experience a higher unrealized loss in the securities portfolio.

  • During the fourth quarter of 2022, the Company purchased $11.7 million of U.S. Treasury securities available-for-sale, with a book yield of 4.53% and an average life of 1.28 years. During the year ended December 31, 2022, the Company purchased $425.7 million of U.S. Treasury securities available-for-sale, with a book yield of 3.08% and an average life of 2.25 years.

• At December 31, 2022, securities held-to-maturity, at amortized cost, totaled $715.0 million, compared to $658.4 million at December 31, 2021, and $703.8 million at September 30, 2022. At December 31, 2022, the Company’s securities held-to-maturity portfolio was comprised of $677.4 million of agency mortgage-backed securities, and $37.6 million of tax-exempt municipal bonds.
  
  

  • The pre-tax unrealized loss on mortgage-backed securities held-to-maturity at December 31, 2022 was ($99.7) million, compared to a pre-tax unrealized loss of ($1.6) million at December 31, 2021, and a pre-tax unrealized loss of ($108.1) million at September 30, 2022. The pre-tax unrealized loss on municipal bonds held-to-maturity at December 31, 2022 was ($810,000), compared to a pre-tax unrealized gain of $805,000 at December 31, 2021, and a pre-tax unrealized loss of ($2.1) million at September 30, 2022. The pre-tax unrealized loss on total securities held-to-maturity at December 31, 2022 was ($100.6) million, compared to a pre-tax unrealized loss of ($790,000) at December 31, 2021, and a pre-tax unrealized loss of ($110.2) million at September 30, 2022.

  • During the fourth quarter of 2022, the Company purchased $27.1 million of agency mortgage-backed securities held-to-maturity, with a book yield of 5.13% and an average life of 8.56 years. During the year ended December 31, 2022, the Company purchased $146.6 million of agency mortgage-backed securities held-to-maturity, with a book yield of 2.75% and an average life of 6.92 years.

• The average life of the total investment securities portfolio was 4.93 years at December 31, 2022.

• The loan portfolio remains well-diversified as reflected in the following table which summarizes the distribution of loans, excluding loans held-for-sale, and the percentage of distribution in each category for the periods indicated:
  

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

---

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

• Loans, excluding loans held-for-sale, increased $211.2 million, or 7%, to $3.299 billion at December 31, 2022, compared to $3.087 billion at December 31, 2021, and increased $82.1 million, or 3%, from $3.216 billion at September 30, 2022. Total loans at December 31, 2022 included $1.2 million of PPP loans, compared to $88.7 million at December 31, 2021 and $1.6 million at September 30, 2022. Total loans at December 31, 2022 included $537.9 million of residential mortgages, compared to $416.7 million at December 31, 2021, and $508.8 million at September 30, 2022. Loans, excluding loans held-for-sale, PPP loans and residential mortgages, increased $175.5 million, or 7%, to $2.760 billion at December 31, 2022, compared to $2.584 billion at December 31, 2021, and increased $53.4 million, or 2%, from $2.706 billion at September 30, 2022.  
  
  

  • Commercial and industrial (“C&I”) line utilization was 29% at both December 31, 2022 and September 30, 2022, compared to 31% at December 31, 2021.
    
    

  • At both December 31, 2022 and September 30, 2022, there was 37% of the CRE loan portfolio secured by owner-occupied real estate, compared to 40% at December 31, 2021.
    
    

  • At December 31, 2022, approximately 33% of the Company’s loan portfolio consisted of floating interest rate loans, compared to 38% at December 31, 2021, and 34% at September 30, 2022.
    
    

• During the fourth quarter of 2022, the Company purchased single family residential mortgage loans totaling $37.4 million, tied to homes located in California, with average principal balances of approximately $1.0 million and a bond equivalent yield of approximately 5.22%, which uses the average life of the loan to recognize the discount into income. During the year ended December 31, 2022, the Company purchased single family residential mortgage loans totaling $185.4 million, tied to homes located in California, with average principal balances of approximately $934,000.

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

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

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

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

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

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

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

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

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

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

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

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

---

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

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

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

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

Forward-Looking Statement Disclaimer

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

Member FDIC

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

		For the Quarter Ended:										Percent Change From:							For the Year Ended:
CONSOLIDATED INCOME STATEMENTS		December 31,			September 30,			December 31,				September 30,			December 31,				December 31,			December 31,				Percent
(in $000’s, unaudited)		2022			2022			2021				2022			2021				2022			2021				Change
Interest income		$	55,192		$	50,174		$	39,956			10		%	38		%		$	188,828		$	153,256			23		%
Interest expense			3,453			2,133			1,847			62		%	87		%			8,948			7,131			25		%
Net interest income before provision
for credit losses on loans			51,739			48,041			38,109			8		%	36		%			179,880			146,125			23		%
Provision for (recapture of) credit losses on loans			508			1,006			(615	)		(50	)	%	183		%			766			(3,134	)		124		%
Net interest income after provision
for credit losses on loans			51,231			47,035			38,724			9		%	32		%			179,114			149,259			20		%
Noninterest income:
Service charges and fees on deposit
accounts			1,801			1,360			644			32		%	180		%			4,640			2,488			86		%
Increase in cash surrender value of
life insurance			481