HERITAGE COMMERCE CORP (Form: 8-K, Received: 01/27/2023 06:01:43)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): January 26, 2023

HERITAGE COMMERCE CORP

(Exact name of registrant as specified in its charter)


California	000-23877	77-0469558
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)


224 Airport Parkway, San Jose, California		95110
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (408) 947-6900

Not Applicable

(Former name or former address, if changed since last report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (See General Instruction A.2. below):

☐	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

☐	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

☐	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

☐	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, No Par Value	HTBK	The Nasdaq Stock Market, LLC

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the

Exchange Act ☐

ITEM 2.02RESULTS OF OPERATIONS AND FINANCIAL CONDITION

On January 26, 2023, Heritage Commerce Corp, the holding company (the “Company”) of Heritage Bank of Commerce (the “Bank”) issued a press release announcing preliminary unaudited results for the fourth quarter of 2022 and the year ended December 31, 2022. A copy of the press release is attached as Exhibit 99.1 to this Current Report and is incorporated herein by reference.

The information in this report set forth under this Item 2.02 shall not be treated as “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference into any registration statement or other document pursuant to the Securities Act of 1933 or the Securities Act of 1934, except as expressly stated by specific reference in such filing.

ITEM 8.01OTHER EVENTS

QUARTERLY DIVIDEND

On January 26, 2023, the Company announced that its Board of Directors declared a $0.13 per share quarterly cash dividend to holders of common stock. The dividend will be paid on February 23, 2023, to shareholders of record at the close of the business day on February 9, 2023. A copy of the press release is attached as Exhibit 99.2 to this Current Report and is incorporated herein by reference.

ITEM 9.01FINANCIAL STATEMENTS AND EXHIBITS

(D) Exhibits.


99.1	Press Release, dated January 26, 2023, entitled “Heritage Commerce Corp Earns Record $20.8 Million for the Fourth Quarter of 2022, and Record $66.6 Million for Full Year 2022”

99.2	Press Release, dated January 26, 2023, entitled “Heritage Commerce Corp Declares Regular Quarterly Cash Dividend of $0.13 Per Share”

104	Cover Page Interactive Data File (embedded within XBRL document)

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: January 26, 2023

Heritage Commerce Corp

By: /s/ Lawrence D. McGovern
Name: Lawrence D. McGovern
Executive Vice President and Chief Financial Officer

Exhibit 99.1

Heritage Commerce Corp Earns Record $20.8 Million for the Fourth Quarter of 2022, and

Record $66.6 Million for Full Year 2022

San Jose, CA — January 26, 2023 — Heritage Commerce Corp (Nasdaq: HTBK), the holding company (the “Company”) for Heritage Bank of Commerce (the “Bank”), today announced fourth quarter 2022 net income increased 49% to $20.8 million, or $0.34 per average diluted common share, compared to $14.0 million, or $0.23 per average diluted common share, for the fourth quarter of 2021, and increased 15% from $18.1 million, or $0.30 per average diluted common share, for the third quarter of 2022. For the year ended December 31, 2022, net income increased 40% to $66.6 million, or $1.09 per average diluted common share, compared to $47.7 million, or $0.79 per average diluted common share, for the year ended December 31, 2021. All results are unaudited.

“Our quarterly results were a strong end to what was a record year on several measures,” said Clay Jones, President and Chief Executive Officer. “We achieved record net income for the fourth quarter and the year ended December 31, 2022 with a 23% increase in net interest income year-over-year, supported by solid loan growth both year-over-year and from the linked quarter. Performance metrics for the fourth quarter of 2022 were highlighted by a return on average tangible common equity of 18.89%, a return on average tangible assets of 1.59%, and net interest margin of 4.10%. Our efficiency ratio also improved to 44.98% for the fourth quarter and 49.93% for the year ended December 31, 2022.”

“Total deposits declined (6%) from the linked quarter and (8%) from 2021,” Mr. Jones stated. “The year-over-year decline was primarily related to the decrease in balances (of approximately $170 million) from two large depositors who had temporary high balances at December 31, 2021. Additional declines in deposits were related to the decrease in balances from the distribution of proceeds from the sale of client businesses and real estate, and to a lesser extent, clients moving funds to seek higher rates. We continue to foster our loyal client relationships as we focus on growing our Company in the Greater San Francisco Bay Area.”

“Our credit metrics remained strong in the fourth quarter of 2022. Nonperforming assets declined ($1.3) million from the fourth quarter a year ago, and classified assets decreased (57%) year-over-year and declined (49%) over the preceding quarter,” said Mr. Jones. “We recorded a $508,000 provision for credit losses on loans during the current quarter to support our growing loan portfolio, which resulted in an allowance for credit losses on loans to total loans of 1.44% at December 31, 2022. We continue to focus on maintaining a healthy balance sheet with strong capital. I want to thank our employees for their efforts this and every year, and for their unwavering commitment to our clients, communities and shareholders.”

Fourth Quarter Ended December 31, 2022

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

(as of, or for the periods ended December 31, 2022, compared to December 31, 2021, and September 30, 2022, except as noted):

Operating Results:

♦	Diluted earnings per share were $0.34 for the fourth quarter of 2022, compared to $0.23 for the fourth quarter of 2021, and $0.30 for the third quarter of 2022. Diluted earnings per share were $1.09 for the year ended December 31, 2022, compared to $0.79 for the year ended December 31, 2021.

♦	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 Year Ended:
	December 31,	September 30,	December 31,	December 31,	December 31,
(unaudited)	2022	2022	2021	2022	2021
Return on average tangible assets	1.59%	1.36%	1.00%	1.27%	0.96%
Return on average tangible common equity	18.89%	16.60%	13.50%	15.57%	11.86%

♦

Net interest income, before provision for credit losses on loans, increased 36% to $51.7 million for the fourth quarter of 2022, compared to $38.1 million for the fourth quarter of 2021. The fully tax equivalent (“FTE”) net interest margin increased 126 basis points to 4.10% for the fourth quarter of 2022, from 2.84% for the fourth quarter of 2021, primarily due to increases in the prime rate and the rate on overnight funds, a shift in the mix of earning assets into higher yielding loans and investment securities, and higher average yield on overnight funds, partially offset by lower interest and fees on Small Business Administration

(“SBA”) Paycheck Protection Program (“PPP”) loans, a decrease in the accretion of the loan purchase discount into interest income from acquired loans, lower prepayment fees, and a higher cost of funds.

●

Net interest income increased 8% to $51.7 million for the fourth quarter of 2022, compared to $48.0 million for the third quarter of 2022. The FTE net interest margin increased 37 basis points to 4.10% for the fourth quarter of 2022 from 3.73% for the third quarter of 2022, primarily due to a shift in the mix of earning assets as the Company invested its excess liquidity into higher yielding loans and investment securities, and higher average yields on overnight funds, partially offset by a higher cost of funds.

●

Net interest income increased 23% to $179.9 million for the year ended December 31, 2022, compared to $146.1 million for the year ended December 31, 2021. For the year ended December 31, 2022, the FTE net interest margin increased 52 basis points to 3.57%, compared to 3.05% for the year ended December 31, 2021, primarily due to higher average balances of loans and investment securities, higher average yields on investment securities and overnight funds, partially offset by lower interest and fees on PPP loans, a decrease in the accretion of the loan purchase discount into interest income from acquired loans, lower prepayment fees, a lower yield on the Bay View Funding factoring portfolio, and a higher cost of funds.

♦	The following table, as of December 31, 2022, sets forth the estimated changes in the Company’s annual net interest income that would result from the designated instantaneous parallel shift in interest rates from the base rate:


	Increase/(Decrease) in
	Estimated Net
	Interest Income⁽¹⁾
	Amount		Percent
Change in Interest Rates (basis points) (in $000's, unaudited)
+400	$	20,274	9.4	%
+300	$	15,183	7.1	%
+200	$	10,119	4.7	%
+100	$	5,090	2.4	%
0		—	—
−100	$	(10,250)	(4.8)	%
−200	$	(24,753)	(11.5)	%
−300	$	(39,082)	(18.2)	%
−400	$	(52,586)	(24.5)	%

(1)

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

♦	The following tables present the average balance of loans outstanding, interest income, and the average yield for the periods indicated:

●

The average yield on the total loan portfolio increased to 5.19% for the fourth quarter of 2022, compared to 4.90% for the third quarter of 2022, primarily due to increases in the prime rate, partially offset by lower fees on PPP loans, and higher average balances of lower yielding purchased residential mortgage loans.


	For the Quarter Ended						For the Quarter Ended
	December 31, 2022						September 30, 2022
	Average		Interest		Average		Average		Interest		Average
(in $000’s, unaudited)	Balance		Income		Yield		Balance		Income		Yield
Loans, core bank	$	2,654,311	$	33,594	5.02	%	$	2,573,908	$	30,490	4.70	%
Prepayment fees		—		123	0.02	%		—		96	0.01	%
PPP loans		1,255		3	0.95	%		4,593		11	0.95	%
PPP fees, net		—		25	7.90	%		—		190	16.41	%
Asset-based lending		35,519		756	8.44	%		53,514		1,032	7.65	%
Bay View Funding factored receivables		71,789		3,696	20.43	%		62,623		3,201	20.28	%
Purchased residential mortgages		485,149		3,842	3.14	%		446,190		3,414	3.04	%
Purchased commercial real estate ("CRE") loans		7,307		80	4.34	%		8,337		83	3.95	%
Loan fair value mark / accretion		(4,774)		382	0.06	%		(5,178)		353	0.05	%
Total loans (includes loans held-for-sale)	$	3,250,556	$	42,501	5.19	%	$	3,143,987	$	38,870	4.90	%

●

The average yield on the total loan portfolio increased to 5.19% for the fourth quarter of 2022, compared to 4.93% for the fourth quarter of 2021, primarily due to increases in the prime rate, partially offset by lower interest and fees on PPP loans, a decrease in the accretion of the loan purchase discount into interest income from acquired loans, lower prepayment fees, and higher average balances of lower yielding purchased residential mortgages.


	For the Quarter Ended						For the Quarter Ended
	December 31, 2022						December 31, 2021
	Average		Interest		Average		Average		Interest		Average
(in $000’s, unaudited)	Balance		Income		Yield		Balance		Income		Yield
Loans, core bank	$	2,654,311	$	33,594	5.02	%	$	2,432,700	$	26,484	4.32	%
Prepayment fees		—		123	0.02	%		—		397	0.06	%
PPP loans		1,255		3	0.95	%		127,592		318	0.99	%
PPP fees, net		—		25	7.90	%		—		2,211	6.87	%
Asset-based lending		35,519		756	8.44	%		52,918		683	5.12	%
Bay View Funding factored receivables		71,789		3,696	20.43	%		62,571		3,248	20.59	%
Purchased residential mortgages		485,149		3,842	3.14	%		199,139		1,437	2.86	%
Purchased CRE loans		7,307		80	4.34	%		8,929		69	3.07	%
Loan fair value mark / accretion		(4,774)		382	0.06	%		(7,728)		915	0.15	%
Total loans (includes loans held-for-sale)	$	3,250,556	$	42,501	5.19	%	$	2,876,121	$	35,762	4.93	%

●

The average yield on the total loan portfolio decreased to 4.91% for the year ended December 31, 2022, compared to 5.03% for the year ended December 31, 2021, primarily due to a decrease in interest and fees on PPP loans, a decrease in the accretion of the loan purchase discount into interest income from acquired loans, lower prepayment fees, and an increase in the average balance of lower yielding purchased residential mortgages.


	For the Year Ended						For the Year Ended
	December 31, 2022						December 31, 2021
	Average		Interest		Average		Average		Interest		Average
(in $000’s, unaudited)	Balance		Income		Yield		Balance		Income		Yield
Loans, core bank	$	2,561,195	$	117,582	4.59	%	$	2,299,367	$	101,690	4.42	%
Prepayment fees		—		1,278	0.05	%		—		2,700	0.12	%
PPP loans		21,689		213	0.98	%		249,253		2,481	1.00	%
PPP fees, net		—		2,054	9.47	%		—		9,995	4.01	%
Asset-based lending		51,990		3,613	6.95	%		39,798		2,106	5.29	%
Bay View Funding factored receivables		64,099		12,819	20.00	%		52,618		11,485	21.83	%
Purchased residential mortgages		417,672		12,395	2.97	%		122,566		3,555	2.90	%
Purchased CRE loans		8,143		317	3.89	%		12,436		441	3.55	%
Loan fair value mark / accretion		(5,782)		2,739	0.11	%		(9,717)		4,791	0.21	%
Total loans (includes loans held-for-sale)	$	3,119,006	$	153,010	4.91	%	$	2,766,321	$	139,244	5.03	%

●

In aggregate, the remaining net purchase discount on total loans acquired from Focus Business Bank, Tri-Valley Bank, United American Bank, and Presidio Bank was $4.6 million at December 31, 2022.

♦

The average cost of total deposits was 0.25% for the fourth quarter of 2022, compared to 0.10% for the fourth quarter of 2021, and 0.13% for the third quarter of 2022. The average cost of total deposits was 0.15% for the year ended December 31, 2022, compared to 0.11% for the year ended December 31, 2021.

♦

During the fourth quarter of 2022, there was a provision for credit losses on loans of $508,000, compared to a $615,000 negative provision for credit losses on loans for the fourth quarter of 2021, and a provision for credit losses on loans of $1.0 million for the third quarter of 2022. There was a provision for credit losses on loans of $766,000 for the year ended December 31, 2022, compared to a $3.1 million negative provision for credit losses on loans for the year ended December 31, 2021.

♦

Total noninterest income remained relatively flat at $2.8 million for both the fourth quarter of 2022 and 2021. The fourth quarter of 2022 included higher income on off-balance sheet deposits. The fourth quarter of 2021 included termination fees, a gain on sales of SBA loans, and a gain on proceeds from company-owned life insurance. Total noninterest income remained relatively flat at $2.8 million for both the fourth and third quarters of 2022, as higher service charges and fees on deposit accounts was offset by a lower gain on sales of SBA loans during the fourth quarter of 2022.

●

For the year ended December 31, 2022, total noninterest income increased 4% to $10.1 million, compared to $9.7 million for the year ended December 31, 2021, primarily due to higher income on off-balance sheet deposits, and a $669,000 gain on warrants, partially offset by a lower gain on sales of SBA loans and a lower gain on proceeds from company-owned life insurance during the year ended December 31, 2022.

♦

Total noninterest expense for the fourth quarter of 2022 increased to $24.5 million, compared to $22.2 million for the fourth quarter of 2021, primarily due to higher salaries and employee benefits, higher rent included in occupancy and equipment expense, higher professional fees, and higher insurance and information technology related expenses included in other noninterest expense during the fourth quarter of 2022.

●

Total noninterest expense for the fourth quarter of 2022 increased to $24.5 million, compared to $23.9 million for the third quarter of 2022, primarily due to approximately $900,000 in additional expense as a result of higher bonuses, professional fees, insurance and information technology related expenses incurred during the fourth quarter of 2022. The higher salaries and employee benefits during the third quarter of 2022 included $784,000 of restricted stock expense for vesting of restricted common stock held by the previous President and Chief Executive Officer of the Company, which was partially offset by a higher bonus accrual during the fourth quarter of 2022.

●

Noninterest expense for the year ended December 31, 2022 increased to $94.9 million, compared to $93.1 million for the year ended December 31, 2021, primarily due to higher salaries and employee benefits, higher rent included in occupancy and equipment expense, and higher insurance and information technology related expenses during the year ended December 31, 2022. These increases were partially offset by higher legal fees included in professional fees and a reserve for a legal settlement included in other noninterest expense during the year ended December 31, 2021.

●

Full time equivalent employees were 331 at December 31, 2022, and 326 at December 31, 2021, and 327 at September 30, 2022.

♦

The efficiency ratio was 44.98% for the fourth quarter of 2022, compared to 54.32% for the fourth quarter of 2021, and 47.02% for the third quarter of 2022. The efficiency ratio for the year ended December 31, 2022 was 49.93%, compared to 59.74% for the year ended December 31, 2021. The improvement in the efficiency ratio for the fourth quarter of 2022 and the year ended December 31, 2022 was primarily due to an increase in net interest income from the rising interest rate environment.

♦

Income tax expense was $8.7 million for the fourth quarter of 2022, compared to $5.3 million for the fourth quarter of 2021, and $7.8 million for the third quarter of 2022. The effective tax rate for the fourth quarter of 2022 was 29.5%, compared to 27.7% for the fourth quarter of 2021, and 30.3% for the third quarter of 2022. Income tax expense for the year ended December 31, 2022 was $27.8 million, compared to $18.2 million for the year ended December 31, 2021. The effective tax rate for the year ended December 31, 2022 was 29.5%, compared to 27.6% for the year ended December 31, 2021.

Balance Sheet Review, Capital Management and Credit Quality:

♦Total assets decreased (6%) to $5.154 billion at December 31, 2022, compared to $5.499 billion at December 31, 2021, and decreased (5%) from $5.431 billion at September 30, 2022.

♦

Securities available-for-sale, at fair value, totaled $489.6 million at December 31, 2022, compared to $102.3 million at December 31, 2021, and $478.5 million at September 30, 2022. At December 31, 2022, the Company’s securities available-for-sale portfolio was comprised of $418.5 million of U.S. Treasury securities and $71.1 million of agency mortgage-backed securities (all issued by U.S. Government sponsored entities).

●

The pre-tax unrealized loss on U.S. Treasury securities available-for-sale at December 31, 2022 was ($10.3) million, compared to a pre-tax unrealized loss of ($10.1) million at September 30, 2022. There were no U.S. Treasury securities available-for-sale at December 31, 2021. The pre-tax unrealized loss on mortgage-backed securities available-for-sale at December 31, 2022 was ($5.8) million, compared to a pre-tax unrealized gain of $2.9 million at December 31, 2021, and a pre-tax unrealized loss of ($7.3) million at September 30, 2022. The pre-tax unrealized loss on total securities available-for-sale at December 31, 2022 was ($16.1) million, compared to a pre-tax unrealized gain of $2.9 million at December 31, 2021, and a pre-tax unrealized loss of ($17.4) million at September 30, 2022. All other factors remaining the same, when market interest rates are increasing, the Company will experience a higher unrealized loss in the securities portfolio.

●

During the fourth quarter of 2022, the Company purchased $11.7 million of U.S. Treasury securities available-for-sale, with a book yield of 4.53% and an average life of 1.28 years. During the year ended December 31, 2022, the Company purchased $425.7 million of U.S. Treasury securities available-for-sale, with a book yield of 3.08% and an average life of 2.25 years.

♦

At December 31, 2022, securities held-to-maturity, at amortized cost, totaled $715.0 million, compared to $658.4 million at December 31, 2021, and $703.8 million at September 30, 2022. At December 31, 2022, the Company’s securities held-to-maturity portfolio was comprised of $677.4 million of agency mortgage-backed securities, and $37.6 million of tax-exempt municipal bonds.

●

The pre-tax unrealized loss on mortgage-backed securities held-to-maturity at December 31, 2022 was ($99.7) million, compared to a pre-tax unrealized loss of ($1.6) million at December 31, 2021, and a pre-tax unrealized loss of ($108.1) million at September 30, 2022. The pre-tax unrealized loss on municipal bonds held-to-maturity at December 31, 2022 was ($810,000), compared to a pre-tax unrealized gain of $805,000 at December 31, 2021, and a pre-tax unrealized loss of ($2.1) million at September 30, 2022. The pre-tax unrealized loss on total securities held-to-maturity at December 31, 2022 was ($100.6) million, compared to a pre-tax unrealized loss of ($790,000) at December 31, 2021, and a pre-tax unrealized loss of ($110.2) million at September 30, 2022.

●

During the fourth quarter of 2022, the Company purchased $27.1 million of agency mortgage-backed securities held-to-maturity, with a book yield of 5.13% and an average life of 8.56 years. During the year ended December 31, 2022, the Company purchased $146.6 million of agency mortgage-backed securities held-to-maturity, with a book yield of 2.75% and an average life of 6.92 years.

♦	The average life of the total investment securities portfolio was 4.93 years at December 31, 2022.

♦	The loan portfolio remains well-diversified as reflected in the following table which summarizes the distribution of loans, excluding loans held-for-sale, and the percentage of distribution in each category for the periods indicated:


LOANS	December 31, 2022				September 30, 2022				December 31, 2021
(in $000’s, unaudited)	Balance		% to Total		Balance		% to Total		Balance		% to Total
Commercial	$	532,749	16	%	$	541,215	17	%	$	594,108	19	%
PPP Loans⁽¹⁾		1,166	0	%		1,614	0	%		88,726	3	%
Real estate:
CRE - owner occupied		614,663	19	%		612,241	19	%		595,934	19	%
CRE - non-owner occupied		1,066,368	32	%		1,023,405	32	%		902,326	29	%
Land and construction		163,577	5	%		167,439	5	%		147,855	5	%
Home equity		120,724	4	%		116,489	3	%		109,579	4	%
Multifamily		244,882	7	%		229,455	7	%		218,856	7	%
Residential mortgages		537,905	16	%		508,839	16	%		416,660	13	%
Consumer and other		17,033	1	%		16,620	1	%		16,744	1	%
Total Loans		3,299,067	100	%		3,217,317	100	%		3,090,788	100	%
Deferred loan costs (fees), net		(517)	—			(844)	—			(3,462)	—
Loans, net of deferred costs and fees	$	3,298,550	100	%	$	3,216,473	100	%	$	3,087,326	100	%

(1)

Less than 1% at December 31, 2022 and September 30, 2022.

●

Loans, excluding loans held-for-sale, increased $211.2 million, or 7%, to $3.299 billion at December 31, 2022, compared to $3.087 billion at December 31, 2021, and increased $82.1 million, or 3%, from $3.216 billion at September 30, 2022. Total loans at December 31, 2022 included $1.2 million of PPP loans, compared to $88.7 million at December 31, 2021 and $1.6 million at September 30, 2022. Total loans at December 31, 2022 included $537.9 million of residential mortgages, compared to $416.7 million at December 31, 2021, and $508.8 million at September 30, 2022. Loans, excluding loans held-for-sale, PPP loans and residential mortgages, increased $175.5 million, or 7%, to $2.760 billion at December 31, 2022, compared to $2.584 billion at December 31, 2021, and increased $53.4 million, or 2%, from $2.706 billion at September 30, 2022.

●

Commercial and industrial (“C&I”) line utilization was 29% at both December 31, 2022 and September 30, 2022, compared to 31% at December 31, 2021.

●

At both December 31, 2022 and September 30, 2022, there was 37% of the CRE loan portfolio secured by owner-occupied real estate, compared to 40% at December 31, 2021.

●

At December 31, 2022, approximately 33% of the Company’s loan portfolio consisted of floating interest rate loans, compared to 38% at December 31, 2021, and 34% at September 30, 2022.

●

During the fourth quarter of 2022, the Company purchased single family residential mortgage loans totaling $37.4 million, tied to homes located in California, with average principal balances of approximately $1.0 million and a bond equivalent yield of approximately 5.22%, which uses the average life of the loan to recognize the discount into income. During the year ended December 31, 2022, the Company purchased single family residential mortgage loans totaling $185.4 million, tied to homes located in California, with average principal balances of approximately $934,000.

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


	At or For the Quarter Ended:									For the Year Ended:
ALLOWANCE FOR CREDIT LOSSES ON LOANS	December 31,			September 30,			December 31,			December 31,			December 31,
(in $000’s, unaudited)	2022			2022			2021			2022			2021
Balance at beginning of period	$	46,921		$	45,490		$	43,680		$	43,290		$	44,400
Charge-offs during the period		(56)			(7)			(87)			(434)			(520)
Recoveries during the period		139			432			312			3,890			2,544
Net recoveries (charge-offs) during the period		83			425			225			3,456			2,024
Provision for (recapture of) credit losses on loans during the period		508			1,006			(615)			766			(3,134)
Balance at end of period	$	47,512		$	46,921		$	43,290		$	47,512		$	43,290

Total loans, net of deferred fees	$	3,298,550		$	3,216,473		$	3,087,326		$	3,298,550		$	3,087,326
Total nonperforming loans	$	2,425		$	1,036		$	3,738		$	2,425		$	3,738
ACLL to total loans		1.44	%		1.46	%		1.40	%		1.44	%		1.40	%
ACLL to total nonperforming loans		1,959.26	%		4,529.05	%		1,158.11	%		1,959.26	%		1,158.11	%

●

The following table shows the drivers of change in ACLL under the current expected credit losses (“CECL”) methodology for the full year of 2022:


DRIVERS OF CHANGE IN ACLL UNDER CECL
(in $000’s, unaudited)
ACLL at December 31, 2021	$	43,290
Portfolio changes during the first quarter of 2022 including net recoveries		(33)
Qualitative and quantitative changes during the first
quarter of 2022 including changes in economic forecasts		(469)
ACLL at March 31, 2022		42,788
Portfolio changes during the second quarter of 2022 including net recoveries		1,383
Qualitative and quantitative changes during the second
quarter of 2022 including changes in economic forecasts		1,319
ACLL at June 30, 2022		45,490
Portfolio changes during the third quarter of 2022 including net recoveries		2,009
Qualitative and quantitative changes during the third
quarter of 2022 including changes in economic forecasts		(578)
ACLL at September 30, 2022		46,921
Portfolio changes during the fourth quarter of 2022 including net recoveries		1,316
Qualitative and quantitative changes during the fourth
quarter of 2022 including changes in economic forecasts		(725)
ACLL at December 31, 2022	$	47,512

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


NONPERFORMING ASSETS	December 31, 2022				September 30, 2022				December 31, 2021
(in $000’s, unaudited)	Balance		% of Total		Balance		% of Total		Balance		% of Total
Restructured and loans over 90 days past due
and still accruing	$	1,685	70	%	$	545	53	%	$	278	8	%
Commercial loans		642	26	%		491	47	%		1,122	30	%
Home equity loans		98	4	%		—	—	%		84	2	%
CRE loans		—	—	%		—	—	%		2,254	60	%
Total nonperforming assets	$	2,425	100	%	$	1,036	100	%	$	3,738	100	%

●

NPAs totaled $2.4 million, or 0.05% of total assets, at December 31, 2022, compared to $3.7 million, or 0.07% of total assets, at December 31, 2021, and $1.0 million, or 0.02% of total assets, at September 30, 2022.

●

There were no foreclosed assets on the balance sheet at December 31, 2022, December 31, 2021, or September 30, 2022.

●

Classified assets decreased to $14.5 million, or 0.28% of total assets, at December 31, 2022, compared to $33.7 million, or 0.61% of total assets, at December 31, 2021, and $28.6 million, or 0.53% of total assets, at September 30, 2022.

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


DEPOSITS	December 31, 2022				September 30, 2022				December 31, 2021
(in $000’s, unaudited)	Balance		% to Total		Balance		% to Total		Balance		% to Total
Demand, noninterest-bearing	$	1,736,722	40	%	$	1,883,574	40	%	$	1,903,768	40	%
Demand, interest-bearing		1,196,427	27	%		1,154,403	24	%		1,308,114	27	%
Savings and money market		1,285,444	29	%		1,487,400	32	%		1,375,825	29	%
Time deposits — under $250		32,445	1	%		34,728	1	%		38,734	1	%
Time deposits — $250 and over		108,192	2	%		93,263	2	%		94,700	2	%
CDARS — interest-bearing demand,
money market and time deposits		30,374	1	%		29,897	1	%		38,271	1	%
Total deposits	$	4,389,604	100	%	$	4,683,265	100	%	$	4,759,412	100	%

●

Total deposits decreased ($369.8) million, or (8%), to $4.390 billion at December 31, 2022, compared to $4.759 billion at December 31, 2021, and decreased ($293.7) million, or (6%), from $4.683 billion at September 30, 2022.

●

Deposits, excluding all time deposits and CDARS deposits, decreased ($369.2) million, or (8%), to $4.219 billion at December 31, 2022, compared to $4.588 billion at December 31, 2021, and decreased ($306.8) million, or (7%), compared to $4.525 billion at September 30, 2022.

●

Off-balance sheet deposits increased $9.4 million, or 4%, to $254.4 million at December 31, 2022, compared to $245.0 million at December 31, 2021, and increased $3.9 million, or 2%, from $250.5 million at September 30, 2022.

♦

The Company’s consolidated capital ratios exceeded regulatory guidelines and the Bank’s capital ratios exceeded regulatory guidelines under the Basel III prompt corrective action (“PCA”) regulatory guidelines for a well-capitalized financial institution, and the Basel III minimum regulatory requirements at December 31, 2022, as reflected in the following table:


					Well-capitalized
					Financial
					Institution		Basel III
	Heritage		Heritage		Basel III PCA		Minimum
	Commerce		Bank of		Regulatory		Regulatory
CAPITAL RATIOS (unaudited)	Corp		Commerce		Guidelines		Requirement⁽¹⁾
Total Capital	14.8	%	14.2	%	10.0	%	10.5	%
Tier 1 Capital	12.7	%	13.2	%	8.0	%	8.5	%
Common Equity Tier 1 Capital	12.7	%	13.2	%	6.5	%	7.0	%
Tier 1 Leverage	9.2	%	9.5	%	5.0	%	4.0	%

(1)

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

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


ACCUMULATED OTHER COMPREHENSIVE LOSS	December 31,		September 30,		December 31,
(in $000’s, unaudited)	2022		2022		2021
Unrealized (loss) gain on securities available-for-sale	$	(11,506)	$	(12,398)	$	1,991
Split dollar insurance contracts liability		(3,091)		(5,511)		(5,480)
Supplemental executive retirement plan liability		(2,371)		(7,428)		(7,669)
Unrealized gain on interest-only strip from SBA loans		112		125		162
Total accumulated other comprehensive loss	$	(16,856)	$	(25,212)	$	(10,996)

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

Forward-Looking Statement Disclaimer

Certain matters discussed in this press release constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to various risks and uncertainties that may be outside our control and our actual results could differ materially from our projected results. Risks and uncertainties that could cause our financial performance to differ materially from our goals, plans, expectations and projections expressed in forward-looking statements include those set forth in our filings with the Securities and Exchange Commission (“SEC”), Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, and the following: (1) geopolitical and domestic political developments that can increase levels of political and economic unpredictability, contribute to rising energy 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; (5) 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; (6) volatility in credit and equity markets and its effect on the global economy; (7) 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; (8) our ability to effectively compete with other banks and financial services companies and the effects of competition in the financial services industry on our business; (9) our ability to achieve loan growth and attract deposits in our market area, the impact of the cost of deposits and our ability to retain deposits; (10) risks associated with concentrations in real estate related loans; (11) the relative strength or weakness of the commercial and real estate markets where our borrowers are located, including related asset and market prices; (12) credit related impairment charges to our securities portfolio; (13) increased capital requirements for our continual growth or as imposed by banking regulators, which may require us to raise capital at a time when capital is not available on favorable terms or at all; (14) regulatory limits on Heritage Bank of Commerce’s ability to pay dividends to the Company; (15) operational issues stemming from, and/or capital spending necessitated by, the potential need to adapt to industry changes in information technology systems, on which we are highly dependent; (16) our inability to attract, recruit, and retain qualified officers and other personnel could harm our ability to implement our strategic plan, impair our relationships with customers and adversely affect our business, results of operations and growth prospects; (17) possible adjustment of the valuation of our deferred tax assets; (18) our ability to keep pace with technological changes, including our ability to identify and address cyber-security risks such as data security breaches, “denial of service” attacks, “hacking” and identity theft; (19) inability of our framework to manage risks associated with our business, including operational risk and credit risk; (20) risks of loss of funding of Small Business Administration (“SBA”) or SBA loan programs, or changes in those programs; (21) compliance with applicable laws and governmental and regulatory requirements, including the Dodd-Frank Act and others relating to banking, consumer protection, securities, accounting and tax matters; (22) effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters; (23) the expense and uncertain resolution of litigation matters whether occurring in the ordinary course of business or otherwise; (24) availability of and competition for acquisition opportunities; (25) risks resulting from domestic terrorism; (26) risks resulting from social unrest and protests; (27) risks of natural disasters (including earthquakes, fires, and flooding) and other events beyond our control; and (28) our success in managing the risks involved in the foregoing factors.

Member FDIC

For additional information, contact:

Debbie Reuter

EVP, Corporate Secretary

Direct: (408) 494-4542

Debbie.Reuter@herbank.com


	For the Quarter Ended:									Percent Change From:				For the Year Ended:
CONSOLIDATED INCOME STATEMENTS	December 31,			September 30,			December 31,			September 30,		December 31,		December 31,			December 31,			Percent
(in $000’s, unaudited)	2022			2022			2021			2022		2021		2022			2021			Change
Interest income	$	55,192		$	50,174		$	39,956		10	%	38	%	$	188,828		$	153,256		23	%
Interest expense		3,453			2,133			1,847		62	%	87	%		8,948			7,131		25	%
Net interest income before provision
for credit losses on loans		51,739			48,041			38,109		8	%	36	%		179,880			146,125		23	%
Provision for (recapture of) credit losses on loans		508			1,006			(615)		(50)	%	183	%		766			(3,134)		124	%
Net interest income after provision
for credit losses on loans		51,231			47,035			38,724		9	%	32	%		179,114			149,259		20	%
Noninterest income:
Service charges and fees on deposit
accounts		1,801			1,360			644		32	%	180	%		4,640			2,488		86	%
Increase in cash surrender value of
life insurance		481			484			454		(1)	%	6	%		1,925			1,838		5	%
Servicing income		138			125			138		10	%	0	%		508			553		(8)	%
Gain on sales of SBA loans		—			308			491		(100)	%	(100)	%		491			1,718		(71)	%
Gain on warrants		—			32			—		(100)	%	N/A			669			11		5982	%
Termination fees		—			16			618		(100)	%	(100)	%		61			797		(92)	%
Gain on proceeds from company-owned
life insurance		—			—			104		N/A		(100)	%		27			675		(96)	%
Other		352			456			361		(23)	%	(2)	%		1,790			1,608		11	%
Total noninterest income		2,772			2,781			2,810		0	%	(1)	%		10,111			9,688		4	%
Noninterest expense:
Salaries and employee benefits		13,915			14,119			12,871		(1)	%	8	%		55,331			51,862		7	%
Occupancy and equipment		2,510			2,415			2,366		4	%	6	%		9,639			9,038		7	%
Professional fees		1,414			1,230			1,200		15	%	18	%		5,015			5,901		(15)	%
Other		6,679			6,135			5,790		9	%	15	%		24,874			26,276		(5)	%
Total noninterest expense		24,518			23,899			22,227		3	%	10	%		94,859			93,077		2	%
Income before income taxes		29,485			25,917			19,307		14	%	53	%		94,366			65,870		43	%
Income tax expense		8,686			7,848			5,342		11	%	63	%		27,811			18,170		53	%
Net income	$	20,799		$	18,069		$	13,965		15	%	49	%	$	66,555		$	47,700		40	%

PER COMMON SHARE DATA
(unaudited)
Basic earnings per share	$	0.34		$	0.30		$	0.23		13	%	48	%	$	1.10		$	0.79		39	%
Diluted earnings per share	$	0.34		$	0.30		$	0.23		13	%	48	%	$	1.09		$	0.79		38	%
Weighted average shares outstanding - basic		60,788,803			60,686,992			60,298,424		0	%	1	%		60,602,962			60,133,821		1	%
Weighted average shares outstanding - diluted		61,357,023			61,123,801			60,844,221		0	%	1	%		61,090,290			60,689,062		1	%
Common shares outstanding at period-end		60,852,723			60,716,794			60,339,837		0	%	1	%		60,852,723			60,339,837		1	%
Dividend per share	$	0.13		$	0.13		$	0.13		0	%	0	%	$	0.52		$	0.52		0	%
Book value per share	$	10.39		$	10.04		$	9.91		3	%	5	%	$	10.39		$	9.91		5	%
Tangible book value per share	$	7.46		$	7.09		$	6.91		5	%	8	%	$	7.46		$	6.91		8	%

KEY FINANCIAL RATIOS
(unaudited)
Annualized return on average equity		13.40	%		11.72	%		9.35	%	14	%	43	%		10.95	%		8.15	%	34	%
Annualized return on average tangible
common equity		18.89	%		16.60	%		13.50	%	14	%	40	%		15.57	%		11.86	%	31	%
Annualized return on average assets		1.54	%		1.31	%		0.97	%	18	%	59	%		1.23	%		0.92	%	34	%
Annualized return on average tangible assets		1.59	%		1.36	%		1.00	%	17	%	59	%		1.27	%		0.96	%	32	%
Net interest margin (FTE)		4.10	%		3.73	%		2.84	%	10	%	44	%		3.57	%		3.05	%	17	%
Efficiency ratio		44.98	%		47.02	%		54.32	%	(4)	%	(17)	%		49.93	%		59.74	%	(16)	%

AVERAGE BALANCES
(in $000’s, unaudited)
Average assets	$	5,360,867		$	5,466,330		$	5,695,136		(2)	%	(6)	%	$	5,401,220		$	5,166,294		5	%
Average tangible assets	$	5,181,793		$	5,286,591		$	5,513,359		(2)	%	(6)	%	$	5,221,159		$	4,983,407		5	%
Average earning assets	$	5,009,578		$	5,117,373		$	5,336,129		(2)	%	(6)	%	$	5,051,552		$	4,805,630		5	%
Average loans held-for-sale	$	2,346		$	3,282		$	4,047		(29)	%	(42)	%	$	2,238		$	4,095		(45)	%
Average total loans	$	3,248,210		$	3,140,705		$	2,872,074		3	%	13	%	$	3,116,768		$	2,762,226		13	%
Average deposits	$	4,600,533		$	4,712,044		$	4,945,204		(2)	%	(7)	%	$	4,647,200		$	4,426,885		5	%
Average demand deposits - noninterest-bearing	$	1,851,003		$	1,910,748		$	1,979,940		(3)	%	(7)	%	$	1,863,928		$	1,834,909		2	%
Average interest-bearing deposits	$	2,749,530		$	2,801,296		$	2,965,264		(2)	%	(7)	%	$	2,783,272		$	2,591,976		7	%
Average interest-bearing liabilities	$	2,788,880		$	2,840,611		$	3,005,212		(2)	%	(7)	%	$	2,825,035		$	2,631,848		7	%
Average equity	$	615,941		$	611,707		$	592,291		1	%	4	%	$	607,603		$	585,156		4	%
Average tangible common equity	$	436,867		$	431,968		$	410,514		1	%	6	%	$	427,542		$	402,269		6	%


	For the Quarter Ended:
CONSOLIDATED INCOME STATEMENTS	December 31,			September 30,			June 30,			March 31,			December 31,
(in $000’s, unaudited)	2022			2022			2022			2022			2021
Interest income	$	55,192		$	50,174		$	43,556		$	39,906		$	39,956
Interest expense		3,453			2,133			1,677			1,685			1,847
Net interest income before provision
for credit losses on loans		51,739			48,041			41,879			38,221			38,109
Provision for (recapture of) credit losses on loans		508			1,006			(181)			(567)			(615)
Net interest income after provision
for credit losses on loans		51,231			47,035			42,060			38,788			38,724
Noninterest income:
Service charges and fees on deposit
accounts		1,801			1,360			867			612			644
Increase in cash surrender value of
life insurance		481			484			480			480			454
Servicing income		138			125			139			106			138
Gain on sales of SBA loans		—			308			27			156			491
Gain on warrants		—			32			—			637			—
Termination fees		—			16			45			—			618
Gain on proceeds from company-owned
life insurance		—			—			27			—			104
Other		352			456			513			469			361
Total noninterest income		2,772			2,781			2,098			2,460			2,810
Noninterest expense:
Salaries and employee benefits		13,915			14,119			13,476			13,821			12,871
Occupancy and equipment		2,510			2,415			2,277			2,437			2,366
Professional fees		1,414			1,230			1,291			1,080			1,200
Other		6,679			6,135			6,146			5,914			5,790
Total noninterest expense		24,518			23,899			23,190			23,252			22,227
Income before income taxes		29,485			25,917			20,968			17,996			19,307
Income tax expense		8,686			7,848			6,147			5,130			5,342
Net income	$	20,799		$	18,069		$	14,821		$	12,866		$	13,965

PER COMMON SHARE DATA
(unaudited)
Basic earnings per share	$	0.34		$	0.30		$	0.24		$	0.21		$	0.23
Diluted earnings per share	$	0.34		$	0.30		$	0.24		$	0.21		$	0.23
Weighted average shares outstanding - basic		60,788,803			60,686,992			60,542,170			60,393,883			60,298,424
Weighted average shares outstanding - diluted		61,357,023			61,123,801			60,969,154			60,921,835			60,844,221
Common shares outstanding at period-end		60,852,723			60,716,794			60,666,794			60,407,846			60,339,837
Dividend per share	$	0.13		$	0.13		$	0.13		$	0.13		$	0.13
Book value per share	$	10.39		$	10.04		$	10.01		$	9.95		$	9.91
Tangible book value per share	$	7.46		$	7.09		$	7.04		$	6.96		$	6.91

KEY FINANCIAL RATIOS
(unaudited)
Annualized return on average equity		13.40	%		11.72	%		9.86	%		8.71	%		9.35	%
Annualized return on average tangible
common equity		18.89	%		16.60	%		14.06	%		12.47	%		13.50	%
Annualized return on average assets		1.54	%		1.31	%		1.11	%		0.96	%		0.97	%
Annualized return on average tangible assets		1.59	%		1.36	%		1.15	%		0.99	%		1.00	%
Net interest margin (FTE)		4.10	%		3.73	%		3.38	%		3.05	%		2.84	%
Efficiency ratio		44.98	%		47.02	%		52.73	%		57.16	%		54.32	%

AVERAGE BALANCES
(in $000’s, unaudited)
Average assets	$	5,360,867		$	5,466,330		$	5,334,636		$	5,443,240		$	5,695,136
Average tangible assets	$	5,181,793		$	5,286,591		$	5,154,245		$	5,262,175		$	5,513,359
Average earning assets	$	5,009,578		$	5,117,373		$	4,985,611		$	5,093,851		$	5,336,129
Average loans held-for-sale	$	2,346		$	3,282		$	1,824		$	1,478		$	4,047
Average total loans	$	3,248,210		$	3,140,705		$	3,048,353		$	3,027,111		$	2,872,074
Average deposits	$	4,600,533		$	4,712,044		$	4,579,436		$	4,697,136		$	4,945,204
Average demand deposits - noninterest-bearing	$	1,851,003		$	1,910,748		$	1,836,350		$	1,857,164		$	1,979,940
Average interest-bearing deposits	$	2,749,530		$	2,801,296		$	2,743,086		$	2,839,972		$	2,965,264
Average interest-bearing liabilities	$	2,788,880		$	2,840,611		$	2,791,527		$	2,879,952		$	3,005,212
Average equity	$	615,941		$	611,707		$	603,182		$	599,355		$	592,291
Average tangible common equity	$	436,867		$	431,968		$	422,791		$	418,290		$	410,514


	End of Period:						Percent Change From:
CONSOLIDATED BALANCE SHEETS	December 31,		September 30,		December 31,		September 30,		December 31,
(in $000’s, unaudited)	2022		2022		2021		2022		2021
ASSETS
Cash and due from banks	$	27,595	$	40,500	$	15,703	(32)	%	76	%
Other investments and interest-bearing deposits
in other financial institutions		279,008		641,251		1,290,513	(56)	%	(78)	%
Securities available-for-sale, at fair value		489,596		478,534		102,252	2	%	379	%
Securities held-to-maturity, at amortized cost		714,990		703,794		658,397	2	%	9	%
Loans held-for-sale - SBA, including deferred costs		2,456		2,081		2,367	18	%	4	%
Loans:
Commercial		532,749		541,215		594,108	(2)	%	(10)	%
PPP loans		1,166		1,614		88,726	(28)	%	(99)	%
Real estate:
CRE - owner occupied		614,663		612,241		595,934	0	%	3	%
CRE - non-owner occupied		1,066,368		1,023,405		902,326	4	%	18	%
Land and construction		163,577		167,439		147,855	(2)	%	11	%
Home equity		120,724		116,489		109,579	4	%	10	%
Multifamily		244,882		229,455		218,856	7	%	12	%
Residential mortgages		537,905		508,839		416,660	6	%	29	%
Consumer and other		17,033		16,620		16,744	2	%	2	%
Loans		3,299,067		3,217,317		3,090,788	3	%	7	%
Deferred loan fees, net		(517)		(844)		(3,462)	(39)	%	(85)	%
Total loans, net of deferred costs and fees		3,298,550		3,216,473		3,087,326	3	%	7	%
Allowance for credit losses on loans		(47,512)		(46,921)		(43,290)	1	%	10	%
Loans, net		3,251,038		3,169,552		3,044,036	3	%	7	%
Company-owned life insurance		78,945		78,456		77,589	1	%	2	%
Premises and equipment, net		9,301		9,428		9,639	(1)	%	(4)	%
Goodwill		167,631		167,631		167,631	0	%	0	%
Other intangible assets		11,033		11,692		13,668	(6)	%	(19)	%
Accrued interest receivable and other assets		122,631		128,343		117,614	(4)	%	4	%
Total assets	$	5,154,224	$	5,431,262	$	5,499,409	(5)	%	(6)	%

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand, noninterest-bearing	$	1,736,722	$	1,883,574	$	1,903,768	(8)	%	(9)	%
Demand, interest-bearing		1,196,427		1,154,403		1,308,114	4	%	(9)	%
Savings and money market		1,285,444		1,487,400		1,375,825	(14)	%	(7)	%
Time deposits - under $250		32,445		34,728		38,734	(7)	%	(16)	%
Time deposits - $250 and over		108,192		93,263		94,700	16	%	14	%
CDARS - money market and time deposits		30,374		29,897		38,271	2	%	(21)	%
Total deposits		4,389,604		4,683,265		4,759,412	(6)	%	(8)	%
Subordinated debt, net of issuance costs		39,350		39,312		39,925	0	%	(1)	%
Accrued interest payable and other liabilities		92,814		99,168		102,044	(6)	%	(9)	%
Total liabilities		4,521,768		4,821,745		4,901,381	(6)	%	(8)	%

Shareholders’ Equity:
Common stock		502,923		501,240		497,695	0	%	1	%
Retained earnings		146,389		133,489		111,329	10	%	31	%
Accumulated other comprehensive loss		(16,856)		(25,212)		(10,996)	33	%	(53)	%
Total shareholders' equity		632,456		609,517		598,028	4	%	6	%
Total liabilities and shareholders’ equity	$	5,154,224	$	5,431,262	$	5,499,409	(5)	%	(6)	%


	End of Period:
CONSOLIDATED BALANCE SHEETS	December 31,		September 30,		June 30,		March 31,		December 31,
(in $000’s, unaudited)	2022		2022		2022		2022		2021
ASSETS
Cash and due from banks	$	27,595	$	40,500	$	35,764	$	29,729	$	15,703
Other investments and interest-bearing deposits
in other financial institutions		279,008		641,251		840,821		1,187,436		1,290,513
Securities available-for-sale, at fair value		489,596		478,534		332,129		111,217		102,252
Securities held-to-maturity, at amortized cost		714,990		703,794		723,716		736,823		658,397
Loans held-for-sale - SBA, including deferred costs		2,456		2,081		2,281		831		2,367
Loans:
Commercial		532,749		541,215		523,268		568,053		594,108
PPP loans		1,166		1,614		8,153		37,393		88,726
Real estate:
CRE - owner occupied		614,663		612,241		597,521		597,542		595,934
CRE - non-owner occupied		1,066,368		1,023,405		993,621		928,220		902,326
Land and construction		163,577		167,439		155,389		153,323		147,855
Home equity		120,724		116,489		116,641		111,609		109,579
Multifamily		244,882		229,455		221,938		221,767		218,856
Residential mortgages		537,905		508,839		448,958		391,171		416,660
Consumer and other		17,033		16,620		18,354		17,110		16,744
Loans		3,299,067		3,217,317		3,083,843		3,026,188		3,090,788
Deferred loan fees, net		(517)		(844)		(1,391)		(2,124)		(3,462)
Total loans, net of deferred fees		3,298,550		3,216,473		3,082,452		3,024,064		3,087,326
Allowance for credit losses on loans		(47,512)		(46,921)		(45,490)		(42,788)		(43,290)
Loans, net		3,251,038		3,169,552		3,036,962		2,981,276		3,044,036
Company-owned life insurance		78,945		78,456		77,972		78,069		77,589
Premises and equipment, net		9,301		9,428		9,593		9,580		9,639
Goodwill		167,631		167,631		167,631		167,631		167,631
Other intangible assets		11,033		11,692		12,351		13,009		13,668
Accrued interest receivable and other assets		122,631		128,343		117,621		111,797		117,614
Total assets	$	5,154,224	$	5,431,262	$	5,356,841	$	5,427,398	$	5,499,409

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand, noninterest-bearing	$	1,736,722	$	1,883,574	$	1,846,365	$	1,811,943	$	1,903,768
Demand, interest-bearing		1,196,427		1,154,403		1,218,538		1,268,942		1,308,114
Savings and money market		1,285,444		1,487,400		1,387,003		1,447,434		1,375,825
Time deposits - under $250		32,445		34,728		36,691		38,417		38,734
Time deposits - $250 and over		108,192		93,263		98,760		93,161		94,700
CDARS - money market and time deposits		30,374		29,897		26,287		30,008		38,271
Total deposits		4,389,604		4,683,265		4,613,644		4,689,905		4,759,412
Subordinated debt, net of issuance costs		39,350		39,312		39,274		39,987		39,925
Accrued interest payable and other liabilities		92,814		99,168		96,699		96,450		102,044
Total liabilities		4,521,768		4,821,745		4,749,617		4,826,342		4,901,381

Shareholders’ Equity:
Common stock		502,923		501,240		499,832		498,763		497,695
Retained earnings		146,389		133,489		123,310		116,347		111,329
Accumulated other comprehensive loss		(16,856)		(25,212)		(15,918)		(14,054)		(10,996)
Total shareholders' equity		632,456		609,517		607,224		601,056		598,028
Total liabilities and shareholders’ equity	$	5,154,224	$	5,431,262	$	5,356,841	$	5,427,398	$	5,499,409


	At or For the Quarter Ended:									Percent Change From:
CREDIT QUALITY DATA	December 31,			September 30,			December 31,			September 30,		December 31,
(in $000’s, unaudited)	2022			2022			2021			2022		2021
Nonaccrual loans - held-for-investment	$	740		$	491		$	3,460		51	%	(79)	%
Restructured and loans over 90 days past due
and still accruing		1,685			545			278		209	%	506	%
Total nonperforming loans		2,425			1,036			3,738		134	%	(35)	%
Foreclosed assets		—			—			—		N/A		N/A
Total nonperforming assets	$	2,425		$	1,036		$	3,738		134	%	(35)	%
Other restructured loans still accruing	$	171		$	93		$	125		84	%	37	%
Net charge-offs (recoveries) during the quarter	$	(83)		$	(425)		$	(225)		80	%	63	%
Provision for (recapture of) credit losses on loans during the quarter	$	508		$	1,006		$	(615)		(50)	%	183	%
Allowance for credit losses on loans	$	47,512		$	46,921		$	43,290		1	%	10	%
Classified assets	$	14,544		$	28,570		$	33,719		(49)	%	(57)	%
Allowance for credit losses on loans to total loans		1.44	%		1.46	%		1.40	%	(1)	%	3	%
Allowance for credit losses on loans to total nonperforming loans		1,959.26	%		4,529.05	%		1,158.11	%	(57)	%	69	%
Nonperforming assets to total assets		0.05	%		0.02	%		0.07	%	150	%	(29)	%
Nonperforming loans to total loans		0.07	%		0.03	%		0.12	%	133	%	(42)	%
Classified assets to Heritage Commerce Corp
Tier 1 capital plus allowance for credit losses on loans		3	%		6	%		7	%	(50)	%	(57)	%
Classified assets to Heritage Bank of Commerce
Tier 1 capital plus allowance for credit losses on loans		3	%		5	%		7	%	(40)	%	(57)	%

OTHER PERIOD-END STATISTICS
(in $000’s, unaudited)
Heritage Commerce Corp:
Tangible common equity ⁽¹⁾	$	453,792		$	430,194		$	416,729		5	%	9	%
Shareholders’ equity / total assets		12.27	%		11.22	%		10.87	%	9	%	13	%
Tangible common equity / tangible assets ⁽²⁾		9.12	%		8.19	%		7.84	%	11	%	16	%
Loan to deposit ratio		75.14	%		68.68	%		64.87	%	9	%	16	%
Noninterest-bearing deposits / total deposits		39.56	%		40.22	%		40.00	%	(2)	%	(1)	%
Total capital ratio		14.8	%		14.5	%		14.4	%	2	%	3	%
Tier 1 capital ratio		12.7	%		12.4	%		12.3	%	2	%	3	%
Common Equity Tier 1 capital ratio		12.7	%		12.4	%		12.3	%	2	%	3	%
Tier 1 leverage ratio		9.2	%		8.7	%		7.9	%	6	%	16	%
Heritage Bank of Commerce:
Total capital ratio		14.2	%		14.0	%		13.8	%	1	%	3	%
Tier 1 capital ratio		13.2	%		12.9	%		12.8	%	2	%	3	%
Common Equity Tier 1 capital ratio		13.2	%		12.9	%		12.8	%	2	%	3	%
Tier 1 leverage ratio		9.5	%		9.0	%		8.2	%	6	%	16	%

(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	December 31,			September 30,			June 30,			March 31,			December 31,
(in $000’s, unaudited)	2022			2022			2022			2022			2021
Nonaccrual loans - held-for-investment	$	740		$	491		$	1,734		$	3,303		$	3,460
Restructured and loans over 90 days past due
and still accruing		1,685			545			981			527			278
Total nonperforming loans		2,425			1,036			2,715			3,830			3,738
Foreclosed assets		—			—			—			—			—
Total nonperforming assets	$	2,425		$	1,036		$	2,715		$	3,830		$	3,738
Other restructured loans still accruing	$	171		$	93		$	113		$	125		$	125
Net charge-offs (recoveries) during the quarter	$	(83)		$	(425)		$	(2,883)		$	(65)		$	(225)
Provision for (recapture of) credit losses on loans during the quarter	$	508		$	1,006		$	(181)		$	(567)		$	(615)
Allowance for credit losses on loans	$	47,512		$	46,921		$	45,490		$	42,788		$	43,290
Classified assets	$	14,544		$	28,570		$	28,929		$	30,579		$	33,719
Allowance for credit losses on loans to total loans		1.44	%		1.46	%		1.48	%		1.41	%		1.40	%
Allowance for credit losses on loans to total nonperforming loans		1,959.26	%		4,529.05	%		1,675.51	%		1,117.18	%		1,158.11	%
Nonperforming assets to total assets		0.05	%		0.02	%		0.05	%		0.07	%		0.07	%
Nonperforming loans to total loans		0.07	%		0.03	%		0.09	%		0.13	%		0.12	%
Classified assets to Heritage Commerce Corp
Tier 1 capital plus allowance for credit losses on loans		3	%		6	%		6	%		6	%		7	%
Classified assets to Heritage Bank of Commerce
Tier 1 capital plus allowance for credit losses on loans		3	%		5	%		6	%		6	%		7	%

OTHER PERIOD-END STATISTICS
(in $000’s, unaudited)
Heritage Commerce Corp:
Tangible common equity ⁽¹⁾	$	453,792		$	430,194		$	427,242		$	420,416		$	416,729
Shareholders’ equity / total assets		12.27	%		11.22	%		11.34	%		11.07	%		10.87	%
Tangible common equity / tangible assets ⁽²⁾		9.12	%		8.19	%		8.25	%		8.01	%		7.84	%
Loan to deposit ratio		75.14	%		68.68	%		66.81	%		64.48	%		64.87	%
Noninterest-bearing deposits / total deposits		39.56	%		40.22	%		40.02	%		38.63	%		40.00	%
Total capital ratio		14.8	%		14.5	%		14.6	%		14.6	%		14.4	%
Tier 1 capital ratio		12.7	%		12.4	%		12.5	%		12.4	%		12.3	%
Common Equity Tier 1 capital ratio		12.7	%		12.4	%		12.5	%		12.4	%		12.3	%
Tier 1 leverage ratio		9.2	%		8.7	%		8.7	%		8.3	%		7.9	%
Heritage Bank of Commerce:
Total capital ratio		14.2	%		14.0	%		14.1	%		13.9	%		13.8	%
Tier 1 capital ratio		13.2	%		12.9	%		13.0	%		12.9	%		12.8	%
Common Equity Tier 1 capital ratio		13.2	%		12.9	%		13.0	%		12.9	%		12.8	%
Tier 1 leverage ratio		9.5	%		9.0	%		9.0	%		8.7	%		8.2	%

(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
	December 31, 2022						December 31, 2021
			Interest		Average				Interest		Average
NET INTEREST INCOME AND NET INTEREST MARGIN	Average		Income/		Yield/		Average		Income/		Yield/
(in $000’s, unaudited)	Balance		Expense		Rate		Balance		Expense		Rate
Assets:
Loans, gross⁽¹⁾⁽²⁾	$	3,250,556	$	42,501	5.19	%	$	2,876,121	$	35,762	4.93	%
Securities - taxable		1,156,563		6,941	2.38	%		660,663		2,686	1.61	%
Securities - exempt from Federal tax ⁽³⁾		37,958		324	3.39	%		54,965		457	3.30	%
Other investments and interest-bearing deposits
in other financial institutions		564,501		5,494	3.86	%		1,744,380		1,147	0.26	%
Total interest earning assets⁽³⁾		5,009,578		55,260	4.38	%		5,336,129		40,052	2.98	%
Cash and due from banks		36,392						38,178
Premises and equipment, net		9,436						9,755
Goodwill and other intangible assets		179,074						181,777
Other assets		126,387						129,297
Total assets	$	5,360,867					$	5,695,136

Liabilities and shareholders’ equity:
Deposits:
Demand, noninterest-bearing	$	1,851,003					$	1,979,940

Demand, interest-bearing		1,164,378		945	0.32	%		1,346,878		559	0.16	%
Savings and money market		1,424,964		1,694	0.47	%		1,451,230		582	0.16	%
Time deposits - under $100		12,157		7	0.23	%		13,766		5	0.14	%
Time deposits - $100 and over		120,246		268	0.88	%		118,089		116	0.39	%
CDARS - money market and time deposits		27,785		1	0.01	%		35,301		2	0.02	%
Total interest-bearing deposits		2,749,530		2,915	0.42	%		2,965,264		1,264	0.17	%
Total deposits		4,600,533		2,915	0.25	%		4,945,204		1,264	0.10	%

Subordinated debt, net of issuance costs		39,326		538	5.43	%		39,896		583	5.80	%
Short-term borrowings		24		—	0.00	%		52		—	0.00	%
Total interest-bearing liabilities		2,788,880		3,453	0.49	%		3,005,212		1,847	0.24	%
Total interest-bearing liabilities and demand,
noninterest-bearing / cost of funds		4,639,883		3,453	0.30	%		4,985,152		1,847	0.15	%
Other liabilities		105,043						117,693
Total liabilities		4,744,926						5,102,845
Shareholders’ equity		615,941						592,291
Total liabilities and shareholders’ equity	$	5,360,867					$	5,695,136

Net interest income ⁽³⁾ / margin				51,807	4.10	%				38,205	2.84	%
Less tax equivalent adjustment⁽³⁾				(68)						(96)
Net interest income			$	51,739					$	38,109

(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 $326,000 for the fourth quarter of 2022 (of which $25,000 was from PPP loans), compared to $2,567,000 for the fourth quarter of 2021 (of which $2,211,000 was from PPP loans). Prepayment fees totaled $123,000 for the fourth quarter of 2022, compared to $397,000 for the fourth quarter of 2021.

(3)	Reflects the FTE adjustment for Federal tax-exempt income based on a 21% tax rate.


	For the Quarter Ended						For the Quarter Ended
	December 31, 2022						September 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⁾	$	3,250,556	$	42,501	5.19	%	$	3,143,987	$	38,870	4.90	%
Securities - taxable		1,156,563		6,941	2.38	%		1,076,742		5,874	2.16	%
Securities - exempt from Federal tax ⁽³⁾		37,958		324	3.39	%		38,733		329	3.37	%
Other investments and interest-bearing deposits
in other financial institutions		564,501		5,494	3.86	%		857,911		5,170	2.39	%
Total interest earning assets⁽³⁾		5,009,578		55,260	4.38	%		5,117,373		50,243	3.90	%
Cash and due from banks		36,392						37,961
Premises and equipment, net		9,436						9,591
Goodwill and other intangible assets		179,074						179,739
Other assets		126,387						121,666
Total assets	$	5,360,867					$	5,466,330

Liabilities and shareholders’ equity:
Deposits:
Demand, noninterest-bearing	$	1,851,003					$	1,910,748

Demand, interest-bearing		1,164,378		945	0.32	%		1,205,937		543	0.18	%
Savings and money market		1,424,964		1,694	0.47	%		1,429,055		925	0.26	%
Time deposits - under $100		12,157		7	0.23	%		12,329		5	0.16	%
Time deposits - $100 and over		120,246		268	0.88	%		123,458		121	0.39	%
CDARS - money market and time deposits		27,785		1	0.01	%		30,517		1	0.01	%
Total interest-bearing deposits		2,749,530		2,915	0.42	%		2,801,296		1,595	0.23	%
Total deposits		4,600,533		2,915	0.25	%		4,712,044		1,595	0.13	%

Subordinated debt, net of issuance costs		39,326		538	5.43	%		39,288		538	5.43	%
Short-term borrowings		24		—	0.00	%		27		—	0.00	%
Total interest-bearing liabilities		2,788,880		3,453	0.49	%		2,840,611		2,133	0.30	%
Total interest-bearing liabilities and demand,
noninterest-bearing / cost of funds		4,639,883		3,453	0.30	%		4,751,359		2,133	0.18	%
Other liabilities		105,043						103,264
Total liabilities		4,744,926						4,854,623
Shareholders’ equity		615,941						611,707
Total liabilities and shareholders’ equity	$	5,360,867					$	5,466,330

Net interest income ⁽³⁾ / margin				51,807	4.10	%				48,110	3.73	%
Less tax equivalent adjustment⁽³⁾				(68)						(69)
Net interest income			$	51,739					$	48,041

(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 $326,000 for the fourth quarter of 2022 (of which $25,000 was from PPP loans), compared to $507,000 for the third quarter of 2022 (of which $190,000 was from PPP loans). Prepayment fees totaled $123,000 for the fourth quarter of 2022, compared to $96,000 for the third quarter of 2022.

(3)	Reflects the FTE adjustment for Federal tax-exempt income based on a 21% tax rate.


	For the Year Ended						For the Year Ended
	December 31, 2022						December 31, 2021
			Interest		Average				Interest		Average
NET INTEREST INCOME AND NET INTEREST MARGIN	Average		Income/		Yield/		Average		Income/		Yield/
(in $000’s, unaudited)	Balance		Expense		Rate		Balance		Expense		Rate
Assets:
Loans, gross⁽¹⁾⁽²⁾	$	3,119,006	$	153,010	4.91	%	$	2,766,321	$	139,244	5.03	%
Securities - taxable		983,137		20,666	2.10	%		534,387		8,678	1.62	%
Securities - exempt from Federal tax ⁽³⁾		40,478		1,372	3.39	%		60,566		1,995	3.29	%
Other investments, interest-bearing deposits in other
financial institutions and Federal funds sold		908,931		14,068	1.55	%		1,444,356		3,758	0.26	%
Total interest earning assets⁽³⁾		5,051,552		189,116	3.74	%		4,805,630		153,675	3.20	%
Cash and due from banks		37,287						39,841
Premises and equipment, net		9,574						10,056
Goodwill and other intangible assets		180,061						182,887
Other assets		122,746						127,880
Total assets	$	5,401,220					$	5,166,294

Liabilities and shareholders’ equity:
Deposits:
Demand, noninterest-bearing	$	1,863,928					$	1,834,909

Demand, interest-bearing		1,224,676		2,415	0.20	%		1,164,556		1,988	0.17	%
Savings and money market		1,394,283		3,720	0.27	%		1,251,438		2,195	0.18	%
Time deposits - under $100		12,587		21	0.17	%		14,924		29	0.19	%
Time deposits - $100 and over		122,018		609	0.50	%		128,753		598	0.46	%
CDARS - money market and time deposits		29,708		5	0.02	%		32,305		6	0.02	%
Total interest-bearing deposits		2,783,272		6,770	0.24	%		2,591,976		4,816	0.19	%
Total deposits		4,647,200		6,770	0.15	%		4,426,885		4,816	0.11	%

Subordinated debt, net of issuance costs		41,739		2,178	5.22	%		39,827		2,314	5.81	%
Short-term borrowings		24		—	0.00	%		45		1	2.22	%
Total interest-bearing liabilities		2,825,035		8,948	0.32	%		2,631,848		7,131	0.27	%
Total interest-bearing liabilities and demand,
noninterest-bearing / cost of funds		4,688,963		8,948	0.19	%		4,466,757		7,131	0.16	%
Other liabilities		104,654						114,381
Total liabilities		4,793,617						4,581,138
Shareholders’ equity		607,603						585,156
Total liabilities and shareholders’ equity	$	5,401,220					$	5,166,294

Net interest income ⁽³⁾ / margin				180,168	3.57	%				146,544	3.05	%
Less tax equivalent adjustment⁽³⁾				(288)						(419)
Net interest income			$	179,880					$	146,125

(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 $3,437,000 for the year ended December 31, 2022 (of which $2,054,000 was from PPP loans), compared to $11,257,000 for the year ended December 31, 2021 (of which $9,995,000 was from PPP loans). Prepayment fees totaled $1,278,000 for the year ended December 31, 2022, compared to $2,700,000 for the year ended December 31, 2021.

(3)	Reflects the FTE adjustment for Federal tax-exempt income based on a 21% tax rate.

Exhibit 99.2