Heritage Commerce Corp Earns $16.4 Million for the Second Quarter of 2023, and $35.3 Million for the First Six Months of 2023; Continued Deposit Growth

Heritage Commerce Corp

SAN JOSE, Calif., July 27, 2023 (GLOBE NEWSWIRE) -- Heritage Commerce Corp (Nasdaq: HTBK), the holding company (the “Company”) for Heritage Bank of Commerce (the “Bank”), today announced second quarter 2023 net income increased 11% to $16.4 million, or $0.27 per average diluted common share, compared to $14.8 million, or $0.24 per average diluted common share, for the second quarter of 2022, and decreased (13%) from $18.9 million, or $0.31 per average diluted common share, for the first quarter of 2023. For the six months ended June 30, 2023, net income increased 28% to $35.3 million, or $0.58 per average diluted common share, compared to $27.7 million, or $0.45 per average diluted common share, for the six months ended June 30, 2022. All results are unaudited.

"We are pleased to report excellent operating results for the second quarter of 2023, achieving record earnings not only for this quarter but also for the first six months of the year,” said Clay Jones, President and Chief Executive Officer. “Our profits have shown a notable 28% increase compared to the first six months of 2022. This growth is attributed to the expansion of our loan portfolio, increased deposits, higher net interest income, and improved efficiency."

Mr. Jones further acknowledged that as clients sought higher yields on their deposits, there was an anticipated shift towards interest-bearing deposits. While this shift affected margins during the period, it reflects the Bank's responsiveness to client preferences and demonstrates the commitment to meeting their financial needs.

“Our credit quality remains strong, with only a minor increase to nonperforming and classified assets.” said Mr. Jones. “We remain confident in our allowance for credit losses with respect to our loan portfolio, as our reserves represent 863% of nonperforming loans and 1.45% of total loans.”

"Looking ahead to the second half of the year, we remain confident in the Bank's well-positioned balance sheet, with an emphasis on strength, stability, and liquidity. With a well-diversified and stable deposit base, along with abundant alternative funding sources, we are successfully navigating the current challenges within the banking industry," stated Mr. Jones.

Mr. Jones conveyed his gratitude to the loyal clients, dedicated team members, community nonprofits, and the Company’s shareholders, recognizing their continuing support. Their trust and collaboration play a crucial role in the Company’s ongoing success and ability to provide exceptional financial services to our clients.

Current Financial Condition and Liquidity Position

The following are important factors in understanding our current financial condition and liquidity position:

Liquidity and Available Lines of Credit:

• The following table shows our liquidity and available lines of credit at June 30, 2023:
  

LIQUIDITY AND AVAILABLE LINES OF CREDIT		Total
(in $000’s, unaudited)		Available
Excess funds at the Federal Reserve Bank ("FRB")		$	464,100
FRB discount window collateralized line of credit			1,266,522
Federal Home Loan Bank ("FHLB") collateralized borrowing capacity			1,087,564
Unpledged investment securities (at fair value)			108,571
Off-balance sheet deposits			86,734
Federal funds purchase arrangements			80,000
Holding company line of credit			20,000
Total		$	3,113,491

• The Company’s total liquidity and borrowing capacity was $3.113 billion, all of which remained available at June 30, 2023.

• The available liquidity and borrowing capacity was 69% of total deposits and approximately 145% of estimated uninsured deposits at June 30, 2023.

• The Bank increased its credit line availability from the FRB and the FHLB by $332.3 million to $2.354 billion at June 30, 2023, from $2.022 billion at March 31, 2023, and increased by $1.515 billion from $839.5 million at 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 rapid, flexible liquidity during an uncertain time.

• The loan to deposit ratio was 73.07% at June 30, 2023, compared to 75.14% at December 31, 2022, and 73.39% at March 31, 2023.
  

Deposits:

• Total deposits increased $111.2 million, or 3%, to $4.501 billion at June 30, 2023 from $4.390 billion at December 31, 2022, and increased $56.2 million, or 1% from March 31, 2023.

• Migration of customer deposits resulted in an increase in Insured Cash Sweep (“ICS”)/Certificate of Deposit Account Registry Service (“CDARS”) deposits of $793.7 million to $824.1 million at June 30, 2023, compared to $30.4 million at December 31, 2022. ICS/CDARS deposits increased $520.0 million to $824.1 million at June 30, 2023 from $304.1 million at March 31, 2023.

• Noninterest-bearing demand deposits decreased ($416.9) million, or (24%), to $1.320 billion at June 30, 2023 from December 31, 2022, and decreased ($149.2) million, or (10%) from March 31, 2023, primarily due to clients seeking higher yields and moving noninterest-bearing deposits to the Bank’s interest-bearing and ICS deposits.

• The Company had 24,404 deposits accounts at June 30, 2023, with an average balance of $187,000, compared to 24,103 deposit accounts at March 31, 2023, with an average balance of $184,000. At December 31, 2023, the Company had 23,833 deposit accounts, with an average balance of $184,000.

• Deposits from the top 100 client relationships totaled $2.108 billion, representing 47% of total deposits, with an average account size of $401,000, representing 22% of the total number of accounts at June 30, 2023.
  

Investment Securities:

• Investment securities totaled $1.168 billion at June 30, 2023, of which $486.1 million were in the securities available-for-sale portfolio (at fair value), and $682.1 million were in the securities held-to-maturity portfolio (at amortized cost, net of allowance for credit losses of $13,000).

• The weighted average life of the total investment securities portfolio was 4.79 years at June 30, 2023.

• The following are the projected cash flows from paydowns and maturities in the investment securities portfolio for the periods indicated based on the current interest rate environment:
  

					Agency
					Mortgage-
					backed and
PROJECTED INVESTMENT SECURITIES CASH FLOWS		U.S.			Municipal
(in $000’s, unaudited)		Treasury			Securities			Total
Third quarter of 2023		$	27,000		$	24,587		$	51,587
Fourth quarter of 2023			20,000			19,739			39,739
First quarter of 2024			37,000			19,458			56,458
Second quarter of 2024			131,000			18,624			149,624
Total		$	215,000		$	82,408		$	297,408

Loans:

• Loans, excluding loans held-for-sale, decreased ($9.8) million to $3.289 billion at June 30, 2023 from December 31, 2022, and increased $26.9 million, or 1%, from March 31, 2023.

• Commercial real estate (“CRE”) loans totaled $1.755 billion at June 30, 2023, of which 35% were owner occupied and 65% were investor CRE loans.

• During the second quarter of 2023, 41 new CRE loans were originated totaling $92 million with a weighted average loan-to-value and debt-service coverage for the non-owner occupied portfolio of 40% and 1.77 times, respectively

• The average loan size for all CRE loans was $1.6 million, and the average loan size for office CRE loans was $1.7 million.

• The Company has personal guarantees on 90% of its CRE portfolio. A substantial portion of the unguaranteed CRE loans were made to credit-worthy non-profit organizations.

• Total office exposure in the CRE portfolio was $397 million, including 30 loans totaling approximately $76 million, in San Jose, 17 loans totaling approximately $29 million in San Francisco, and 6 loans totaling approximately $11 million, in Oakland, at June 30, 2023.   Non-owner occupied CRE with office exposure totaled $307 million at June 30, 2023.

• Of the $397 million of CRE loans with office exposure, approximately $35 million, or 9%, are situated in the Bay Area downtown business districts of San Jose and San Francisco, with an average balance of $2.3 million.

• At June 30, 2023, the weighted average loan-to-value and debt-service coverage for the entire non-owner occupied office portfolio were 43.6% and 1.87 times, respectively. For the 8 non-owner occupied office loans in San Francisco at June 30, 2023, the weighted average loan-to-value and debt-service coverage were 34% and 1.55 times, respectively.

Second Quarter Ended June 30, 2023
Operating Results, Balance Sheet Review, Capital Management, and Credit Quality

(as of, or for the periods ended June 30, 2023, compared to June 30, 2022, and March 31, 2023, except as noted):

Operating Results:

• Diluted earnings per share were $0.27 for the second quarter of 2023, compared to $0.24 for the second quarter of 2022, and $0.31 for the first quarter of 2023. Diluted earnings per share were $0.58 for the first six months of 2023, compared to $0.45 for the first six months 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:												For the Six Months Ended:
		June 30,				March 31,				June 30,				June 30,				June 30,
(unaudited)		2023				2023				2022				2023				2022
Return on average tangible assets		1.29	%			1.52	%			1.15	%			1.40	%			1.07	%
Return on average tangible common equity		13.93	%			16.71	%			14.06	%			15.29	%			13.28	%

• Net interest income increased 11% to $46.3 million for the second quarter of 2023, compared to $41.9 million for the second quarter of 2022. The fully tax equivalent (“FTE”) net interest margin increased 38 basis points to 3.76% for the second quarter of 2023, from 3.38% for the second quarter of 2022, primarily due to increases in the prime rate and the rate on overnight funds, partially offset by a higher cost of funds, a decrease in the average balances of noninterest bearing demand deposits and an increase in the average balances of short-term borrowings.
  

  • Net interest income decreased (6%) to $46.3 million for the second quarter of 2023, compared to $49.3 million for the first quarter of 2023. The FTE net interest margin decreased (33) basis points to 3.76% for the second quarter of 2023 from 4.09% for the first quarter of 2023, primarily due to a higher cost of funds, a decrease in the average balances of noninterest bearing demand deposits, and a decrease in the accretion of the loan purchase discount into interest income from acquired loans partially offset by increases in the prime rate and higher average yields on overnight funds.
    

  • For the first six months of 2023, the net interest income increased 19% to $95.6 million, compared to $80.1 million for the first six months of 2022. The FTE net interest margin increased 71 basis points to 3.92% for the first six months of 2023, from 3.21% for the first six months of 2022, primarily due to increases in the prime rate and the rate on overnight funds, partially offset by a higher cost of funds, a decrease in the average balances of noninterest bearing demand deposits, and an increase in the average balances of short-term borrowings.
    

• The following table, as of June 30, 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		$	16,770			8.2		%
+300		$	12,537			6.2		%
+200		$	8,326			4.1		%
+100		$	4,147			2.0		%
0			—			—
−100		$	(5,371	)		(2.6	)	%
−200		$	(17,083	)		(8.4	)	%
−300		$	(32,894	)		(16.2	)	%
−400		$	(48,726	)		(24.0	)	%

(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 5.47% for the second quarter of 2023, compared to 5.46% for the first quarter of 2023, primarily due to increases in the prime rate.

		For the Quarter Ended									For the Quarter Ended
		June 30, 2023									March 31, 2023
		Average				Interest			Average		Average				Interest			Average
(in $000’s, unaudited)		Balance				Income			Yield		Balance				Income			Yield
Loans, core bank		$	2,660,119			$	35,310		5.32	%	$	2,688,800			$	34,967		5.27	%
Prepayment fees			—				73		0.01	%		—				138		0.02	%
Asset-based lending			28,251				686		9.74	%		27,550				627		9.23	%
Bay View Funding factored receivables			68,680				3,847		22.47	%		77,755				4,001		20.87	%
Purchased residential mortgages			478,220				3,829		3.21	%		487,780				3,857		3.21	%
Loan fair value mark / accretion			(3,929	)			283		0.04	%		(4,360	)			522		0.08	%
Total loans (includes loans held-for-sale)		$	3,231,341			$	44,028		5.47	%	$	3,277,525			$	44,112		5.46	%

• The average yield on the total loan portfolio increased to 5.47% for the second quarter of 2023, compared to 4.80% for the second quarter of 2022, primarily due to increases in the prime rate, partially offset by a decrease in the accretion of the loan purchase discount into interest income from acquired loans, lower prepayment fees, and higher average balances of lower yielding purchased residential mortgages.

		For the Quarter Ended									For the Quarter Ended
		June 30, 2023									June 30, 2022
		Average				Interest			Average		Average				Interest			Average
(in $000’s, unaudited)		Balance				Income			Yield		Balance				Income			Yield
Loans, core bank		$	2,660,119			$	35,310		5.32	%	$	2,560,740			$	28,025		4.39	%
Prepayment fees			—				73		0.01	%		—				549		0.09	%
Asset-based lending			28,251				686		9.74	%		49,667				874		7.06	%
Bay View Funding factored receivables			68,680				3,847		22.47	%		64,085				3,129		19.58	%
Purchased residential mortgages			478,220				3,829		3.21	%		381,988				2,711		2.85	%
Loan fair value mark / accretion			(3,929	)			283		0.04	%		(6,303	)			1,250		0.20	%
Total loans (includes loans held-for-sale)		$	3,231,341			$	44,028		5.47	%	$	3,050,177			$	36,538		4.80	%

• The average yield on the total loan portfolio increased to 5.46% for the first six months of 2023, compared to 4.75% for the first six months of 2022, primarily due to increases in the prime rate, partially offset by a decrease in the accretion of the loan purchase discount into interest income from acquired loans, lower prepayment fees, and higher average balances of lower yielding purchased residential mortgages.

		For the Six Months Ended									For the Six Months Ended
		June 30, 2023									June 30, 2022
		Average				Interest			Average		Average				Interest			Average
(in $000’s, unaudited)		Balance				Income			Yield		Balance				Income			Yield
Loans, core bank		$	2,674,389			$	70,277		5.30	%	$	2,556,636			$	55,690		4.39	%
Prepayment fees			—				211		0.02	%		—				1,059		0.08	%
Asset-based lending			27,902				1,313		9.49	%		59,587				1,825		6.18	%
Bay View Funding factored receivables			73,193				7,848		21.62	%		60,940				5,922		19.60	%
Purchased residential mortgages			482,964				7,686		3.21	%		368,880				5,139		2.81	%
Loan fair value mark / accretion			(4,143	)			805		0.06	%		(6,600	)			2,004		0.16	%
Total loans (includes loans held-for-sale)		$	3,254,305			$	88,140		5.46	%	$	3,039,443			$	71,639		4.75	%

	•	In aggregate, the remaining net purchase discount on total loans acquired was $3.8 million at June 30, 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
		June 30, 2023								March 31, 2023
		Average			Interest			Average		Average			Interest			Average
(in $000’s, unaudited)		Balance			Expense			Rate		Balance			Expense			Rate
Deposits:
Demand, noninterest-bearing		$	1,368,373							$	1,667,260
Demand, interest-bearing			1,118,200		$	1,788		0.64	%		1,217,731		$	1,476		0.49	%
Savings and money market			1,109,347			4,638		1.68	%		1,285,173			3,489		1.10	%
Time deposits - under $100			11,610			20		0.69	%		12,280			10		0.33	%
Time deposits - $100 and over			201,600			1,410		2.81	%		163,047			845		2.10	%
ICS/CDARS - interest-bearing demand, money market
and time deposits			614,911			2,867		1.87	%		70,461			81		0.47	%
Total interest-bearing deposits			3,055,668			10,723		1.41	%		2,748,692			5,901		0.87	%
Total deposits			4,424,041			10,723		0.97	%		4,415,952			5,901		0.54	%
Short-term borrowings			62,653			787		5.04	%		46,677			578		5.02	%
Subordinated debt, net of issuance costs			39,401			538		5.48	%		39,363			537		5.53	%
Total interest-bearing liabilities			3,157,722			12,048		1.53	%		2,834,732			7,016		1.00	%
Total interest-bearing liabilities and demand,
noninterest-bearing / cost of funds		$	4,526,095		$	12,048		1.07	%	$	4,501,992		$	7,016		0.63	%

	•	The average cost of total deposits increased to 0.97% for the second quarter of 2023, compared to 0.54% for the first quarter of 2023.   The average cost of funds increased to 1.07% for the second quarter of 2023, compared to 0.63% for the first quarter of 2023. The average cost of deposits was 0.10% and the average cost of funds was 0.15% for the second quarter of 2022.
	•	The average cost of total deposits increased to 0.76% for the first six months of 2023, compared to 0.10% for the first six months of 2022.   The average cost of funds increased to 0.85% for the first six months of 2023, compared to 0.14% for the first six months of 2022.
	•	The increase in the average cost of total deposits and the average cost of funds for the second quarter of 2023 and first six months of 2023 was primarily due to clients seeking higher yields and moving noninterest-bearing deposits to the Bank’s interest-bearing and ICS deposits and an increase in market interest rates.

• During the second quarter of 2023, we recorded a provision for credit losses on loans of $260,000, compared to a ($181,000) recapture of provision for credit losses on loans for the second quarter of 2022, and a provision for credit losses on loans of $32,000 for the first quarter of 2023. There was a provision for credit losses on loans of $292,000 for the six months ended June 30, 2023, compared to a ($748,000) recapture of provision for credit losses on loans for the six months ended June 30, 2022.

• Total noninterest income remained relatively flat at $2.1 million for both the second quarter of 2023 and the second quarter of 2022. Total noninterest income decreased (25%) to $2.1 million for the second quarter of 2023, compared to $2.8 million for the first quarter of 2023, primarily due to lower service charges and fees on deposit accounts.
  
  

  • For the six months ended June 30, 2023, total noninterest income increased 6% to $4.8 million, compared to $4.6 million for the six months ended June 30, 2022, primarily due to higher service charges and fees on deposit accounts, partially offset by a $637,000 gain on warrants during the first six months of 2022.

• Total noninterest expense for the second quarter of 2023 increased to $25.0 million, compared to $23.2 million for the second quarter of 2022, primarily due to higher salaries and employee benefits, and higher insurance and information technology related expenses included in other noninterest expense during the second quarter of 2023. Total noninterest expense for the second quarter of 2023 decreased to $25.0 million, compared to $25.4 million for the first quarter of 2023, primarily due to a decrease in payroll taxes, vacation and 401(k) expenses, higher deferred loan origination costs, and lower professional fees, partially offset by higher information technology related expenses.
  
  

  • Total noninterest expense for the six months ended June 30, 2023 increased to $50.4 million, compared to $46.4 million for the six months ended June 30, 2022, primarily due to higher salaries and employee benefits, and higher insurance and information technology related expenses included in other noninterest expense during the six months ended June 30, 2023.
    
    

  • Full time equivalent employees were 347 at June 30, 2023, and 332 at June 30, 2022, and 339 at March 31, 2023.  
    

• The efficiency ratio was 51.67% for the second quarter of 2023, compared to 52.73% for the second quarter of 2022, and 48.83% for the first quarter of 2023. The efficiency ratio improved to 50.20% for the six months ended June 30, 2023, compared to 54.86% for the six months ended June 30, 2022, primarily due to higher net interest income.
  
  

• Income tax expense was $6.7 million for the second quarter of 2023, compared to $6.1 million for the second quarter of 2022, and $7.7 million for the first quarter of 2023. The effective tax rate for the second quarter of 2023 was 29.0%, compared to 29.3% for the second quarter of 2022, and 28.9% for the first quarter of 2023. Income tax expense for the six months ended June 30, 2023 was $14.4 million, compared to $11.3 million for the six months ended June 30, 2022. The effective tax rate for both the six months ended June 30, 2023 and June 30, 2022 was 28.9%.
  

Balance Sheet Review, Capital Management and Credit Quality:

• Total assets decreased (1%) to $5.312 billion at June 30, 2023, compared to $5.357 billion at June 30, 2022. Total assets decreased (4%) from $5.537 billion at March 31, 2023, due to the repayment during the second quarter of 2023 of $300.0 million in borrowings that were outstanding at March 31, 2023.  
  
  

• 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		June 30,				March 31,				June 30,
(in $000’s, unaudited)		2023				2023				2022
Balance (at fair value):
U.S. Treasury		$	421,146			$	422,903			$	250,126
Agency mortgage-backed securities			64,912				68,848				82,003
Total		$	486,058			$	491,751			$	332,129
Pre-tax unrealized (loss):
U.S. Treasury		$	(10,903	)		$	(7,510	)		$	(1,239	)
Agency mortgage-backed securities			(5,659	)			(4,969	)			(2,949	)
Total		$	(16,562	)		$	(12,479	)		$	(4,188	)

	•	The pre-tax unrealized loss on the securities available-for-sale portfolio was ($16.6) million, or ($11.7) million net of taxes, which was 2% of total shareholders’ equity at June 30, 2023.
	•	The weighted average life of the securities available-for-sale portfolio was 1.64 years at June 30, 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		June 30,				March 31,				June 30,
(in $000’s, unaudited)		2023				2023				2022
Balance (at amortized cost):
Agency mortgage-backed securities		$	648,337			$	663,481			$	683,779
Municipals — exempt from Federal tax			33,771				34,764				39,976
Total		$	682,108			$	698,245			$	723,755
Pre-tax unrealized (loss):
Agency mortgage-backed securities		$	(95,285	)		$	(89,962	)		$	(72,490	)
Municipals — exempt from Federal tax			(1,052	)			(297	)			(436	)
Total		$	(96,337	)		$	(90,259	)		$	(72,926	)
Allowance for credit losses on municipal securities		$	(13	)		$	(14	)		$	(39	)

	•	The pre-tax unrealized loss on the securities held-to-maturity portfolio was ($96.3) million at June 30, 2023, or ($67.9) million net of taxes, which was 11% of total shareholders’ equity at June 30, 2023.
	•	The weighted average life of the securities held-to-maturity portfolio was 7.12 years at June 30, 2023.

• The unrealized losses in both the available-for-sale and held-to-maturity portfolios were due to higher interest rates at June 30, 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		June 30, 2023							March 31, 2023							June 30, 2022
(in $000’s, unaudited)		Balance				% to Total			Balance				% to Total			Balance				% to Total
Commercial		$	466,354			14	%		$	506,602			16	%		$	531,421			17	%
Real estate:
CRE - owner occupied			608,031			18	%			603,298			18	%			597,521			19	%
CRE - non-owner occupied			1,147,313			35	%			1,083,852			33	%			993,621			32	%
Land and construction			162,816			5	%			166,408			5	%			155,389			5	%
Home equity			128,009			4	%			124,481			4	%			116,641			4	%
Multifamily			244,959			7	%			231,242			7	%			221,938			7	%
Residential mortgages			514,064			16	%			528,639			16	%			448,958			15	%
Consumer and other			17,635			1	%			17,905			1	%			18,354			1	%
Total Loans			3,289,181			100	%			3,262,427			100	%			3,083,843			100	%
Deferred loan costs (fees), net			(397	)		—				(512	)		—				(1,391	)		—
Loans, net of deferred costs and fees		$	3,288,784			100	%		$	3,261,915			100	%		$	3,082,452			100	%

	•	Loans, excluding loans held-for-sale, increased $206.3 million, or 7%, to $3.289 billion at June 30, 2023, compared to $3.082 billion at June 30, 2022, and increased $26.9 million, or 1%, from $3.262 billion at March 31, 2023.   Loans, excluding residential mortgages, increased $141.2 million, or 5%, to $2.775 billion at June 30, 2023, compared to $2.633 billion at June 30, 2022, and increased $41.4 million, or 2%, from $2.733 billion at March 31, 2023.
	•	Commercial and industrial (“C&I”) line utilization was 29% at June 30, 2023, compared to 28% at June 30, 2022, and 31% at March 31, 2023.
	•	At June 30, 2023, there was 35% of the CRE loan portfolio secured by owner occupied real estate, compared to 36% at both June 30, 2022 and March 31, 2023.

• The following table presents the maturity distribution of the Company’s loans, excluding loans held-for-sale, as of June 30, 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, and contractual repricing dates.

		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		$	392,663		41	%		$	259,692		27	%		$	307,481		32	%		$	959,836
Loans with fixed interest rates			66,900		3	%			576,870		25	%			1,685,575		72	%			2,329,345
Loans		$	459,563		14	%		$	836,562		25	%		$	1,993,056		61	%		$	3,289,181

	•	At June 30, 2023, approximately 29% of the Company’s loan portfolio consisted of floating interest rate loans, compared to 36% at June 30, 2022, and 31% at March 31, 2023.

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

		At or For the Quarter Ended:												At or For the Six Months Ended:
ALLOWANCE FOR CREDIT LOSSES ON LOANS		June 30,				March 31,				June 30,				June 30,				June 30,
(in $000’s, unaudited)		2023				2023				2022				2023				2022
Balance at beginning of period		$	47,273			$	47,512			$	42,788			$	47,512			$	43,290
Charge-offs during the period			(24	)			(380	)			(355	)			(404	)			(371	)
Recoveries during the period			294				109				3,238				403				3,319
Net recoveries (charge-offs) during the period			270				(271	)			2,883				(1	)			2,948
Provision for (recapture of) credit losses on loans during the period			260				32				(181	)			292				(748	)
Balance at end of period		$	47,803			$	47,273			$	45,490			$	47,803			$	45,490
Total loans, net of deferred fees		$	3,288,784			$	3,261,915			$	3,082,452			$	3,288,784			$	3,082,452
Total nonperforming loans		$	5,537			$	2,240			$	2,715			$	5,537			$	2,715
ACLL to total loans			1.45		%		1.45		%		1.48		%		1.45		%		1.48		%
ACLL to total nonperforming loans			863.34		%		2,110.40		%		1,675.51		%		863.34		%		1,675.51		%

•

The following table shows the drivers of change in ACLL for the first and second quarters of 2023:

DRIVERS OF CHANGE IN ACLL
(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
Portfolio changes during the second quarter of 2023			1,652
Qualitative and quantitative changes during the second
quarter of 2023 including changes in economic forecasts			(1,122	)
ACLL at June 30, 2023		$	47,803

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

NONPERFORMING ASSETS		June 30, 2023						March 31, 2023						June 30, 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		$	2,262		41	%		$	1,459		65	%		$	981		36	%
Residential mortgages			1,873		34	%			—		—	%			—		—	%
Commercial loans			1,306		23	%			685		31	%			640		24	%
Home equity loans			96		2	%			96		4	%			—		—	%
CRE loans			—		—	%			—		—	%			1,094		40	%
Total nonperforming assets		$	5,537		100	%		$	2,240		100	%		$	1,621		60	%

	•	NPAs totaled $5.5 million, or 0.10% of total assets, at June 30, 2023, compared to $2.7 million, or 0.05% of total assets, at June 30, 2022, and $2.2 million, or 0.04% of total assets, at March 31, 2023.
	•	There were no foreclosed assets on the balance sheet at June 30, 2023, June 30, 2022, or March 31, 2023.
	•	Classified assets totaled $30.5 million, or 0.57% of total assets, at June 30, 2023, compared to $28.9 million, or 0.54% of total assets, at June 30, 2022, and $26.8 million, or 0.48% of total assets, at March 31, 2023.

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

DEPOSITS		June 30, 2023						March 31, 2023						June 30, 2022
(in $000’s, unaudited)		Balance			% to Total			Balance			% to Total			Balance			% to Total
Demand, noninterest-bearing		$	1,319,844		29	%		$	1,469,081		33	%		$	1,846,365		40	%
Demand, interest-bearing			1,064,638		24	%			1,196,789		27	%			1,218,538		26	%
Savings and money market			1,075,835		24	%			1,264,567		28	%			1,387,003		30	%
Time deposits — under $250			44,520		1	%			37,884		1	%			36,691		1	%
Time deposits — $250 and over			171,852		4	%			172,070		4	%			98,760		2	%
ICS/CDARS — interest-bearing demand,
money market and time deposits			824,083		18	%			304,147		7	%			26,287		1	%
Total deposits		$	4,500,772		100	%		$	4,444,538		100	%		$	4,613,644		100	%

	•	Total deposits decreased ($112.9) million, or (2%), to $4.501 billion at June 30, 2023, compared to $4.614 billion at June 30, 2022, and increased $56.2 million, or 1%, from $4.445 billion at March 31, 2023.
	•	ICS/CDARS deposits increased $797.8 million to $824.1 million at June 30, 2023, compared to $26.3 million at June 30, 2022, and increased $519.9 million from $304.1 million at March 31, 2023.
	•	Uninsured deposits were approximately $2.148 billion, or 48% of total deposits, at June 30, 2023, compared to $2.556 billion, or 58% of total deposits, at March 31, 2023, and $2.788 billion, or 64% of total deposits, at December 31, 2022.

• The Company’s consolidated capital ratios exceeded regulatory guidelines and the Bank’s capital ratios exceeded regulatory guidelines under the Basel III prompt corrective action (“PCA”) regulatory guidelines for a well-capitalized financial institution, and the Basel III minimum regulatory requirements at June 30, 2023, 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		15.4	%		14.8	%		10.0	%		10.5	%
Tier 1 Capital		13.2	%		13.7	%		8.0	%		8.5	%
Common Equity Tier 1 Capital		13.2	%		13.7	%		6.5	%		7.0	%
Tier 1 Leverage		9.7	%		10.0	%		5.0	%		4.0	%
Tangible common equity / tangible assets (2)		9.3	%		9.6	%		N/A			N/A

(1)		Basel III minimum regulatory requirements for both the Company and the Bank include a 2.5% capital conservation buffer, except the leverage ratio.
(2)		Represents shareholders’ equity minus goodwill and other intangible assets divided by total assets minus goodwill and other intangible assets.

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

ACCUMULATED OTHER COMPREHENSIVE LOSS		June 30,				March 31,				June 30,
(in $000’s, unaudited)		2023				2023				2022
Unrealized loss on securities available-for-sale		$	(11,822	)		$	(8,924	)		$	(3,036	)
Split dollar insurance contracts liability			(3,187	)			(3,139	)			(5,501	)
Supplemental executive retirement plan liability			(2,352	)			(2,361	)			(7,508	)
Unrealized gain on interest-only strip from SBA loans			103				107				127
Total accumulated other comprehensive loss		$	(17,258	)		$	(14,317	)		$	(15,918	)

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. The contents of our website are not incorporated into, and do not perform a part of, this release or of our filings with the SEC.

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, including public announcements by, and media stories regarding, other financial institutions that may affect depositors’ confidence in the banking system; (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

		For the Quarter Ended:										Percent Change From:							For the Six Months Ended:
CONSOLIDATED INCOME STATEMENTS		June 30,			March 31,			June 30,				March 31,			June 30,				June 30,			June 30,				Percent
(in $000’s, unaudited)		2023			2023			2022				2023			2022				2023			2022				Change
Interest income		$	58,341		$	56,274		$	43,556			4		%	34		%		$	114,615		$	83,462			37		%
Interest expense			12,048			7,016			1,677			72		%	618		%			19,064			3,362			467		%
Net interest income before provision
for credit losses on loans			46,293			49,258			41,879			(6	)	%	11		%			95,551			80,100			19		%
Provision for (recapture of) credit losses on loans			260			32			(181	)		713		%	244		%			292			(748	)		139		%
Net interest income after provision
for credit losses on loans			46,033			49,226			42,060			(6	)	%	9		%			95,259			80,848			18		%
Noninterest income:
Service charges and fees on deposit
accounts			901			1,743			867			(48	)	%	4		%			2,644			1,479			79		%
Increase in cash surrender value of
life insurance			502			493			480			2		%	5		%			995			960			4		%
Gain on sales of SBA loans			199			76			27			162		%	637		%			275			183			50		%
Servicing income			104			131			139			(21	)	%	(25	)	%			235			245			(4	)	%
Termination fees			—			11			45			(100	)	%	(100	)	%			11			45			(76	)	%
Gain on proceeds from company-owned
life insurance			—			—			27			N/A			(100	)	%			—			27			(100	)	%
Gain on warrants			—			—			—			N/A			N/A					—			637			(100	)	%
Other			368			312			513			18		%	(28	)	%			680			982			(31	)	%
Total noninterest income			2,074			2,766			2,098			(25	)	%	(1	)	%			4,840			4,558			6		%
Noninterest expense:
Salaries and employee benefits			13,987			14,809			13,476			(6	)	%	4		%			28,796			27,297			5		%
Occupancy and equipment			2,422			2,400			2,277			1		%	6		%			4,822			4,714			2		%
Professional fees			1,149			1,399			1,291			(18	)	%	(11	)	%			2,548			2,371			7		%
Other			7,433			6,793			6,146			9		%	21		%			14,226			12,060			18		%
Total noninterest expense			24,991			25,401			23,190			(2	)	%	8		%			50,392			46,442			9		%
Income before income taxes			23,116			26,591			20,968			(13	)	%	10		%			49,707			38,964			28		%
Income tax expense			6,713			7,674			6,147			(13	)	%	9		%			14,387			11,277			28		%
Net income		$	16,403		$	18,917		$	14,821			(13	)	%	11		%		$	35,320		$	27,687			28		%
PER COMMON SHARE DATA
(unaudited)
Basic earnings per share		$	0.27		$	0.31		$	0.24			(13	)	%	13		%		$	0.58		$	0.46			26		%
Diluted earnings per share		$	0.27		$	0.31		$	0.24			(13	)	%	13		%		$	0.58		$	0.45			29		%
Weighted average shares outstanding - basic			61,035,435			60,908,221			60,542,170			0		%	1		%			60,971,828			60,468,027			1		%
Weighted average shares outstanding - diluted			61,167,689			61,268,072			60,969,154			0		%	0		%			61,192,720			60,945,711			0		%
Common shares outstanding at period-end			61,091,155			60,948,607			60,666,794			0		%	1		%			61,091,155			60,666,794			1		%
Dividend per share		$	0.13		$	0.13		$	0.13			0		%	0		%		$	0.26		$	0.26			0		%
Book value per share		$	10.70		$	10.62		$	10.01			1		%	7		%		$	10.70		$	10.01			7		%
Tangible book value per share		$	7.80		$	7.70		$	7.04			1		%	11		%		$	7.80		$	7.04			11		%
KEY FINANCIAL RATIOS
(unaudited)
Annualized return on average equity			10.12	%		12.03	%		9.86		%	(16	)	%	3		%			11.06	%		9.29		%	19		%
Annualized return on average tangible
common equity			13.93	%		16.71	%		14.06		%	(17	)	%	(1	)	%			15.29	%		13.28		%	15		%
Annualized return on average assets			1.25	%		1.47	%		1.11		%	(15	)	%	13		%			1.35	%		1.04		%	30		%
Annualized return on average tangible assets			1.29	%		1.52	%		1.15		%	(15	)	%	12		%			1.40	%		1.07		%	31		%
Net interest margin (FTE)			3.76	%		4.09	%		3.38		%	(8	)	%	11		%			3.92	%		3.21		%	22		%
Efficiency ratio			51.67	%		48.83	%		52.73		%	6		%	(2	)	%			50.20	%		54.86		%	(8	)	%
AVERAGE BALANCES
(in $000’s, unaudited)
Average assets		$	5,278,243		$	5,235,506		$	5,334,636			1		%	(1	)	%		$	5,256,993		$	5,388,638			(2	)	%
Average tangible assets		$	5,100,399		$	5,057,063		$	5,154,245			1		%	(1	)	%		$	5,078,851		$	5,207,912			(2	)	%
Average earning assets		$	4,948,397		$	4,895,009		$	4,985,611			1		%	(1	)	%		$	4,921,850		$	5,039,432			(2	)	%
Average loans held-for-sale		$	4,166		$	2,755		$	1,824			51		%	128		%		$	3,764		$	1,652			128		%
Average total loans		$	3,227,175		$	3,274,770		$	3,048,353			(1	)	%	6		%		$	3,250,541		$	3,037,791			7		%
Average deposits		$	4,424,041		$	4,415,952		$	4,579,436			0		%	(3	)	%		$	4,420,019		$	4,637,960			(5	)	%
Average demand deposits - noninterest-bearing		$	1,368,373		$	1,667,260		$	1,836,350			(18	)	%	(25	)	%		$	1,516,991		$	1,846,699			(18	)	%
Average interest-bearing deposits		$	3,055,668		$	2,748,692		$	2,743,086			11		%	11		%		$	2,903,028		$	2,791,261			4		%
Average interest-bearing liabilities		$	3,157,722		$	2,834,732		$	2,791,527			11		%	13		%		$	2,997,119		$	2,835,495			6		%
Average equity		$	650,240		$	637,597		$	603,182			2		%	8		%		$	643,954		$	601,279			7		%
Average tangible common equity		$	472,396		$	459,154		$	422,791			3		%	12		%		$	465,812		$	420,553			11		%

		For the Quarter Ended:
CONSOLIDATED INCOME STATEMENTS		June 30,			March 31,			December 31,			September 30,			June 30,
(in $000’s, unaudited)		2023			2023			2022			2022			2022
Interest income		$	58,341		$	56,274		$	55,192		$	50,174		$	43,556
Interest expense			12,048			7,016			3,453			2,133			1,677
Net interest income before provision
for credit losses on loans			46,293			49,258			51,739			48,041			41,879
Provision for (recapture of) credit losses on loans			260			32			508			1,006			(181	)
Net interest income after provision
for credit losses on loans			46,033			49,226			51,231			47,035			42,060
Noninterest income:
Service charges and fees on deposit
accounts			901			1,743			1,801			1,360			867
Increase in cash surrender value of
life insurance			502			493			481			484			480
Gain on sales of SBA loans			199			76			—			308			27
Servicing income			104			131			138			125			139
Termination fees			—			11			—			16			45
Gain on proceeds from company-owned
life insurance			—			—			—			—			27
Gain on warrants			—			—			—			32			—
Other			368			312			352			456			513
Total noninterest income			2,074			2,766			2,772			2,781			2,098
Noninterest expense:
Salaries and employee benefits			13,987			14,809			13,915			14,119			13,476
Occupancy and equipment			2,422			2,400			2,510			2,415			2,277
Professional fees			1,149			1,399			1,414			1,230			1,291
Other			7,433			6,793			6,679			6,135			6,146
Total noninterest expense			24,991			25,401			24,518			23,899			23,190
Income before income taxes			23,116			26,591			29,485			25,917			20,968
Income tax expense			6,713			7,674			8,686			7,848			6,147
Net income		$	16,403		$	18,917		$	20,799		$	18,069		$	14,821
PER COMMON SHARE DATA
(unaudited)
Basic earnings per share		$	0.27		$	0.31		$	0.34		$	0.30		$	0.24
Diluted earnings per share		$	0.27		$	0.31		$	0.34		$	0.30		$	0.24
Weighted average shares outstanding - basic			61,035,435			60,908,221			60,788,803			60,686,992			60,542,170
Weighted average shares outstanding - diluted			61,167,689			61,268,072			61,357,023			61,123,801			60,969,154
Common shares outstanding at period-end			61,091,155			60,948,607			60,852,723			60,716,794			60,666,794
Dividend per share		$	0.13		$	0.13		$	0.13		$	0.13		$	0.13
Book value per share		$	10.70		$	10.62		$	10.39		$	10.04		$	10.01
Tangible book value per share		$	7.80		$	7.70		$	7.46		$	7.09		$	7.04
KEY FINANCIAL RATIOS
(unaudited)
Annualized return on average equity			10.12	%		12.03	%		13.40	%		11.72	%		9.86		%
Annualized return on average tangible
common equity			13.93	%		16.71	%		18.89	%		16.60	%		14.06		%
Annualized return on average assets			1.25	%		1.47	%		1.54	%		1.31	%		1.11		%
Annualized return on average tangible assets			1.29	%		1.52	%		1.59	%		1.36	%		1.15		%
Net interest margin (FTE)			3.76	%		4.09	%		4.10	%		3.73	%		3.38		%
Efficiency ratio			51.67	%		48.83	%		44.98	%		47.02	%		52.73		%
AVERAGE BALANCES
(in $000’s, unaudited)
Average assets		$	5,278,243		$	5,235,506		$	5,360,867		$	5,466,330		$	5,334,636
Average tangible assets		$	5,100,399		$	5,057,063		$	5,181,793		$	5,286,591		$	5,154,245
Average earning assets		$	4,948,397		$	4,895,009		$	5,009,578		$	5,117,373		$	4,985,611
Average loans held-for-sale		$	4,166		$	2,755		$	2,346		$	3,282		$	1,824
Average total loans		$	3,227,175		$	3,274,770		$	3,248,210		$	3,140,705		$	3,048,353
Average deposits		$	4,424,041		$	4,415,952		$	4,600,533		$	4,712,044		$	4,579,436
Average demand deposits - noninterest-bearing		$	1,368,373		$	1,667,260		$	1,851,003		$	1,910,748		$	1,836,350
Average interest-bearing deposits		$	3,055,668		$	2,748,692		$	2,749,530		$	2,801,296		$	2,743,086
Average interest-bearing liabilities		$	3,157,722		$	2,834,732		$	2,788,880		$	2,840,611		$	2,791,527
Average equity		$	650,240		$	637,597		$	615,941		$	611,707		$	603,182
Average tangible common equity		$	472,396		$	459,154		$	436,867		$	431,968		$	422,791

		End of Period:												Percent Change From:
CONSOLIDATED BALANCE SHEETS		June 30,				March 31,				June 30,				March 31,			June 30,
(in $000’s, unaudited)		2023				2023				2022				2023			2022
ASSETS
Cash and due from banks		$	42,551			$	41,318			$	35,764			3		%	19		%
Other investments and interest-bearing deposits
in other financial institutions			468,951				698,690				840,821			(33	)	%	(44	)	%
Securities available-for-sale, at fair value			486,058				491,751				332,129			(1	)	%	46		%
Securities held-to-maturity, at amortized cost			682,095				698,231				723,716			(2	)	%	(6	)	%
Loans held-for-sale - SBA, including deferred costs			3,136				2,792				2,281			12		%	37		%
Loans:
Commercial			466,354				506,602				531,421			(8	)	%	(12	)	%
Real estate:
CRE - owner occupied			608,031				603,298				597,521			1		%	2		%
CRE - non-owner occupied			1,147,313				1,083,852				993,621			6		%	15		%
Land and construction			162,816				166,408				155,389			(2	)	%	5		%
Home equity			128,009				124,481				116,641			3		%	10		%
Multifamily			244,959				231,242				221,938			6		%	10		%
Residential mortgages			514,064				528,639				448,958			(3	)	%	15		%
Consumer and other			17,635				17,905				18,354			(2	)	%	(4	)	%
Loans			3,289,181				3,262,427				3,083,843			1		%	7		%
Deferred loan fees, net			(397	)			(512	)			(1,391	)		(22	)	%	(71	)	%
Total loans, net of deferred costs and fees			3,288,784				3,261,915				3,082,452			1		%	7		%
Allowance for credit losses on loans			(47,803	)			(47,273	)			(45,490	)		1		%	5		%
Loans, net			3,240,981				3,214,642				3,036,962			1		%	7		%
Company-owned life insurance			79,940				79,438				77,972			1		%	3		%
Premises and equipment, net			9,197				9,142				9,593			1		%	(4	)	%
Goodwill			167,631				167,631				167,631			0		%	0		%
Other intangible assets			9,830				10,431				12,351			(6	)	%	(20	)	%
Accrued interest receivable and other assets			121,467				122,474				117,621			(1	)	%	3		%
Total assets		$	5,311,837			$	5,536,540			$	5,356,841			(4	)	%	(1	)	%
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand, noninterest-bearing		$	1,319,844			$	1,469,081			$	1,846,365			(10	)	%	(29	)	%
Demand, interest-bearing			1,064,638				1,196,789				1,218,538			(11	)	%	(13	)	%
Savings and money market			1,075,835				1,264,567				1,387,003			(15	)	%	(22	)	%
Time deposits - under $250			44,520				37,884				36,691			18		%	21		%
Time deposits - $250 and over			171,852				172,070				98,760			0		%	74		%
ICS/CDARS - interest-bearing demand, money market
and time deposits			824,083				304,147				26,287			171		%	3035		%
Total deposits			4,500,772				4,444,538				4,613,644			1		%	(2	)	%
Other short-term borrowings			—				300,000				—			N/A			N/A
Subordinated debt, net of issuance costs			39,425				39,387				39,274			0		%	0		%
Accrued interest payable and other liabilities			117,970				105,407				96,699			12		%	22		%
Total liabilities			4,658,167				4,889,332				4,749,617			(5	)	%	(2	)	%
Shareholders’ Equity:
Common stock			505,075				504,135				499,832			0		%	1		%
Retained earnings			165,853				157,390				123,310			5		%	35		%
Accumulated other comprehensive loss			(17,258	)			(14,317	)			(15,918	)		(21	)	%	(8	)	%
Total shareholders' equity			653,670				647,208				607,224			1		%	8		%
Total liabilities and shareholders’ equity		$	5,311,837			$	5,536,540			$	5,356,841			(4	)	%	(1	)	%

		End of Period:
CONSOLIDATED BALANCE SHEETS		June 30,				March 31,				December 31,				September 30,				June 30,
(in $000’s, unaudited)		2023				2023				2022				2022				2022
ASSETS
Cash and due from banks		$	42,551			$	41,318			$	27,595			$	40,500			$	35,764
Other investments and interest-bearing deposits
in other financial institutions			468,951				698,690				279,008				641,251				840,821
Securities available-for-sale, at fair value			486,058				491,751				489,596				478,534				332,129
Securities held-to-maturity, at amortized cost			682,095				698,231				714,990				703,794				723,716
Loans held-for-sale - SBA, including deferred costs			3,136				2,792				2,456				2,081				2,281
Loans:
Commercial			466,354				506,602				533,915				542,829				531,421
Real estate:
CRE - owner occupied			608,031				603,298				614,663				612,241				597,521
CRE - non-owner occupied			1,147,313				1,083,852				1,066,368				1,023,405				993,621
Land and construction			162,816				166,408				163,577				167,439				155,389
Home equity			128,009				124,481				120,724				116,489				116,641
Multifamily			244,959				231,242				244,882				229,455				221,938
Residential mortgages			514,064				528,639				537,905				508,839				448,958
Consumer and other			17,635				17,905				17,033				16,620				18,354
Loans			3,289,181				3,262,427				3,299,067				3,217,317				3,083,843
Deferred loan fees, net			(397	)			(512	)			(517	)			(844	)			(1,391	)
Total loans, net of deferred fees			3,288,784				3,261,915				3,298,550				3,216,473				3,082,452
Allowance for credit losses on loans			(47,803	)			(47,273	)			(47,512	)			(46,921	)			(45,490	)
Loans, net			3,240,981				3,214,642				3,251,038				3,169,552				3,036,962
Company-owned life insurance			79,940				79,438				78,945				78,456				77,972
Premises and equipment, net			9,197				9,142				9,301				9,428				9,593
Goodwill			167,631				167,631				167,631				167,631				167,631
Other intangible assets			9,830				10,431				11,033				11,692				12,351
Accrued interest receivable and other assets			121,467				122,474				125,987				128,343				117,621
Total assets		$	5,311,837			$	5,536,540			$	5,157,580			$	5,431,262			$	5,356,841
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand, noninterest-bearing		$	1,319,844			$	1,469,081			$	1,736,722			$	1,883,574			$	1,846,365
Demand, interest-bearing			1,064,638				1,196,789				1,196,427				1,154,403				1,218,538
Savings and money market			1,075,835				1,264,567				1,285,444				1,487,400				1,387,003
Time deposits - under $250			44,520				37,884				32,445				34,728				36,691
Time deposits - $250 and over			171,852				172,070				108,192				93,263				98,760
ICS/CDARS - interest-bearing demand, money market
and time deposits			824,083				304,147				30,374				29,897				26,287
Total deposits			4,500,772				4,444,538				4,389,604				4,683,265				4,613,644
Other short-term borrowings			—				300,000				—				—				—
Subordinated debt, net of issuance costs			39,425				39,387				39,350				39,312				39,274
Accrued interest payable and other liabilities			117,970				105,407				96,170				99,168				96,699
Total liabilities			4,658,167				4,889,332				4,525,124				4,821,745				4,749,617
Shareholders’ Equity:
Common stock			505,075				504,135				502,923				501,240				499,832
Retained earnings			165,853				157,390				146,389				133,489				123,310
Accumulated other comprehensive loss			(17,258	)			(14,317	)			(16,856	)			(25,212	)			(15,918	)
Total shareholders' equity			653,670				647,208				632,456				609,517				607,224
Total liabilities and shareholders’ equity		$	5,311,837			$	5,536,540			$	5,157,580			$	5,431,262			$	5,356,841

		At or For the Quarter Ended:											Percent Change From:
CREDIT QUALITY DATA		June 30,				March 31,			June 30,				March 31,			June 30,
(in $000’s, unaudited)		2023				2023			2022				2023			2022
Nonaccrual loans - held-for-investment		$	3,275			$	781		$	1,734			319		%	89		%
Restructured and loans over 90 days past due
and still accruing			2,262				1,459			981			55		%	131		%
Total nonperforming loans			5,537				2,240			2,715			147		%	104		%
Foreclosed assets			—				—			—			N/A			N/A
Total nonperforming assets		$	5,537			$	2,240		$	2,715			147		%	104		%
Other restructured loans still accruing		$	—			$	—		$	113			N/A			(100	)	%
Net charge-offs (recoveries) during the quarter		$	(270	)		$	271		$	(2,883	)		(200	)	%	91		%
Provision for (recapture of) credit losses on loans during the quarter		$	260			$	32		$	(181	)		713		%	244		%
Allowance for credit losses on loans		$	47,803			$	47,273		$	45,490			1		%	5		%
Classified assets		$	30,500			$	26,800		$	28,929			14		%	5		%
Allowance for credit losses on loans to total loans			1.45		%		1.45	%		1.48		%	0		%	(2	)	%
Allowance for credit losses on loans to total nonperforming loans			863.34		%		2,110.40	%		1,675.51		%	(59	)	%	(48	)	%
Nonperforming assets to total assets			0.10		%		0.04	%		0.05		%	150		%	100		%
Nonperforming loans to total loans			0.17		%		0.07	%		0.09		%	143		%	89		%
Classified assets to Heritage Commerce Corp
Tier 1 capital plus allowance for credit losses on loans			6		%		5	%		6		%	20		%	0		%
Classified assets to Heritage Bank of Commerce
Tier 1 capital plus allowance for credit losses on loans			5		%		5	%		6		%	0		%	(17	)	%
OTHER PERIOD-END STATISTICS
(in $000’s, unaudited)
Heritage Commerce Corp:
Tangible common equity (1)		$	476,209			$	469,146		$	427,242			2		%	11		%
Shareholders’ equity / total assets			12.31		%		11.69	%		11.34		%	5		%	9		%
Tangible common equity / tangible assets (2)			9.27		%		8.76	%		8.25		%	6		%	12		%
Loan to deposit ratio			73.07		%		73.39	%		66.81		%	0		%	9		%
Noninterest-bearing deposits / total deposits			29.32		%		33.05	%		40.02		%	(11	)	%	(27	)	%
Total capital ratio			15.4		%		15.3	%		14.6		%	1		%	5		%
Tier 1 capital ratio			13.2		%		13.1	%		12.5		%	1		%	6		%
Common Equity Tier 1 capital ratio			13.2		%		13.1	%		12.5		%	1		%	6		%
Tier 1 leverage ratio			9.7		%		9.6	%		8.7		%	1		%	11		%
Heritage Bank of Commerce:
Total capital ratio			14.8		%		14.7	%		14.1		%	1		%	5		%
Tier 1 capital ratio			13.7		%		13.5	%		13.0		%	1		%	5		%
Common Equity Tier 1 capital ratio			13.7		%		13.5	%		13.0		%	1		%	5		%
Tier 1 leverage ratio			10.0		%		9.9	%		9.0		%	1		%	11		%

(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		June 30,				March 31,			December 31,				September 30,				June 30,
(in $000’s, unaudited)		2023				2023			2022				2022				2022
Nonaccrual loans - held-for-investment		$	3,275			$	781		$	740			$	491			$	1,734
Restructured and loans over 90 days past due
and still accruing			2,262				1,459			1,685				545				981
Total nonperforming loans			5,537				2,240			2,425				1,036				2,715
Foreclosed assets			—				—			—				—				—
Total nonperforming assets		$	5,537			$	2,240		$	2,425			$	1,036			$	2,715
Other restructured loans still accruing		$	—			$	—		$	171			$	93			$	113
Net charge-offs (recoveries) during the quarter		$	(270	)		$	271		$	(83	)		$	(425	)		$	(2,883	)
Provision for (recapture of) credit losses on loans during the quarter		$	260			$	32		$	508			$	1,006			$	(181	)
Allowance for credit losses on loans		$	47,803			$	47,273		$	47,512			$	46,921			$	45,490
Classified assets		$	30,500			$	26,800		$	14,544			$	28,570			$	28,929
Allowance for credit losses on loans to total loans			1.45		%		1.45	%		1.44		%		1.46		%		1.48		%
Allowance for credit losses on loans to total nonperforming loans			863.34		%		2,110.40	%		1,959.26		%		4,529.05		%		1,675.51		%
Nonperforming assets to total assets			0.10		%		0.04	%		0.05		%		0.02		%		0.05		%
Nonperforming loans to total loans			0.17		%		0.07	%		0.07		%		0.03		%		0.09		%
Classified assets to Heritage Commerce Corp
Tier 1 capital plus allowance for credit losses on loans			6		%		5	%		3		%		6		%		6		%
Classified assets to Heritage Bank of Commerce
Tier 1 capital plus allowance for credit losses on loans			5		%		5	%		3		%		5		%		6		%
OTHER PERIOD-END STATISTICS
(in $000’s, unaudited)
Heritage Commerce Corp:
Tangible common equity (1)		$	476,209			$	469,146		$	453,792			$	430,194			$	427,242
Shareholders’ equity / total assets			12.31		%		11.69	%		12.26		%		11.22		%		11.34		%
Tangible common equity / tangible assets (2)			9.27		%		8.76	%		9.11		%		8.19		%		8.25		%
Loan to deposit ratio			73.07		%		73.39	%		75.14		%		68.68		%		66.81		%
Noninterest-bearing deposits / total deposits			29.32		%		33.05	%		39.56		%		40.22		%		40.02		%
Total capital ratio			15.4		%		15.3	%		14.8		%		14.5		%		14.6		%
Tier 1 capital ratio			13.2		%		13.1	%		12.7		%		12.4		%		12.5		%
Common Equity Tier 1 capital ratio			13.2		%		13.1	%		12.7		%		12.4		%		12.5		%
Tier 1 leverage ratio			9.7		%		9.6	%		9.2		%		8.7		%		8.7		%
Heritage Bank of Commerce:
Total capital ratio			14.8		%		14.7	%		14.2		%		14.0		%		14.1		%
Tier 1 capital ratio			13.7		%		13.5	%		13.2		%		12.9		%		13.0		%
Common Equity Tier 1 capital ratio			13.7		%		13.5	%		13.2		%		12.9		%		13.0		%
Tier 1 leverage ratio			10.0		%		9.9	%		9.5		%		9.0		%		9.0		%

(1)		Represents shareholders' equity minus goodwill and other intangible assets.
(2)		Represents shareholders' equity minus goodwill and other intangible assets divided by total assets minus goodwill and other intangible assets.

		For the Quarter Ended									For the Quarter Ended
		June 30, 2023									June 30, 2022
					Interest				Average					Interest				Average
NET INTEREST INCOME AND NET INTEREST MARGIN		Average			Income/				Yield/		Average			Income/				Yield/
(in $000’s, unaudited)		Balance			Expense				Rate		Balance			Expense				Rate
Assets:
Loans, gross (1)(2)		$	3,231,341		$	44,028			5.47	%	$	3,050,177		$	36,538			4.80	%
Securities - taxable			1,147,375			6,982			2.44	%		912,408			4,407			1.94	%
Securities - exempt from Federal tax (3)			34,070			302			3.56	%		40,447			343			3.40	%
Other investments and interest-bearing deposits
in other financial institutions			535,611			7,092			5.31	%		982,579			2,340			0.96	%
Total interest earning assets (3)			4,948,397			58,404			4.73	%		4,985,611			43,628			3.51	%
Cash and due from banks			35,159									37,172
Premises and equipment, net			9,190									9,666
Goodwill and other intangible assets			177,844									180,391
Other assets			107,653									121,796
Total assets		$	5,278,243								$	5,334,636
Liabilities and shareholders’ equity:
Deposits:
Demand, noninterest-bearing		$	1,368,373								$	1,836,350
Demand, interest-bearing			1,118,200			1,788			0.64	%		1,249,875			468			0.15	%
Savings and money market			1,109,347			4,638			1.68	%		1,327,665			558			0.17	%
Time deposits - under $100			11,610			20			0.69	%		12,643			4			0.13	%
Time deposits - $100 and over			201,600			1,410			2.81	%		125,258			114			0.37	%
ICS/CDARS - interest-bearing demand, money market
and time deposits			614,911			2,867			1.87	%		27,645			2			0.03	%
Total interest-bearing deposits			3,055,668			10,723			1.41	%		2,743,086			1,146			0.17	%
Total deposits			4,424,041			10,723			0.97	%		4,579,436			1,146			0.10	%
Short-term borrowings			62,653			787			5.04	%		16			—			0.00	%
Subordinated debt, net of issuance costs			39,401			538			5.48	%		48,425			531			4.40	%
Total interest-bearing liabilities			3,157,722			12,048			1.53	%		2,791,527			1,677			0.24	%
Total interest-bearing liabilities and demand,
noninterest-bearing / cost of funds			4,526,095			12,048			1.07	%		4,627,877			1,677			0.15	%
Other liabilities			101,908									103,577
Total liabilities			4,628,003									4,731,454
Shareholders’ equity			650,240									603,182
Total liabilities and shareholders’ equity		$	5,278,243								$	5,334,636
Net interest income (3) / margin						46,356			3.76	%					41,951			3.38	%
Less tax equivalent adjustment (3)						(63	)								(72	)
Net interest income					$	46,293								$	41,879

(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 $94,000 for the second quarter of 2023, compared to $816,000 for the second quarter of 2022. Prepayment fees totaled $73,000 for the second quarter of 2023, compared to $549,000 for the second quarter of 2022.
(3)		Reflects the FTE adjustment for Federal tax-exempt income based on a 21% tax rate.

		For the Quarter Ended									For the Quarter Ended
		June 30, 2023									March 31, 2023
					Interest				Average					Interest				Average
NET INTEREST INCOME AND NET INTEREST MARGIN		Average			Income/				Yield/		Average			Income/				Yield/
(in $000’s, unaudited)		Balance			Expense				Rate		Balance			Expense				Rate
Assets:
Loans, gross (1)(2)		$	3,231,341		$	44,028			5.47	%	$	3,277,525		$	44,112			5.46	%
Securities - taxable			1,147,375			6,982			2.44	%		1,161,021			7,056			2.46	%
Securities - exempt from Federal tax (3)			34,070			302			3.56	%		36,012			313			3.52	%
Other investments and interest-bearing deposits
in other financial institutions			535,611			7,092			5.31	%		420,451			4,859			4.69	%
Total interest earning assets (3)			4,948,397			58,404			4.73	%		4,895,009			56,340			4.67	%
Cash and due from banks			35,159									37,563
Premises and equipment, net			9,190									9,269
Goodwill and other intangible assets			177,844									178,443
Other assets			107,653									115,222
Total assets		$	5,278,243								$	5,235,506
Liabilities and shareholders’ equity:
Deposits:
Demand, noninterest-bearing		$	1,368,373								$	1,667,260
Demand, interest-bearing			1,118,200			1,788			0.64	%		1,217,731			1,476			0.49	%
Savings and money market			1,109,347			4,638			1.68	%		1,285,173			3,489			1.10	%
Time deposits - under $100			11,610			20			0.69	%		12,280			10			0.33	%
Time deposits - $100 and over			201,600			1,410			2.81	%		163,047			845			2.10	%
ICS/CDARS - interest-bearing demand, money market
and time deposits			614,911			2,867			1.87	%		70,461			81			0.47	%
Total interest-bearing deposits			3,055,668			10,723			1.41	%		2,748,692			5,901			0.87	%
Total deposits			4,424,041			10,723			0.97	%		4,415,952			5,901			0.54	%
Short-term borrowings			62,653			787			5.04	%		46,677			578			5.02	%
Subordinated debt, net of issuance costs			39,401			538			5.48	%		39,363			537			5.53	%
Total interest-bearing liabilities			3,157,722			12,048			1.53	%		2,834,732			7,016			1.00	%
Total interest-bearing liabilities and demand,
noninterest-bearing / cost of funds			4,526,095			12,048			1.07	%		4,501,992			7,016			0.63	%
Other liabilities			101,908									95,917
Total liabilities			4,628,003									4,597,909
Shareholders’ equity			650,240									637,597
Total liabilities and shareholders’ equity		$	5,278,243								$	5,235,506
Net interest income (3) / margin						46,356			3.76	%					49,324			4.09	%
Less tax equivalent adjustment (3)						(63	)								(66	)
Net interest income					$	46,293								$	49,258

(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 $94,000 for the second quarter of 2023, compared to $300,000 for the first quarter of 2023. Prepayment fees totaled $73,000 for the second quarter of 2023, compared to $138,000 for the first quarter of 2023.
(3)		Reflects the FTE adjustment for Federal tax-exempt income based on a 21% tax rate.

		For the Six Months Ended									For the Six Months Ended
		June 30, 2023									June 30, 2022
					Interest				Average					Interest				Average
NET INTEREST INCOME AND NET INTEREST MARGIN		Average			Income/				Yield/		Average			Income/				Yield/
(in $000’s, unaudited)		Balance			Expense				Rate		Balance			Expense				Rate
Assets:
Loans, gross (1)(2)		$	3,254,305		$	88,140			5.46	%	$	3,039,443		$	71,639			4.75	%
Securities - taxable			1,154,160			14,038			2.45	%		847,409			7,851			1.87	%
Securities - exempt from Federal tax (3)			35,036			615			3.54	%		42,647			719			3.40	%
Other investments, interest-bearing deposits in other
financial institutions and Federal funds sold			478,349			11,951			5.04	%		1,109,933			3,404			0.62	%
Total interest earning assets (3)			4,921,850			114,744			4.70	%		5,039,432			83,613			3.35	%
Cash and due from banks			36,354									37,400
Premises and equipment, net			9,229									9,636
Goodwill and other intangible assets			178,142									180,726
Other assets			111,418									121,444
Total assets		$	5,256,993								$	5,388,638
Liabilities and shareholders’ equity:
Deposits:
Demand, noninterest-bearing		$	1,516,991								$	1,846,699
Demand, interest-bearing			1,167,690			3,264			0.56	%		1,264,849			927			0.15	%
Savings and money market			1,196,774			8,127			1.37	%		1,361,014			1,101			0.16	%
Time deposits - under $100			11,943			30			0.51	%		12,937			9			0.14	%
Time deposits - $100 and over			182,430			2,255			2.49	%		122,187			220			0.36	%
ICS/CDARS - interest-bearing demand, money market
and time deposits			344,191			2,948			1.73	%		30,274			3			0.02	%
Total interest-bearing deposits			2,903,028			16,624			1.15	%		2,791,261			2,260			0.16	%
Total deposits			4,420,019			16,624			0.76	%		4,637,960			2,260			0.10	%
Short-term borrowings			54,709			1,365			5.03	%		23			—			0.00	%
Subordinated debt, net of issuance costs			39,382			1,075			5.50	%		44,211			1,102			5.03	%
Total interest-bearing liabilities			2,997,119			19,064			1.28	%		2,835,495			3,362			0.24	%
Total interest-bearing liabilities and demand,
noninterest-bearing / cost of funds			4,514,110			19,064			0.85	%		4,682,194			3,362			0.14	%
Other liabilities			98,929									105,165
Total liabilities			4,613,039									4,787,359
Shareholders’ equity			643,954									601,279
Total liabilities and shareholders’ equity		$	5,256,993								$	5,388,638
Net interest income (3) / margin						95,680			3.92	%					80,251			3.21	%
Less tax equivalent adjustment (3)						(129	)								(151	)
Net interest income					$	95,551								$	80,100

(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 $394,000 for the first six months of 2023, compared to $2,604,000 for the first six months of 2022. Prepayment fees totaled $211,000 for the first six months of 2023, compared to $1,059,000 for the first six months of 2022.
(3)		Reflects the FTE adjustment for Federal tax-exempt income based on a 21% tax rate.