Heritage Commerce Corp Earns $18.9 Million for the First Quarter of 2023; Total Deposits Stable

SAN JOSE, Calif., April 27, 2023 (GLOBE NEWSWIRE) -- Heritage Commerce Corp (Nasdaq: HTBK), the holding company (the “Company”) for Heritage Bank of Commerce (the “Bank”), today announced first quarter 2023 net income increased 47% to $18.9 million, or $0.31 per average diluted common share, compared to $12.9 million, or $0.21 per average diluted common share, for the first quarter of 2022, and decreased (9%) from $20.8 million, or $0.34 per average diluted common share, for the fourth quarter of 2022. All results are unaudited.

“We delivered record first quarter earnings and the second best quarterly results in the Company’s history,” said Clay Jones, President and Chief Executive Officer. “First quarter earnings have been typically impacted by higher payroll taxes and employee benefits, due to the seasonal peak of these expenses. Profits increased 47% over the first quarter a year ago supported by strong year-over-year growth in net interest income and noninterest income, higher net interest margin and improved efficiency ratio. Total deposits increased by $54.9 million from the linked quarter to $4.445 billion at March 31, 2023. Noninterest-bearing deposits shifted during the quarter to the Bank's interest-bearing deposits, primarily due to the acceleration of recent rate hikes by the Federal Reserve Bank, prompting customers to seek higher yields.” As a result, there was a substantial increase in the Bank’s interest-bearing deposits and Insured Cash Sweep (“ICS”) deposits. “With a solid earnings performance, a large core deposit base and excellent credit quality, we believe we have a solid foundation to accommodate our clients lending and deposit needs,” stated Mr. Jones.

“Both the Company and the Bank remain in a strong financial position. Our capital levels and liquidity position are healthy, and the Bank has experienced stable deposit trends. Our prudent approach to risk management has enabled us to navigate recent market volatility in the financial industry,” Mr. Jones continued. Mr. Jones expressed gratitude to the Bank's clients for their continued support and emphasized that the banking team is dedicated to meeting their needs.

“Our credit quality remains strong. Over our nearly 30 year history, the Bank has consistently taken a prudent approach to real estate underwriting across all product types, through many economic cycles. We believe our conservative credit standards, along with our continuous stress testing of each borrower for maturity dates, lease maturities, occupancy, interest rates and liquidity capacity will prove our loan portfolio is well positioned to successfully weather economic volatility.” The Company recorded a $32,000 provision for credit losses on loans for the first quarter of 2023. The allowance for credit losses on loans was $47.3 million, and increased to 1.45% of total loans, at March 31, 2023, compared to 1.41% of total loans from the year ago quarter, and 1.44% of total loans at December 31, 2022.

“Complementing our stellar performance this quarter, we are very proud to have recently ranked 21^st nationally for the best performing Community Bank by S&P Market Intelligence,” said Mr. Jones. “Criteria for the ranking included a gross loans and leases-to-total assets ratio of at least 33% and a leverage ratio of at least 5%. Based on the selected criteria, 196 banks and thrifts were eligible for ranking.” [Source S&P Capital IQ]

Current Financial Condition and Liquidity Position

In light of current industry developments, the following are important factors in understanding our current financial condition and liquidity position:

Liquidity and Lines of Credit:

• The following table shows our liquidity, available lines of credit and the amounts outstanding at March 31, 2023:
  

LIQUIDITY AND LINES OF CREDIT		Total Available			Outstanding Lines of Credit			Remaining Available
(in $000’s, unaudited)
Unpledged investment securities (at fair value)		$	122,483		$	—		$	122,483
Off-balance sheet deposits			132,987			—			132,987
Excess funds at the Federal Reserve Bank ("FRB")			695,400			—			695,400
FRB discount window			1,231,874			150,000	(1)		1,081,874
Federal Home Loan Bank ("FHLB") Advances			789,909			150,000	(1)		639,909
Federal funds purchase arrangements			80,000			—			80,000
Holding company line of credit			20,000			—			20,000
Total		$	3,072,653		$	300,000		$	2,772,653

______________________
(1)	Both the FRB and the FHLB lines of credit were repaid in full on April 20, 2023.
______________________

• The Company’s total liquidity and borrowing capacity was $3.073 billion, of which $2.773 billion was remaining available at March 31, 2023.
• The remaining available liquidity and borrowing capacity of $2.773 billion was 62% of total deposits and approximately 110% of estimated uninsured deposits at March 31, 2023.
• During the first quarter of 2023, the Bank increased its credit line availability from the FRB and the FHLB by $839.5 million to $2.022 billion at March 31, 2023 from December 31, 2022.
• The Company borrowed $150.0 million on its line of credit with the FRB, and another $150.0 million on its line of credit with the FHLB during the first quarter of 2023, and both lines of credit were repaid in full on April 20, 2023. These short-term borrowings provided instant liquidity during an uncertain time and allowed the Company to test the lines for future contingency planning purposes.
• The loan to deposit ratio was 73.39% at March 31, 2023, compared to 75.14% at December 31, 2022.
  

Deposits:

• Total deposits increased $54.9 million, or 1%, to $4.445 billion at March 31, 2023 from December 31, 2022.
• ICS/Certificate of Deposit Account Registry Service (“CDARS”) deposits increased $273.7 million, or 901%, to $304.1 million at March 31, 2023 from $30.4 million at December 31, 2022, which included $128.0 million of off-balance sheet relationship-based client deposits brought onto the balance sheet, and an increase in client deposits of $145.8 million during the first quarter of 2023.
• Noninterest-bearing demand deposits decreased ($267.6) million, or (15%), to $1.469 billion at March 31, 2023 from December 31, 2022, primarily due to clients moving noninterest-bearing deposits to the Bank’s interest-bearing and ICS deposits.
• The Company had 24,103 deposits accounts at March 31, 2023, with an average balance of $184,000.
• Deposits from the top 100 client relationships totaled $2.201 billion, representing 50% of total deposits, with an average account size of $445,000, representing 21% of the total number of accounts at March 31, 2023.
  

Investment Securities:

• Investment securities totaled $1.190 billion at March 31, 2023, of which $491.8 million were in the securities available-for-sale portfolio (at fair value), and $698.2 million were in the securities held-to-maturity portfolio (at amortized cost, net of allowance for credit losses of $14,000).
• The weighted average life of the investment securities portfolio was 4.82 years and the modified duration was 4.04 years at March 31, 2023.

Loans:

• Loans, excluding loans held-for-sale, decreased ($36.6) million, or (1%) to $3.3 billion at March 31, 2023 from December 31, 2022.
• Commercial real estate (“CRE”) loans totaled $1.687 billion at March 31, 2023, which included 36% of owner occupied loans and 64% of investor and other CRE loans.
• The average loan size for all CRE loans was $1.6 million, and the average loan size for office CRE loans was also $1.6 million.
• The Company has personal guaranties on 90% of its CRE portfolio, while 10% are unguaranteed. A substantial portion of the unguaranteed CRE loans were made to credit-worthy non-profit organizations.
• Office exposure in the CRE portfolio totaled $383 million, including 30 loans totaling approximately $70 million, in San Jose, 19 loans totaling approximately $28 million, in San Francisco, and 5 loans totaling approximately $10 million, in Oakland, at March 31, 2023.
• Of the $383 million of CRE loans with office exposure, approximately $29 million, or 8%, are situated in the Bay Area downtown business districts of San Jose and San Francisco, with an average balance of $2.2 million.
• At March 31, 2023, the weighted average loan-to-value and debt-service coverage for the entire non-owner occupied office portfolio were 43.2% and 2.09 times, respectively. For the ten non-owner occupied office loans in the City of San Francisco at March 31, 2023, the weighted average loan-to-value and debt-service coverage were 28.5% and 3.41 times, respectively.
• The average vacancy level for the San Francisco CRE loans was 5.8%, of which the vast majority are single-tenant small spaces in office buildings situated outside of downtown.

First Quarter Ended March 31, 2023
Operating Results, Balance Sheet Review, Capital Management, and Credit Quality

(as of, or for the periods ended March 31, 2023, compared to March 31, 2022, and December 31, 2022, except as noted):

Operating Results:

• Diluted earnings per share were $0.31 for the first quarter of 2023, compared to $0.21 for the first quarter of 2022, and $0.34 for the fourth quarter of 2022.
• The following table indicates the ratios for the return on average tangible assets and the return on average tangible common equity for the periods indicated:

		For the Quarter Ended:
		March 31,				December 31,				March 31,
(unaudited)		2023				2022				2022
Return on average tangible assets		1.52	%			1.59	%			0.99	%
Return on average tangible common equity		16.71	%			18.89	%			12.47	%

• Net interest income, before provision for credit losses on loans, increased 29% to $49.3 million for the first quarter of 2023, compared to $38.2 million for the first quarter of 2022. The fully tax equivalent (“FTE”) net interest margin increased 104 basis points to 4.09% for the first quarter of 2023, from 3.05% for the first quarter of 2022, primarily due to increases in the prime rate and the rate on overnight funds, and a shift in the mix of earning assets into higher yielding loans and investment securities, partially offset by lower interest and fees on Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans, lower prepayment fees, a decrease in the accretion of the loan purchase discount into interest income from acquired loans, a higher cost of funds, and an increase in short-term borrowings.
  
  
  • Net interest income, before provision for credit losses on loans, decreased (5%) to $49.3 million for the first quarter of 2023, compared to $51.7 million for the fourth quarter of 2022. The FTE net interest margin decreased 1 basis point to 4.09% for the first quarter of 2023 from 4.10% for the fourth quarter of 2022, primarily due to a higher cost of funds, a decrease in the average balances of noninterest bearing demand deposits, and an increase in short-term borrowings, partially offset by increases in the prime rate and higher average yields on overnight funds, and an increase in the accretion of the loan purchase discount into interest income from acquired loans.
    
    
• The Company reviewed beta assumptions for non-maturing interest-bearing deposit accounts as of March 31, 2023, and increased the beta assumptions for the upward shock scenarios. The following table, as of March 31, 2023, sets forth the estimated changes in the Company’s annual net interest income that would result from an instantaneous shift in interest rates from the base rate:

		Increase/(Decrease) in
		Estimated Net
		Interest Income(1)
CHANGE IN INTEREST RATES (basis points)		Amount				Percent
(in $000's, unaudited)
+400		$	14,603			7.1		%
+300		$	10,917			5.3		%
+200		$	7,254			3.5		%
+100		$	3,618			1.8		%
0			—			—
−100		$	(6,667	)		(3.2	)	%
−200		$	(19,823	)		(9.6	)	%
−300		$	(35,220	)		(17.1	)	%
−400		$	(50,409	)		(24.4	)	%

__________________

(1)

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

______________________

• The following tables present the average balance of loans outstanding, interest income, and the average yield for the periods indicated:
  
  
  • The average yield on the total loan portfolio increased to 5.46% for the first quarter of 2023, compared to 5.19% for the fourth quarter of 2022, primarily due to increases in the prime rate, and an increase in the accretion of the loan purchase discount into interest income from acquired loans.

		For the Quarter Ended										For the Quarter Ended
		March 31, 2023										December 31, 2022
		Average				Interest			Average			Average				Interest			Average
(in $000’s, unaudited)		Balance				Income			Yield			Balance				Income			Yield
Loans, core bank		$	2,680,849			$	34,827		5.27	%		$	2,654,311			$	33,594		5.02	%
Prepayment fees			—				138		0.02	%			—				123		0.02	%
PPP loans			832				2		0.97	%			1,255				3		0.95	%
PPP fees, net			—				18		8.77	%			—				25		7.90	%
Asset-based lending			27,550				627		9.23	%			35,519				756		8.44	%
Bay View Funding factored receivables			77,755				4,001		20.87	%			71,789				3,696		20.43	%
Purchased residential mortgages			487,780				3,857		3.21	%			485,149				3,842		3.14	%
Purchased CRE loans			7,119				120		6.84	%			7,307				80		4.34	%
Loan fair value mark / accretion			(4,360	)			522		0.08	%			(4,774	)			382		0.06	%
Total loans (includes loans held-for-sale)		$	3,277,525			$	44,112		5.46	%		$	3,250,556			$	42,501		5.19	%

•

The average yield on the total loan portfolio increased to 5.46% for the first quarter of 2023, compared to 4.70% for the first quarter of 2022, primarily due to increases in the prime rate, partially offset by lower interest and fees on PPP loans, lower prepayment fees, a decrease in the accretion of the loan purchase discount into interest income from acquired loans, and higher average balances of lower yielding purchased residential mortgages.

		For the Quarter Ended										For the Quarter Ended
		March 31, 2023										March 31, 2022
		Average				Interest			Average			Average				Interest			Average
(in $000’s, unaudited)		Balance				Income			Yield			Balance				Income			Yield
Loans, core bank		$	2,680,849			$	34,827		5.27	%		$	2,483,708			$	26,097		4.26	%
Prepayment fees			—				138		0.02	%			—				510		0.08	%
PPP loans			832				2		0.97	%			60,264				146		0.98	%
PPP fees, net			—				18		8.77	%			—				1,346		9.06	%
Asset-based lending			27,550				627		9.23	%			69,617				950		5.53	%
Bay View Funding factored receivables			77,755				4,001		20.87	%			57,761				2,793		19.61	%
Purchased residential mortgages			487,780				3,857		3.21	%			355,626				2,428		2.77	%
Purchased CRE loans			7,119				120		6.84	%			8,514				77		3.67	%
Loan fair value mark / accretion			(4,360	)			522		0.08	%			(6,901	)			754		0.12	%
Total loans (includes loans held-for-sale)		$	3,277,525			$	44,112		5.46	%		$	3,028,589			$	35,101		4.70	%

•

In aggregate, the remaining net purchase discount on total loans acquired was $4.1 million at March 31, 2023.

• The following table presents the average balance of deposits and interest-bearing liabilities, interest expense, and the average rate for the periods indicated:
  

		For the Quarter Ended									For the Quarter Ended
		March 31, 2023									December 31, 2022
		Average			Interest			Average			Average			Interest			Average
(in $000’s, unaudited)		Balance			Expense			Rate			Balance			Expense			Rate
Deposits:
Demand, noninterest-bearing		$	1,667,260		$	—		N/A			$	1,851,003		$	—		N/A
Demand, interest-bearing			1,217,731			1,476		0.49	%			1,164,378			945		0.32	%
Savings and money market			1,285,173			3,489		1.10	%			1,424,964			1,694		0.47	%
Time deposits - under $100			12,280			10		0.33	%			12,157			7		0.23	%
Time deposits - $100 and over			163,047			845		2.10	%			120,246			268		0.88	%
ICS/CDARS - interest-bearing demand, money market
and time deposits			70,461			81		0.47	%			27,785			1		0.01	%
Total interest-bearing deposits			2,748,692			5,901		0.87	%			2,749,530			2,915		0.42	%
Total deposits			4,415,952			5,901		0.54	%			4,600,533			2,915		0.25	%
Short-term borrowings			46,677			578		5.02	%			24			—		—	%
Subordinated debt, net of issuance costs			39,363			537		5.53	%			39,326			538		5.43	%
Total interest-bearing liabilities			2,834,732			7,016		1.00	%			2,788,880			3,453		0.49	%
Total interest-bearing liabilities and demand,
noninterest-bearing / cost of funds		$	4,501,992		$	7,016		0.63	%		$	4,639,883		$	3,453		0.30	%

•

The average cost of total deposits increased to 0.54% for the first quarter of 2023, compared to 0.25% for the fourth quarter of 2022. The average cost of funds increased to 0.63% for the first quarter of 2023, compared to 0.30% for the fourth quarter of 2022. The average cost of deposits was 0.10% and the average cost of funds was 0.14% for the first quarter of 2022.

• During the first quarter of 2023, there was a provision for credit losses on loans of $32,000, compared to a ($567,000) recapture of provision for credit losses on loans for the first quarter of 2022, and a provision for credit losses on loans of $508,000 for the fourth quarter of 2022.
• Total noninterest income increased 12% to $2.8 million for the first quarter of 2023, compared to $2.5 million for the first quarter of 2022, primarily due to higher service charges and fees on deposit accounts. Total noninterest income remained relatively flat at $2.8 million for both the first quarter of 2023 and the fourth quarter of 2022.

• Total noninterest expense for the first quarter of 2023 increased to $25.4 million, compared to $23.3 million for the first quarter of 2022, primarily due to higher payroll taxes and employee benefits, higher professional fees, and higher insurance and information technology related expenses included in other noninterest expense during the first quarter of 2023. Total noninterest expense for the first quarter of 2023 increased to $25.4 million, compared to $24.5 million for the fourth quarter of 2022, primarily due to an increase of $1.3 million for 401(k) employer contribution, vacation, and payroll taxes in the first quarter of 2023, consistent with the cyclical nature of those expenses.
  
  
  • Full time equivalent employees were 339 at March 31, 2023, and 325 at March 31, 2022, and 340 at December 31, 2022.
    
    
• The efficiency ratio improved to 48.83% for the first quarter of 2023, compared to 57.16% for the first quarter of 2022, primarily due to an increase in net interest income. The efficiency ratio was 44.98% for the fourth quarter of 2022.
  
  
• Income tax expense was $7.7 million for the first quarter of 2023, compared to $5.1 million for the first quarter of 2022, and $8.7 million for the fourth quarter of 2022. The effective tax rate for the first quarter of 2023 was 28.9%, compared to 28.5% for the first quarter of 2022, and 29.5% for the fourth quarter of 2022.
  

Balance Sheet Review, Capital Management and Credit Quality:

• Total assets increased 2% to $5.537 billion at March 31, 2023, compared to $5.427 billion at March 31, 2022, and increased 7% from $5.158 billion at December 31, 2022.
  
  
• The following table shows the balances of securities available-for-sale, at fair value, and the related pre-tax unrealized (loss) for the periods indicated:
  

SECURITIES AVAILABLE-FOR-SALE		March 31,				December 31,				March 31,
(in $000’s, unaudited)		2023				2022				2022
Balance (at fair value):
U.S. Treasury		$	422,903			$	418,474			$	21,564
Agency mortgage-backed securities			68,848				71,122				89,653
Total		$	491,751			$	489,596			$	111,217
Pre-tax unrealized (loss):
U.S. Treasury		$	(7,510	)		$	(10,323	)		$	(93	)
Agency mortgage-backed securities			(4,969	)			(5,794	)			(1,406	)
Total		$	(12,479	)		$	(16,117	)		$	(1,499	)

•

The pre-tax unrealized loss on the securities available-for-sale portfolio was $12.5 million, or $8.9 million net of taxes, which was 1% of total shareholders’ equity at March 31, 2023.

• The following table shows the balances of securities held-to-maturity, at amortized cost, and the related pre-tax unrealized (loss) gain and allowance for credit losses for the periods indicated:

SECURITIES HELD-TO-MATURITY		March 31,				December 31,				March 31,
(in $000’s, unaudited)		2023				2022				2022
Balance (at amortized cost):
Agency mortgage-backed securities		$	663,481			$	677,381			$	696,161
Municipals — exempt from Federal tax			34,764				37,623				40,701
Total		$	698,245			$	715,004			$	736,862
Pre-tax unrealized (loss) gain:
Agency mortgage-backed securities		$	(89,962	)		$	(99,742	)		$	(46,226	)
Municipals — exempt from Federal tax			(297	)			(810	)			148
Total		$	(90,259	)		$	(100,552	)		$	(46,078	)
Allowance for credit losses on municipal securities		$	(14	)		$	(14	)		$	(39	)

•

The pre-tax unrealized loss on the securities held-to-maturity portfolio was $90.3 million at March 31, 2023, or $64.5 million net of taxes, which was 10% of total shareholders’ equity at March 31, 2023.

• The unrealized losses in both the available-for-sale and held-to-maturity portfolios were due to higher interest rates at March 31, 2023 compared to when the securities were purchased. The issuers are of high credit quality and all principal amounts are expected to be repaid when the securities mature. The fair value is expected to recover as the securities approach their maturity date and/or market rates decline.
  
  
• 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, 2023							December 31, 2022							March 31, 2022
(in $000’s, unaudited)		Balance				% to Total			Balance				% to Total			Balance				% to Total
Commercial		$	506,037			16	%		$	532,749			16	%		$	568,053			19	%
PPP Loans(1)			565			0	%			1,166			0	%			37,393			1	%
Real estate:
CRE - owner occupied			603,298			18	%			614,663			19	%			597,542			20	%
CRE - non-owner occupied			1,083,852			33	%			1,066,368			32	%			928,220			31	%
Land and construction			166,408			5	%			163,577			5	%			153,323			5	%
Home equity			124,481			4	%			120,724			4	%			111,609			3	%
Multifamily			231,242			7	%			244,882			7	%			221,767			7	%
Residential mortgages			528,639			16	%			537,905			16	%			391,171			13	%
Consumer and other			17,905			1	%			17,033			1	%			17,110			1	%
Total Loans			3,262,427			100	%			3,299,067			100	%			3,026,188			100	%
Deferred loan costs (fees), net			(512	)		—				(517	)		—				(2,124	)		—
Loans, net of deferred costs and fees		$	3,261,915			100	%		$	3,298,550			100	%		$	3,024,064			100	%

__________________

(1)	Less than 1% at March 31, 2023 and December 31, 2022.

	•	Loans, excluding loans held-for-sale, increased $237.9 million, or 8%, to $3.262 billion at March 31, 2023, compared to $3.024 billion at March 31, 2022, and decreased ($36.6) million, or (1%), from $3.299 billion at December 31, 2022. Loans, excluding loans held-for-sale, PPP loans and residential mortgages, increased $136.5 million, or 5%, to $2.733 billion at March 31, 2023, compared to $2.596 billion at March 31, 2022, and decreased ($26.8) million, or (1%), from $2.760 billion at December 31, 2022.
	•	Commercial and industrial (“C&I”) line utilization was 31% at both March 31, 2023 and March 31, 2022, compared to 29% at December 31, 2022.
	•	At March 31, 2023, there was 36% of the CRE loan portfolio secured by owner occupied real estate, compared to 39% at March 31, 2022, and 37% at December 31, 2022.

• The following table presents the maturity distribution of the Company’s loans, excluding loans held-for-sale, as of March 31, 2023. The table shows the distribution of such loans between those loans with predetermined (fixed) interest rates and those with variable (floating) interest rates. Floating rates generally fluctuate with changes in the prime rate as reflected in the Western Edition of The Wall Street Journal.
  
  

		Due in						Over One Year But
LOAN MATURITIES		One Year or Less						Less than Five Years						Over Five Years
(in $000’s, unaudited)		Balance			% to Total			Balance			% to Total			Balance			% to Total			Total
Loans with variable interest rates		$	409,059		41	%		$	286,346		28	%		$	312,341		31	%		$	1,007,746
Loans with fixed interest rates			65,799		3	%			500,734		22	%			1,688,148		75	%			2,254,681
Loans		$	474,858		15	%		$	787,080		24	%		$	2,000,489		61	%		$	3,262,427

•

At March 31, 2023, approximately 31% of the Company’s loan portfolio consisted of floating interest rate loans, compared to 38% at March 31, 2022, and 33% at December 31, 2022.

• 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)		2023				2022				2022
Balance at beginning of period		$	47,512			$	46,921			$	43,290
Charge-offs during the period			(380	)			(56	)			(16	)
Recoveries during the period			109				139				81
Net recoveries (charge-offs) during the period			(271	)			83				65
Provision for (recapture of) credit losses on loans during the period			32				508				(567	)
Balance at end of period		$	47,273			$	47,512			$	42,788
Total loans, net of deferred fees		$	3,261,915			$	3,298,550			$	3,024,064
Total nonperforming loans		$	2,240			$	2,425			$	3,830
ACLL to total loans			1.45		%		1.44		%		1.41		%
ACLL to total nonperforming loans			2,110.40		%		1,959.26		%		1,117.18		%

•

The following table shows the drivers of change in ACLL under the current expected credit losses (“CECL”) methodology for the first quarter of 2023:

DRIVERS OF CHANGE IN ACLL UNDER CECL
(in $000’s, unaudited)
ACLL at December 31, 2022		$	47,512
Portfolio changes during the first quarter of 2023			(160	)
Qualitative and quantitative changes during the first
quarter of 2023 including changes in economic forecasts			(79	)
ACLL at March 31, 2023		$	47,273

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

NONPERFORMING ASSETS		March 31, 2023						December 31, 2022						March 31, 2022
(in $000’s, unaudited)		Balance			% of Total			Balance			% of Total			Balance			% of Total
Restructured and loans over 90 days past due
and still accruing		$	1,459		65	%		$	1,685		70	%		$	527		14	%
Commercial loans			685		31	%			642		26	%			997		26	%
Home equity loans			96		4	%			98		4	%			73		2	%
CRE loans			—		—	%			—		—	%			2,233		58	%
Total nonperforming assets		$	2,240		100	%		$	2,425		100	%		$	3,830		100	%

	•	NPAs totaled $2.2 million, or 0.04% of total assets, at March 31, 2023, compared to $3.8 million, or 0.07% of total assets, at March 31, 2022, and $2.4 million, or 0.05% of total assets, at December 31, 2022.
	•	There were no foreclosed assets on the balance sheet at March 31, 2023, March 31, 2022, or December 31, 2022.
	•	Classified assets totaled $26.8 million, or 0.48% of total assets, at March 31, 2023, compared to $30.6 million, or 0.56% of total assets, at March 31, 2022, and $14.5 million, or 0.28% of total assets, at December 31, 2022.

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

DEPOSITS		March 31, 2023						December 31, 2022						March 31, 2022
(in $000’s, unaudited)		Balance			% to Total			Balance			% to Total			Balance			% to Total
Demand, noninterest-bearing		$	1,469,081		33	%		$	1,736,722		40	%		$	1,811,943		38	%
Demand, interest-bearing			1,196,789		27	%			1,196,427		27	%			1,268,942		27	%
Savings and money market			1,264,567		28	%			1,285,444		29	%			1,447,434		31	%
Time deposits — under $250			37,884		1	%			32,445		1	%			38,417		1	%
Time deposits — $250 and over			172,070		4	%			108,192		2	%			93,161		2	%
ICS/CDARS — interest-bearing demand,
money market and time deposits			304,147		7	%			30,374		1	%			30,008		1	%
Total deposits		$	4,444,538		100	%		$	4,389,604		100	%		$	4,689,905		100	%

	•	Total deposits increased $54.9 million, or 1%, to $4.445 billion at March 31, 2023, compared to $4.390 billion at December 31, 2022, and decreased ($245.4) million, or (5%), from $4.690 billion at March 31, 2022.
	•	ICS/CDARS deposits increased $273.7 million, or 901%, to $304.1 million at March 31, 2023, compared to $30.4 million at December 31, 2022, and increased $274.1 million, or 914%, from $30.0 million at March 31, 2022.
	•	Uninsured deposits represented approximately 57% of total deposits at March 31, 2023.

• 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, 2023, as reflected in the following table:

		Heritage Commerce Corp			Heritage Bank of Commerce			Well-capitalized Financial Institution Basel III PCA Regulatory Guidelines			Basel III   Minimum Regulatory Requirement (1)
CAPITAL RATIOS (unaudited)
Total Capital		15.3	%		14.7	%		10.0	%		10.5	%
Tier 1 Capital		13.1	%		13.5	%		8.0	%		8.5	%
Common Equity Tier 1 Capital		13.1	%		13.5	%		6.5	%		7.0	%
Tier 1 Leverage		9.6	%		9.9	%		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		March 31,				December 31,				March 31,
(in $000’s, unaudited)		2023				2022				2022
Unrealized loss on securities available-for-sale		$	(8,924	)		$	(11,506	)		$	(1,127	)
Split dollar insurance contracts liability			(3,139	)			(3,091	)			(5,491	)
Supplemental executive retirement plan liability			(2,361	)			(2,371	)			(7,588	)
Unrealized gain on interest-only strip from SBA loans			107				112				152
Total accumulated other comprehensive loss		$	(14,317	)		$	(16,856	)		$	(14,054	)

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, 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, 2022, and the following: (1) geopolitical and domestic political developments that can increase levels of political and economic unpredictability, contribute to rising energy and commodity prices, and increase the volatility of financial markets; (2) current and future economic and market conditions in the United States generally or in the communities we serve, including the effects of declines in property values and overall slowdowns in economic growth should these events occur; (3) effects of and changes in trade, monetary and fiscal policies and laws, including the interest rate policies of the Federal Open Market Committee of the Federal Reserve Board; (4) inflationary pressures and changes in the interest rate environment that reduce our margins and yields, the fair value of financial instruments or our level of loan originations, or increase the level of defaults, losses and prepayments on loans we have made and make, whether held in the portfolio or in the secondary market; (5) liquidity risks; (6) our ability to mitigate and manage deposit liabilities in a manner that balances the need to meet current and expected withdrawals while investing a sufficient portion of our assets to promote strong earning capacity; (7) 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; (8) volatility in credit and equity markets and its effect on the global economy; (9) conditions relating to the impact of the COVID-19 pandemic, and other infectious illness outbreaks that may arise in the future, our customers, employees, businesses, liquidity, financial results and overall condition including severity and duration of the associated uncertainties in U.S. and global markets; (10) 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; (11) our ability to achieve loan growth and attract deposits in our market area, the impact of the cost of deposits and our ability to retain deposits; (12) risks associated with concentrations in real estate related loans; (13) the relative strength or weakness of the commercial and real estate markets where our borrowers are located, including related vacancy rates, and asset and market prices; (14) credit related impairment charges to our securities portfolio; (15) 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; (16) regulatory limits on Heritage Bank of Commerce’s ability to pay dividends to the Company; (17) 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; (18) 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; (19) possible adjustment of the valuation of our deferred tax assets; (20) 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; (21) inability of our framework to manage risks associated with our business, including operational risk and credit risk; (22) risks of loss of funding of Small Business Administration (“SBA”) or SBA loan programs, or changes in those programs; (23) 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; (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) the expense and uncertain resolution of litigation matters whether occurring in the ordinary course of business or otherwise; (26) availability of and competition for acquisition opportunities; (27) risks resulting from domestic terrorism; (28) risks resulting from social unrest and protests; (29) risks of natural disasters (including earthquakes, fires, and flooding) and other events beyond our control; and (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
Debbie.Reuter@herbank.com

CONSOLIDATED INCOME STATEMENTS		For the Quarter Ended:										Percent Change From:
		March 31,			December 31,			March 31,				December 31,			March 31,
(in $000’s, unaudited)		2023			2022			2022				2022			2022
Interest income		$	56,274		$	55,192		$	39,906			2		%	41		%
Interest expense			7,016			3,453			1,685			103		%	316		%
Net interest income before provision
for credit losses on loans			49,258			51,739			38,221			(5	)	%	29		%
Provision for (recapture of) credit losses on loans			32			508			(567	)		(94	)	%	106		%
Net interest income after provision
for credit losses on loans			49,226			51,231			38,788			(4	)	%	27		%
Noninterest income:
Service charges and fees on deposit
accounts			1,743			1,801			612			(3	)	%	185		%
Increase in cash surrender value of
life insurance			493			481			480			2		%	3		%
Servicing income			131			138			106			(5	)	%	24		%
Gain on sales of SBA loans			76			—			156			N/A			(51	)	%
Termination fees			11			—			—			N/A			N/A
Gain on warrants			—			—			637			N/A			(100	)	%
Other			312			352			469			(11	)	%	(33	)	%
Total noninterest income			2,766			2,772			2,460			0		%	12		%
Noninterest expense:
Salaries and employee benefits			14,809			13,915			13,821			6		%	7		%
Occupancy and equipment			2,400			2,510			2,437			(4	)	%	(2	)	%
Professional fees			1,399			1,414			1,080			(1	)	%	30		%
Other			6,793			6,679			5,914			2		%	15		%
Total noninterest expense			25,401			24,518			23,252			4		%	9		%
Income before income taxes			26,591			29,485			17,996			(10	)	%	48		%
Income tax expense			7,674			8,686			5,130			(12	)	%	50		%
Net income		$	18,917		$	20,799		$	12,866			(9	)	%	47		%
PER COMMON SHARE DATA
(unaudited)
Basic earnings per share		$	0.31		$	0.34		$	0.21			(9	)	%	48		%
Diluted earnings per share		$	0.31		$	0.34		$	0.21			(9	)	%	48		%
Weighted average shares outstanding - basic			60,908,221			60,788,803			60,393,883			0		%	1		%
Weighted average shares outstanding - diluted			61,268,072			61,357,023			60,921,835			0		%	1		%
Common shares outstanding at period-end			60,948,607			60,852,723			60,407,846			0		%	1		%
Dividend per share		$	0.13		$	0.13		$	0.13			0		%	0		%
Book value per share		$	10.62		$	10.39		$	9.95			2		%	7		%
Tangible book value per share		$	7.70		$	7.46		$	6.96			3		%	11		%
KEY FINANCIAL RATIOS
(unaudited)
Annualized return on average equity			12.03	%		13.40	%		8.71		%	(10	)	%	38		%
Annualized return on average tangible
common equity			16.71	%		18.89	%		12.47		%	(12	)	%	34		%
Annualized return on average assets			1.47	%		1.54	%		0.96		%	(5	)	%	53		%
Annualized return on average tangible assets			1.52	%		1.59	%		0.99		%	(4	)	%	54		%
Net interest margin (FTE)			4.09	%		4.10	%		3.05		%	0		%	34		%
Efficiency ratio			48.83	%		44.98	%		57.16		%	9		%	(15	)	%
AVERAGE BALANCES
(in $000’s, unaudited)
Average assets		$	5,235,506		$	5,360,867		$	5,443,240			(2	)	%	(4	)	%
Average tangible assets		$	5,057,063		$	5,181,793		$	5,262,175			(2	)	%	(4	)	%
Average earning assets		$	4,895,009		$	5,009,578		$	5,093,851			(2	)	%	(4	)	%
Average loans held-for-sale		$	2,755		$	2,346		$	1,478			17		%	86		%
Average total loans		$	3,274,770		$	3,248,210		$	3,027,111			1		%	8		%
Average deposits		$	4,415,952		$	4,600,533		$	4,697,136			(4	)	%	(6	)	%
Average demand deposits - noninterest-bearing		$	1,667,260		$	1,851,003		$	1,857,164			(10	)	%	(10	)	%
Average interest-bearing deposits		$	2,748,692		$	2,749,530		$	2,839,972			0		%	(3	)	%
Average interest-bearing liabilities		$	2,834,732		$	2,788,880		$	2,879,952			2		%	(2	)	%
Average equity		$	637,597		$	615,941		$	599,355			4		%	6		%
Average tangible common equity		$	459,154		$	436,867		$	418,290			5		%	10		%

		For the Quarter Ended:
CONSOLIDATED INCOME STATEMENTS		March 31,			December 31,			September 30,			June 30,				March 31,
(in $000’s, unaudited)		2023			2022			2022			2022				2022
Interest income		$	56,274		$	55,192		$	50,174		$	43,556			$	39,906
Interest expense			7,016			3,453			2,133			1,677				1,685
Net interest income before provision
for credit losses on loans			49,258			51,739			48,041			41,879				38,221
Provision for (recapture of) credit losses on loans			32			508			1,006			(181	)			(567	)
Net interest income after provision
for credit losses on loans			49,226			51,231			47,035			42,060				38,788
Noninterest income:
Service charges and fees on deposit
accounts			1,743			1,801			1,360			867				612
Increase in cash surrender value of
life insurance			493			481			484			480				480
Servicing income			131			138			125			139				106
Gain on sales of SBA loans			76			—			308			27				156
Termination fees			11			—			16			45				—
Gain on warrants			—			—			32			—				637
Gain on proceeds from company-owned
life insurance			—			—			—			27				—
Other			312			352			456			513				469
Total noninterest income			2,766			2,772			2,781			2,098				2,460
Noninterest expense:
Salaries and employee benefits			14,809			13,915			14,119			13,476				13,821
Occupancy and equipment			2,400			2,510			2,415			2,277				2,437
Professional fees			1,399			1,414			1,230			1,291				1,080
Other			6,793			6,679			6,135			6,146				5,914
Total noninterest expense			25,401			24,518			23,899			23,190				23,252
Income before income taxes			26,591			29,485			25,917			20,968				17,996
Income tax expense			7,674			8,686			7,848			6,147				5,130
Net income		$	18,917		$	20,799		$	18,069		$	14,821			$	12,866
PER COMMON SHARE DATA
(unaudited)
Basic earnings per share		$	0.31		$	0.34		$	0.30		$	0.24			$	0.21
Diluted earnings per share		$	0.31		$	0.34		$	0.30		$	0.24			$	0.21
Weighted average shares outstanding - basic			60,908,221			60,788,803			60,686,992			60,542,170				60,393,883
Weighted average shares outstanding - diluted			61,268,072			61,357,023			61,123,801			60,969,154				60,921,835
Common shares outstanding at period-end			60,948,607			60,852,723			60,716,794			60,666,794				60,407,846
Dividend per share		$	0.13		$	0.13		$	0.13		$	0.13			$	0.13
Book value per share		$	10.62		$	10.39		$	10.04		$	10.01			$	9.95
Tangible book value per share		$	7.70		$	7.46		$	7.09		$	7.04			$	6.96
KEY FINANCIAL RATIOS
(unaudited)
Annualized return on average equity			12.03	%		13.40	%		11.72	%		9.86		%		8.71		%
Annualized return on average tangible
common equity			16.71	%		18.89	%		16.60	%		14.06		%		12.47		%
Annualized return on average assets			1.47	%		1.54	%		1.31	%		1.11		%		0.96		%
Annualized return on average tangible assets			1.52	%		1.59	%		1.36	%		1.15		%		0.99		%
Net interest margin (FTE)			4.09	%		4.10	%		3.73	%		3.38		%		3.05		%
Efficiency ratio			48.83	%		44.98	%		47.02	%		52.73		%		57.16		%
AVERAGE BALANCES
(in $000’s, unaudited)
Average assets		$	5,235,506		$	5,360,867		$	5,466,330		$	5,334,636			$	5,443,240
Average tangible assets		$	5,057,063		$	5,181,793		$	5,286,591		$	5,154,245			$	5,262,175
Average earning assets		$	4,895,009		$	5,009,578		$	5,117,373		$	4,985,611			$	5,093,851
Average loans held-for-sale		$	2,755		$	2,346		$	3,282		$	1,824			$	1,478
Average total loans		$	3,274,770		$	3,248,210		$	3,140,705		$	3,048,353			$	3,027,111
Average deposits		$	4,415,952		$	4,600,533		$	4,712,044		$	4,579,436			$	4,697,136
Average demand deposits - noninterest-bearing		$	1,667,260		$	1,851,003		$	1,910,748		$	1,836,350			$	1,857,164
Average interest-bearing deposits		$	2,748,692		$	2,749,530		$	2,801,296		$	2,743,086			$	2,839,972
Average interest-bearing liabilities		$	2,834,732		$	2,788,880		$	2,840,611		$	2,791,527			$	2,879,952
Average equity		$	637,597		$	615,941		$	611,707		$	603,182			$	599,355
Average tangible common equity		$	459,154		$	436,867		$	431,968		$	422,791			$	418,290

		End of Period:												Percent Change From:
CONSOLIDATED BALANCE SHEETS		March 31,				December 31,				March 31,				December 31,			March 31,
(in $000’s, unaudited)		2023				2022				2022				2022			2022
ASSETS
Cash and due from banks		$	41,318			$	27,595			$	29,729			50		%	39		%
Other investments and interest-bearing deposits
in other financial institutions			698,690				279,008				1,187,436			150		%	(41	)	%
Securities available-for-sale, at fair value			491,751				489,596				111,217			0		%	342		%
Securities held-to-maturity, at amortized cost			698,231				714,990				736,823			(2	)	%	(5	)	%
Loans held-for-sale - SBA, including deferred costs			2,792				2,456				831			14		%	236		%
Loans:
Commercial			506,037				532,749				568,053			(5	)	%	(11	)	%
PPP loans			565				1,166				37,393			(52	)	%	(98	)	%
Real estate:
CRE - owner occupied			603,298				614,663				597,542			(2	)	%	1		%
CRE - non-owner occupied			1,083,852				1,066,368				928,220			2		%	17		%
Land and construction			166,408				163,577				153,323			2		%	9		%
Home equity			124,481				120,724				111,609			3		%	12		%
Multifamily			231,242				244,882				221,767			(6	)	%	4		%
Residential mortgages			528,639				537,905				391,171			(2	)	%	35		%
Consumer and other			17,905				17,033				17,110			5		%	5		%
Loans			3,262,427				3,299,067				3,026,188			(1	)	%	8		%
Deferred loan fees, net			(512	)			(517	)			(2,124	)		(1	)	%	(76	)	%
Total loans, net of deferred costs and fees			3,261,915				3,298,550				3,024,064			(1	)	%	8		%
Allowance for credit losses on loans			(47,273	)			(47,512	)			(42,788	)		(1	)	%	10		%
Loans, net			3,214,642				3,251,038				2,981,276			(1	)	%	8		%
Company-owned life insurance			79,438				78,945				78,069			1		%	2		%
Premises and equipment, net			9,142				9,301				9,580			(2	)	%	(5	)	%
Goodwill			167,631				167,631				167,631			0		%	0		%
Other intangible assets			10,431				11,033				13,009			(5	)	%	(20	)	%
Accrued interest receivable and other assets			122,474				125,987				111,797			(3	)	%	10		%
Total assets		$	5,536,540			$	5,157,580			$	5,427,398			7		%	2		%
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand, noninterest-bearing		$	1,469,081			$	1,736,722			$	1,811,943			(15	)	%	(19	)	%
Demand, interest-bearing			1,196,789				1,196,427				1,268,942			0		%	(6	)	%
Savings and money market			1,264,567				1,285,444				1,447,434			(2	)	%	(13	)	%
Time deposits - under $250			37,884				32,445				38,417			17		%	(1	)	%
Time deposits - $250 and over			172,070				108,192				93,161			59		%	85		%
ICS/CDARS - interest-bearing demand, money market
and time deposits			304,147				30,374				30,008			901		%	914		%
Total deposits			4,444,538				4,389,604				4,689,905			1		%	(5	)	%
Other short-term borrowings			300,000				—				—			N/A			N/A
Subordinated debt, net of issuance costs			39,387				39,350				39,987			0		%	(2	)	%
Accrued interest payable and other liabilities			105,407				96,170				96,450			10		%	9		%
Total liabilities			4,889,332				4,525,124				4,826,342			8		%	1		%
Shareholders’ Equity:
Common stock			504,135				502,923				498,763			0		%	1		%
Retained earnings			157,390				146,389				116,347			8		%	35		%
Accumulated other comprehensive loss			(14,317	)			(16,856	)			(14,054	)		15		%	(2	)	%
Total shareholders' equity			647,208				632,456				601,056			2		%	8		%
Total liabilities and shareholders’ equity		$	5,536,540			$	5,157,580			$	5,427,398			7		%	2		%

		End of Period:
CONSOLIDATED BALANCE SHEETS		March 31,				December 31,				September 30,				June 30,				March 31,
(in $000’s, unaudited)		2023				2022				2022				2022				2022
ASSETS
Cash and due from banks		$	41,318			$	27,595			$	40,500			$	35,764			$	29,729
Other investments and interest-bearing deposits
in other financial institutions			698,690				279,008				641,251				840,821				1,187,436
Securities available-for-sale, at fair value			491,751				489,596				478,534				332,129				111,217
Securities held-to-maturity, at amortized cost			698,231				714,990				703,794				723,716				736,823
Loans held-for-sale - SBA, including deferred costs			2,792				2,456				2,081				2,281				831
Loans:
Commercial			506,037				532,749				541,215				523,268				568,053
PPP loans			565				1,166				1,614				8,153				37,393
Real estate:
CRE - owner occupied			603,298				614,663				612,241				597,521				597,542
CRE - non-owner occupied			1,083,852				1,066,368				1,023,405				993,621				928,220
Land and construction			166,408				163,577				167,439				155,389				153,323
Home equity			124,481				120,724				116,489				116,641				111,609
Multifamily			231,242				244,882				229,455				221,938				221,767
Residential mortgages			528,639				537,905				508,839				448,958				391,171
Consumer and other			17,905				17,033				16,620				18,354				17,110
Loans			3,262,427				3,299,067				3,217,317				3,083,843				3,026,188
Deferred loan fees, net			(512	)			(517	)			(844	)			(1,391	)			(2,124	)
Total loans, net of deferred fees			3,261,915				3,298,550				3,216,473				3,082,452				3,024,064
Allowance for credit losses on loans			(47,273	)			(47,512	)			(46,921	)			(45,490	)			(42,788	)
Loans, net			3,214,642				3,251,038				3,169,552				3,036,962				2,981,276
Company-owned life insurance			79,438				78,945				78,456				77,972				78,069
Premises and equipment, net			9,142				9,301				9,428				9,593				9,580
Goodwill			167,631				167,631				167,631				167,631				167,631
Other intangible assets			10,431				11,033				11,692				12,351				13,009
Accrued interest receivable and other assets			122,474				125,987				128,343				117,621				111,797
Total assets		$	5,536,540			$	5,157,580			$	5,431,262			$	5,356,841			$	5,427,398
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand, noninterest-bearing		$	1,469,081			$	1,736,722			$	1,883,574			$	1,846,365			$	1,811,943
Demand, interest-bearing			1,196,789				1,196,427				1,154,403				1,218,538				1,268,942
Savings and money market			1,264,567				1,285,444				1,487,400				1,387,003				1,447,434
Time deposits - under $250			37,884				32,445				34,728				36,691				38,417
Time deposits - $250 and over			172,070				108,192				93,263				98,760				93,161
ICS/CDARS - interest-bearing demand, money market
and time deposits			304,147				30,374				29,897				26,287				30,008
Total deposits			4,444,538				4,389,604				4,683,265				4,613,644				4,689,905
Other short-term borrowings			300,000				—				—				—				—
Subordinated debt, net of issuance costs			39,387				39,350				39,312				39,274				39,987
Accrued interest payable and other liabilities			105,407				96,170				99,168				96,699				96,450
Total liabilities			4,889,332				4,525,124				4,821,745				4,749,617				4,826,342
Shareholders’ Equity:
Common stock			504,135				502,923				501,240				499,832				498,763
Retained earnings			157,390				146,389				133,489				123,310				116,347
Accumulated other comprehensive loss			(14,317	)			(16,856	)			(25,212	)			(15,918	)			(14,054	)
Total shareholders' equity			647,208				632,456				609,517				607,224				601,056
Total liabilities and shareholders’ equity		$	5,536,540			$	5,157,580			$	5,431,262			$	5,356,841			$	5,427,398

		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)		2023			2022				2022				2022			2022
Nonaccrual loans - held-for-investment		$	781		$	740			$	3,303			6		%	(76	)	%
Restructured and loans over 90 days past due
and still accruing			1,459			1,685				527			(13	)	%	177		%
Total nonperforming loans			2,240			2,425				3,830			(8	)	%	(42	)	%
Foreclosed assets			—			—				—			N/A			N/A
Total nonperforming assets		$	2,240		$	2,425			$	3,830			(8	)	%	(42	)	%
Other restructured loans still accruing		$	—		$	171			$	125			(100	)	%	(100	)	%
Net charge-offs (recoveries) during the quarter		$	271		$	(83	)		$	(65	)		427		%	517		%
Provision for (recapture of) credit losses on loans during the quarter		$	32		$	508			$	(567	)		(94	)	%	106		%
Allowance for credit losses on loans		$	47,273		$	47,512			$	42,788			(1	)	%	10		%
Classified assets		$	26,800		$	14,544			$	30,579			84		%	(12	)	%
Allowance for credit losses on loans to total loans			1.45	%		1.44		%		1.41		%	1		%	3		%
Allowance for credit losses on loans to total nonperforming loans			2,110.40	%		1,959.26		%		1,117.18		%	8		%	89		%
Nonperforming assets to total assets			0.04	%		0.05		%		0.07		%	(20	)	%	(43	)	%
Nonperforming loans to total loans			0.07	%		0.07		%		0.13		%	0		%	(46	)	%
Classified assets to Heritage Commerce Corp
Tier 1 capital plus allowance for credit losses on loans			5	%		3		%		6		%	67		%	(17	)	%
Classified assets to Heritage Bank of Commerce
Tier 1 capital plus allowance for credit losses on loans			5	%		3		%		6		%	67		%	(17	)	%
OTHER PERIOD-END STATISTICS
(in $000’s, unaudited)
Heritage Commerce Corp:
Tangible common equity (1)		$	469,146		$	453,792			$	420,416			3		%	12		%
Shareholders’ equity / total assets			11.69	%		12.26		%		11.07		%	(5	)	%	6		%
Tangible common equity / tangible assets (2)			8.76	%		9.11		%		8.01		%	(4	)	%	9		%
Loan to deposit ratio			73.39	%		75.14		%		64.48		%	(2	)	%	14		%
Noninterest-bearing deposits / total deposits			33.05	%		39.56		%		38.63		%	(16	)	%	(14	)	%
Total capital ratio			15.3	%		14.8		%		14.6		%	3		%	5		%
Tier 1 capital ratio			13.1	%		12.7		%		12.4		%	3		%	6		%
Common Equity Tier 1 capital ratio			13.1	%		12.7		%		12.4		%	3		%	6		%
Tier 1 leverage ratio			9.6	%		9.2		%		8.3		%	4		%	16		%
Heritage Bank of Commerce:
Total capital ratio			14.7	%		14.2		%		13.9		%	4		%	6		%
Tier 1 capital ratio			13.5	%		13.2		%		12.9		%	2		%	5		%
Common Equity Tier 1 capital ratio			13.5	%		13.2		%		12.9		%	2		%	5		%
Tier 1 leverage ratio			9.9	%		9.5		%		8.7		%	4		%	14		%

__________________

(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)		2023			2022				2022				2022				2022
Nonaccrual loans - held-for-investment		$	781		$	740			$	491			$	1,734			$	3,303
Restructured and loans over 90 days past due
and still accruing			1,459			1,685				545				981				527
Total nonperforming loans			2,240			2,425				1,036				2,715				3,830
Foreclosed assets			—			—				—				—				—
Total nonperforming assets		$	2,240		$	2,425			$	1,036			$	2,715			$	3,830
Other restructured loans still accruing		$	—		$	171			$	93			$	113			$	125
Net charge-offs (recoveries) during the quarter		$	271		$	(83	)		$	(425	)		$	(2,883	)		$	(65	)
Provision for (recapture of) credit losses on loans during the quarter		$	32		$	508			$	1,006			$	(181	)		$	(567	)
Allowance for credit losses on loans		$	47,273		$	47,512			$	46,921			$	45,490			$	42,788
Classified assets		$	26,800		$	14,544			$	28,570			$	28,929			$	30,579
Allowance for credit losses on loans to total loans			1.45	%		1.44		%		1.46		%		1.48		%		1.41		%
Allowance for credit losses on loans to total nonperforming loans			2,110.40	%		1,959.26		%		4,529.05		%		1,675.51		%		1,117.18		%
Nonperforming assets to total assets			0.04	%		0.05		%		0.02		%		0.05		%		0.07		%
Nonperforming loans to total loans			0.07	%		0.07		%		0.03		%		0.09		%		0.13		%
Classified assets to Heritage Commerce Corp
Tier 1 capital plus allowance for credit losses on loans			5	%		3		%		6		%		6		%		6		%
Classified assets to Heritage Bank of Commerce
Tier 1 capital plus allowance for credit losses on loans			5	%		3		%		5		%		6		%		6		%
OTHER PERIOD-END STATISTICS
(in $000’s, unaudited)
Heritage Commerce Corp:
Tangible common equity (1)		$	469,146		$	453,792			$	430,194			$	427,242			$	420,416
Shareholders’ equity / total assets			11.69	%		12.26		%		11.22		%		11.34		%		11.07		%
Tangible common equity / tangible assets (2)			8.76	%		9.11		%		8.19		%		8.25		%		8.01		%
Loan to deposit ratio			73.39	%		75.14		%		68.68		%		66.81		%		64.48		%
Noninterest-bearing deposits / total deposits			33.05	%		39.56		%		40.22		%		40.02		%		38.63		%
Total capital ratio			15.3	%		14.8		%		14.5		%		14.6		%		14.6		%
Tier 1 capital ratio			13.1	%		12.7		%		12.4		%		12.5		%		12.4		%
Common Equity Tier 1 capital ratio			13.1	%		12.7		%		12.4		%		12.5		%		12.4		%
Tier 1 leverage ratio			9.6	%		9.2		%		8.7		%		8.7		%		8.3		%
Heritage Bank of Commerce:
Total capital ratio			14.7	%		14.2		%		14.0		%		14.1		%		13.9		%
Tier 1 capital ratio			13.5	%		13.2		%		12.9		%		13.0		%		12.9		%
Common Equity Tier 1 capital ratio			13.5	%		13.2		%		12.9		%		13.0		%		12.9		%
Tier 1 leverage ratio			9.9	%		9.5		%		9.0		%		9.0		%		8.7		%

__________________

(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

NET INTEREST INCOME AND NET INTEREST MARGIN		For the Quarter Ended									For the Quarter Ended
		March 31, 2023									March 31, 2022
					Interest				Average					Interest				Average
		Average			Income/				Yield/		Average			Income/				Yield/
(in $000’s, unaudited)		Balance			Expense				Rate		Balance			Expense				Rate
Assets:
Loans, gross (1)(2)		$	3,277,525		$	44,112			5.46	%	$	3,028,589			35,101			4.70	%
Securities - taxable			1,161,021			7,056			2.46	%		781,689			3,444			1.79	%
Securities - exempt from Federal tax (3)			36,012			313			3.52	%		44,871			376			3.40	%
Other investments and interest-bearing deposits
in other financial institutions			420,451			4,859			4.69	%		1,238,702			1,064			0.35	%
Total interest earning assets (3)			4,895,009			56,340			4.67	%		5,093,851			39,985			3.18	%
Cash and due from banks			37,563									37,630
Premises and equipment, net			9,269									9,605
Goodwill and other intangible assets			178,443									181,065
Other assets			115,222									121,089
Total assets		$	5,235,506								$	5,443,240
Liabilities and shareholders’ equity:
Deposits:
Demand, noninterest-bearing		$	1,667,260								$	1,857,164
Demand, interest-bearing			1,217,731			1,476			0.49	%		1,279,989			459			0.15	%
Savings and money market			1,285,173			3,489			1.10	%		1,394,734			543			0.16	%
Time deposits - under $100			12,280			10			0.33	%		13,235			5			0.15	%
Time deposits - $100 and over			163,047			845			2.10	%		119,082			106			0.36	%
ICS/CDARS - interest-bearing demand, money market
and time deposits			70,461			81			0.47	%		32,932			1			0.01	%
Total interest-bearing deposits			2,748,692			5,901			0.87	%		2,839,972			1,114			0.16	%
Total deposits			4,415,952			5,901			0.54	%		4,697,136			1,114			0.10	%
Short-term borrowings			46,677			578			5.02	%		29			—			0.00	%
Subordinated debt, net of issuance costs			39,363			537			5.53	%		39,951			571			5.80	%
Total interest-bearing liabilities			2,834,732			7,016			1.00	%		2,879,952			1,685			0.24	%
Total interest-bearing liabilities and demand,
noninterest-bearing / cost of funds			4,501,992			7,016			0.63	%		4,737,116			1,685			0.14	%
Other liabilities			95,917									106,769
Total liabilities			4,597,909									4,843,885
Shareholders’ equity			637,597									599,355
Total liabilities and shareholders’ equity		$	5,235,506								$	5,443,240
Net interest income (3) / margin						49,324			4.09	%					38,300			3.05	%
Less tax equivalent adjustment (3)						(66	)								(79	)
Net interest income					$	49,258								$	38,221

__________________

(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 $300,000 for the first quarter of 2023 (of which $18,000 was from PPP loans), compared to $1,788,000 for the first quarter of 2022 (of which $1,346,000 was from PPP loans). Prepayment fees totaled $138,000 for the first quarter of 2023, compared to $510,000 for the first quarter of 2022.
(3)	Reflects the FTE adjustment for Federal tax-exempt income based on a 21% tax rate.

NET INTEREST INCOME AND NET INTEREST MARGIN		For the Quarter Ended									For the Quarter Ended
		March 31, 2023									December 31, 2022
					Interest				Average					Interest				Average
		Average			Income/				Yield/		Average			Income/				Yield/
(in $000’s, unaudited)		Balance			Expense				Rate		Balance			Expense				Rate
Assets:
Loans, gross (1)(2)		$	3,277,525		$	44,112			5.46	%	$	3,250,556		$	42,501			5.19	%
Securities - taxable			1,161,021			7,056			2.46	%		1,156,563			6,941			2.38	%
Securities - exempt from Federal tax (3)			36,012			313			3.52	%		37,958			324			3.39	%
Other investments and interest-bearing deposits
in other financial institutions			420,451			4,859			4.69	%		564,501			5,494			3.86	%
Total interest earning assets (3)			4,895,009			56,340			4.67	%		5,009,578			55,260			4.38	%
Cash and due from banks			37,563									36,392
Premises and equipment, net			9,269									9,436
Goodwill and other intangible assets			178,443									179,074
Other assets			115,222									126,387
Total assets		$	5,235,506								$	5,360,867
Liabilities and shareholders’ equity:
Deposits:
Demand, noninterest-bearing		$	1,667,260								$	1,851,003
Demand, interest-bearing			1,217,731			1,476			0.49	%		1,164,378			945			0.32	%
Savings and money market			1,285,173			3,489			1.10	%		1,424,964			1,694			0.47	%
Time deposits - under $100			12,280			10			0.33	%		12,157			7			0.23	%
Time deposits - $100 and over			163,047			845			2.10	%		120,246			268			0.88	%
ICS/CDARS - interest-bearing demand, money market
and time deposits			70,461			81			0.47	%		27,785			1			0.01	%
Total interest-bearing deposits			2,748,692			5,901			0.87	%		2,749,530			2,915			0.42	%
Total deposits			4,415,952			5,901			0.54	%		4,600,533			2,915			0.25	%
Short-term borrowings			46,677			578			5.02	%		24			—			0.00	%
Subordinated debt, net of issuance costs			39,363			537			5.53	%		39,326			538			5.43	%
Total interest-bearing liabilities			2,834,732			7,016			1.00	%		2,788,880			3,453			0.49	%
Total interest-bearing liabilities and demand,
noninterest-bearing / cost of funds			4,501,992			7,016			0.63	%		4,639,883			3,453			0.30	%
Other liabilities			95,917									105,043
Total liabilities			4,597,909									4,744,926
Shareholders’ equity			637,597									615,941
Total liabilities and shareholders’ equity		$	5,235,506								$	5,360,867
Net interest income (3) / margin						49,324			4.09	%					51,807			4.10	%
Less tax equivalent adjustment (3)						(66	)								(68	)
Net interest income					$	49,258								$	51,739

__________________

(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 $300,000 for the first quarter of 2023 (of which $18,000 was from PPP loans), compared to $326,000 for the fourth quarter of 2022 (of which $25,000 was from PPP loans). Prepayment fees totaled $138,000 for the first quarter of 2023, compared to $123,000 for the fourth quarter of 2022.
(3)	Reflects the FTE adjustment for Federal tax-exempt income based on a 21% tax rate.