Heritage Commerce Corp Earns a Record $14.0 Million for the Fourth Quarter of 2021, and a Record $47.7 Million for 2021

SAN JOSE, Calif., Jan. 27, 2022 (GLOBE NEWSWIRE) -- Heritage Commerce Corp (Nasdaq: HTBK), the holding company (the “Company”) for Heritage Bank of Commerce (the “Bank”), today announced fourth quarter 2021 net income of $14.0 million, or $0.23 per average diluted common share, compared to $11.6 million, or $0.19 per average diluted common share, for the fourth quarter of 2020, and $13.7 million, or $0.23 per average diluted common share, for the third quarter of 2021. For the year ended December 31, 2021, net income was $47.7 million, or $0.79 per average diluted common share, an increase of 35% as compared to $35.3 million, or $0.59 per average diluted common share, for the year ended December 31, 2020. Earnings for the year ended December 31, 2021 included a pre-tax $4.0 million reserve for litigation expense that was recorded during the second quarter of 2021. Earnings for the year end December 31, 2020, were impacted by the effect of a $13.2 million pre-tax provision for potential credit losses on loans, incorporating the forecasted effects on economic activity from the Coronavirus pandemic, and $2.6 million of pre-tax merger-related costs. All results are unaudited.

“The fourth quarter of 2021 results capped a stellar year for our Company which delivered record earnings for both the fourth quarter and for the full year of 2021. Net income for the fourth quarter of 2021 increased 20% over the fourth quarter a year ago, supported by 11% growth in net interest income, a return on average tangible equity of 13.50%, a return on average tangible assets of 1.00%, and an improving efficiency ratio of 54.32%. Earnings for the full year of 2021 increased 35% to a record $47.7 million,” said Walter Kaczmarek, President and Chief Executive Officer. “We ended the year with $5.5 billion in total assets. Our loan portfolio grew 18% from a year ago to $3.09 billion, reflecting growth in commercial loans, both owner occupied and non-owner occupied commercial real estate (“CRE”) loans, multifamily loans, and from the purchase of residential mortgage loans. Total deposits grew 22% to $4.76 billion year-over-year, with noninterest-bearing deposits representing 40% of total deposits at year end. Growth in total deposits has been consistently robust over the past several quarters, and we expect to leverage our excess liquidity in the coming quarters to increase interest income.”

“Credit metrics were also sound at year end. Nonperforming assets (“NPAs”) decreased 52% in the fourth quarter of 2021 from a year ago, and were down 21% from the preceding quarter. Despite taking a negative provision for credit losses on loans of $615,000 during the fourth quarter of 2021, the allowance for credit losses on loans (“ACLL”) to total loans remained solid at 1.40%, and the ACLL to total nonperforming loans was 1,158.11%, at December 31, 2021,” said Mr. Kaczmarek. “Although COVID-19 continues to pose a challenge to businesses and communities in our markets, our staff and this Bank remain prepared and dedicated to helping our clients navigate pandemic-related disruptions and continue to benefit from improving economic conditions in 2022.”

Fourth Quarter Ended December 31, 2021
Operating Results, Balance Sheet Review, Capital Management, and Credit Quality

(as of, or for the periods ended December 31, 2021, compared to December 31, 2020, and September 30, 2021, except as noted):

Operating Results:

• Diluted earnings per share were $0.23 for the fourth quarter of 2021, compared to $0.19 for the fourth quarter of 2020, and $0.23 for the third quarter of 2021. Diluted earnings per share were $0.79 for the year ended December 31, 2021, compared to $0.59 for the year ended December 31, 2020.
  
  

• 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 Year Ended
		December 31,			September 30,			December 31,			December 31,			December 31,
(unaudited)		2021			2021			2020			2021			2020
Return on average tangible assets		1.00	%		1.10	%		1.02	%		0.96	%		0.83	%
Return on average tangible equity		13.50	%		13.49	%		11.75	%		11.86	%		9.04	%

• Net interest income, before provision for credit losses on loans, increased 11% to $38.1 million for the fourth quarter of 2021, compared to $34.2 million for the fourth quarter of 2020, primarily due to higher average balances of loans, investment securities, and overnight funds, and an increase in the accretion of the loan purchase discount into interest income from acquired loans. Net interest income remained relatively flat compared to $38.2 million for the third quarter of 2021.

	•	For the year ended December 31, 2021, net interest income, before provision for credit losses on loans, increased 3% to $146.1 million, compared to $141.9 million for the year ended December 31, 2020, primarily due to higher interest and fees recognized on Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans, higher loan prepayment fees, an increase in the accretion of the loan purchase discount into interest income from acquired loans, and lower costs of deposits, partially offset by decreases in the prime rate and decreases in yields on investment securities and overnight funds. There were higher fees recognized into income on PPP loans for the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily as a result of accelerated forgiveness of the PPP loans by the SBA.
	•	The fully tax equivalent (“FTE”) net interest margin contracted 31 basis points to 2.84% for the fourth quarter of 2021, from 3.15% for the fourth quarter of 2020, primarily due to a shift in the mix of earning assets toward lower yielding shorter term investments, partially offset by a decline in the cost of interest-bearing liabilities. The FTE net interest margin contracted 34 basis points for the fourth quarter of 2021 from 3.18% for the third quarter of 2021, primarily due to a decrease in the accretion of the loan purchase discount into interest income from acquired loans, lower loan prepayment fees, lower interest and fees on PPP loans, and a shift in the mix of earning assets toward lower yielding shorter term investments.
	•	For the year ended December 31, 2021, the FTE net interest margin contracted 45 basis points to 3.05%, compared to 3.50% for the year ended December 31, 2020, primarily due to declines in the average yields on loans, investment securities, and overnight funds, and a shift in the mix of earning assets toward lower yielding shorter term investments, partially offset by an increase in the accretion of the loan purchase discount into interest income from acquired loans, higher interest and fee income from PPP loans, higher loan prepayment fees, and lower costs of deposits.

• 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 was 4.93% for both the fourth quarter of 2021 and the fourth quarter of 2020, as the benefit from higher fees on PPP loans, higher loan prepayment fees, and an increase in the accretion of the loan purchase discount into interest income from acquired loans, was offset by a decline in the core bank and asset-based lending average yield. There were higher fees recognized into income on PPP loans for the quarter ended December 31, 2021, compared to the quarter ended December 31, 2020, primarily as a result of accelerated forgiveness of the PPP loans by the SBA.

		For the Quarter Ended										For the Quarter Ended
		December 31, 2021										December 31, 2020
		Average				Interest				Average		Average				Interest				Average
(in $000’s, unaudited)		Balance				Income				Yield		Balance				Income				Yield
Loans, core bank and asset-based lending		$	2,496,026			$	27,167			4.32	%	$	2,256,944			$	26,091			4.60	%
Prepayment fees			—				397			0.06	%		—				257			0.05	%
SBA PPP loans			127,592				318			0.99	%		313,335				787			1.00	%
PPP fees, net			—				2,211			6.87	%		—				1,935			2.46	%
Bay View Funding factored receivables			62,571				3,248			20.59	%		50,720				2,856			22.40	%
Purchased residential mortgages			188,731				1,437			3.02	%		24,955				118			1.88	%
Purchased CRE loans			8,929				69			3.07	%		20,854				176			3.36	%
Loan fair value mark / accretion			(7,728	)			915			0.15	%		(12,017	)			687			0.12	%
Total loans (includes loans held-for-sale)		$	2,876,121			$	35,762			4.93	%	$	2,654,791			$	32,907			4.93	%

•

The average yield on the total loan portfolio decreased to 4.93% for the fourth quarter of 2021, compared to 5.18% for the third quarter of 2021, primarily due to lower loan prepayment fees, 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
		December 31, 2021										September 30, 2021
		Average				Interest				Average		Average				Interest				Average
(in $000’s, unaudited)		Balance				Income				Yield		Balance				Income				Yield
Loans, core bank and asset-based lending		$	2,496,026			$	27,167			4.32	%	$	2,361,442			$	26,062			4.38	%
Prepayment fees			—				397			0.06	%		—				1,282			0.22	%
SBA PPP loans			127,592				318			0.99	%		218,098				548			1.00	%
PPP fees, net			—				2,211			6.87	%		—				2,508			4.56	%
Bay View Funding factored receivables			62,571				3,248			20.59	%		50,674				2,815			22.04	%
Purchased residential mortgages			188,731				1,437			3.02	%		141,073				1,019			2.87	%
Purchased CRE loans			8,929				69			3.07	%		9,177				91			3.93	%
Loan fair value mark / accretion			(7,728	)			915			0.15	%		(8,923	)			1,882			0.32	%
Total loans (includes loans held-for-sale)		$	2,876,121			$	35,762			4.93	%	$	2,771,541			$	36,207			5.18	%

•

The average yield on the total loan portfolio decreased to 5.03% for the year ended December 31, 2021, compared to 5.06% for the year ended December 31, 2020, primarily due to a decline in the average yield on core bank loans, and increases in the average balances of lower yielding purchased residential mortgages, partially offset by increases in interest and fees on PPP loans, higher loan prepayment fees, and an increase in the accretion of the loan purchase discount into interest income from acquired loans. There were higher fees recognized into income on PPP loans for the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily as a result of accelerated forgiveness of the PPP loans by the SBA.

		For the Year Ended										For the Year Ended
		December 31, 2021										December 31, 2020
		Average				Interest				Average		Average				Interest				Average
(in $000’s, unaudited)		Balance				Income				Yield		Balance				Income				Yield
Loans, core bank and asset-based lending		$	2,344,841			$	103,796			4.43	%	$	2,327,624			$	109,531			4.71	%
Prepayment fees			—				2,700			0.12	%		—				1,121			0.05	%
SBA PPP loans			249,253				2,481			1.00	%		218,391				2,185			1.00	%
PPP fees, net			—				9,995			4.01	%		—				3,877			1.78	%
Bay View Funding factored receivables			52,618				11,485			21.83	%		45,765				10,727			23.44	%
Purchased residential mortgages			116,890				3,555			3.04	%		29,648				725			2.45	%
Purchased CRE loans			12,436				441			3.55	%		24,072				831			3.45	%
Loan fair value mark / accretion			(9,717	)			4,791			0.20	%		(14,005	)			4,172			0.18	%
Total loans (includes loans held-for-sale)		$	2,766,321			$	139,244			5.03	%	$	2,631,495			$	133,169			5.06	%

•

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 $7.3 million at December 31, 2021.

• The average cost of total deposits was 0.10% for the fourth and third quarters of 2021, compared to 0.14% for the fourth quarter of 2020. The average cost of total deposits was 0.11% for the year ended December 31, 2021, compared to 0.17% for the year ended December 31, 2020.
  
  

• During the fourth quarter of 2021, there was a $615,000 negative provision for credit losses on loans, primarily due to recoveries on previously charged-off loans, compared to a $1.3 million negative provision for credit losses on loans taken in the fourth quarter of 2020, and a $514,000 negative provision for credit losses on loans for the third quarter of 2021. There was a $3.1 million negative provision for credit losses on loans for the year ended December 31, 2021, compared to a $13.2 million provision for credit losses on loans for year ended December 31, 2020.

•

The higher provision for credit losses on loans for the year ended December 31, 2020 was driven primarily by a significantly deteriorating economic outlook resulting from the Coronavirus pandemic. Ongoing impacts of the current expected credit losses (“CECL”) methodology will be dependent upon changes in economic conditions and forecasts, originated and acquired loan portfolio composition, portfolio duration, and other factors.

• Total noninterest income increased to $2.8 million for the fourth quarter of 2021, compared to $2.1 million for the fourth quarter of 2020, and $2.4 million for the third quarter of 2021, primarily due to higher termination fees at Bay View Funding, a subsidiary of the Bank.

•

For the year ended December 31, 2021, total noninterest income decreased to $9.7 million, compared to $9.9 million for the year ended December 31, 2020, primarily due to lower service charges and fees on deposits and servicing income during 2021, and a $791,000 gain on disposition of foreclosed assets, a $449,000 gain on warrants, and a $277,000 gain on the sale of securities during 2020. These decreases were partially offset by a higher gain on sales of SBA loans, higher termination fees at Bay View Funding, and a $676,000 gain on proceeds for company owned life insurance during 2021.

• Total noninterest expense for the fourth quarter of 2021 increased to $22.2 million, compared to $21.6 million for the fourth quarter of 2020, primarily due to higher salaries and employee benefits during the fourth quarter of 2021. Noninterest expense for the fourth quarter of 2021 increased from $21.8 million for the third quarter of 2021, primarily due to higher salaries and employee benefits during the fourth quarter of 2021
  

	•	Noninterest expense for the year ended December 31, 2021 increased to $93.1 million, compared to $89.5 million for the year ended December 31, 2020, primarily due to a $4.0 million reserve for a litigation matter that settled in the second quarter of 2021.
	•	The following table reflects pre-tax merger-related costs resulting from the merger with Presidio Bank for the periods indicated:

		For the Quarter Ended												For the Year Ended
MERGER-RELATED COSTS		December 31,				September 30,				December 31,				December 31,				December 31,
(in $000’s, unaudited)		2021				2021				2020				2021				2020
Salaries and employee benefits		$	—			$	—			$	—			$	—			$	356
Other			—				(7	)			101				27				2,245
Total merger-related costs		$	—			$	(7	)		$	101			$	27			$	2,601

•

Full time equivalent employees were 326 at December 31, 2021, and 331 at December 31, 2020, and 325 at September 30, 2021.

• The efficiency ratio was 54.32% for the fourth quarter of 2021, compared to 59.45% for the fourth quarter of 2020, and 53.78% for the third quarter of 2021. The efficiency ratio for year ended December 31, 2021 was 59.74%, compared to 58.96% for the year ended December 31, 2020.
  
  

• Income tax expense was $5.3 million for the fourth quarter of 2021, compared to $4.4 million for the fourth quarter of 2020, and $5.6 million the third quarter of 2021. The effective tax rate for the fourth quarter of 2021 was 27.7%, compared to 27.6% for the fourth quarter of 2020, and 28.8% for the third quarter of 2021. Income tax expense for the year ended December 31, 2021 was $18.2 million, compared to $13.8 million for the year ended December 31, 2020. The effective tax rate for the year ended December 31, 2021 was 27.6%, compared to 28.1% for the year ended December 31, 2020.

•

The difference in the effective tax rate for the periods reported compared to the combined Federal and state statutory tax rate of 29.6% is 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 19% to $5.499 billion at December 31, 2021, compared to $4.634 billion at December 31, 2020, and increased 1% from $5.463 billion at September 30, 2021.
  
  

• Securities available-for-sale, at fair value, totaled $102.3 million at December 31, 2021, compared to $235.8 million at December 31, 2020, and $121.0 million at September 30, 2021. At December 31, 2021, the Company’s securities available-for-sale portfolio was entirely comprised of agency mortgage-backed securities (all issued by U.S. Government sponsored entities). The pre-tax unrealized gain on securities available-for-sale at December 31, 2021 was $2.9 million, compared to a pre-tax unrealized gain on securities available-for-sale of $5.8 million at December 31, 2020, and a pre-tax unrealized gain on securities available-for-sale of $4.0 million at September 30, 2021. All other factors remaining the same, when market interest rates are increasing, the Company will experience a lower unrealized gain (or a higher unrealized loss) on the securities portfolio.
  
  

• At December 31, 2021, securities held-to-maturity, at amortized cost, totaled $658.4 million, compared to $297.4 million at December 31, 2020, and $537.3 million at September 30, 2021. At December 31, 2021, the Company’s securities held-to-maturity portfolio was comprised of $607.4 million of agency mortgage-backed securities, and $51.0 million of tax-exempt municipal bonds. During the fourth quarter of 2021, the Company purchased $151.7 million of agency mortgage-backed securities (securities held-to-maturity), with a book yield of 1.71% and an average life of 6.01 years. During 2021, the Company purchased $474.2 million of agency mortgage-backed securities (securities held-to-maturity), with a book yield of 1.56% and an average life of 5.78 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		December 31, 2021						September 30, 2021						December 31, 2020
(in $000’s, unaudited)		Balance				% to Total		Balance				% to Total		Balance				% to Total
Commercial		$	594,108			19	%	$	578,944			20	%	$	555,707			21	%
Paycheck Protection Program Loans			88,726			3	%		164,506			6	%		290,679			11	%
Real estate:
CRE - owner occupied			595,934			19	%		580,624			20	%		560,362			21	%
CRE - non-owner occupied			902,326			29	%		829,022			29	%		693,103			27	%
Land and construction			147,855			5	%		141,277			5	%		144,594			6	%
Home equity			109,579			4	%		106,690			4	%		111,885			4	%
Multifamily			218,856			7	%		205,952			7	%		166,425			6	%
Residential mortgages			416,660			13	%		211,467			8	%		85,116			3	%
Consumer and other			16,744			1	%		20,106			1	%		18,116			1	%
Total Loans			3,090,788			100	%		2,838,588			100	%		2,625,987			100	%
Deferred loan costs (fees), net			(3,462	)		—			(5,729	)		—			(6,726	)		—
Loans, net of deferred costs and fees		$	3,087,326			100	%	$	2,832,859			100	%	$	2,619,261			100	%

	•	Loans, excluding loans held-for-sale, increased $468.1 million, or 18%, to $3.087 billion at December 31, 2021, compared to $2.619 billion at December 31, 2020, and increased $254.5 million, or 9%, from $2.833 billion at September 30, 2021. Total loans at December 31, 2021 included $88.7 million of PPP loans, compared to $290.7 million at December 31, 2020 and $164.5 million at September 30, 2021. Total loans at December 31, 2021 included $416.7 million of residential mortgages, compared to $85.1 million at December 31, 2020, and $211.5 million at September 30, 2021.
			•	Loans, excluding loans held-for-sale and PPP loans, increased $666.0 million, or 29%, to $3.001 billion at December 31, 2021, compared to $2.335 billion at December 31, 2020, and increased $328.0 million, or 12%, from $2.673 billion at September 30, 2021. Loans, excluding loans held-for-sale, PPP loans and residential mortgages, increased $334.6 million, or 15%, to $2.584 billion at December 31, 2021, compared to $2.250 billion at December 31, 2020, and increased $122.8 million, or 5%, from $2.461 billion at September 30, 2021.
	•	In response to economic stimulus laws passed by Congress in 2020 and 2021, the Bank funded two rounds of PPP loans. At December 31, 2021, after accounting for loan payoffs and SBA loan forgiveness, “Round 1” PPP loans were $1.7 million and “Round 2” PPP loans were $87.0 million. In total, the Bank had $88.7 million in outstanding PPP loan balances at December 31, 2021. 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 Year Ended:
PPP LOANS		December 31,				September 30,				December 31,				December 31,				December 31,
(in $000’s, unaudited)		2021				2021				2020				2021				2020
Interest income		$	318			$	548			$	787			$	2,481			$	2,185
Fee income, net			2,211				2,508				1,935				9,995				3,877
Total		$	2,529			$	3,056			$	2,722			$	12,476			$	6,062
PPP loans outstanding at period end:
Round 1		$	1,717			$	5,795			$	290,679			$	1,717			$	290,679
Round 2			87,009				158,711				—				87,009				—
Total		$	88,726			$	164,506			$	290,679			$	88,726			$	290,679
Deferred fees outstanding at period end		$	(2,342	)		$	(4,831	)		$	(6,819	)		$	(2,342	)		$	(6,819	)
Deferred costs outstanding at period end			189				461				783				189				783
Total		$	(2,153	)		$	(4,370	)		$	(6,036	)		$	(2,153	)		$	(6,036	)

	•	During the fourth quarter of 2021, the Company purchased single family residential mortgage loans totaling $223.8 million, tied to homes all located in California, with average principal balances of approximately $1.1 million, and a weighted average yield of approximately 3.01% (net of servicing fees). During the year ended December 31, 2021, the Company purchased single family residential mortgage loans totaling $405.8 million, tied to homes all located in California, with average principal balances of approximately $853,000, and a weighted average yield of approximately 3.14% (net of servicing fees). Purchases of residential loans have been an attractive alternative for replacing mortgage-backed security paydowns in the investment securities portfolio.
	•	Commercial and industrial (“C&I”) line utilization increased to 31% at December 31, 2021, compared to 28% at December 31, 2020, and 27% at September 30, 2021.
	•	At December 31, 2021, 40% of the CRE loan portfolio was secured by owner-occupied real estate.
	•	At December 31, 2021, approximately 38% of the Company’s loan portfolio consisted of floating interest rate loans, compared to approximately 42% at both December 31, 2020 and September 30, 2021.

• The following table summarizes the allowance for credit losses on loans for the periods indicated:
  

		For the Quarter Ended												For the Year Ended
ALLOWANCE FOR CREDIT LOSSES ON LOANS		December 31,				September 30,				December 31,				December 31,				December 31,
(in $000’s, unaudited)		2021				2021				2020				2021				2020
Balance at beginning of period		$	43,680			$	43,956			$	45,422			$	44,400			$	23,285
Charge-offs during the period			(87	)			(65	)			(144	)			(520	)			(1,880	)
Recoveries during the period			312				303				470				2,544				1,192
Net recoveries (charge-offs) during the period			225				238				326				2,024				(688	)
Impact of adopting Topic 326			—				—				—				—				8,570
Provision for (recapture of) credit losses on loans during the period			(615	)			(514	)			(1,348	)			(3,134	)			13,233
Balance at end of period		$	43,290			$	43,680			$	44,400			$	43,290			$	44,400
Total loans, net of deferred fees		$	3,087,326			$	2,832,859			$	2,619,261			$	3,087,326			$	2,619,261
Total nonperforming loans		$	3,738			$	4,733			$	7,869			$	3,738			$	7,869
Allowance for credit losses on loans ("ACLL") to total loans			1.40		%		1.54		%		1.70		%		1.40		%		1.70		%
ACLL to total nonperforming loans			1,158.11		%		922.88		%		564.24		%		1,158.11		%		564.24		%

	•	The ACLL was 1.40% of total loans at December 31, 2021 while the ACLL to total nonperforming loans was 1,158.11%. The ACLL was 1.70% of total loans and the ACLL to nonperforming loans was 564.24% at December 31, 2020. The ACLL was 1.54% of total loans and the ACLL to total nonperforming loans was 922.88% at September 30, 2021. The ACLL to total loans, excluding PPP loans, was 1.44 % at December 31, 2021, 1.91% at December 31, 2020 and 1.63% at September 30, 2021.
	•	The following table shows the drivers of change in ACLL under CECL for each of the first four quarters of 2021:

DRIVERS OF CHANGE IN ACLL UNDER CECL
(in $000’s, unaudited)
ACLL at December 31, 2020		$	44,400
Net recoveries during the first quarter of 2021			1,408
Portfolio changes during the first quarter of 2021			313
Qualitative and quantitative changes during the first quarter of 2021 including changes in economic forecasts			(1,825	)
ACLL at March 31, 2021			44,296
Net recoveries during the second quarter of 2021			153
Portfolio changes during the second quarter of 2021			2,153
Qualitative and quantitative changes during the second quarter of 2021 including changes in economic forecasts			(2,646	)
ACLL at June 30, 2021			43,956
Net recoveries during the third quarter of 2021			238
Portfolio changes during the third quarter of 2021			2,485
Qualitative and quantitative changes during the third quarter of 2021 including changes in economic forecasts			(2,999	)
ACLL at September 30, 2021			43,680
Net recoveries during the fourth quarter of 2021			225
Portfolio changes during the fourth quarter of 2021			3,786
Qualitative and quantitative changes during the fourth quarter of 2021 including changes in economic forecasts			(4,401	)
ACLL at December 31, 2021		$	43,290

	•	Net recoveries totaled $225,000 for the fourth quarter of 2021, compared to net recoveries of $326,000 for the fourth quarter of 2020, and net recoveries of $238,000 for the third quarter of 2021.
	•	The following is a breakout of NPAs at the periods indicated:

		End of Period:
NONPERFORMING ASSETS		December 31, 2021						September 30, 2021						December 31, 2020
(in $000’s, unaudited)		Balance				% of Total		Balance				% of Total		Balance				% of Total
CRE loans		$	2,254			60	%	$	2,260			48	%	$	3,706			47	%
Commercial loans			1,122			30	%		1,330			28	%		2,726			35	%
Restructured and loans over 90 days past due and still accruing			278			8	%		642			13	%		81			1	%
Home equity loans			84			2	%		94			2	%		949			12	%
Consumer and other loans			—			—	%		407			9	%		407			5	%
Total nonperforming assets		$	3,738			100	%	$	4,733			100	%	$	7,869			100	%

	•	NPAs totaled $3.7 million, or 0.07% of total assets, at December 31, 2021, compared to $7.9 million, or 0.17% of total assets, at December 31, 2020, $4.7 million, or 0.09% of total assets, at September 30, 2021.
	•	There were no foreclosed assets on the balance sheet at December 31, 2021, December 31, 2020, or September 30, 2021.
	•	Classified assets decreased to $33.8 million, or 0.62% of total assets, at December 31, 2021, compared to $34.0 million, or 0.73% of total assets, at December 31, 2020, and increased from $31.9 million, or 0.58% of total assets, at September 30, 2021.

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

DEPOSITS		December 31, 2021						September 30, 2021						December 31, 2020
(in $000’s, unaudited)		Balance				% to Total		Balance				% to Total		Balance				% to Total
Demand, noninterest-bearing		$	1,903,768			40	%	$	1,804,965			38	%	$	1,661,655			42	%
Demand, interest-bearing			1,308,114			27	%		1,141,944			24	%		960,179			24	%
Savings and money market			1,375,825			29	%		1,600,754			34	%		1,119,968			29	%
Time deposits — under $250			38,734			1	%		39,628			1	%		45,027			1	%
Time deposits — $250 and over			94,700			2	%		103,046			2	%		103,746			3	%
CDARS — interest-bearing demand,
money market and time deposits			38,271			1	%		36,044			1	%		23,911			1	%
Total deposits		$	4,759,412			100	%	$	4,726,381			100	%	$	3,914,486			100	%

	•	Total deposits increased $844.9 million, or 22%, to $4.759 billion at December 31, 2021, compared to $3.914 billion at December 31, 2020, and increased $33.0 million, or 1%, from $4.726 billion at September 30, 2021.
	•	Deposits, excluding all time deposits and CDARS deposits, increased $845.9 million, or 23%, to $4.588 billion at December 31, 2021, compared to $3.742 billion at December 31, 2020, and increased $40.0 million, or 1%, compared to $4.548 billion at September 30, 2021.
	•	Total deposits at September 30, 2021 included $336 million of temporary deposits from one customer that were received late in the third quarter of 2021. The deposits from this customer decreased to $140 million 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 December 31, 2021, 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		14.3	%		13.7	%		10.0	%		10.5	%
Tier 1 Capital		12.3	%		12.8	%		8.0	%		8.5	%
Common Equity Tier 1 Capital		12.3	%		12.8	%		6.5	%		7.0	%
Tier 1 Leverage		7.9	%		8.2	%		5.0	%		4.0	%

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

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

ACCUMULATED OTHER COMPREHENSIVE LOSS		December 31,				September 30,				December 31,
(in $000’s, unaudited)		2021				2021				2020
Unrealized gain on securities available-for-sale		$	1,991			$	2,435			$	3,709
Remaining unamortized unrealized gain on securities
available-for-sale transferred to held-to-maturity			—				234				261
Split dollar insurance contracts liability			(5,480	)			(6,143	)			(6,140	)
Supplemental executive retirement plan liability			(7,668	)			(8,411	)			(8,767	)
Unrealized gain on interest-only strip from SBA loans			161				179				220
Total accumulated other comprehensive loss		$	(10,996	)		$	(11,706	)		$	(10,717	)

• Tangible equity was $416.7 million at December 31, 2021, compared to $393.6 million at December 31, 2020, and $408.1 million at September 30, 2021. Tangible book value per share was $6.91 at December 31, 2021, compared to $6.57 at December 31, 2020, and $6.77 at September 30, 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

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, 2020, and the following: (1) the effect of the COVID-19 pandemic, and other infectious illness outbreaks that may arise in the future, on our customers, employees, businesses, liquidity, and financial results; (2) current and future economic and market conditions in the United States generally or in the communities we serve, including the effects of declines in property values and overall slowdowns in economic growth should these events occur; (3) effects of and changes in trade, monetary and fiscal policies and laws, including the interest rate policies of the Federal Open Market Committee of the Federal Reserve Board; (4) our ability to anticipate interest rate changes and manage interest rate risk; (5) changes in inflation, interest rates, and market liquidity which may impact interest margins and impact funding sources; (6) volatility in credit and equity markets and its effect on the global economy; (7) 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; (8) our ability to achieve loan growth and attract deposits; (9) risks associated with concentrations in real estate related loans; (10) the relative strength or weakness of the commercial and real estate markets where our borrowers are located, including related asset and market prices; (11) credit related impairment charges to our securities portfolio; (12) 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; (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 Small Business Administration (“SBA”) or SBA loan programs, or changes in those programs; (22) compliance with governmental and regulatory requirements, including the Dodd-Frank Act and others relating to banking, consumer protection, securities, accounting and tax matters; (23) significant changes in applicable laws and regulations, including those concerning taxes, banking and securities; (24) 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; (25) costs and effects of legal and regulatory developments, including resolution of regulatory or other governmental inquiries, and the results of regulatory examinations or reviews; (26) the expense and uncertain resolution of litigation matters whether occurring in the ordinary course of business or otherwise; (27) availability of and competition for acquisition opportunities; (28) risks resulting from domestic terrorism; (29) risks resulting from social unrest and protests: (30) risks of natural disasters (including earthquakes) and other events beyond our control; (31) changes in governmental policy and regulation, the Federal Reserve Board's efforts to provide liquidity to the financial system and provide credit to private commercial and municipal borrowers, and other programs designed to address the effects of the COVID-19 pandemic; (32) the Bank's participation as a lender in the PPP and similar programs and its effect on the Bank's 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; (33) 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

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