SAN JOSE, Calif., Oct. 27, 2022 (GLOBE NEWSWIRE) -- Heritage Commerce Corp (NASDAQ:HTBK), the holding company (the "Company") for Heritage Bank of Commerce (the "Bank"), today announced third quarter 2022 net income of $18.1 million, or $0.30 per average diluted common share, compared to $13.7 million, or $0.23 per average diluted common share, for the third quarter of 2021, and $14.8 million, or $0.24 per average diluted common share, for the second quarter of 2022. For the nine months ended September 30, 2022, net income was $45.8 million, or $0.75 per average diluted common share, compared to $33.7 million, or $0.56 per average diluted common share, for the nine months ended September 30, 2021. All results are unaudited.

"Our outstanding operating results reflect the continued successful implementation of our growth plan. We delivered record third quarter and year-to-date 2022 earnings, fueled by higher net interest income and solid loan growth. Our net interest margin improved to 3.73% for the third quarter of 2022, compared to 3.38% from the preceding quarter, driven primarily by a shift in the mix of earning assets as the Company invested its excess liquidity into higher yielding loans and investment securities. Loans, excluding Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loans and residential mortgages, increased 10% from a year earlier, and 3% from the preceding quarter. Total deposits increased $69.6 million from the linked quarter with noninterest-bearing deposits increasing 4% from a year ago," said Clay Jones, President and Chief Executive Officer. "Net income increased 22% from the preceding quarter and 32% from the third quarter a year ago. The return on average tangible equity was 16.60%, the return on average tangible assets was 1.36% and our efficiency ratio improved to 47.02%, for the third quarter of 2022."

"Our credit quality remains healthy as a result of our credit management, while we continue to be vigilant to the potential impact an uncertain economic future could have on our portfolio. Nonperforming assets ("NPAs") declined $3.7 million at September 30, 2022 from September 30, 2021, and declined $1.7 million from June 30, 2022, with continued net recoveries throughout the first nine months of 2022," said Mr. Jones. "Reflecting our strong loan growth, we recorded a $1.0 million provision for credit losses on loans during the third quarter of 2022."

"Our noninterest income was also higher in the third quarter of 2022, compared to the preceding quarter, primarily due to the substantial increase in gain on sale of SBA loans and higher income on off-balance sheet deposits," said Mr. Jones. Third quarter 2022 noninterest expense was elevated compared to the third quarter a year ago and to the preceding quarter, due to non-cash expenses related to the retirement of the previous President and Chief Executive Officer of the Company from the vesting of shares of restricted common stock. This one-time contractual event added $784,000 to salaries and employee benefits for the third quarter of 2022, which increased 13% from the third quarter of 2021, and 5% from the second quarter of 2022.

"These solid results are a direct result of our dedicated employees and their commitment and effort in supporting our clients, communities and shareholders," said Mr. Jones. "Our strong liquidity continues to provide us with the opportunity for investment strategies that positively impact our net interest income."

Third Quarter Ended September 30, 2022

Operating Results, Balance Sheet Review, Capital Management, and Credit Quality

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

Operating Results:

Diluted earnings per share were $0.30 for the third quarter of 2022, compared to $0.23 for the third quarter of 2021, and $0.24 for the second quarter of 2022. Diluted earnings per share were $0.75 for the first nine months of 2022, compared to $0.56 for the first nine months of 2021.
The following table indicates the ratios for the return on average tangible assets and the return on average tangible equity for the periods indicated:

	For the Quarter Ended:									For the Nine Months Ended
	September 30,			June 30,			September 30,			September 30,			September 30,
(unaudited)	2022			2022			2021			2022			2021
Return on average tangible assets		1.36	%		1.15	%		1.10	%		1.17	%		0.94	%
Return on average tangible equity		16.60	%		14.06	%		13.49	%		14.41	%		11.29	%

Net interest income, before provision for credit losses on loans, increased 26% to $48.0 million for the third quarter of 2022, compared to $38.2 million for the third quarter of 2021. The fully tax equivalent ("FTE") net interest margin increased 55 basis points to 3.73% for the third quarter of 2022, from 3.18% for the third quarter of 2021, primarily due to a shift in the mix of earning assets into higher yielding loans and investment securities, and higher average yield on overnight funds, partially offset by lower interest and fees on PPP loans, a decrease in the accretion of the loan purchase discount into interest income from acquired loans, lower prepayment fees, and a higher cost of funds.
- Net interest income increased 15% to $48.0 million for the third quarter of 2022, compared to $41.9 million for the second quarter of 2022. The FTE net interest margin increased 35 basis points to 3.73% for the third quarter of 2022 from 3.38% for the second quarter of 2022, primarily due to a shift in the mix of earning assets as the Company invested its excess liquidity into higher yielding loans and investment securities, and higher average yields on overnight funds, partially offset by a decrease in the accretion of the loan purchase discount into interest income from acquired loans, lower prepayment fees, lower interest and fees on PPP loans, and a higher cost of funds.
- Net interest income increased 19% to $128.1 million for the first nine months of 2022, compared to $108.0 million for the first nine months of 2021. For the first nine months of 2022, the FTE net interest margin increased 26 basis points to 3.39%, compared to 3.13% for the first nine months of 2021, primarily due to higher average balances of loans and investment securities, higher average yields on investment securities and overnight funds, partially offset by lower interest and fees on PPP loans, a decrease in the accretion of the loan purchase discount into interest income from acquired loans, and lower prepayment fees.
The following table, as of September 30, 2022, sets forth the estimated changes in the Company's annual net interest income that would result from the designated instantaneous parallel shift in interest rates from the base rate:

	Increase/(Decrease) in
	Estimated Net
	Interest Income⁽¹⁾
	Amount			Percent
	(Dollars in thousands)
Change in Interest Rates (basis points)
+400	$	33,788			16.2		%
+300	$	25,318			12.1		%
+200	$	16,899			8.1		%
+100	$	8,479			4.1		%
0		—			—
−100	$	(16,828	)		(8.1	)	%
−200	$	(35,111	)		(16.8	)	%
−300	$	(53,144	)		(25.5	)	%

____________________

(1)

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

____________________

The following tables present the average balance of loans outstanding, interest income, and the average yield for the periods indicated:
- The average yield on the total loan portfolio increased to 4.90% for the third quarter of 2022, compared to 4.80% for the second quarter of 2022, primarily due to increases in the prime rate, partially offset by a decrease in the accretion of the loan purchase discount into interest income from acquired loans, lower prepayment fees, lower fees on PPP loans, and higher average balances of lower yielding purchased residential mortgage loans.

	For the Quarter Ended							For the Quarter Ended
	September 30, 2022							June 30, 2022
	Average			Interest		Average		Average			Interest		Average
(in $000's, unaudited)	Balance			Income		Yield		Balance			Income		Yield
Loans, core bank	$	2,574,842		$	30,490	4.70	%	$	2,530,836		$	27,402	4.34	%
Prepayment fees		—			96	0.01	%		—			549	0.09	%
PPP loans		4,593			11	0.95	%		21,479			53	0.99	%
PPP fees, net		—			190	16.41	%		—			493	9.21	%
Asset-based lending		53,514			1,032	7.65	%		49,667			874	7.06	%
Bay View Funding factored receivables		62,623			3,201	20.28	%		64,085			3,129	19.58	%
Purchased residential mortgages		445,256			3,414	3.04	%		381,988			2,711	2.85	%
Purchased commercial real estate ("CRE") loans		8,337			83	3.95	%		8,425			77	3.67	%
Loan fair value mark / accretion		(5,178	)		353	0.05	%		(6,303	)		1,250	0.20	%
Total loans (includes loans held-for-sale)	$	3,143,987		$	38,870	4.90	%	$	3,050,177		$	36,538	4.80	%

•

The average yield on the total loan portfolio decreased to 4.90% for the third quarter of 2022, compared to 5.18% for the third quarter of 2021, primarily due to lower interest and fees on PPP loans, a decrease in the accretion of the loan purchase discount into interest income from acquired loans, lower prepayment fees, and higher average balances of lower yielding purchased residential mortgages, partially offset by increases in the prime rate.

	For the Quarter Ended							For the Quarter Ended
	September 30, 2022							September 30, 2021
	Average			Interest		Average		Average			Interest		Average
(in $000's, unaudited)	Balance			Income		Yield		Balance			Income		Yield
Loans, core bank	$	2,574,842		$	30,490	4.70	%	$	2,317,985		$	25,476	4.36	%
Prepayment fees		—			96	0.01	%		—			1,282	0.22	%
PPP loans		4,593			11	0.95	%		218,098			548	1.00	%
PPP fees, net		—			190	16.41	%		—			2,508	4.56	%
Asset-based lending		53,514			1,032	7.65	%		43,457			586	5.35	%
Bay View Funding factored receivables		62,623			3,201	20.28	%		50,674			2,815	22.04	%
Purchased residential mortgages		445,256			3,414	3.04	%		141,073			1,019	2.87	%
Purchased CRE loans		8,337			83	3.95	%		9,177			91	3.93	%
Loan fair value mark / accretion		(5,178	)		353	0.05	%		(8,923	)		1,882	0.32	%
Total loans (includes loans held-for-sale)	$	3,143,987		$	38,870	4.90	%	$	2,771,541		$	36,207	5.18	%

•

The average yield on the total loan portfolio decreased to 4.81% for the nine months ended September 30, 2022, compared to 5.07% for the nine months ended September 30, 2021, primarily due to a decrease in interest and fees on PPP loans, a decrease in the accretion of the loan purchase discount into interest income from acquired loans, lower prepayment fees, and an increase in the average balance of lower yielding purchased residential mortgages.

	For the Nine Months Ended							For the Nine Months Ended
	September 30, 2022							September 30, 2021
	Average			Interest		Average		Average			Interest		Average
(in $000's, unaudited)	Balance			Income		Yield		Balance			Income		Yield
Loans, core bank	$	2,530,130		$	83,988	4.44	%	$	2,254,435		$	75,205	4.46	%
Prepayment fees		—			1,155	0.06	%		—			2,303	0.14	%
PPP loans		28,575			210	0.98	%		290,253			2,163	1.00	%
PPP fees, net		—			2,029	9.49	%		—			7,784	3.59	%
Asset-based lending		57,540			2,857	6.64	%		35,376			1,424	5.38	%
Bay View Funding factored receivables		61,508			9,123	19.83	%		49,263			8,237	22.36	%
Purchased residential mortgages		394,618			8,553	2.90	%		96,761			2,118	2.93	%
Purchased CRE loans		8,424			237	3.76	%		13,618			372	3.65	%
Loan fair value mark / accretion		(6,121	)		2,357	0.12	%		(10,387	)		3,876	0.23	%
Total loans (includes loans held-for-sale)	$	3,074,674		$	110,509	4.81	%	$	2,729,319		$	103,482	5.07	%

•

In aggregate, the remaining net purchase discount on total loans acquired from Focus Business Bank, Tri-Valley Bank, United American Bank, and Presidio Bank was $5.0 million at September 30, 2022.

The average cost of total deposits was 0.13% for the third quarter of 2022, compared to 0.10% for both the third quarter of 2021 and the second quarter of 2022. The average cost of total deposits was 0.11% for both the nine months ended September 30, 2022 and September 30, 2021.
During the third quarter of 2022, there was a provision for credit losses on loans of $1.0 million, compared to a $514,000 negative provision for credit losses on loans for the third quarter of 2021, and a negative provision for credit losses on loans of $181,000 for the second quarter of 2022. There was a provision for credit losses on loans of $258,000 for the nine months ended September 30, 2022, compared to a $2.5 million negative provision for credit losses on loans for the nine months ended September 30, 2021.
Total noninterest income increased 15% to $2.8 million for the third quarter of 2022, compared to $2.4 million for the third quarter of 2021, primarily due to higher income on off-balance sheet deposits, partially offset by a lower gain on sale of SBA loans during the third quarter of 2022, and a gain on proceeds from company-owned life insurance during the third quarter of 2021. Total noninterest income increased 33% from $2.1 million for the second quarter of 2022, primarily due to higher service charges and fees on deposit accounts, and a higher gain on sale of SBA loans during the third quarter of 2022.

•

For the nine months ended September 30, 2022, total noninterest income increased 7% to $7.3 million, compared to $6.9 million for the nine months ended September 30, 2021, primarily due to higher income on off-balance sheet deposits, and a $669,000 gain on warrants, partially offset by a lower gain on sale of SBA loans and a lower gain on proceeds from company-owned life insurance during the first nine months of 2022.

Total noninterest expense for the third quarter of 2022 increased to $23.9 million, compared to $21.8 million for the third quarter of 2021, and $23.2 million for the second quarter of 2022, primarily due to higher salaries and employee benefits, occupancy and equipment, and insurance expense during the third quarter of 2022. Salaries and employee benefits included $784,000 of restricted stock expense for vesting of restricted common stock held by the previous President and Chief Executive Officer of the Company who retired during the third quarter of 2022.
- Noninterest expense for the nine months ended September 30, 2022 decreased to $70.3 million, compared to $70.9 million for the nine months ended September 30, 2021, primarily due to a reserve for a legal settlement during the first nine months of 2021, partially offset by higher salaries and employee benefits, occupancy and equipment, and insurance expense during the first nine months of 2022.
- Full time equivalent employees were 327 at September 30, 2022, and 325 at September 30, 2021, and 332 at June 30, 2022.
The efficiency ratio was 47.02% for the third quarter of 2022, compared to 53.78% for the third quarter of 2021, and 52.73% for the second quarter of 2022. The efficiency ratio for the nine months ended September 30, 2022 was 51.92%, compared to 61.67% for the nine months ended September 30, 2021. The improvement in the efficiency ratio for the third quarter and first nine months of 2022 was primarily due to an increase in net interest income from the rising interest rate environment. The efficiency ratio for the nine months ended September 30, 2021 was negatively impacted by the $4.0 million reserve for a legal settlement. Excluding the $4.0 million reserve for a legal settlement, the efficiency ratio was 58.18% for the nine months ended September 30, 2021.
Income tax expense was $7.8 million for the third quarter of 2022, compared to $5.6 million for the third quarter of 2021, and $6.1 million for the second quarter of 2022. The effective tax rate for the third quarter of 2022 was 30.3%, compared to 28.8% for the third quarter of 2021, and 29.3% for the second quarter of 2021. The increase in the effective tax rate was due to an adjustment from significantly higher earnings for the third quarter of 2022, compared to the first and second quarters of 2022. Income tax expense for the nine months ended September 30, 2022 was $19.1 million, compared to $12.8 million for the nine months ended September 30, 2021. The effective tax rate for the nine months ended September 30, 2022 was 29.5%, compared to 27.5% for the nine months ended September 30, 2021.

Balance Sheet Review, Capital Management and Credit Quality:

Total assets decreased (1%) to $5.431 billion at September 30, 2022, compared to $5.463 billion at September 30, 2021, and increased 1% from $5.357 billion at June 30, 2022.
Securities available-for-sale, at fair value, totaled $478.5 million at September 30, 2022, compared to $121.0 million at September 30, 2021, and $332.1 million at June 30, 2022. At September 30, 2022, the Company's securities available-for-sale portfolio was comprised of $405.4 million of U.S. Treasury securities and $73.1 million of agency mortgage-backed securities (all issued by U.S. Government sponsored entities).
- The pre-tax unrealized loss on U.S. Treasury securities available-for-sale at September 30, 2022 was ($10.1) million, compared to a pre-tax unrealized gain of $11,000 at September 30, 2021, and a pre-tax unrealized loss of ($1.2) million at June 30, 2022. The pre-tax unrealized loss on mortgage-backed securities available-for-sale at September 30, 2022 was ($7.3) million, compared to a pre-tax unrealized gain of $4.0 million at September 30, 2021, and a pre-tax unrealized loss of ($2.9) million at June 30, 2022. The pre-tax unrealized loss on total securities available-for-sale at September 30, 2022 was ($17.4) million, compared to a pre-tax unrealized gain of $4.0 million at September 30, 2021, and a pre-tax unrealized loss of ($4.1) million at June 30, 2022. All other factors remaining the same, when market interest rates are increasing, the Company will experience a higher unrealized loss in the securities portfolio.
- During the third quarter of 2022, the Company purchased $163.0 million of U.S. Treasury securities available-for-sale, with a book yield of 3.50% and an average life of 1.83 years. During the first nine months of 2022, the Company purchased $414.0 million of U.S. Treasury securities available-for-sale, with a book yield of 3.04% and an average life of 2.28 years.
At September 30, 2022, securities held-to-maturity, at amortized cost, totaled $703.8 million, compared to $537.3 million at September 30, 2021, and $723.7 million at June 30, 2022. At September 30, 2022, the Company's securities held-to-maturity portfolio was comprised of $665.7 million of agency mortgage-backed securities, and $38.1 million of tax-exempt municipal bonds.
- The pre-tax unrealized loss on mortgage-backed securities held-to-maturity at September 30, 2022 was ($108.1) million, compared to a pre-tax unrealized gain of $1.1 million at September 30, 2021, and a pre-tax unrealized loss of ($72.5) million at June 30, 2022. The pre-tax unrealized loss on municipal bonds held-to-maturity at September 30, 2022 was ($2.1) million, compared to a pre-tax unrealized gain of $989,000 at September 30, 2021, and a pre-tax unrealized loss of ($436,000) at June 30, 2022. The pre-tax unrealized loss on total securities held-to-maturity at September 30, 2022 was ($110.2) million, compared to a pre-tax unrealized gain of $2.1 million at September 30, 2021, and a pre-tax unrealized loss of ($72.9) million at June 30, 2022.
- There were no purchases of securities held-to-maturity during the third quarter of 2022. During the first nine months of 2022, the Company purchased $119.4 million of agency mortgage-backed securities held-to-maturity, with a book yield of 2.21% and an average life of 6.55 years.
The average life of the total investment securities portfolio was 5.18 years at September 30, 2022.
The loan portfolio remains well-diversified as reflected in the following table which summarizes the distribution of loans, excluding loans held-for-sale, and the percentage of distribution in each category for the periods indicated:

LOANS	September 30, 2022					June 30, 2022					September 30, 2021
(in $000's, unaudited)	Balance			% to Total		Balance			% to Total		Balance			% to Total
Commercial	$	541,215		17	%	$	523,268		17	%	$	578,944		20	%
PPP Loans⁽¹⁾		1,614		0	%		8,153		0	%		164,506		6	%
Real estate:
CRE - owner occupied		612,241		19	%		597,521		19	%		580,624		20	%
CRE - non-owner occupied		1,023,405		32	%		993,621		32	%		829,022		29	%
Land and construction		167,439		5	%		155,389		5	%		141,277		5	%
Home equity		116,489		3	%		116,641		4	%		106,690		4	%
Multifamily		229,455		7	%		221,938		7	%		205,952		7	%
Residential mortgages		508,839		16	%		448,958		15	%		211,467		8	%
Consumer and other		16,620		1	%		18,354		1	%		20,106		1	%
Total Loans		3,217,317		100	%		3,083,843		100	%		2,838,588		100	%
Deferred loan costs (fees), net		(844	)	—			(1,391	)	—			(5,729	)	—
Loans, net of deferred costs and fees	$	3,216,473		100	%	$	3,082,452		100	%	$	2,832,859		100	%

____________________

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

____________________

Loans, excluding loans held-for-sale, increased $383.6 million, or 14%, to $3.216 billion at September 30, 2022, compared to $2.833 billion at September 30, 2021, and increased $134.0 million, or 4%, from $3.082 billion at June 30, 2022. Total loans at September 30, 2022 included $1.6 million of PPP loans, compared to $164.5 million at September 30, 2021 and $8.2 million at June 30, 2022. Total loans at September 30, 2022 included $508.8 million of residential mortgages, compared to $211.5 million at September 30, 2021, and $449.0 million at June 30, 2022. Loans, excluding loans held-for-sale, PPP loans and residential mortgages, increased $244.9 million, or 10%, to $2.706 billion at September 30, 2022, compared to $2.461 billion at September 30, 2021, and increased $80.5 million, or 3%, from $2.626 billion at June 30, 2022.
- Commercial and industrial ("C&I") line utilization was 29% at September 30, 2022, compared to 27% at September 30, 2021, and 28% at June 30, 2022.
- At September 30, 2022, 37% of the CRE loan portfolio was secured by owner-occupied real estate, compared to 41% at September 30, 2021, and 38% at June 30, 2022.
- At September 30, 2022, approximately 34% of the Company's loan portfolio consisted of floating interest rate loans, compared to 42% at September 30, 2021, and 36% at June 30, 2022.
In response to economic stimulus laws passed by Congress in 2020 and 2021, the Bank funded two rounds of PPP loans totaling $530.8 million. At September 30, 2022, there were no remaining "Round 1" PPP loans. After accounting for loan payoffs and SBA loan forgiveness, "Round 2" PPP loans totaled $1.6 million at September 30, 2022. The following table shows interest income, fee income and deferred origination costs generated by the PPP loans, outstanding PPP loan balances and related deferred fees and costs for the periods indicated:

	At or For the Quarter Ended:									At or For the Nine Months Ended:
PPP LOANS	September 30,			June 30,			September 30,			September 30,			September 30,
(in $000's, unaudited)	2022			2022			2021			2022			2021
Interest income	$	11		$	53		$	548		$	210		$	2,163
Fee income, net		190			493			2,508			2,029			7,784
Total	$	201		$	546		$	3,056		$	2,239		$	9,947

PPP loans outstanding at period end:
Round 1	$	—		$	43		$	5,795		$	—		$	5,795
Round 2		1,614			8,110			158,711			1,614			158,711
Total	$	1,614		$	8,153		$	164,506		$	1,614		$	164,506

Deferred fees outstanding at period end	$	(132	)	$	(337	)	$	(4,831	)	$	(132	)	$	(4,831	)
Deferred costs outstanding at period end		8			24			461			8			461
Total	$	(124	)	$	(313	)	$	(4,370	)	$	(124	)	$	(4,370	)

•

During the third quarter of 2022, the Company purchased single family residential mortgage loans totaling $73.5 million, tied to homes located in California, with average principal balances of approximately $1.0 million and a bond equivalent yield of approximately 5.24%, which uses the average life of the loan to recognize the discount into income. During the first nine months of 2022, the Company purchased single family residential mortgage loans totaling $148.0 million, tied to homes located in California, with average principal balances of approximately $915,000.

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

	At or For the Quarter Ended:												For the Nine Months Ended
ALLOWANCE FOR CREDIT LOSSES ON LOANS	September 30,				June 30,				September 30,				September 30,				September 30,
(in $000's, unaudited)	2022				2022				2021				2022				2021
Balance at beginning of period	$	45,490			$	42,788			$	43,956			$	43,290			$	44,400
Charge-offs during the period		(7	)			(355	)			(65	)			(378	)			(433	)
Recoveries during the period		432				3,238				303				3,751				2,232
Net recoveries (charge-offs) during the period		425				2,883				238				3,373				1,799
Provision for (recapture of) credit losses on loans during the period		1,006				(181	)			(514	)			258				(2,519	)
Balance at end of period	$	46,921			$	45,490			$	43,680			$	46,921			$	43,680

Total loans, net of deferred fees	$	3,216,473			$	3,082,452			$	2,832,859			$	3,216,473			$	2,832,859
Total nonperforming loans	$	1,036			$	2,715			$	4,733			$	1,036			$	4,733
ACLL to total loans		1.46		%		1.48		%		1.54		%		1.46		%		1.54		%
ACLL to total nonperforming loans		4,529.05		%		1,675.51		%		922.88		%		4,529.05		%		922.88		%

•

The ACLL was 1.46% of total loans at September 30, 2022 while the ACLL to total nonperforming loans was 4,529.05%. The ACLL was 1.54% of total loans and the ACLL to nonperforming loans was 922.88% at September 30, 2021. The ACLL was 1.48% of total loans and the ACLL to total nonperforming loans was 1,675.51% at June 30, 2022.

• The following table shows the drivers of change in ACLL under the current expected credit losses ("CECL") methodology for the first nine months of 2022:

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

•

Net recoveries totaled $425,000 for the third quarter of 2022, compared to net recoveries of $238,000 for the third quarter of 2021, and net recoveries of $2.9 million for the second quarter of 2022. Net recoveries totaled $3.4 million during the first nine months of 2022, compared to net recoveries of $1.8 million for the first nine months of 2021.

• The following is a breakout of NPAs at the periods indicated:

NONPERFORMING ASSETS	September 30, 2022				June 30, 2022				September 30, 2021
(in $000's, unaudited)	Balance		% of Total		Balance		% of Total		Balance		% of Total
Restructured and loans over 90 days past due and still accruing	$	545	53	%	$	981	36	%	$	642	13	%
Commercial loans		491	47	%		640	24	%		1,330	28	%
CRE loans		—	—	%		1,094	40	%		2,260	48	%
Home equity loans		—	—	%		—	—	%		94	2	%
Consumer and other loans		—	—	%		—	—	%		407	9	%
Total nonperforming assets	$	1,036	100	%	$	2,715	100	%	$	4,733	100	%

	•	NPAs totaled $1.0 million, or 0.02% of total assets, at September 30, 2022, compared to $4.7 million, or 0.09% of total assets, at September 30, 2021, $2.7 million, or 0.05% of total assets, at June 30, 2022.

	•	There were no foreclosed assets on the balance sheet at September 30, 2022, September 30, 2021, or June 30, 2022.

	•	Classified assets decreased to $28.6 million, or 0.53% of total assets, at September 30, 2022, compared to $31.9 million, or 0.58% of total assets, at September 30, 2021, and $28.9 million, or 0.54% of total assets, at June 30, 2022.

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

DEPOSITS	September 30, 2022				June 30, 2022				September 30, 2021
(in $000's, unaudited)	Balance		% to Total		Balance		% to Total		Balance		% to Total
Demand, noninterest-bearing	$	1,883,574	40	%	$	1,846,365	40	%	$	1,804,965	38	%
Demand, interest-bearing		1,154,403	24	%		1,218,538	26	%		1,141,944	24	%
Savings and money market		1,487,400	32	%		1,387,003	30	%		1,600,754	34	%
Time deposits — under $250		34,728	1	%		36,691	1	%		39,628	1	%
Time deposits — $250 and over		93,263	2	%		98,760	2	%		103,046	2	%
CDARS — interest-bearing demand, money market and time deposits		29,897	1	%		26,287	1	%		36,044	1	%
Total deposits	$	4,683,265	100	%	$	4,613,644	100	%	$	4,726,381	100	%

	•	Total deposits decreased ($43.1) million, or (1%), to $4.683 billion at September 30, 2022, compared to $4.726 billion at September 30, 2021, and increased $69.6 million, or 2%, from $4.614 billion at June 30, 2022.

	•	Deposits, excluding all time deposits and CDARS deposits, decreased ($22.3) million to $4.525 billion at September 30, 2022, compared to $4.548 billion at September 30, 2021, and increased $73.5 million, or 2%, compared to $4.452 billion at June 30, 2022.

The Company's consolidated capital ratios exceeded regulatory guidelines and the Bank's capital ratios exceeded regulatory guidelines under the Basel III prompt corrective action ("PCA") regulatory guidelines for a well-capitalized financial institution, and the Basel III minimum regulatory requirements at September 30, 2022, as reflected in the following table:

					Well-capitalized
					Financial
					Institution		Basel III
	Heritage		Heritage		Basel III PCA		Minimum
	Commerce		Bank of		Regulatory		Regulatory
CAPITAL RATIOS (unaudited)	Corp		Commerce		Guidelines		Requirement⁽¹⁾
Total Capital	14.5	%	14.0	%	10.0	%	10.5	%
Tier 1 Capital	12.4	%	12.9	%	8.0	%	8.5	%
Common Equity Tier 1 Capital	12.4	%	12.9	%	6.5	%	7.0	%
Tier 1 Leverage	8.7	%	9.0	%	5.0	%	4.0	%

____________________

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

____________________

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

ACCUMULATED OTHER COMPREHENSIVE LOSS	September 30,			June 30,			September 30,
(in $000's, unaudited)	2022			2022			2021
Unrealized (loss) gain on securities available-for-sale	$	(12,398	)	$	(3,036	)	$	2,435
Remaining unamortized unrealized gain on securities available-for-sale transferred to held-to-maturity		—			—			234
Split dollar insurance contracts liability		(5,511	)		(5,501	)		(6,143	)
Supplemental executive retirement plan liability		(7,428	)		(7,508	)		(8,411	)
Unrealized gain on interest-only strip from SBA loans		125			127			179
Total accumulated other comprehensive loss	$	(25,212	)	$	(15,918	)	$	(11,706	)

Tangible equity was $430.2 million at September 30, 2022, compared to $408.1 million at September 30, 2021, and $427.2 million at June 30, 2022. Tangible book value per share was $7.09 at September 30, 2022, compared to $6.77 at September 30, 2021, and $7.04 at June 30, 2022.

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

Forward-Looking Statement Disclaimer

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

Member FDIC

For additional information, contact:

Debbie Reuter

EVP, Corporate Secretary

Direct: (408) 494-4542

Debbie.Reuter@herbank.com

	For the Quarter Ended:											Percent Change From:						For the Nine Months Ended:
CONSOLIDATED INCOME STATEMENTS	September 30,			June 30,				September 30,				June 30,			September 30,			September 30,			September 30,				Percent
(in $000's, unaudited)	2022			2022				2021				2022			2021			2022			2021				Change
Interest income	$	50,174		$	43,556			$	39,907			15		%	26		%	$	133,636		$	113,300			18		%
Interest expense		2,133			1,677				1,725			27		%	24		%		5,495			5,284			4		%
Net interest income before provision for credit losses on loans		48,041			41,879				38,182			15		%	26		%		128,141			108,016			19		%
Provision for (recapture of) credit losses on loans		1,006			(181	)			(514	)		656		%	296		%		258			(2,519	)		110		%
Net interest income after provision for credit losses on loans		47,035			42,060				38,696			12		%	22		%		127,883			110,535			16		%
Noninterest income:
Service charges and fees on deposit accounts		1,360			867				584			57		%	133		%		2,839			1,844			54		%
Increase in cash surrender value of life insurance		484			480				470			1		%	3		%		1,444			1,384			4		%
Gain on sales of SBA loans		308			27				594			1041		%	(48	)	%		491			1,227			(60	)	%
Servicing income		125			139				129			(10	)	%	(3	)	%		370			415			(11	)	%
Gain on warrants		32			—				—			N/A			N/A				669			—			N/A
Termination fees		16			45				32			(64	)	%	(50	)	%		61			179			(66	)	%
Gain on proceeds from company-owned life insurance		—			27				109			(100	)	%	(100	)	%		27			571			(95	)	%
Other		456			513				490			(11	)	%	(7	)	%		1,438			1,258			14		%
Total noninterest income		2,781			2,098				2,408			33		%	15		%		7,339			6,878			7		%
Noninterest expense:
Salaries and employee benefits		14,119			13,476				12,461			5		%	13		%		41,416			38,991			6		%
Occupancy and equipment		2,415			2,277				2,151			6		%	12		%		7,129			6,672			7		%
Professional fees		1,230			1,291				1,211			(5	)	%	2		%		3,601			4,701			(23	)	%
Other		6,135			6,146				6,008			0		%	2		%		18,195			20,486			(11	)	%
Total noninterest expense		23,899			23,190				21,831			3		%	9		%		70,341			70,850			(1	)	%
Income before income taxes		25,917			20,968				19,273			24		%	34		%		64,881			46,563			39		%
Income tax expense		7,848			6,147				5,555			28		%	41		%		19,125			12,828			49		%
Net income	$	18,069		$	14,821			$	13,718			22		%	32		%	$	45,756		$	33,735			36		%

PER COMMON SHARE DATA
(unaudited)
Basic earnings per share	$	0.30		$	0.24			$	0.23			25		%	30		%	$	0.76		$	0.56			36		%
Diluted earnings per share	$	0.30		$	0.24			$	0.23			25		%	30		%	$	0.75		$	0.56			34		%
Weighted average shares outstanding - basic		60,686,992			60,542,170				60,220,717			0		%	1		%		60,541,015			60,078,953			1		%
Weighted average shares outstanding - diluted		61,123,801			60,969,154				60,760,189			0		%	1		%		61,004,840			60,635,304			1		%
Common shares outstanding at period-end		60,716,794			60,666,794				60,266,316			0		%	1		%		60,716,794			60,266,316			1		%
Dividend per share	$	0.13		$	0.13			$	0.13			0		%	0		%	$	0.39		$	0.39			0		%
Book value per share	$	10.04		$	10.01			$	9.79			0		%	3		%	$	10.04		$	9.79			3		%
Tangible book value per share	$	7.09		$	7.04			$	6.77			1		%	5		%	$	7.09		$	6.77			5		%

KEY FINANCIAL RATIOS
(unaudited)
Annualized return on average equity		11.72	%		9.86		%		9.29		%	19		%	26		%		10.12	%		7.74		%	31		%
Annualized return on average tangible equity		16.60	%		14.06		%		13.49		%	18		%	23		%		14.41	%		11.29		%	28		%
Annualized return on average assets		1.31	%		1.11		%		1.06		%	18		%	24		%		1.13	%		0.90		%	26		%
Annualized return on average tangible assets		1.36	%		1.15		%		1.10		%	18		%	24		%		1.17	%		0.94		%	24		%
Net interest margin (FTE)		3.73	%		3.38		%		3.18		%	10		%	17		%		3.39	%		3.13		%	8		%
Efficiency ratio		47.02	%		52.73		%		53.78		%	(11	)	%	(13	)	%		51.92	%		61.67		%	(16	)	%

AVERAGE BALANCES
(in $000's, unaudited)
Average assets	$	5,466,330		$	5,334,636			$	5,139,239			2		%	6		%	$	5,414,820		$	4,988,076			9		%
Average tangible assets	$	5,286,591		$	5,154,245			$	4,956,738			3		%	7		%	$	5,234,427		$	4,804,814			9		%
Average earning assets	$	5,117,373		$	4,985,611			$	4,778,574			3		%	7		%	$	5,065,698		$	4,626,853			9		%
Average loans held-for-sale	$	3,282		$	1,824			$	4,810			80		%	(32	)	%	$	2,201		$	4,112			(46	)	%
Average total loans	$	3,140,705		$	3,048,353			$	2,766,731			3		%	14		%	$	3,072,473		$	2,725,207			13		%
Average deposits	$	4,712,044		$	4,579,436			$	4,396,315			3		%	7		%	$	4,662,926		$	4,252,214			10		%
Average demand deposits - noninterest-bearing	$	1,910,748		$	1,836,350			$	1,835,219			4		%	4		%	$	1,868,283		$	1,786,035			5		%
Average interest-bearing deposits	$	2,801,296		$	2,743,086			$	2,561,096			2		%	9		%	$	2,794,643		$	2,466,179			13		%
Average interest-bearing liabilities	$	2,840,611		$	2,791,527			$	2,601,002			2		%	9		%	$	2,837,219		$	2,506,025			13		%
Average equity	$	611,707		$	603,182			$	586,012			1		%	4		%	$	604,794		$	582,751			4		%
Average tangible equity	$	431,968		$	422,791			$	403,511			2		%	7		%	$	424,401		$	399,489			6		%

	For the Quarter Ended:
CONSOLIDATED INCOME STATEMENTS	September 30,		June 30,			March 31,			December 31,			September 30,
(in $000's, unaudited)	2022		2022			2022			2021			2021
Interest income	$	50,174	$	43,556		$	39,906		$	39,956		$	39,907
Interest expense		2,133		1,677			1,685			1,847			1,725
Net interest income before provision for credit losses on loans		48,041		41,879			38,221			38,109			38,182
Provision for (recapture of) credit losses on loans		1,006		(181	)		(567	)		(615	)		(514	)
Net interest income after provision for credit losses on loans		47,035		42,060			38,788			38,724			38,696
Noninterest income:
Service charges and fees on deposit accounts		1,360		867			612			644			584
Increase in cash surrender value of life insurance		484		480			480			454			470
Gain on sales of SBA loans		308		27			156			491			594
Servicing income		125		139			106			138			129
Gain on warrants		32		—			637			—			—
Termination fees		16		45			—			618			32
Gain on proceeds from company-owned life insurance		—		27			—			104			109
Other		456		513			469			361			490
Total noninterest income		2,781		2,098			2,460

Heritage Commerce Corp Earns $18.1 Million for the Third Quarter of 2022, and $45.8 Million for the First Nine Months of 2022