Heritage Commerce Corp Earns $12.9 Million for the First Quarter of 2022

Heritage Commerce Corp Earns .9 Million for the First Quarter of 2022

SAN JOSE, Calif., April 28, 2022 (GLOBE NEWSWIRE) — Heritage Commerce Corp (Nasdaq: HTBK), the holding company (the “Company”) for Heritage Bank of Commerce (the “Bank”), today announced first quarter 2022 net income of $12.9 million, or $0.21 per average diluted common share, compared to $11.2 million, or $0.19 per average diluted common share, for the first quarter of 2021, and $14.0 million, or $0.23 per average diluted common share, for the fourth quarter of 2021. All results are unaudited.

“We delivered solid earnings for the first quarter of 2022, fueled by year-over-year growth in net interest income and noninterest income resulting from healthy loan and deposit growth and the benefit of excellent credit quality,” said Walter Kaczmarek, President and Chief Executive Officer.

“Our credit quality continues to be particularly strong with nonperforming assets declining 32% to $3.8 million from $5.6 million a year ago and classified assets declining year-over-year and on a linked quarter basis. We had net loan recoveries of $65,000 on previously charged-off loans, compared to net recoveries of $1.4 million for the first quarter of 2021, and net recoveries of $225,000 in the preceding quarter,” continued Mr. Kaczmarek. With a negative provision for credit losses on loans of $567,000 for the first quarter of 2022, the allowance for credit losses on loans to total loans was 1.41% at March 31, 2022, compared to 1.64% at March 31, 2021, and 1.40% at December 31, 2021.

“As we move on from pandemic-related activities, we continue to focus our efforts on strategic growth in the San Francisco Bay Area,” said Mr. Kaczmarek. “Our capital levels and excess liquidity positions all remain strong, and with a solid earnings performance, a large core deposit base and excellent credit quality, we believe we have a solid foundation upon which to continue to grow our franchise.”

First Quarter Ended March 31, 2022
Operating Results, Balance Sheet Review, Capital Management, and Credit Quality

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

Operating Results:

  • Diluted earnings per share were $0.21 for the first quarter of 2022, compared to $0.19 for the first quarter of 2021, and $0.23 for the fourth quarter 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:
    March 31,    December 31,    March 31, 
(unaudited)   2022   2021   2021
Return on average tangible assets   0.99 %   1.00 %   0.99 %
Return on average tangible equity   12.47 %   13.50 %   11.50 %
  • Net interest income, before provision for credit losses on loans, increased 9% to $38.2 million for the first quarter of 2022, compared to $35.0 million for the first quarter of 2021, primarily due to higher average balances of loans and investment securities, higher average yields on investment securities and overnight funds, and a lower cost of funds, partially offset by lower interest and fees on Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans, and a decrease in the accretion of the loan purchase discount into interest income from acquired loans. Net interest income remained relatively flat compared to $38.1 million for the fourth quarter of 2021, as higher average balances of loans and investment securities, higher average yields on investment securities, and a lower cost of funds, were offset by lower interest and fees on PPP loans and two fewer days in the first quarter of 2022.
    • The fully tax equivalent (“FTE”) net interest margin increased 21 basis points to 3.05% for the first quarter of 2022 from 2.84% for the fourth quarter of 2021, 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, higher average yields on overnight funds, and a slightly lower cost of funds, partially offset by lower interest and fees on PPP loans, lower average balances of factored receivables, and a decrease in the accretion of the loan purchase discount into interest income from acquired loans.
    • The FTE net interest margin contracted 17 basis points to 3.05% for the first quarter of 2022, from 3.22% for the first quarter of 2021, primarily due to a decline in the average yield on loans, lower interest and fees on PPP loans, and a decrease in the accretion of the loan purchase discount into interest income from acquired loans, partially offset by increases in the average yields on investment securities and overnight funds, and a decline in the cost of funds.
  • The following table 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 noted, as of March 31, 2022. 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.
             
    Increase/(Decrease) in  
    Estimated Net  
    Interest Income  
    Amount   Percent  
    (Dollars in thousands)  
Change in Interest Rates (basis points)            
+400   $ 52,129     34.7   %
+300   $ 39,086     26.0   %
+200   $ 26,071     17.4   %
+100   $ 13,035     8.7   %
0            
−100   $ (14,636 )   (9.7 ) %
−200   $ (25,760 )   (17.2 ) %
  • 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 decreased to 4.70% for the first quarter of 2022, compared to 5.24% for the first quarter of 2021, primarily due to lower fees on PPP loans, higher average balances of lower yielding purchased residential mortgages, declines in the average yields of the core bank and asset-based lending and Bay View Funding factored receivables, and a decrease in the accretion of the loan purchase discount into interest income from acquired loans.
                                     
    For the Quarter Ended     For the Quarter Ended  
    March 31, 2022     March 31, 2021  
    Average   Interest   Average     Average   Interest   Average  
(in $000’s, unaudited)   Balance   Income   Yield     Balance   Income   Yield  
Loans, core bank and asset-based lending   $ 2,553,325     $ 27,047   4.30 %   $ 2,225,342     $ 25,064   4.57 %
Prepayment fees           510   0.08 %           517   0.09 %
PPP loans     60,264       146   0.98 %     319,168       784   1.00 %
PPP fees, net           1,346   9.06 %           3,401   4.32 %
Bay View Funding factored receivables     57,761       2,793   19.61 %     48,094       2,650   22.35 %
Purchased residential mortgages     355,626       2,428   2.77 %     22,194       119   2.17 %
Purchased commercial real estate (“CRE”) loans     8,514       77   3.67 %     17,162       172   4.06 %
Loan fair value mark / accretion     (6,901 )     754   0.12 %     (11,626 )     1,129   0.21 %
Total loans (includes loans held-for-sale)   $ 3,028,589     $ 35,101   4.70 %   $ 2,620,334     $ 33,836   5.24 %
                                     
   • The average yield on the total loan portfolio decreased to 4.70% for the first quarter of 2022, compared to 4.93% for the fourth quarter of 2021, primarily due to lower fees on PPP loans, lower average balances and average yields on factored receivables, higher average balances of lower yielding purchased residential mortgage loans, and a decrease in the accretion of the loan purchase discount into interest income from acquired loans. The loss of income from the lower average yield on the loan portfolio was offset by the purchase of residential mortgage loans late in the fourth quarter of 2021 and organic loan growth resulting in a higher average balance of loans for the first quarter of 2022.
                                     
    For the Quarter Ended     For the Quarter Ended  
    March 31, 2022     December 31, 2021  
    Average   Interest   Average     Average   Interest   Average  
(in $000’s, unaudited)   Balance   Income   Yield     Balance   Income   Yield  
Loans, core bank and asset-based lending   $ 2,553,325     $ 27,047   4.30 %   $ 2,496,026     $ 27,167   4.32 %
Prepayment fees           510   0.08 %           397   0.06 %
PPP loans     60,264       146   0.98 %     127,592       318   0.99 %
PPP fees, net           1,346   9.06 %           2,211   6.87 %
Bay View Funding factored receivables     57,761       2,793   19.61 %     62,571       3,248   20.59 %
Purchased residential mortgages     355,626       2,428   2.77 %     188,731       1,437   3.02 %
Purchased CRE loans     8,514       77   3.67 %     8,929       69   3.07 %
Loan fair value mark / accretion     (6,901 )     754   0.12 %     (7,728 )     915   0.15 %
Total loans (includes loans held-for-sale)   $ 3,028,589     $ 35,101   4.70 %   $ 2,876,121     $ 35,762   4.93 %
  In aggregate, the original total net purchase discount on loans from the Focus Business Bank, Tri-Valley Bank, United American Bank, and Presidio Bank loan portfolios was $25.2 million. In aggregate, the remaining net purchase discount on total loans acquired was $6.6 million at March 31, 2022.
  • The average cost of total deposits was 0.10% for both the first quarter of 2022 and the fourth quarter of 2021, compared to 0.12% for the first quarter of 2021.
  • During the first quarter of 2022, there was a negative provision for credit losses on loans of $567,000, compared to a $1.5 million negative provision for credit losses on loans for the first quarter of 2021, and a $615,000 negative provision for credit losses on loans for the fourth quarter of 2021.
  • Total noninterest income increased to $2.5 million for the first quarter of 2022, compared to $2.3 million for the first quarter of 2021, primarily due to a realized gain on warrants of $637,000, partially offset by a lower gain on the sale of SBA loans during the first quarter of 2022.
    • Total noninterest income decreased from $2.8 million for the fourth quarter of 2021, primarily due to a lower gain on sale of SBA loans during the first quarter of 2022. The first quarter of 2022 included a $637,000 gain on warrants, while the fourth quarter of 2021 included $618,000 of termination fees at Bay View Funding, a subsidiary of the Bank.
  • Total noninterest expense for the first quarter of 2022 was relatively flat at $23.3 million, compared to $23.2 million for the first quarter of 2021, as higher insurance expense and Federal Deposit Insurance Corporation (“FDIC”) assessments were offset by lower professional fees during the first quarter of 2022. Noninterest expense for the first quarter of 2022 increased from $22.2 million for the fourth quarter of 2021, primarily due to higher salaries and employee benefits during the first quarter of 2022, consistent with the cyclical nature of these expenses.
    • Full time equivalent employees were 325 at both March 31, 2022 and March 31, 2021, and 326 at December 31, 2021.
  • The efficiency ratio was 57.16% for the first quarter of 2022, compared to 62.38% for the first quarter of 2021, and 54.32% for the fourth quarter of 2021.
  • Income tax expense was $5.1 million for the first quarter of 2022, compared to $4.3 million for the first quarter of 2021, and $5.3 million for the fourth quarter of 2021. The effective tax rate for the first quarter of 2022 was 28.5%, compared to 27.8% for the first quarter of 2021, and 27.7% for the fourth quarter of 2021.
    • The difference in the effective tax rate for the periods reported compared to the combined Federal and state statutory tax rate of 29.6% was primarily the result of the Company’s investment in life insurance policies whose earnings are not subject to taxes, tax credits related to investments in low-income housing limited partnerships (net of low-income housing investment losses), and tax-exempt interest income earned on municipal bonds.

Balance Sheet Review, Capital Management and Credit Quality:

  • Total assets increased 9% to $5.427 billion at March 31, 2022, compared to $5.001 billion at March 31, 2021, and decreased (1)% from $5.499 billion at December 31, 2021.
  • Securities available-for-sale, at fair value, totaled $111.2 million at March 31, 2022, compared to $196.7 million at March 31, 2021, and $102.3 million at December 31, 2021. At March 31, 2022, the Company’s securities available-for-sale portfolio was comprised of $89.6 million of agency mortgage-backed securities (all issued by U.S. Government sponsored entities) and $21.6 million of U.S. Treasury securities. The pre-tax unrealized loss on securities available-for-sale at March 31, 2022 was ($1.5) million, compared to a pre-tax unrealized gain on securities available-for-sale of $4.9 million at March 31, 2021, and a pre-tax unrealized gain on securities available-for-sale of $2.9 million at December 31, 2021. All other factors remaining the same, when market interest rates are increasing, the Company will experience a higher unrealized loss (or a lower unrealized gain) on the securities portfolio. During the first quarter of 2022, the Company purchased $21.6 million of U.S. Treasury securities (available-for-sale), with a book yield of 2.22% and an average life of 2.51 years.
  • At March 31, 2022, securities held-to-maturity, at amortized cost, totaled $736.8 million, compared to $306.5 million at March 31, 2021, and $658.4 million at December 31, 2021. At March 31, 2022, the Company’s securities held-to-maturity portfolio was comprised of $696.1 million of agency mortgage-backed securities, and $40.7 million of tax-exempt municipal bonds. During the first quarter of 2022, the Company purchased $109.6 million of agency mortgage-backed securities (held-to-maturity), with a book yield of 2.12% and an average life of 6.52 years.
  • 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   March 31, 2022     December 31, 2021     March 31, 2021  
(in $000’s, unaudited)   Balance   % to Total     Balance   % to Total     Balance   % to Total  
Commercial   $ 568,053     19 %   $ 594,108     19 %   $ 559,698     20 %
PPP Loans     37,393     1 %     88,726     3 %     349,744     13 %
Real estate:                                    
CRE – owner occupied     597,542     20 %     595,934     19 %     568,637     21 %
CRE – non-owner occupied     928,220     31 %     902,326     29 %     700,117     26 %
Land and construction     153,323     5 %     147,855     5 %     159,504     6 %
Home equity     111,609     3 %     109,579     4 %     104,303     4 %
Multifamily     221,767     7 %     218,856     7 %     168,917     6 %
Residential mortgages     391,171     13 %     416,660     13 %     82,181     3 %
Consumer and other     17,110     1 %     16,744     1 %     19,872     1 %
Total Loans     3,026,188     100 %     3,090,788     100 %     2,712,973     100 %
Deferred loan costs (fees), net     (2,124 )         (3,462 )         (8,266 )    
Loans, net of deferred costs and fees   $ 3,024,064     100 %   $ 3,087,326     100 %   $ 2,704,707     100 %
  Loans, excluding loans held-for-sale, increased $319.4 million, or 12%, to $3.024 billion at March 31, 2022, compared to $2.705 billion at March 31, 2021, and decreased ($63.3) million, or (2%), from $3.087 billion at December 31, 2021. The decrease in loans at March 31, 2022 from December 31, 2021, was primarily due to forgiveness of PPP loans and paydowns in the residential loan portfolio. Total loans at March 31, 2022 included $37.4 million of PPP loans, compared to $349.7 million at March 31, 2021 and $88.7 million at December 31, 2021. Total loans at March 31, 2022 included $391.2 million of residential mortgages, compared to $82.2 million at March 31, 2021, and $416.7 million at December 31, 2021.

  • Commercial and industrial (“C&I”) line utilization was 31% at both March 31, 2022 and December 31, 2021, compared to 28% at March 31, 2021.
  • At March 31, 2022, 39% of the CRE loan portfolio was secured by owner-occupied real estate, compared to 45% at March 31, 2021, and 40% at December 31, 2021.
  • At both March 31, 2022 and December 31, 2021, approximately 38% of the Company’s loan portfolio consisted of floating interest rate loans, compared to 40% at March 31, 2021.
  • 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 March 31, 2022, after accounting for loan payoffs and SBA loan forgiveness, “Round 1” PPP loans were $1.2 million and “Round 2” PPP loans were $36.2 million. In total, the Bank had $37.4 million in outstanding PPP loan balances at March 31, 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:
PPP LOANS   March 31,    December 31,    March 31, 
(in $000’s, unaudited)   2022     2021     2021  
Interest income   $ 146     $ 318     $ 784  
Fee income, net     1,346       2,211       3,401  
Total   $ 1,492     $ 2,529     $ 4,185  
                   
PPP loans outstanding at period end:                  
Round 1   $ 1,186     $ 1,717     $ 170,391  
Round 2     36,207       87,009       179,353  
Total   $ 37,393     $ 88,726     $ 349,744  
                   
Deferred fees outstanding at period end   $ (876 )   $ (2,342 )   $ (8,757 )
Deferred costs outstanding at period end     69       189       1,099  
Total   $ (807 )   $ (2,153 )   $ (7,658 )
  • The following table summarizes the allowance for credit losses on loans (“ACLL”) for the periods indicated:
                     
    At or For the Quarter Ended:  
ALLOWANCE FOR CREDIT LOSSES ON LOANS   March 31,    December 31,    March 31,   
(in $000’s, unaudited)   2022     2021     2021    
Balance at beginning of period   $ 43,290     $ 43,680     $ 44,400    
Charge-offs during the period     (16 )     (87 )     (263 )  
Recoveries during the period     81       312       1,671    
Net recoveries (charge-offs) during the period     65       225       1,408    
Provision for (recapture of) credit losses on loans during the period     (567 )     (615 )     (1,512 )  
Balance at end of period   $ 42,788     $ 43,290     $ 44,296    
                     
Total loans, net of deferred fees   $ 3,024,064     $ 3,087,326     $ 2,704,707    
Total nonperforming loans   $ 3,830     $ 3,738     $ 5,593    
ACLL to total loans     1.41     1.40     1.64  
ACLL to total nonperforming loans     1,117.18     1,158.11     791.99  
  The ACLL was 1.41% of total loans at March 31, 2022 while the ACLL to total nonperforming loans was 1,117.18%. The ACLL was 1.64% of total loans and the ACLL to nonperforming loans was 791.99% at March 31, 2021. The ACLL was 1.40% of total loans and the ACLL to total nonperforming loans was 1,158.11% at December 31, 2021. The ACLL to total loans, excluding PPP loans, was 1.43% at March 31, 2022, 1.87% at March 31, 2021 and 1.44% at December 31, 2021.
  The following table shows the drivers of change in ACLL under the current expected credit losses (“CECL”) methodology for the first quarter of 2022:
       
DRIVERS OF CHANGE IN ACLL UNDER CECL    
(in $000’s, unaudited)    
ACLL at December 31, 2021   $ 43,290  
Net recoveries during the first quarter of 2022     65  
Portfolio changes during the first quarter of 2022     (98 )
Qualitative and quantitative changes during the first      
quarter of 2022 including changes in economic forecasts     (469 )
ACLL at March 31, 2022   $ 42,788  
  Net recoveries totaled $65,000 for the first quarter of 2022, compared to net recoveries of $1.4 million for the first quarter of 2021, and net recoveries of $225,000 for the fourth quarter of 2021.
  The following is a breakout of nonperforming assets (“NPAs”) at the periods indicated:
                                     
NONPERFORMING ASSETS   March 31, 2022     December 31, 2021     March 31, 2021  
(in $000’s, unaudited)      Balance      % of Total        Balance      % of Total        Balance      % of Total  
CRE loans   $ 2,233   58 %   $ 2,254   60 %   $ 2,973   53 %
Commercial loans     997   26 %     1,122   30 %     1,985   36 %
Restructured and loans over 90 days past due and still accruing     527   14 %     278   8 %     51   1 %
Home equity loans     73   2 %     84   2 %     177   3 %
Consumer and other loans       %       %     407   7 %
Total nonperforming assets   $ 3,830   100 %   $ 3,738   100 %   $ 5,593   100 %
  NPAs totaled $3.8 million, or 0.07% of total assets, at March 31, 2022, compared to $5.6 million, or 0.11% of total assets, at March 31, 2021, $3.7 million, or 0.07% of total assets, at December 31, 2021.
  There were no foreclosed assets on the balance sheet at March 31, 2022, March 31, 2021, or December 31, 2021.
  Classified assets decreased to $30.6 million, or 0.56% of total assets, at March 31, 2022, compared to $33.4 million, or 0.67% of total assets, at March 31, 2021, and $33.7 million, or 0.61% of total assets, at December 31, 2021.
  • The following table summarizes the distribution of deposits and the percentage of distribution in each category for the periods indicated:
                                     
DEPOSITS   March 31, 2022     December 31, 2021     March 31, 2021  
(in $000’s, unaudited)   Balance   % to Total     Balance   % to Total     Balance   % to Total  
Demand, noninterest-bearing   $ 1,811,943   38 %   $ 1,903,768   40 %   $ 1,813,962   42 %
Demand, interest-bearing     1,268,942   27 %     1,308,114   27 %     1,101,807   26 %
Savings and money market     1,447,434   31 %     1,375,825   29 %     1,189,566   28 %
Time deposits — under $250     38,417   1 %     38,734   1 %     42,596   1 %
Time deposits — $250 and over     93,161   2 %     94,700   2 %     102,508   2 %
CDARS — interest-bearing demand,                                    
money market and time deposits     30,008   1 %     38,271   1 %     28,663   1 %
Total deposits   $ 4,689,905   100 %   $ 4,759,412   100 %   $ 4,279,102   100 %
                                     
  Total deposits increased $410.8 million, or 10%, to $4.690 billion at March 31, 2022, compared to $4.279 billion at March 31, 2021, and decreased ($69.5) million, or (1%), from $4.759 billion at December 31, 2021. The decrease in total deposits at March 31, 2022, compared to December 31, 2021, was primarily due to a decline in temporary deposits from two customers. The deposits from those two customers decreased ($73.8) million to $194.8 million at March 31, 2022, compared to $268.6 million at December 31, 2021. The Company expects further decreases in the deposits of those two customers in the second quarter of 2022.
  Deposits, excluding all time deposits and CDARS deposits, increased $423.0 million, or 10%, to $4.528 billion at March 31, 2022, compared to $4.105 billion at March 31, 2021, and decreased ($59.4) million, or (1%), compared to $4.588 billion at December 31, 2021.
  • 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 March 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   14.6%     13.9%     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   8.3%     8.7%     5.0%     4.0%  

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(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   March 31,    December 31,    March 31, 
(in $000’s, unaudited)   2022     2021     2021  
Unrealized (loss) gain on securities available-for-sale   $ (1,127 )   $ 1,991     $ 3,113  
Remaining unamortized unrealized gain on securities                  
available-for-sale transferred to held-to-maturity                 252  
Split dollar insurance contracts liability     (5,491 )     (5,480 )     (6,148 )
Supplemental executive retirement plan liability     (7,588 )     (7,669 )     (8,699 )
Unrealized gain on interest-only strip from SBA loans     152       162       214  
Total accumulated other comprehensive loss   $ (14,054 )   $ (10,996 )   $ (11,268 )
                   
  • Tangible equity was $420.4 million at March 31, 2022, compared to $398.1 million at March 31, 2021, and $416.7 million at December 31, 2021. Tangible book value per share was $6.96 at March 31, 2022, compared to $6.64 at March 31, 2021, and $6.91 at December 31, 2021.

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, 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 and increase the volatility of financial markets; (2) conditions related to the COVID-19 pandemic, and other infectious illness outbreaks that may arise in the future, on 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) inflation 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) changes in our capital management policies, including those regarding business combinations, dividends, and share repurchases; (16) 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; (17) 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; (18) possible adjustment of the valuation of our deferred tax assets; (19) 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; (20) inability of our framework to manage risks associated with our business, including operational risk and credit risk; (21) risks of loss of funding of SBA or SBA loan programs, or changes in those programs; (22) 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; (23) 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; (24) the expense and uncertain resolution of litigation matters whether occurring in the ordinary course of business or otherwise; (25) availability of and competition for acquisition opportunities; (26) risks resulting from domestic terrorism; (27) risks resulting from social unrest and protests: (28) risks of natural disasters (including earthquakes and flooding) and other events beyond our control; (29) our participation as a lender in the SBA PPP and similar programs and its effect on our liquidity, financial results, businesses and customers, including the ability of customers to comply with requirements and otherwise perform with respect to loans obtained under such programs; (30) 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
[email protected]

                             
    For the Quarter Ended:   Percent Change From:  
CONSOLIDATED INCOME STATEMENTS      March 31,       December 31,       March 31,       December 31,       March 31,   
(in $000’s, unaudited)   2022     2021     2021     2021     2021    
Interest income   $ 39,906     $ 39,956     $ 36,761     0   % 9   %
Interest expense     1,685       1,847       1,803     (9 ) % (7 ) %
Net interest income before provision                            
for credit losses on loans     38,221       38,109       34,958     0   % 9   %
Provision for (recapture of) credit losses on loans     (567 )     (615 )     (1,512 )   8   % 63   %
Net interest income after provision                            
for credit losses on loans     38,788       38,724       36,470     0   % 6   %
Noninterest income:                            
Gain on warrants     637                 N/A   N/A  
Service charges and fees on deposit accounts     612       644       601     (5 ) % 2   %
Increase in cash surrender value of                            
life insurance     480       454       456     6   % 5   %
Gain on sales of SBA loans     156       491       550     (68 ) % (72 ) %
Servicing income     106       138       182     (23 ) % (42 ) %
Termination fees           618       90     (100 ) % (100 ) %
Gain on proceeds from company owned life insurance           104       66     (100 ) % (100 ) %
Other     469       361       356     30   % 32   %
Total noninterest income     2,460       2,810       2,301     (12 ) % 7   %
Noninterest expense:                            
Salaries and employee benefits     13,821       12,871       13,958     7   % (1 ) %
Occupancy and equipment     2,437       2,366       2,274     3   % 7   %
Professional fees     1,080       1,200       1,719     (10 ) % (37 ) %
Other     5,914       5,790       5,293     2   % 12   %
Total noninterest expense     23,252       22,227       23,244     5   % 0   %
Income before income taxes     17,996       19,307       15,527     (7 ) % 16   %
Income tax expense     5,130       5,342       4,323     (4 ) % 19   %
Net income   $ 12,866     $ 13,965     $ 11,204     (8 ) % 15   %
                             
PER COMMON SHARE DATA                              
(unaudited)                               
Basic earnings per share   $ 0.21     $ 0.23     $ 0.19     (9 ) % 11   %
Diluted earnings per share   $ 0.21     $ 0.23     $ 0.19     (9 ) % 11   %
Weighted average shares outstanding – basic     60,393,883       60,298,424       59,641,309     0   % 1   %
Weighted average shares outstanding – diluted     60,921,835       60,844,221       60,404,213     0   % 1   %
Common shares outstanding at period-end     60,407,846       60,339,837       59,932,334     0   % 1   %
Dividend per share   $ 0.13     $ 0.13     $ 0.13     0   % 0   %
Book value per share   $ 9.95     $ 9.91     $ 9.71     0   % 2   %
Tangible book value per share   $ 6.96     $ 6.91     $ 6.64     1   % 5   %
                             
KEY FINANCIAL RATIOS                                 
(unaudited)                                 
Annualized return on average equity     8.71   %   9.35   %   7.85   % (7 ) % 11   %
Annualized return on average tangible equity     12.47   %   13.50   %   11.50   % (8 ) % 8   %
Annualized return on average assets     0.96   %   0.97   %   0.95   % (1 ) % 1   %
Annualized return on average tangible assets     0.99   %   1.00   %   0.99   % (1 ) % 0   %
Net interest margin (FTE)     3.05   %   2.84   %   3.22   % 7   % (5 ) %
Efficiency ratio     57.16   %   54.32   %   62.38   % 5   % (8 ) %
                             
AVERAGE BALANCES                                
(in $000’s, unaudited)                                 
Average assets   $ 5,443,240     $ 5,695,136     $ 4,773,878     (4 ) % 14   %
Average tangible assets   $ 5,262,175     $ 5,513,359     $ 4,589,861     (5 ) % 15   %
Average earning assets   $ 5,093,851     $ 5,336,129     $ 4,419,963     (5 ) % 15   %
Average loans held-for-sale   $ 1,478     $ 4,047     $ 3,458     (63 ) % (57 ) %
Average total loans   $ 3,027,111     $ 2,872,074     $ 2,616,876     5   % 16   %
Average deposits   $ 4,697,136     $ 4,945,204     $ 4,048,953     (5 ) % 16   %
Average demand deposits – noninterest-bearing   $ 1,857,164     $ 1,979,940     $ 1,712,903     (6 ) % 8   %
Average interest-bearing deposits   $ 2,839,972     $ 2,965,264     $ 2,336,050     (4 ) % 22   %
Average interest-bearing liabilities   $ 2,879,952     $ 3,005,212     $ 2,375,851     (4 ) % 21   %
Average equity   $ 599,355     $ 592,291     $ 579,157     1   % 3   %
Average tangible equity   $ 418,290     $ 410,514     $ 395,140     2   % 6   %
                                 
    For the Quarter Ended:  
CONSOLIDATED INCOME STATEMENTS      March 31,       December 31,       September 30,      June 30,      March 31,  
(in $000’s, unaudited)   2022     2021     2021     2021     2021    
Interest income   $ 39,906     $ 39,956     $ 39,907     $ 36,632     $ 36,761    
Interest expense     1,685       1,847       1,725       1,756       1,803    
Net interest income before provision                                
for credit losses on loans     38,221       38,109       38,182       34,876       34,958    
Provision for (recapture of) credit losses on loans     (567 )     (615 )     (514 )     (493 )     (1,512 )  
Net interest income after provision                                
for credit losses on loans     38,788       38,724       38,696       35,369       36,470    
Noninterest income:                                
Gain on warrants     637                            
Service charges and fees on deposit accounts     612       644       584       659       601    
Increase in cash surrender value of                                
life insurance     480       454       470       458       456    
Gain on sales of SBA loans     156       491       594       83       550    
Servicing income     106       138       129       104       182    
Termination fees           618       32       57       90    
Gain on proceeds from company owned life insurance           104       109       396       66    
Other     469       361       490       412       356    
Total noninterest income     2,460       2,810       2,408       2,169       2,301    
Noninterest expense:                                
Salaries and employee benefits     13,821       12,871       12,461       12,572       13,958    
Occupancy and equipment     2,437       2,366       2,151       2,247       2,274    
Professional fees     1,080       1,200       1,211       1,771       1,719    
Other     5,914       5,790       6,008       9,185       5,293    
Total noninterest expense     23,252       22,227       21,831       25,775       23,244    
Income before income taxes     17,996       19,307       19,273       11,763       15,527    
Income tax expense     5,130       5,342       5,555       2,950       4,323    
Net income   $ 12,866     $ 13,965     $ 13,718     $ 8,813     $ 11,204    
                                 
PER COMMON SHARE DATA                                
(unaudited)                                     
Basic earnings per share   $ 0.21     $ 0.23     $ 0.23     $ 0.15     $ 0.19    
Diluted earnings per share   $ 0.21     $ 0.23     $ 0.23     $ 0.15     $ 0.19    
Weighted average shares outstanding – basic     60,393,883       60,298,424       60,220,717       60,089,327       59,926,816    
Weighted average shares outstanding – diluted     60,921,835       60,844,221       60,760,189       60,730,141       60,404,213    
Common shares outstanding at period-end     60,407,846       60,339,837       60,266,316       60,202,766       59,932,334    
Dividend per share   $ 0.13     $ 0.13     $ 0.13     $ 0.13     $ 0.13    
Book value per share   $ 9.95     $ 9.91     $ 9.79     $ 9.69     $ 9.71    
Tangible book value per share   $ 6.96     $ 6.91     $ 6.77     $ 6.65     $ 6.64    
                                 
KEY FINANCIAL RATIOS                                
(unaudited)                                     
Annualized return on average equity     8.71   %   9.35   %   9.29   %   6.06   %   7.85   %
Annualized return on average tangible equity     12.47   %   13.50   %   13.49   %   8.84   %   11.50   %
Annualized return on average assets     0.96   %   0.97   %   1.06   %   0.70   %   0.95   %
Annualized return on average tangible assets     0.99   %   1.00   %   1.10   %   0.73   %   0.99   %
Net interest margin (FTE)     3.05   %   2.84   %   3.18   %   3.00   %   3.22   %
Efficiency ratio     57.16   %   54.32   %   53.78   %   69.58   %   62.38   %
                                 
AVERAGE BALANCES                                     
(in $000’s, unaudited)                                     
Average assets   $ 5,443,240     $ 5,695,136     $ 5,139,239     $ 5,047,097     $ 4,773,878    
Average tangible assets   $ 5,262,175     $ 5,513,359     $ 4,956,738     $ 4,863,814     $ 4,589,861    
Average earning assets   $ 5,093,851     $ 5,336,129     $ 4,778,574     $ 4,678,084     $ 4,419,963    
Average loans held-for-sale   $ 1,478     $ 4,047     $ 4,810     $ 4,053     $ 3,458    
Average total loans   $ 3,027,111     $ 2,872,074     $ 2,766,731     $ 2,790,368     $ 2,616,876    
Average deposits   $ 4,697,136     $ 4,945,204     $ 4,396,315     $ 4,307,555     $ 4,048,953    
Average demand deposits – noninterest-bearing   $ 1,857,164     $ 1,979,940     $ 1,835,219     $ 1,808,638     $ 1,712,903    
Average interest-bearing deposits   $ 2,839,972     $ 2,965,264     $ 2,561,096     $ 2,498,917     $ 2,336,050    
Average interest-bearing liabilities   $ 2,879,952     $ 3,005,212     $ 2,601,002     $ 2,538,747     $ 2,375,851    
Average equity   $ 599,355     $ 592,291     $ 586,012     $ 583,009     $ 579,157    
Average tangible equity   $ 418,290     $ 410,514     $ 403,511     $ 399,726     $ 395,140    
                             
    End of Period:   Percent Change From:  
CONSOLIDATED BALANCE SHEETS      March 31,       December 31,       March 31,       December 31,       March 31,   
(in $000’s, unaudited)   2022     2021     2021     2021     2021    
ASSETS                            
Cash and due from banks   $ 29,729     $ 15,703     $ 36,534     89   % (19 ) %
Other investments and interest-bearing deposits                            
in other financial institutions     1,187,436       1,290,513       1,406,520     (8 ) % (16 ) %
Securities available-for-sale, at fair value     111,217       102,252       196,718     9   % (43 ) %
Securities held-to-maturity, at amortized cost     736,823       658,397       306,535     12   % 140   %
Loans held-for-sale – SBA, including deferred costs     831       2,367       2,834     (65 ) % (71 ) %
Loans:                            
Commercial     568,053       594,108       559,698     (4 ) % 1   %
PPP loans     37,393       88,726       349,744     (58 ) % (89 ) %
Real estate:                            
CRE – owner occupied     597,542       595,934       568,637     0   % 5   %
CRE – non-owner occupied     928,220       902,326       700,117     3   % 33   %
Land and construction     153,323       147,855       159,504     4   % (4 ) %
Home equity     111,609       109,579       104,303     2   % 7   %
Multifamily     221,767       218,856       168,917     1   % 31   %
Residential mortgages     391,171       416,660       82,181     (6 ) % 376   %
Consumer and other     17,110       16,744       19,872     2   % (14 ) %
Loans     3,026,188       3,090,788       2,712,973     (2 ) % 12   %
Deferred loan fees, net     (2,124 )     (3,462 )     (8,266 )   (39 ) % (74 ) %
Total loans, net of deferred costs and fees     3,024,064       3,087,326       2,704,707     (2 ) % 12   %
Allowance for credit losses on loans     (42,788 )     (43,290 )     (44,296 )   (1 ) % (3 ) %
Loans, net     2,981,276       3,044,036       2,660,411     (2 ) % 12   %
Company-owned life insurance     78,069       77,589       77,421     1   % 1   %
Premises and equipment, net     9,580       9,639       10,220     (1 ) % (6 ) %
Goodwill     167,631       167,631       167,631     0   % 0   %
Other intangible assets     13,009       13,668       15,931     (5 ) % (18 ) %
Accrued interest receivable and other assets     111,797       117,614       120,635     (5 ) % (7 ) %
Total assets   $ 5,427,398     $ 5,499,409     $ 5,001,390     (1 ) % 9   %
                             
LIABILITIES AND SHAREHOLDERS’ EQUITY                            
Liabilities:                            
Deposits:                            
Demand, noninterest-bearing   $ 1,811,943     $ 1,903,768     $ 1,813,962     (5 ) % 0   %
Demand, interest-bearing     1,268,942       1,308,114       1,101,807     (3 ) % 15   %
Savings and money market     1,447,434       1,375,825       1,189,566     5   % 22   %
Time deposits-under $250     38,417       38,734       42,596     (1 ) % (10 ) %
Time deposits-$250 and over     93,161       94,700       102,508     (2 ) % (9 ) %
CDARS – money market and time deposits     30,008       38,271       28,663     (22 ) % 5   %
Total deposits     4,689,905       4,759,412       4,279,102     (1 ) % 10   %
Subordinated debt, net of issuance costs     39,987       39,925       39,786     0   % 1   %
Accrued interest payable and other liabilities     96,450       102,044       100,839     (5 ) % (4 ) %
Total liabilities     4,826,342       4,901,381       4,419,727     (2 ) % 9   %
                             
Shareholders’ Equity:                            
Common stock     498,763       497,695       494,617     0   % 1   %
Retained earnings     116,347       111,329       98,314     5   % 18   %
Accumulated other comprehensive loss     (14,054 )     (10,996 )     (11,268 )   (28 ) % (25 ) %
Total shareholders’ equity     601,056       598,028       581,663     1   % 3   %
Total liabilities and shareholders’ equity   $ 5,427,398     $ 5,499,409     $ 5,001,390     (1 ) % 9   %
                             
                               
    End of Period:
CONSOLIDATED BALANCE SHEETS      March 31,       December 31,       September 30,      June 30,      March 31,
(in $000’s, unaudited)   2022     2021     2021     2021     2021    
ASSETS                              
Cash and due from banks   $ 29,729     $ 15,703     $ 33,013     $ 41,904     $ 36,534    
Other investments and interest-bearing deposits                              
in other financial institutions     1,187,436       1,290,513       1,588,334       1,286,418       1,406,520    
Securities available-for-sale, at fair value     111,217       102,252       121,000       145,955       196,718    
Securities held-to-maturity, at amortized cost     736,823       658,397       537,285       421,286       306,535    
Loans held-for-sale – SBA, including deferred costs     831       2,367       3,678       4,344       2,834    
Loans:                              
Commercial     568,053       594,108       578,944       557,686       559,698    
PPP loans     37,393       88,726       164,506       286,461       349,744    
Real estate:                              
CRE – owner occupied     597,542       595,934       580,624       583,091       568,637    
CRE – non-owner occupied     928,220       902,326       829,022       742,135       700,117    
Land and construction     153,323       147,855       141,277       129,426       159,504    
Home equity     111,609       109,579       106,690       107,873       104,303    
Multifamily     221,767       218,856       205,952       198,771       168,917    
Residential mortgages     391,171       416,660       211,467       205,904       82,181    
Consumer and other     17,110       16,744       20,106       21,519       19,872    
Loans     3,026,188       3,090,788       2,838,588       2,832,866       2,712,973    
Deferred loan fees, net     (2,124 )     (3,462 )     (5,729 )     (8,070 )     (8,266 )  
Total loans, net of deferred fees     3,024,064       3,087,326       2,832,859       2,824,796       2,704,707    
Allowance for credit losses on loans     (42,788 )     (43,290 )     (43,680 )     (43,956 )     (44,296 )  
Loans, net     2,981,276       3,044,036       2,789,179       2,780,840       2,660,411    
Company-owned life insurance     78,069       77,589       77,509       77,393       77,421    
Premises and equipment, net     9,580       9,639       9,821       10,040       10,220    
Goodwill     167,631       167,631       167,631       167,631       167,631    
Other intangible assets     13,009       13,668       14,423       15,177       15,931    
Accrued interest receivable and other assets     111,797       117,614       121,129       121,887       120,635    
Total assets   $ 5,427,398     $ 5,499,409     $ 5,463,002     $ 5,072,875     $ 5,001,390    
                               
LIABILITIES AND SHAREHOLDERS’ EQUITY                              
Liabilities:                              
Deposits:                              
Demand, noninterest-bearing   $ 1,811,943     $ 1,903,768     $ 1,804,965     $ 1,840,516     $ 1,813,962    
Demand, interest-bearing     1,268,942       1,308,114       1,141,944       1,140,867       1,101,807    
Savings and money market     1,447,434       1,375,825       1,600,754       1,174,587       1,189,566    
Time deposits-under $250     38,417       38,734       39,628       42,118       42,596    
Time deposits-$250 and over     93,161       94,700       103,046       110,111       102,508    
CDARS – money market and time deposits     30,008       38,271       36,044       36,273       28,663    
Total deposits     4,689,905       4,759,412       4,726,381       4,344,472       4,279,102    
Subordinated debt, net of issuance costs     39,987       39,925       39,878       39,832       39,786    
Accrued interest payable and other liabilities     96,450       102,044       106,625       105,127       100,839    
Total liabilities     4,826,342       4,901,381       4,872,884       4,489,431       4,419,727    
                               
Shareholders’ Equity:                              
Common stock     498,763       497,695       496,622       495,665       494,617    
Retained earnings     116,347       111,329       105,202       99,311       98,314    
Accumulated other comprehensive loss     (14,054 )     (10,996 )     (11,706 )     (11,532 )     (11,268 )  
Total shareholders’ equity     601,056       598,028       590,118       583,444       581,663    
Total liabilities and shareholders’ equity   $ 5,427,398     $ 5,499,409     $ 5,463,002     $ 5,072,875     $ 5,001,390    
                               
                             
    At or For the Quarter Ended:   Percent Change From:  
CREDIT QUALITY DATA      March 31,       December 31,       March 31,       December 31,       March 31,   
(in $000’s, unaudited)   2022     2021     2021     2021     2021    
Nonaccrual loans – held-for-investment   $ 3,303     $ 3,460     $ 5,542     (5 ) % (40 ) %
Restructured and loans over 90 days past due                            
and still accruing     527       278       51     90   % 933   %
Total nonperforming loans     3,830       3,738       5,593     2   % (32 ) %
Foreclosed assets                     N/A   N/A  
Total nonperforming assets   $ 3,830     $ 3,738     $ 5,593     2   % (32 ) %
Other restructured loans still accruing   $ 125     $ 125     $ 152     0   % (18 ) %
Net charge-offs (recoveries) during the quarter   $ (65 )   $ (225 )   $ (1,408 )   71   % 95   %
Provision for (recapture of) credit losses on loans during the quarter   $ (567 )   $ (615 )   $ (1,512 )   8   % 63   %
Allowance for credit losses on loans   $ 42,788     $ 43,290     $ 44,296     (1 ) % (3 ) %
Classified assets   $ 30,579     $ 33,719     $ 33,421     (9 ) % (9 ) %
Allowance for credit losses on loans to total loans     1.41   %   1.40   %   1.64   % 1   % (14 ) %
Allowance for credit losses on loans to total nonperforming loans     1,117.18   %   1,158.11   %   791.99   % (4 ) % 41   %
Nonperforming assets to total assets     0.07   %   0.07   %   0.11   % 0   % (36 ) %
Nonperforming loans to total loans     0.13   %   0.12   %   0.21   % 8   % (38 ) %
Classified assets to Heritage Commerce Corp                            
Tier 1 capital plus allowance for credit losses on loans     6   %   7   %   7   % (14 ) % (14 ) %
Classified assets to Heritage Bank of Commerce                            
Tier 1 capital plus allowance for credit losses on loans     6   %   7   %   7   % (14 ) % (14 ) %
                             
OTHER PERIOD-END STATISTICS                                 
(in $000’s, unaudited)                                 
Heritage Commerce Corp:                            
Tangible common equity (1)   $ 420,416     $ 416,729     $ 398,101     1   % 6   %
Shareholders’ equity / total assets     11.07   %   10.87   %   11.63   % 2   % (5 ) %
Tangible common equity / tangible assets (2)     8.01   %   7.84   %   8.26   % 2   % (3 ) %
Loan to deposit ratio     64.48   %   64.87   %   63.21   % (1 ) % 2   %
Noninterest-bearing deposits / total deposits     38.63   %   40.00   %   42.39   % (3 ) % (9 ) %
Total capital ratio     14.6   %   14.4   %   16.5   % 1   % (12 ) %
Tier 1 capital ratio     12.4   %   12.3   %   14.0   % 1   % (11 ) %
Common Equity Tier 1 capital ratio     12.4   %   12.3   %   14.0   % 1   % (11 ) %
Tier 1 leverage ratio     8.3   %   7.9   %   9.1   % 5   % (9 ) %
Heritage Bank of Commerce:                            
Total capital ratio     13.9   %   13.8   %   15.8   % 1   % (12 ) %
Tier 1 capital ratio     12.9   %   12.8   %   14.7   % 1   % (12 ) %
Common Equity Tier 1 capital ratio     12.9   %   12.8   %   14.7   % 1   % (12 ) %
Tier 1 leverage ratio     8.7   %   8.2   %   9.5   % 6   % (8 ) %
                             

___________________

(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      March 31,       December 31,       September 30,      June 30,      March 31,   
(in $000’s, unaudited)   2022     2021     2021     2021     2021    
Nonaccrual loans – held-for-investment   $ 3,303     $ 3,460     $ 4,091     $ 5,291     $ 5,542    
Restructured and loans over 90 days past due                                
and still accruing     527       278       642       889       51    
Total nonperforming loans     3,830       3,738       4,733       6,180       5,593    
Foreclosed assets                                
Total nonperforming assets   $ 3,830     $ 3,738     $ 4,733     $ 6,180     $ 5,593    
Other restructured loans still accruing   $ 125     $ 125     $ 90     $ 93     $ 152    
Net charge-offs (recoveries) during the quarter   $ (65 )   $ (225 )   $ (238 )   $ (153 )   $ (1,408 )  
Provision for (recapture of) credit losses on loans during the quarter   $ (567 )   $ (615 )   $ (514 )   $ (493 )   $ (1,512 )  
Allowance for credit losses on loans   $ 42,788     $ 43,290     $ 43,680     $ 43,956     $ 44,296    
Classified assets   $ 30,579     $ 33,719     $ 31,937     $ 32,402     $ 33,421    
Allowance for credit losses on loans to total loans     1.41   %   1.40   %   1.54   %   1.56   %   1.64   %
Allowance for credit losses on loans to total nonperforming loans     1,117.18   %   1,158.11   %   922.88   %   711.26   %   791.99   %
Nonperforming assets to total assets     0.07   %   0.07   %   0.09   %   0.12   %   0.11   %
Nonperforming loans to total loans     0.13   %   0.12   %   0.17   %   0.22   %   0.21   %
Classified assets to Heritage Commerce Corp                                
Tier 1 capital plus allowance for credit losses on loans     6   %   7   %   7   %   7   %   7   %
Classified assets to Heritage Bank of Commerce                                
Tier 1 capital plus allowance for credit losses on loans     6   %   7   %   7   %   7   %   7   %
                                 
OTHER PERIOD-END STATISTICS                                     
(in $000’s, unaudited)                                     
Heritage Commerce Corp:                                
Tangible common equity (1)   $ 420,416     $ 416,729     $ 408,064     $ 400,636     $ 398,101    
Shareholders’ equity / total assets     11.07   %   10.87   %   10.80   %   11.50   %   11.63   %
Tangible common equity / tangible assets (2)     8.01   %   7.84   %   7.73   %   8.19   %   8.26   %
Loan to deposit ratio     64.48   %   64.87   %   59.94   %   65.02   %   63.21   %
Noninterest-bearing deposits / total deposits     38.63   %   40.00   %   38.19   %   42.36   %   42.39   %
Total capital ratio     14.6   %   14.4   %   15.1   %   15.6   %   16.5   %
Tier 1 capital ratio     12.4   %   12.3   %   12.9   %   13.3   %   14.0   %
Common Equity Tier 1 capital ratio     12.4   %   12.3   %   12.9   %   13.3   %   14.0   %
Tier 1 leverage ratio     8.3   %   7.9   %   8.6   %   8.6   %   9.1   %
Heritage Bank of Commerce:                                
Total capital ratio     13.9   %   13.8   %   14.5   %   15.0   %   15.8   %
Tier 1 capital ratio     12.9   %   12.8   %   13.5   %   13.9   %   14.7   %
Common Equity Tier 1 capital ratio     12.9   %   12.8   %   13.5   %   13.9   %   14.7   %
Tier 1 leverage ratio     8.7   %   8.2   %   9.0   %   9.0   %   9.5   %

___________________

(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  
    March 31, 2022   March 31, 2021  
                Interest      Average               Interest      Average  
NET INTEREST INCOME AND NET INTEREST MARGIN   Average   Income/   Yield/   Average   Income/   Yield/  
(in $000’s, unaudited)   Balance   Expense   Rate   Balance   Expense   Rate  
Assets:                                  
Loans, gross (1)(2)   $ 3,028,589     35,101     4.70 % $ 2,620,334   $ 33,836     5.24 %
Securities – taxable     781,689     3,444     1.79 %   436,858     1,728     1.60 %
Securities – exempt from Federal tax (3)     44,871     376     3.40 %   66,513     542     3.30 %
Other investments and interest-bearing deposits                                  
in other financial institutions     1,238,702     1,064     0.35 %   1,296,258     768     0.24 %
Total interest earning assets (3)     5,093,851     39,985     3.18 %   4,419,963     36,874     3.38 %
Cash and due from banks     37,630               40,823            
Premises and equipment, net     9,605               10,369            
Goodwill and other intangible assets     181,065               184,017            
Other assets     121,089               118,706            
Total assets   $ 5,443,240             $ 4,773,878            
                                   
Liabilities and shareholders’ equity:                                  
Deposits:                                  
Demand, noninterest-bearing   $ 1,857,164             $ 1,712,903            
                                   
Demand, interest-bearing     1,279,989     459     0.15 %   1,026,210     479     0.19 %
Savings and money market     1,394,734     543     0.16 %   1,137,837     572     0.20 %
Time deposits – under $100     13,235     5     0.15 %   15,900     9     0.23 %
Time deposits – $100 and over     119,082     106     0.36 %   130,843     171     0.53 %
CDARS – money market and time deposits     32,932     1     0.01 %   25,260     1     0.02 %
Total interest-bearing deposits     2,839,972     1,114     0.16 %   2,336,050     1,232     0.21 %
Total deposits     4,697,136     1,114     0.10 %   4,048,953     1,232     0.12 %
                                   
Subordinated debt, net of issuance costs     39,951     571     5.80 %   39,757     571     5.82 %
Short-term borrowings     29         0.00 %   44         0.00 %
Total interest-bearing liabilities     2,879,952     1,685     0.24 %   2,375,851     1,803     0.31 %
Total interest-bearing liabilities and demand,                                  
noninterest-bearing / cost of funds     4,737,116     1,685     0.14 %   4,088,754     1,803     0.18 %
Other liabilities     106,769               105,967            
Total liabilities     4,843,885               4,194,721            
Shareholders’ equity     599,355               579,157            
Total liabilities and shareholders’ equity   $ 5,443,240             $ 4,773,878            
                                   
Net interest income (3) / margin           38,300     3.05 %         35,071     3.22 %
Less tax equivalent adjustment (3)           (79 )               (113 )      
Net interest income         $ 38,221               $ 34,958        

___________________

(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 $1,788,000 for the first quarter of 2022 (of which $1,346,000 was from PPP loans), compared to $3,689,000 for the first quarter of 2021 (of which $3,401,000 was from PPP loans). Prepayment fees totaled $510,000 for the first quarter of 2022, compared to $517,000 for the first 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  
    March 31, 2022   December 31, 2021  
                Interest      Average               Interest      Average  
NET INTEREST INCOME AND NET INTEREST MARGIN   Average   Income/   Yield/   Average   Income/   Yield/  
(in $000’s, unaudited)   Balance   Expense   Rate   Balance   Expense   Rate  
Assets:                                  
Loans, gross (1)(2)   $ 3,028,589   $ 35,101     4.70 % $ 2,876,121   $ 35,762     4.93 %
Securities – taxable     781,689     3,444     1.79 %   660,663     2,686     1.61 %
Securities – exempt from Federal tax (3)     44,871     376     3.40 %   54,965     457     3.30 %
Other investments and interest-bearing deposits                                  
in other financial institutions     1,238,702     1,064     0.35 %   1,744,380     1,147     0.26 %
Total interest earning assets (3)     5,093,851     39,985     3.18 %   5,336,129     40,052     2.98 %
Cash and due from banks     37,630               38,178            
Premises and equipment, net