Bay Street News

Heritage Commerce Corp Earns $10.2 Million for the First Quarter of 2024 and Grows Client Deposits by 2%

SAN JOSE, Calif., April 25, 2024 (GLOBE NEWSWIRE) — Heritage Commerce Corp (Nasdaq: HTBK), (the “Company”), the holding company for Heritage Bank of Commerce (the “Bank”), today announced that its first quarter 2024 net income was $10.2 million, or $0.17 per average diluted common share, compared to $18.9 million, or $0.31 per average diluted common share, for the first quarter of 2023, and $13.3 million, or $0.22 per average diluted common share, for the fourth quarter of 2023. All data are unaudited.

“Our first quarter 2024 earnings were solid, highlighted by total client deposits increasing over $66 million from the prior quarter and the loan portfolio increasing over $74 million, year-over-year,” said Clay Jones, President and Chief Executive Officer.  “First quarter earnings typically reflect increased seasonal expenses such as payroll taxes and other employee benefits, and this first quarter was no exception. While we benefit from higher yields on assets, we continue to see a modest impact on the increase cost of our deposits causing a slight compression in our net interest margin. The Bank’s credit quality remains strong, supported by sound reserves for potential credit losses.” 

“Heritage Bank of Commerce was honored to be recently recognized on Forbes’ List of World’s Best Banks and ranked 25th on S&P Global Market Intelligence’s top 50 list of best-performing community banks. These prestigious recognitions underscore our commitment to excellence, sound financial management and our dedication to serving our client community,” added Mr. Jones.

“This year we celebrate the Bank’s 30th anniversary, a milestone that speaks to the dedication of our team members, the trust of our loyal clients, and our unwavering commitment to supporting our communities,” said Mr. Jones. “With this support, we have created a vibrant franchise, and remain optimistic about the future of our Company.”

First Quarter Ended March 31, 2024
Operating Results, Current Liquidity Position, Financial Condition, Credit Quality, and Capital Management

(as of, or for the periods ended March 31, 2024, compared to March 31, 2023, and December 31, 2023, except as noted):

Operating Results:

                     
    For the Quarter Ended:  
    March 31,   December 31,   March 31,  
(unaudited)   2024   2023   2023  
Return on average assets   0.79 %     1.00 %     1.47 %    
Return on average tangible assets(1)   0.82 %     1.04 %     1.52 %    
Return on average equity   6.08 %     7.96 %     12.03 %    
Return on average tangible common equity(1)   8.24 %     10.84 %     16.71 %    
                           
_____________________
(1) Financial results are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and with reference to certain non-GAAP financial measures. Management believes that the presentation of certain non-GAAP financial measures such as the Company’s return on tangible assets and return on tangible common equity ratios provide useful supplemental information to investors as a financial measure commonly used in the banking industry.  A reconciliation of GAAP to non-GAAP financial measures are presented in the tables at the end of this earnings release.
____________________
   

Net Interest Income:

             
    Increase/(Decrease) in  
    Estimated Net  
CHANGE IN INTEREST RATES (basis points)   Interest Income(1)  
(in $000’s, unaudited)   Amount   Percent  
+400   $ 18,668     10.0   %
+300   $ 13,966     7.5   %
+200   $ 9,297     5.0   %
+100   $ 4,659     2.5   %
0            
−100   $ (6,272 )   (3.4 ) %
−200   $ (14,475 )   (7.7 ) %
−300   $ (24,805 )   (13.3 ) %
−400   $ (40,025 )   (21.4 ) %
             
    Increase/(Decrease) in  
    Estimated Economic  
CHANGE IN INTEREST RATES (basis points)   Value of Equity(1)  
(in $000’s, unaudited)   Amount   Percent  
+400   $ 104,038     8.6   %
+300   $ 88,095     7.3   %
+200   $ 66,340     5.5   %
+100   $ 37,610     3.1   %
0            
−100   $ (61,930 )   (5.1 ) %
−200   $ (151,250 )   (12.5 ) %
−300   $ (268,857 )   (22.2 ) %
−400   $ (418,343 )   (34.5 ) %
_______________________
(1) Computations of prospective effects of hypothetical interest rate changes are for illustrative purposes only, 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. These projections are forward-looking and should be considered in light of the Forward-Looking Statement Disclaimer below. 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.
_______________________
 
    For the Quarter Ended   For the Quarter Ended  
    March 31, 2024   December 31, 2023  
    Average   Interest   Average   Average   Interest   Average  
(in $000’s, unaudited)   Balance   Income   Yield   Balance   Income   Yield  
Loans, core bank   $ 2,779,487     $ 37,339   5.40 % $ 2,758,935     $ 37,303   5.36 %
Prepayment fees           24   0.00 %         91   0.01 %
Asset-based lending     15,864       382   9.68 %   14,717       371   10.00 %
Bay View Funding factored receivables     53,511       2,838   21.33 %   52,861       2,803   21.04 %
Purchased residential mortgages     454,240       3,788   3.35 %   459,268       3,812   3.29 %
Loan fair value mark / accretion     (3,113 )     229   0.03 %   (3,352 )     255   0.04 %
Total loans (includes loans held-for-sale)   $ 3,299,989     $ 44,600   5.44 % $ 3,282,429     $ 44,635   5.39 %
  The average yield on the total loan portfolio increased to 5.44% for the first quarter of 2024, compared to 5.39% for the fourth quarter of 2023, primarily due to higher loan yields on the core bank, and higher average balances of higher yielding asset-based lending loans and Bay View Funding factored receivables.
     
  The average yield on the total loan portfolio decreased to 5.44% for the first quarter of 2024, compared to 5.46% for the first quarter of 2023, primarily due to lower average balances of higher yielding asset-based lending loans and Bay View Funding factored receivables, a decrease in the accretion of loan purchase discount into interest income from acquired loans, and lower prepayment fees, partially offset by increases in the prime rate.
     
  In aggregate, the unamortized net purchase discount on total loans acquired was $3.0 million at March 31, 2024.
     
                                   
    For the Quarter Ended   For the Quarter Ended  
    March 31, 2024   December 31, 2023  
    Average   Interest   Average   Average   Interest   Average  
(in $000’s, unaudited)   Balance   Expense   Rate   Balance   Expense   Rate  
Deposits:                                  
Demand, noninterest-bearing   $ 1,177,078             $ 1,243,222            
                                   
Demand, interest-bearing     920,048   $ 1,554   0.68 %   948,061   $ 1,661   0.70 %
Savings and money market     1,067,581     6,649   2.50 %   1,096,962     6,216   2.25 %
Time deposits – under $100     10,945     42   1.54 %   11,389     37   1.29 %
Time deposits – $100 and over     221,211     2,064   3.75 %   234,140     2,130   3.61 %
Insured Cash Sweep (“ICS”)/Certificate of Deposit Registry                                  
Service (“CDARS”) – interest-bearing demand, money market                                  
and time deposits     963,287     6,611   2.76 %   920,976     6,009   2.59 %
Total interest-bearing deposits     3,183,072     16,920   2.14 %   3,211,528     16,053   1.98 %
Total deposits     4,360,150     16,920   1.56 %   4,454,750     16,053   1.43 %
                                   
Short-term borrowings     15       0.00 %   29       0.00 %
Subordinated debt, net of issuance costs     39,516     538   5.48 %   39,477     538   5.41 %
Total interest-bearing liabilities     3,222,603     17,458   2.18 %   3,251,034     16,591   2.02 %
Total interest-bearing liabilities and demand,                                  
noninterest-bearing / cost of funds   $ 4,399,681   $ 17,458   1.60 % $ 4,494,256   $ 16,591   1.46 %
  The average cost of total deposits increased to 1.56% for the first quarter of 2024, compared to 1.43% for the fourth quarter of 2023.   The average cost of funds increased to 1.60% for the first quarter of 2024, compared to 1.46% for the fourth quarter of 2023. The average cost of deposits was 0.54% and the average cost of funds was 0.63% for the first quarter of 2023.
     
  The increase in the average cost of total deposits and the average cost of funds for the first quarter of 2024 was primarily due to clients seeking higher yields and moving noninterest-bearing deposits to the Bank’s ICS/CDARS deposits and interest-bearing money market accounts.
     

Provision for Credit Losses on Loans:

Noninterest Income:

Noninterest Expense:

Income Tax Expense:

Current Liquidity Position, Financial Condition, Credit Quality, and Capital Management:

Liquidity and Available Lines of Credit:

                   
LIQUIDITY AND AVAILABLE LINES OF CREDIT   Total       Remaining
(in $000’s, unaudited)   Available   Outstanding   Available
Excess funds at the Federal Reserve Bank (“FRB”)   $ 490,000   $   $ 490,000
FRB discount window collateralized line of credit     1,245,362         1,245,362
Federal Home Loan Bank (“FHLB”) collateralized borrowing capacity     1,097,518         1,097,518
Unpledged investment securities (at fair value)     55,358         55,358
Federal funds purchase arrangements     90,000         90,000
Holding company line of credit     20,000         20,000
Total   $ 2,998,238   $   $ 2,998,238
  The Company’s total available liquidity and borrowing capacity was $3.00 billion at March 31, 2024. The Company’s total available liquidity and borrowing capacity was $2.64 billion at March 31, 2023, and $2.87 billion at December 31, 2023.
     
  The available liquidity and borrowing capacity was 67% of the Company’s total deposits and approximately 149% of the Bank’s estimated uninsured deposits at March 31, 2024. The available liquidity and borrowing capacity was 59% of the Company’s total deposits and approximately 103% of the Bank’s estimated uninsured deposits at March 31, 2023. The available liquidity and borrowing capacity was 66% of the Company’s total deposits and approximately 142% of the Bank’s estimated uninsured deposits at December 31, 2023.
     
  The loan to deposit ratio was 75.06% at March 31, 2024, compared to 73.39% at March 31, 2023, and 76.52% at December 31, 2023.
     

Investment Securities:

                   
SECURITIES AVAILABLE-FOR-SALE   March 31,   December 31,   March 31,
(in $000’s, unaudited)   2024     2023     2023  
Balance (at fair value):                  
U.S. Treasury   $ 347,453     $ 382,369     $ 422,903  
Agency mortgage-backed securities     57,021       60,267       68,848  
Total   $ 404,474     $ 442,636     $ 491,751  
                   
Pre-tax unrealized (loss):                  
U.S. Treasury   $ (4,784 )   $ (5,621 )   $ (7,510 )
Agency mortgage-backed securities     (4,895 )     (4,313 )     (4,969 )
Total   $ (9,679 )   $ (9,934 )   $ (12,479 )
                         
Weighted average life     1.15       1.29       1.88  
  The pre-tax unrealized loss on the securities available-for-sale portfolio was ($9.7) million, or ($6.9) million net of taxes, which was 1.0% of total shareholders’ equity at March 31, 2024.
     
                   
SECURITIES HELD-TO-MATURITY   March 31,   December 31,   March 31,
(in $000’s, unaudited)   2024     2023     2023  
Balance (at amortized cost):                  
Agency mortgage-backed securities   $ 604,458     $ 618,374     $ 663,481  
Municipals — exempt from Federal tax (1)     31,803       32,203       34,764  
Total (1)   $ 636,261     $ 650,577     $ 698,245  
                   
Pre-tax unrecognized (loss):                  
Agency mortgage-backed securities   $ (92,332 )   $ (85,729 )   $ (89,962 )
Municipals — exempt from Federal tax     (1,071 )     (721 )     (297 )
Total   $ (93,403 )   $ (86,450 )   $ (90,259 )
                   
Allowance for credit losses on municipal securities   $ (12 )   $ (12 )   $ (14 )
                         
Weighted average life     6.59       6.57       6.95  
________________________________
(1)   Gross of the allowance for credit losses of ($12,000) at both March 31, 2024 and December 31, 2023, and ($14,000) at March 31, 2023.
________________________________
  The pre-tax unrecognized loss on the securities held-to-maturity portfolio was ($93.4) million, or ($65.8) million net of taxes, which was 9.7% of total shareholders’ equity at March 31, 2024.
     
                   
          Agency      
          Mortgage-      
PROJECTED INVESTMENT SECURITIES       backed and    
PAYDOWNS & MATURITIES   U.S.   Municipal    
(in $000’s, unaudited)   Treasury   Securities   Total
Second quarter of 2024   $ 131,000   $ 22,245   $ 153,245
Third quarter of 2024     37,500     21,031     58,531
Fourth quarter of 2024     9,000     19,442     28,442
First quarter of 2025     35,000     18,851     53,851
Second quarter of 2025     118,000     18,381     136,381
Third quarter of 2025     25,500     19,583     45,083
Fourth quarter of 2025         18,035     18,035
First quarter of 2026         17,136     17,136
Total   $ 356,000   $ 154,704   $ 510,704
  The weighted average life of the total investment securities portfolio was 4.44 years at March 31, 2024, compared to 4.82 years at March 31, 2023, and 4.40 years at December 31, 2023.
     

Loans:

                                 
LOANS   March 31, 2024   December 31, 2023   March 31, 2023  
(in $000’s, unaudited)   Balance   % to Total   Balance   % to Total   Balance   % to Total  
Commercial   $ 452,231     14 % $ 463,778     14 % $ 506,602     16 %
Real estate:                                
CRE – owner occupied     585,031     17 %   583,253     17 %   603,298     18 %
CRE – non-owner occupied     1,271,184     38 %   1,256,590     37 %   1,083,852     33 %
Land and construction     129,712     4 %   140,513     4 %   166,408     5 %
Home equity     122,794     4 %   119,125     4 %   124,481     4 %
Multifamily     269,263     8 %   269,734     8 %   231,242     7 %
Residential mortgages     490,035     15 %   496,961     15 %   528,639     16 %
Consumer and other     16,439     < 1 %   20,919     1 %   17,905     1 %
Total Loans     3,336,689     100 %   3,350,873     100 %   3,262,427     100 %
Deferred loan costs (fees), net     (587 )       (495 )       (512 )    
Loans, net of deferred costs and fees   $ 3,336,102     100 % $ 3,350,378     100 % $ 3,261,915     100 %
 
  Loans, excluding loans held-for-sale, increased $74.2 million, or 2%, to $3.34 billion at March 31, 2024, compared to $3.26 billion at March 31, 2023, and decreased ($14.3) million from $3.35 billion at December 31, 2023.  Core loans, excluding residential mortgages, increased $112.8 million, or 4%, to $2.85 billion at March 31, 2024, compared to $2.73 billion at March 31, 2023, and remained relatively flat from $2.85 billion at December 31, 2023. 
     
  Commercial and industrial (“C&I”) line utilization was 28% at March 31, 2024, compared to 31% at March 31, 2023, and 29% at December 31, 2023.
     
  Commercial real estate (“CRE”) loans totaled $1.86 billion at March 31, 2024, of which 32% were owner occupied and 68% were investor CRE loans. There was 36% of the CRE loan portfolio secured by owner occupied real estate at March 31, 2023, and 32% at December 31, 2023. 
  During the first quarter of 2024, there were 23 new CRE loans originated totaling $40 million with a weighted average loan-to-value (“LTV”) and debt-service coverage ratio (“DSCR”) for the non-owner occupied portfolio of 51% and 1.84 times, respectively.
     
  The average loan size for all CRE loans was $1.6 million, and the average loan size for office CRE loans was also $1.6 million.
     
  The Company has personal guarantees on 92% of its CRE portfolio. A substantial portion of the unguaranteed CRE loans were made to credit-worthy non-profit organizations.
     
  Total office exposure (excluding medical/dental offices) in the CRE portfolio was $398 million, including 29 loans totaling approximately $74 million in San Jose, 17 loans totaling approximately $26 million in San Francisco, and eight loans totaling approximately $16 million, in Oakland, at March 31, 2024. Non-owner occupied CRE with office exposure totaled $311 million at March 31, 2024.
     
  At March 31, 2024, the weighted average LTV and DSCR for the entire non-owner occupied office portfolio were 42.6% and 1.83 times, respectively.
     
  Total medical/dental office exposure in the non-owner occupied CRE portfolio consisted of 14 loans totaling $16.8 million, with a weighted average LTV and DSCR of 46.1% and 2.02 times, respectively, at March 31, 2024.
     
  The following table presents the weighted average LTV and DSCR by collateral type for CRE loans at March 31, 2024:
    CRE – Non-owner Occupied   CRE – Owner Occupied   Total CRE
Collateral Type   Outstanding   LTV   DSCR   Outstanding   LTV   Outstanding   LTV
Industrial     19 %     40.7 %     2.40       33 %     43.7 %     23 %     41.8 %
Retail     25 %     38.8 %     1.99       16 %     47.3 %     23 %     40.3 %
Mixed-Use, Special                                                        
Purpose and Other     18 %     42.5 %     1.98       35 %     41.1 %     22 %     41.9 %
Office     20 %     42.6 %     1.83       16 %     41.9 %     19 %     42.4 %
Multifamily     18 %     42.8 %     1.93       0 %     0.0 %     13 %     42.8 %
Hotel/Motel     < 1 %     19.7 %     1.88       0 %     0.0 %     < 1 %     19.7 %
Total     100 %     41.2 %     2.03       100 %     43.0 %     100 %     41.7 %
  The following table presents the weighted average LTV and DSCR by county for CRE loans at March 31, 2024:
    CRE – Non-owner Occupied   CRE – Owner Occupied   Total CRE
County   Outstanding   LTV   DSCR   Outstanding   LTV   Outstanding   LTV
Alameda     25 %     45.1 %     1.92       18 %     45.0 %     23 %     45.1 %
Contra Costa     7 %     42.5 %     1.76       8 %     48.5 %     7 %     44.3 %
Marin     7 %     46.8 %     1.95       2 %     52.8 %     5 %     47.4 %
Monterey     2 %     44.4 %     1.78       2 %     45.9 %     2 %     44.8 %
Napa     1 %     29.6 %     2.44       1 %     52.7 %     1 %     37.6 %
Out of Area     9 %     43.0 %     2.11       9 %     51.6 %     9 %     45.4 %
San Benito     1 %     35.3 %     2.13       2 %     40.7 %     1 %     37.5 %
San Francisco     9 %     39.0 %     1.75       4 %     38.6 %     8 %     38.9 %
San Mateo     10 %     37.4 %     2.14       15 %     40.1 %     12 %     38.4 %
Santa Clara     24 %     38.2 %     2.25       36 %     40.2 %     27 %     38.9 %
Santa Cruz     2 %     35.7 %     1.87       1 %     46.1 %     2 %     37.5 %
Solano     1 %     32.8 %     2.33       1 %     35.9 %     1 %     33.5 %
Sonoma     2 %     41.3 %     2.23       1 %     38.5 %     2 %     40.8 %
Total     100 %     41.2 %     2.03       100 %     43.0 %     100 %     41.7 %
 
                                           
    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   $ 328,683   37 %   $ 281,761   32 %   $ 272,620   31 %   $ 883,064
Loans with fixed interest rates     78,160   3 %     631,435   26 %     1,744,030   71 %     2,453,625
Loans   $ 406,843   12 %   $ 913,196   27 %   $ 2,016,650   61 %   $ 3,336,689
  At March 31, 2024, approximately 26% of the Company’s loan portfolio consisted of floating interest rate loans, compared to 31% at March 31, 2023, and 27% at December 31, 2023.
     

Credit Quality: 

                     
    At or For the Quarter Ended:  
ALLOWANCE FOR CREDIT LOSSES ON LOANS   March 31,   December 31,   March 31,  
(in $000’s, unaudited)   2024     2023     2023    
Balance at beginning of period   $ 47,958     $ 47,702     $ 47,512    
Charge-offs during the period     (358 )     (160 )     (380 )  
Recoveries during the period     104       127       109    
Net recoveries (charge-offs) during the period     (254 )     (33 )     (271 )  
Provision for credit losses on loans during the period     184       289       32    
Balance at end of period   $ 47,888     $ 47,958     $ 47,273    
                     
Total loans, net of deferred fees   $ 3,336,102     $ 3,350,378     $ 3,261,915    
Total nonperforming loans   $ 7,871     $ 7,707     $ 2,240    
ACLL to total loans     1.44   %   1.43   %   1.45   %
ACLL to total nonperforming loans     608.41   %   622.27   %   2,110.40   %
   •  The following table shows the drivers of change in ACLL for the first quarter of 2024:
DRIVERS OF CHANGE IN ACLL    
(in $000’s, unaudited)    
ACLL at December 31, 2023   $ 47,958  
Portfolio changes during the first quarter of 2024     (234 )
Qualitative and quantitative changes during the first      
quarter of 2024 including changes in economic forecasts     164  
ACLL at March 31, 2024   $ 47,888  
 
                                 
NONPERFORMING ASSETS   March 31, 2024   December 31, 2023   March 31, 2023  
(in $000’s, unaudited)   Balance   % of Total   Balance   % of Total   Balance   % of Total  
Land and construction loans   $ 4,673   59 % $ 4,661   60 % $   0 %
Loans over 90 days past due and still accruing     1,951   25 %   889   12 %   1,459   65 %
Commercial loans     1,127   14 %   1,236   16 %   685   31 %
Home equity and other loans     120   2 %   142   2 %   96   4 %
Residential mortgages       0 %   779   10 %     0 %
CRE loans       0 %     0 %     0 %
Total nonperforming assets   $ 7,871   100 % $ 7,707   100 % $ 2,240   100 %
   •  There were 13 borrowers included in NPAs totaling $7.9 million, or 0.15% of total assets, at March 31, 2024, compared to 8 borrowers totaling $2.2 million, or 0.04% of total assets, at March 31, 2023, and 12 borrowers totaling $7.7 million, or 0.15% of total assets at December 31, 2023.
     
   •  There were no CRE loans included in NPAs at March 31, 2024, March 31, 2023, or December 31, 2023.
     
   •  There were no foreclosed assets on the balance sheet at March 31, 2024, March 31, 2023, or December 31, 2023.
     
   •  There were no Shared National Credits (“SNCs”) or material purchased participations included in NPAs or total loans at March 31, 2024, March 31, 2023, or December 31, 2023.
     

Deposits:

                                 
DEPOSITS   March 31, 2024   December 31, 2023   March 31, 2023  
(in $000’s, unaudited)   Balance   % to Total   Balance   % to Total   Balance   % to Total  
Demand, noninterest-bearing   $ 1,242,059   28 % $ 1,292,486   30 % $ 1,469,081   33 %
Demand, interest-bearing     925,100   21 %   914,066   21 %   1,196,789   27 %
Savings and money market     1,124,900   25 %   1,087,518   25 %   1,264,567   28 %
Time deposits — under $250     38,105   1 %   38,055   1 %   37,884   1 %
Time deposits — $250 and over     200,739   4 %   192,228   4 %   172,070   4 %
ICS/CDARS — interest-bearing demand,                                
money market and time deposits     913,757   21 %   854,105   19 %   304,147   7 %
Total deposits   $ 4,444,660   100 % $ 4,378,458   100 % $ 4,444,538   100 %
   • Total deposits were relatively flat at $4.44 billion at both March 31, 2024 and March 31, 2023. Total deposits increased $66.2 million, or 2% from $4.38 billion at December 31, 2023.
     
   • Migration of client deposits into interest-bearing accounts resulted in an increase in ICS/CDARS deposits to $913.8 million at March 31, 2024, compared to $304.1 million at March 31, 2023, and increased $59.7 million from $854.1 million at December 31, 2023.
     
   • Noninterest-bearing demand deposits decreased ($227.0) million, or (15%), to $1.24 billion at March 31, 2024 from $1.47 billion at March 31, 2023, largely in response to the increasing interest rate environment. Noninterest-bearing demand deposits decreased ($50.4) million, or (4%), from $1.29 billion at December 31, 2023. 
     
   • The Bank had 24,730 deposit accounts at March 31, 2024, with an average balance of $180,000, compared to 24,103 deposit accounts at March 31, 2023, with an average balance of $184,000. At December 31, 2023, the Company had 24,737 deposit accounts, with an average balance of $177,000. 
     
   • Deposits from the Bank’s top 100 client relationships, representing 22% of the total number of accounts, totaled $2.05 billion, representing 46% of total deposits, with an average account size of $384,000 at March 31, 2024. At March 31, 2023, deposits from the Bank’s top 100 client relationships, representing 21% of the total number of accounts, totaled $2.20 billion, representing 50% of total deposits, with an average account size of $445,000. At December 31, 2023, deposits from the Bank’s top 100 client relationships, representing 22% of the total number of accounts, totaled $1.96 billion, representing 45% of total deposits, with an average account size of $368,000. 
     
   • The Bank’s uninsured deposits were approximately $2.02 billion, or 45% of the Company’s total deposits, at March 31, 2024, compared to $2.56 billion, or 58% of the Company’s total deposits, at March 31, 2023, and $2.01 billion, or 46% of the Company’s total deposits, at December 31, 2023. 
     

Capital Management:

                         
                Well-capitalized    
                Financial    
                Institution   Basel III
    Heritage   Heritage   PCA   Minimum
    Commerce   Bank of   Regulatory   Regulatory
CAPITAL RATIOS (unaudited)   Corp   Commerce   Guidelines   Requirements(1)
Total Capital   15.6 %   15.1 %   10.0 %   10.5 %
Tier 1 Capital   13.4 %   13.9 %   8.0 %   8.5 %
Common Equity Tier 1 Capital   13.4 %   13.9 %   6.5 %   7.0 %
Tier 1 Leverage   10.2 %   10.6 %   5.0 %   4.0 %
Tangible common equity / tangible assets(2)   9.9 %   10.2 %   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 Tier 1 Leverage ratio.
(2) This is a non-GAAP financial measure that represents shareholders’ equity minus goodwill and other intangible assets divided by total assets minus goodwill and other intangible assets. A reconciliation of GAAP to non-GAAP financial measures are presented in the tables at the end of this earnings release.
_____________________________
 
                   
ACCUMULATED OTHER COMPREHENSIVE LOSS   March 31,   December 31,   March 31,
(in $000’s, unaudited)   2024     2023     2023  
Unrealized loss on securities available-for-sale   $ (6,936 )   $ (7,116 )   $ (8,924 )
Split dollar insurance contracts liability     (2,861 )     (2,809 )     (3,139 )
Supplemental executive retirement plan liability     (2,874 )     (2,892 )     (2,361 )
Unrealized gain on interest-only strip from SBA loans     83       87       107  
Total accumulated other comprehensive loss   $ (12,588 )   $ (12,730 )   $ (14,317 )
                   

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 Securities and Exchange Commission.

Forward-Looking Statement Disclaimer

Certain matters discussed in this press release constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements may be deemed to include, among other things, statements relating to the Company’s future financial performance, projected cash flows of our investment securities portfolio, the performance of our loan portfolio, estimated net interest income resulting from a shift in interest rates, expectation of high credit quality issuers ability to repay, as well as statements relating to the anticipated effects on the Company’s financial condition and results of operations from expected developments or events. Any statements that reflect our belief about, confidence in, or expectations for future events, performance or condition should be considered forward-looking statements. Readers should not construe these statements as assurances of a given level of performance, nor as promises that we will take actions that we currently expect to take. All statements are subject to various risks and uncertainties, many of which are outside our control and some of which may fall outside our ability to predict or anticipate. Accordingly, our actual results may differ materially from our projected results, and we may take actions or experience events that we do not currently expect. 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, 2023, and the following: (1) factors that affect our liquidity and our ability to meet customer demands for deposit withdrawals, including our cash on hand and the availability of funds from our lines of credit; (2) media items and consumer confidence as those factors affect depositors’ confidence in the banking system generally and in our bank specifically; (3) factors that affect the value and liquidity of our investment portfolios, particularly the values of securities available-for-sale; (4) market fluctuations that affect the costs we pay for sources of funding, including the interest we pay on deposits and loans; (5) 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 and other factors that affect market interest rates generally; (6) our ability to estimate accurately, and to establish adequate reserves against, the risk of loss associated with our loan and lease portfolio; (7) events and circumstances that affect our borrowers’ financial condition, results of operations and cash flows, which may, during periods of economic uncertainty or decline, adversely affect those borrowers’ ability to repay our loans timely and in full, or to comply with their other obligations under our loan agreements with those customers; (8) geopolitical and domestic political developments, including recent, current and potential future wars and international and multinational conflicts, acts of terrorism, insurrection, piracy and civil unrest, and events reflecting or resulting from social instability, any of which can increase levels of political and economic unpredictability, contribute to rising energy and commodity prices, can affect the physical security of our assets and the assets of our customers, and which may increase the volatility of financial markets; (9) 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; (10) 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 to customers, whether held in the portfolio or in the secondary market; (11) 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; (12) volatility in credit and equity markets and its effect on the global economy; (13) conditions relating to the impact of recent and potential future pandemics, epidemics and other infectious illness outbreaks that may arise in the future, on our customers, employees, businesses, liquidity, financial results and overall condition including severity and duration of the associated uncertainties in U.S. and global markets; (14) our ability to compete effectively with other banks and financial services companies and the effects of competition in the financial services industry on our business; (15) our ability to achieve loan growth and attract deposits in our market area; (16) risks associated with concentrations in real estate related loans; (17) 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; (18) 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; (19) regulatory limits and practical factors that affect Heritage Bank of Commerce’s ability to pay dividends to the Company; (20) 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; (21) 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; (22) possible adjustment of the valuation of our deferred tax assets or of the goodwill associated with previous acquisitions; (23) our ability to keep pace with technological changes, including our ability to identify and address cyber-security risks, including those posed by the increasing use of artificial intelligence, such as data security breaches, “denial of service” attacks, “hacking” and identity theft affecting us or third party vendors or service providers; (24) inability of our framework to manage risks associated with our business, including operational risk and credit risk; (25) risks of loss of funding of the Small Business Administration (“SBA”) or SBA loan programs, or changes in those programs; (26) 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; (27) 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; (28) the expense and uncertain resolution of litigation matters whether occurring in the ordinary course of business or otherwise; (29) availability of and competition for acquisition opportunities; (30) geographic and sociopolitical factors that arise by virtue of the fact that substantially all of our operations are located in the San Francisco Bay Area of Northern California; (31) risks of natural disasters (including earthquakes, fires, and flooding) and other events beyond our control; (32) actions taken, planned, or announced by federal, state, regional and local governments in response to the occurrence or threat of any of the foregoing; and (33) our success in managing the risks involved in the foregoing factors.

Member FDIC

For additional information, contact:

Debbie Reuter
EVP, Corporate Secretary
Direct: (408) 494-4542
Debbie.Reuter@herbank.com

                             
    For the Quarter Ended:   Percent Change From:  
CONSOLIDATED INCOME STATEMENTS   March 31,   December 31,   March 31,   December 31,   March 31,  
(in $000’s, unaudited)   2024   2023   2023   2023     2023    
Interest income   $ 57,551   $ 58,892   $ 56,274   (2 ) % 2   %
Interest expense     17,458     16,591     7,016   5   % 149   %
Net interest income before provision                            
for credit losses on loans     40,093     42,301     49,258   (5 ) % (19 ) %
Provision for credit losses on loans     184     289     32   (36 ) % 475   %
Net interest income after provision                            
for credit losses on loans     39,909     42,012     49,226   (5 ) % (19 ) %
Noninterest income:                            
Service charges and fees on deposit                            
accounts     877     838     1,743   5   % (50 ) %
Increase in cash surrender value of                            
life insurance     518     519     493   0   % 5   %
Gain on sales of SBA loans     178         76   N/A   134   %
Servicing income     90     103     131   (13 ) % (31 ) %
Termination fees     13     25     11   (48 ) % 18   %
Gain on proceeds from company-owned                            
life insurance         25       (100 ) % N/A  
Other     371     432     312   (14 ) % 19   %
Total noninterest income     2,047     1,942     2,766   5   % (26 ) %
Noninterest expense:                            
Salaries and employee benefits     15,509     13,919     14,809   11   % 5   %
Occupancy and equipment     2,443     2,367     2,400   3   % 2   %
Professional fees     1,327     1,085     1,399   22   % (5 ) %
Other     8,257     8,120     6,793   2   % 22   %
Total noninterest expense     27,536     25,491     25,401   8   % 8   %
Income before income taxes     14,420     18,463     26,591   (22 ) % (46 ) %
Income tax expense     4,254     5,135     7,674   (17 ) % (45 ) %
Net income   $ 10,166   $ 13,328   $ 18,917   (24 ) % (46 ) %
                             
PER COMMON SHARE DATA                            
(unaudited)                            
Basic earnings per share   $ 0.17   $ 0.22   $ 0.31   (23 ) % (45 ) %
Diluted earnings per share   $ 0.17   $ 0.22   $ 0.31   (23 ) % (45 ) %
Weighted average shares outstanding – basic     61,186,623     61,118,485     60,908,221   0   % 0   %
Weighted average shares outstanding – diluted     61,470,552     61,412,816     61,268,072   0   % 0   %
Common shares outstanding at period-end     61,253,625     61,146,835     60,948,607   0   % 1   %
Dividend per share   $ 0.13   $ 0.13   $ 0.13   0   % 0   %
Book value per share   $ 11.04   $ 11.00   $ 10.62   0   % 4   %
Tangible book value per share(1)   $ 8.17   $ 8.12   $ 7.70   1   % 6   %
                             
KEY FINANCIAL RATIOS                            
(unaudited)                            
Annualized return on average equity     6.08 %   7.96 %   12.03 % (24 ) % (49 ) %
Annualized return on average tangible                            
common equity(1)     8.24 %   10.84 %   16.71 % (24 % (51 %
Annualized return on average assets     0.79 %   1.00 %   1.47 % (21 ) % (46 ) %
Annualized return on average tangible assets(1)     0.82 %   1.04 %   1.52 % (21 ) % (46 ) %
Net interest margin (FTE)     3.34 %   3.41 %   4.09 % (2 ) % (18 ) %
Efficiency ratio     65.34 %   57.62 %   48.83 % 13   % 34   %
                             
AVERAGE BALANCES                            
(in $000’s, unaudited)                            
Average assets   $ 5,178,636   $ 5,264,905   $ 5,235,506   (2 ) % (1 ) %
Average tangible assets(1)   $ 5,002,597   $ 5,088,264   $ 5,057,063   (2 ) % (1 ) %
Average earning assets   $ 4,842,279   $ 4,923,582   $ 4,895,009   (2 ) % (1 ) %
Average loans held-for-sale   $ 2,749   $ 1,612   $ 2,755   71   % 0   %
Average total loans   $ 3,297,240   $ 3,280,817   $ 3,274,770   1   % 1   %
Average deposits   $ 4,360,150   $ 4,454,750   $ 4,415,952   (2 ) % (1 ) %
Average demand deposits – noninterest-bearing   $ 1,177,078   $ 1,243,222   $ 1,667,260   (5 ) % (29 ) %
Average interest-bearing deposits   $ 3,183,072   $ 3,211,528   $ 2,748,692   (1 ) % 16   %
Average interest-bearing liabilities   $ 3,222,603   $ 3,251,034   $ 2,834,732   (1 ) % 14   %
Average equity   $ 672,292   $ 664,638   $ 637,597   1   % 5   %
Average tangible common equity(1)   $ 496,253   $ 487,997   $ 459,154   2   % 8   %
__________________
 (1)  This is a non-GAAP financial measure. A reconciliation of GAAP to non-GAAP financial measures are presented in the tables at the end of this earnings release.
  
                                 
    For the Quarter Ended:  
CONSOLIDATED INCOME STATEMENTS   March 31,   December 31,   September 30,   June 30,   March 31,  
(in $000’s, unaudited)   2024   2023   2023   2023   2023  
Interest income   $ 57,551   $ 58,892   $ 60,791   $ 58,341   $ 56,274  
Interest expense     17,458     16,591     15,419     12,048     7,016  
Net interest income before provision                                
for credit losses on loans     40,093     42,301     45,372     46,293     49,258  
Provision for credit losses on loans     184     289     168     260     32  
Net interest income after provision                                
for credit losses on loans     39,909     42,012     45,204     46,033     49,226  
Noninterest income:                                
Service charges and fees on deposit                                
accounts     877     838     859     901     1,743  
Increase in cash surrender value of                                
life insurance     518     519     517     502     493  
Gain on sales of SBA loans     178         207     199     76  
Servicing income     90     103     62     104     131  
Termination fees     13     25     118         11  
Gain on proceeds from company-owned                                
life insurance         25     100          
Other     371     432     353     368     312  
Total noninterest income     2,047     1,942     2,216     2,074     2,766  
Noninterest expense:                                
Salaries and employee benefits     15,509     13,919     14,147     13,987     14,809  
Occupancy and equipment     2,443     2,367     2,301     2,422     2,400  
Professional fees     1,327     1,085     717     1,149     1,399  
Other     8,257     8,120     8,006     7,433     6,793  
Total noninterest expense     27,536     25,491     25,171     24,991     25,401  
Income before income taxes     14,420     18,463     22,249     23,116     26,591  
Income tax expense     4,254     5,135     6,454     6,713     7,674  
Net income   $ 10,166   $ 13,328   $ 15,795   $ 16,403   $ 18,917  
                                 
PER COMMON SHARE DATA                                
(unaudited)                                
Basic earnings per share   $ 0.17   $ 0.22   $ 0.26   $ 0.27   $ 0.31  
Diluted earnings per share   $ 0.17   $ 0.22   $ 0.26   $ 0.27   $ 0.31  
Weighted average shares outstanding – basic     61,186,623     61,118,485     61,093,289     61,035,435     60,908,221  
Weighted average shares outstanding – diluted     61,470,552     61,412,816     61,436,240     61,266,059     61,268,072  
Common shares outstanding at period-end     61,253,625     61,146,835     61,099,155     61,091,155     60,948,607  
Dividend per share   $ 0.13   $ 0.13   $ 0.13   $ 0.13   $ 0.13  
Book value per share   $ 11.04   $ 11.00   $ 10.83   $ 10.70   $ 10.62  
Tangible book value per share(1)   $ 8.17   $ 8.12   $ 7.94   $ 7.80   $ 7.70  
                                 
KEY FINANCIAL RATIOS                                
(unaudited)                                
Annualized return on average equity     6.08 %   7.96 %   9.54 %   10.12 %   12.03 %
Annualized return on average tangible                                
common equity(1)     8.24 %   10.84 %   13.06 %   13.93 %   16.71 %
Annualized return on average assets     0.79 %   1.00 %   1.16 %   1.25 %   1.47 %
Annualized return on average tangible assets(1)     0.82 %   1.04 %   1.20 %   1.29 %   1.52 %
Net interest margin (FTE)     3.34 %   3.41 %   3.57 %   3.76 %   4.09 %
Efficiency ratio     65.34 %   57.62 %   52.89 %   51.67 %   48.83 %
                                 
AVERAGE BALANCES                                
(in $000’s, unaudited)                                
Average assets   $ 5,178,636   $ 5,264,905   $ 5,399,930   $ 5,278,243   $ 5,235,506  
Average tangible assets(1)   $ 5,002,597   $ 5,088,264   $ 5,222,692   $ 5,100,399   $ 5,057,063  
Average earning assets   $ 4,842,279   $ 4,923,582   $ 5,051,710   $ 4,948,397   $ 4,895,009  
Average loans held-for-sale   $ 2,749   $ 1,612   $ 2,765   $ 4,166   $ 2,755  
Average total loans   $ 3,297,240   $ 3,280,817   $ 3,254,715   $ 3,227,175   $ 3,274,770  
Average deposits   $ 4,360,150   $ 4,454,750   $ 4,573,621   $ 4,424,041   $ 4,415,952  
Average demand deposits – noninterest-bearing   $ 1,177,078   $ 1,243,222   $ 1,302,606   $ 1,368,373   $ 1,667,260  
Average interest-bearing deposits   $ 3,183,072   $ 3,211,528   $ 3,271,015   $ 3,055,668   $ 2,748,692  
Average interest-bearing liabilities   $ 3,222,603   $ 3,251,034   $ 3,310,485   $ 3,157,722   $ 2,834,732  
Average equity   $ 672,292   $ 664,638   $ 656,973   $ 650,240   $ 637,597  
Average tangible common equity(1)   $ 496,253   $ 487,997   $ 479,735   $ 472,396   $ 459,154  
_______________________
(1) This is a non-GAAP financial measure. A reconciliation of GAAP to non-GAAP financial measures are presented in the tables at the end of this earnings release.
   
                             
    End of Period:   Percent Change From:  
CONSOLIDATED BALANCE SHEETS   March 31,   December 31,   March 31,   December 31,   March 31,  
(in $000’s, unaudited)   2024     2023     2023     2023     2023    
ASSETS                            
Cash and due from banks   $ 32,543     $ 41,592     $ 41,318     (22 ) % (21 ) %
Other investments and interest-bearing deposits                            
in other financial institutions     508,816       366,537       698,690     39   % (27 ) %
Securities available-for-sale, at fair value     404,474       442,636       491,751     (9 ) % (18 ) %
Securities held-to-maturity, at amortized cost     636,249       650,565       698,231     (2 ) % (9 ) %
Loans held-for-sale – SBA, including deferred costs     1,946       2,205       2,792     (12 ) % (30 ) %
Loans:                            
Commercial     452,231       463,778       506,602     (2 ) % (11 ) %
Real estate:                            
CRE – owner occupied     585,031       583,253       603,298     0   % (3 ) %
CRE – non-owner occupied     1,271,184       1,256,590       1,083,852     1   % 17   %
Land and construction     129,712       140,513       166,408     (8 ) % (22 ) %
Home equity     122,794       119,125       124,481     3   % (1 ) %
Multifamily     269,263       269,734       231,242     0   % 16   %
Residential mortgages     490,035       496,961       528,639     (1 ) % (7 ) %
Consumer and other     16,439       20,919       17,905     (21 ) % (8 ) %
Loans     3,336,689       3,350,873       3,262,427     0   % 2   %
Deferred loan fees, net     (587 )     (495 )     (512 )   19   % 15   %
Total loans, net of deferred costs and fees     3,336,102       3,350,378       3,261,915     0   % 2   %
Allowance for credit losses on loans     (47,888 )     (47,958 )     (47,273 )   0   % 1   %
Loans, net     3,288,214       3,302,420       3,214,642     0   % 2   %
Company-owned life insurance     80,007       79,489       79,438     1   % 1   %
Premises and equipment, net     9,986       9,857       9,142     1   % 9   %
Goodwill     167,631       167,631       167,631     0   % 0   %
Other intangible assets     8,074       8,627       10,431     (6 ) % (23 ) %
Accrued interest receivable and other assets     118,134       122,536       122,474     (4 ) % (4 ) %
Total assets   $ 5,256,074     $ 5,194,095     $ 5,536,540     1   % (5 ) %
                             
LIABILITIES AND SHAREHOLDERS’ EQUITY                            
Liabilities:                            
Deposits:                            
Demand, noninterest-bearing   $ 1,242,059     $ 1,292,486     $ 1,469,081     (4 ) % (15 ) %
Demand, interest-bearing     925,100       914,066       1,196,789     1   % (23 ) %
Savings and money market     1,124,900       1,087,518       1,264,567     3   % (11 ) %
Time deposits – under $250     38,105       38,055       37,884     0   % 1   %
Time deposits – $250 and over     200,739       192,228       172,070     4   % 17   %
ICS/CDARS – interest-bearing demand, money market                            
and time deposits     913,757       854,105       304,147     7   % 200   %
Total deposits     4,444,660       4,378,458       4,444,538     2   % 0   %
Subordinated debt, net of issuance costs     39,539       39,502       39,387     0   % 0   %
Accrued interest payable and other liabilities     95,579       103,234       105,407     (7 ) % (9 ) %
Total liabilities     4,579,778       4,521,194       4,889,332     1   % (6 ) %
                             
Shareholders’ Equity:                            
Common stock     507,578       506,539       504,135     0   % 1   %
Retained earnings     181,306       179,092       157,390     1   % 15   %
Accumulated other comprehensive loss     (12,588 )     (12,730 )     (14,317 )   (1 ) % (12 ) %
Total shareholders’ equity     676,296       672,901       647,208     1   % 4   %
Total liabilities and shareholders’ equity   $ 5,256,074     $ 5,194,095     $ 5,536,540     1   % (5 ) %
                             
                               
    End of Period:
CONSOLIDATED BALANCE SHEETS   March 31,   December 31,   September 30,   June 30,   March 31,
(in $000’s, unaudited)   2024     2023     2023     2023     2023  
ASSETS                              
Cash and due from banks   $ 32,543     $ 41,592     $ 40,076     $ 42,551     $ 41,318  
Other investments and interest-bearing deposits                              
in other financial institutions     508,816       366,537       605,476       468,951       698,690  
Securities available-for-sale, at fair value     404,474       442,636       457,194       486,058       491,751  
Securities held-to-maturity, at amortized cost     636,249       650,565       664,681       682,095       698,231  
Loans held-for-sale – SBA, including deferred costs     1,946       2,205       841       3,136       2,792  
Loans:                              
Commercial     452,231       463,778       430,664       466,354       506,602  
Real estate:                              
CRE – owner occupied     585,031       583,253       589,751       608,031       603,298  
CRE – non-owner occupied     1,271,184       1,256,590       1,208,324       1,147,313       1,083,852  
Land and construction     129,712       140,513       158,138       162,816       166,408  
Home equity     122,794       119,125       124,477       128,009       124,481  
Multifamily     269,263       269,734       253,129       244,959       231,242  
Residential mortgages     490,035       496,961       503,006       514,064       528,639  
Consumer and other     16,439       20,919       18,526       17,635       17,905  
Loans     3,336,689       3,350,873       3,286,015       3,289,181       3,262,427  
Deferred loan fees, net     (587 )     (495 )     (554 )     (397 )     (512 )
Total loans, net of deferred fees     3,336,102       3,350,378       3,285,461       3,288,784       3,261,915  
Allowance for credit losses on loans     (47,888 )     (47,958 )     (47,702 )     (47,803 )     (47,273 )
Loans, net     3,288,214       3,302,420       3,237,759       3,240,981       3,214,642  
Company-owned life insurance     80,007       79,489       79,607       79,940       79,438  
Premises and equipment, net     9,986       9,857       9,707       9,197       9,142  
Goodwill     167,631       167,631       167,631       167,631       167,631  
Other intangible assets     8,074       8,627       9,229       9,830       10,431  
Accrued interest receivable and other assets     118,134       122,536       131,106       121,467       122,474  
Total assets   $ 5,256,074     $ 5,194,095     $ 5,403,307     $ 5,311,837     $ 5,536,540  
                               
LIABILITIES AND SHAREHOLDERS’ EQUITY                              
Liabilities:                              
Deposits:                              
Demand, noninterest-bearing   $ 1,242,059     $ 1,292,486     $ 1,243,501     $ 1,319,844     $ 1,469,081  
Demand, interest-bearing     925,100       914,066       1,004,185       1,064,638       1,196,789  
Savings and money market     1,124,900       1,087,518       1,110,640       1,075,835       1,264,567  
Time deposits – under $250     38,105       38,055       43,906       44,520       37,884  
Time deposits – $250 and over     200,739       192,228       252,001       171,852       172,070  
ICS/CDARS – interest-bearing demand, money market                              
and time deposits     913,757       854,105       921,224       824,083       304,147  
Total deposits     4,444,660       4,378,458       4,575,457       4,500,772       4,444,538  
Other short-term borrowings                             300,000  
Subordinated debt, net of issuance costs     39,539       39,502       39,463       39,425       39,387  
Accrued interest payable and other liabilities     95,579       103,234       126,457       117,970       105,407  
Total liabilities     4,579,778       4,521,194       4,741,377       4,658,167       4,889,332  
                               
Shareholders’ Equity:                              
Common stock     507,578       506,539       505,692       505,075       504,135  
Retained earnings     181,306       179,092       173,707       165,853       157,390  
Accumulated other comprehensive loss     (12,588 )     (12,730 )     (17,469 )     (17,258 )     (14,317 )
Total shareholders’ equity     676,296       672,901       661,930       653,670       647,208  
Total liabilities and shareholders’ equity   $ 5,256,074     $ 5,194,095     $ 5,403,307     $ 5,311,837     $ 5,536,540  
                               
                             
    At or For the Quarter Ended:   Percent Change From:  
CREDIT QUALITY DATA   March 31,   December 31,   March 31,   December 31,   March 31,  
(in $000’s, unaudited)   2024   2023   2023   2023     2023    
Nonaccrual loans – held-for-investment   $ 5,920   $ 6,818   $ 781   (13 ) % 658   %
Loans over 90 days past due                            
and still accruing     1,951     889     1,459   119   % 34   %
Total nonperforming loans     7,871     7,707     2,240   2   % 251   %
Foreclosed assets               N/A   N/A  
Total nonperforming assets   $ 7,871   $ 7,707   $ 2,240   2   % 251   %
Net charge-offs (recoveries) during the quarter   $ 254   $ 33   $ 271   670   % (6 ) %
Provision for credit losses on loans during the quarter   $ 184   $ 289   $ 32   (36 ) % 475   %
Allowance for credit losses on loans   $ 47,888   $ 47,958   $ 47,273   0   % 1   %
Classified assets   $ 35,392   $ 31,763   $ 26,800   11   % 32   %
Allowance for credit losses on loans to total loans     1.44 %   1.43 %   1.45 % 1   % (1 ) %
Allowance for credit losses on loans to total nonperforming loans     608.41 %   622.27 %   2,110.40 % (2 ) % (71 ) %
Nonperforming assets to total assets     0.15 %   0.15 %   0.04 % 0   % 275   %
Nonperforming loans to total loans     0.24 %   0.23 %   0.07 % 4   % 243   %
Classified assets to Heritage Commerce Corp                            
Tier 1 capital plus allowance for credit losses on loans     6 %   6 %   5 % 0   % 20   %
Classified assets to Heritage Bank of Commerce                            
Tier 1 capital plus allowance for credit losses on loans     6 %   5 %   5 % 20   % 20   %
                             
OTHER PERIOD-END STATISTICS                            
(in $000’s, unaudited)                            
Heritage Commerce Corp:                            
Tangible common equity(1)   $ 500,591   $ 496,643   $ 469,146   1   % 7   %
Shareholders’ equity / total assets     12.87 %   12.96 %   11.69 % (1 ) % 10   %
Tangible common equity / tangible assets(2)     9.85 %   9.90 %   8.76 % (1 ) % 12   %
Loan to deposit ratio     75.06 %   76.52 %   73.39 % (2 ) % 2   %
Noninterest-bearing deposits / total deposits     27.94 %   29.52 %   33.05 % (5 ) % (15 ) %
Total capital ratio     15.6 %   15.5 %   15.3 % 1   % 2   %
Tier 1 capital ratio     13.4 %   13.3 %   13.1 % 1   % 2   %
Common Equity Tier 1 capital ratio     13.4 %   13.3 %   13.1 % 1   % 2   %
Tier 1 leverage ratio     10.2 %   10.0 %   9.6 % 2   % 6   %
Heritage Bank of Commerce:                            
Total capital ratio     15.1 %   14.9 %   14.7 % 1   % 3   %
Tier 1 capital ratio     13.9 %   13.8 %   13.5 % 1   % 3   %
Common Equity Tier 1 capital ratio     13.9 %   13.8 %   13.5 % 1   % 3   %
Tier 1 leverage ratio     10.6 %   10.4 %   9.9 % 2   % 7   %
                             

 

___________________________
(1) This is a non-GAAP financial measure that represents shareholders’ equity minus goodwill and other intangible assets. A reconciliation of GAAP to non-GAAP financial measures are presented in the tables at the end of this earnings release.
(2) This is a non-GAAP financial measure that represents shareholders’ equity minus goodwill and other intangible assets divided by total assets minus goodwill and other intangible assets. A reconciliation of GAAP to non-GAAP financial measures are presented in the tables at the end of this earnings release.

                  

                                 
    At or For the Quarter Ended:  
CREDIT QUALITY DATA   March 31,   December 31,   September 30,   June 30,   March 31,  
(in $000’s, unaudited)   2024   2023   2023   2023     2023  
Nonaccrual loans – held-for-investment   $ 5,920   $ 6,818   $ 3,518   $ 3,275     $ 781  
Loans over 90 days past due                                
and still accruing     1,951     889     1,966     2,262       1,459  
Total nonperforming loans     7,871     7,707     5,484     5,537       2,240  
Foreclosed assets                        
Total nonperforming assets   $ 7,871   $ 7,707   $ 5,484   $ 5,537     $ 2,240  
Net charge-offs (recoveries) during the quarter   $ 254   $ 33   $ 269   $ (270 )   $ 271  
Provision for credit losses on loans during the quarter   $ 184   $ 289   $ 168   $ 260     $ 32  
Allowance for credit losses on loans   $ 47,888   $ 47,958   $ 47,702   $ 47,803     $ 47,273  
Classified assets   $ 35,392   $ 31,763   $ 31,062   $ 30,500     $ 26,800  
Allowance for credit losses on loans to total loans     1.44 %   1.43 %   1.45 %   1.45   %   1.45 %
Allowance for credit losses on loans to total nonperforming loans     608.41 %   622.27 %   869.84 %   863.34   %   2,110.40 %
Nonperforming assets to total assets     0.15 %   0.15 %   0.10 %   0.10   %   0.04 %
Nonperforming loans to total loans     0.24 %   0.23 %   0.17 %   0.17   %   0.07 %
Classified assets to Heritage Commerce Corp                                
Tier 1 capital plus allowance for credit losses on loans     6 %   6 %   6 %   6   %   5 %
Classified assets to Heritage Bank of Commerce                                
Tier 1 capital plus allowance for credit losses on loans     6 %   5 %   5 %   5   %   5 %
                                 
OTHER PERIOD-END STATISTICS                                
(in $000’s, unaudited)                                
Heritage Commerce Corp:                                
Tangible common equity(1)   $ 500,591   $ 496,643   $ 485,070   $ 476,209     $ 469,146  
Shareholders’ equity / total assets     12.87 %   12.96 %   12.25 %   12.31   %   11.69 %
Tangible common equity / tangible assets(2)     9.85 %   9.90 %   9.28 %   9.27   %   8.76 %
Loan to deposit ratio     75.06 %   76.52 %   71.81 %   73.07   %   73.39 %
Noninterest-bearing deposits / total deposits     27.94 %   29.52 %   27.18 %   29.32   %   33.05 %
Total capital ratio     15.6 %   15.5 %   15.6 %   15.4   %   15.3 %
Tier 1 capital ratio     13.4 %   13.3 %   13.4 %   13.2   %   13.1 %
Common Equity Tier 1 capital ratio     13.4 %   13.3 %   13.4 %   13.2   %   13.1 %
Tier 1 leverage ratio     10.2 %   10.0 %   9.6 %   9.7   %   9.6 %
Heritage Bank of Commerce:                                
Total capital ratio     15.1 %   14.9 %   15.0 %   14.8   %   14.7 %
Tier 1 capital ratio     13.9 %   13.8 %   13.9 %   13.7   %   13.5 %
Common Equity Tier 1 capital ratio     13.9 %   13.8 %   13.9 %   13.7   %   13.5 %
Tier 1 leverage ratio     10.6 %   10.4 %   10.0 %   10.0   %   9.9 %

 

_____________________________
(1) This is a non-GAAP financial measure that represents shareholders’ equity minus goodwill and other intangible assets. A reconciliation of GAAP to non-GAAP financial measures are presented in the tables at the end of this earnings release.
(2) This is a non-GAAP financial measure that represents shareholders’ equity minus goodwill and other intangible assets divided by total assets minus goodwill and other intangible assets. A reconciliation of GAAP to non-GAAP financial measures are presented in the tables at the end of this earnings release.
    For the Quarter Ended   For the Quarter Ended  
    March 31, 2024   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)   $ 3,299,989   $ 44,600     5.44 % $ 3,277,525   $ 44,112     5.46 %
Securities – taxable     1,042,484     6,183     2.39 %   1,161,021     7,056     2.46 %
Securities – exempt from Federal tax(3)     31,939     286     3.60 %   36,012     313     3.52 %
Other investments and interest-bearing deposits                                  
in other financial institutions     467,867     6,542     5.62 %   420,451     4,859     4.69 %
Total interest earning assets(3)     4,842,279     57,611     4.79 %   4,895,009     56,340     4.67 %
Cash and due from banks     33,214               37,563            
Premises and equipment, net     10,015               9,269            
Goodwill and other intangible assets     176,039               178,443            
Other assets     117,089               115,222            
Total assets   $ 5,178,636             $ 5,235,506            
                                   
Liabilities and shareholders’ equity:                                  
Deposits:                                  
Demand, noninterest-bearing   $ 1,177,078             $ 1,667,260            
                                   
Demand, interest-bearing     920,048     1,554     0.68 %   1,217,731     1,476     0.49 %
Savings and money market     1,067,581     6,649     2.50 %   1,285,173     3,489     1.10 %
Time deposits – under $100     10,945     42     1.54 %   12,280     10     0.33 %
Time deposits – $100 and over     221,211     2,064     3.75 %   163,047     845     2.10 %
ICS/CDARS – interest-bearing demand, money market                                  
and time deposits     963,287     6,611     2.76 %   70,461     81     0.47 %
Total interest-bearing deposits     3,183,072     16,920     2.14 %   2,748,692     5,901     0.87 %
Total deposits     4,360,150     16,920     1.56 %   4,415,952     5,901     0.54 %
                                   
Short-term borrowings     15         0.00 %   46,677     578     5.02 %
Subordinated debt, net of issuance costs     39,516     538     5.48 %   39,363     537     5.53 %
Total interest-bearing liabilities     3,222,603     17,458     2.18 %   2,834,732     7,016     1.00 %
Total interest-bearing liabilities and demand,                                  
noninterest-bearing / cost of funds     4,399,681     17,458     1.60 %   4,501,992     7,016     0.63 %
Other liabilities     106,663               95,917            
Total liabilities     4,506,344               4,597,909            
Shareholders’ equity     672,292               637,597            
Total liabilities and shareholders’ equity   $ 5,178,636             $ 5,235,506            
                                   
Net interest income(3)/ margin           40,153     3.34 %         49,324     4.09 %
Less tax equivalent adjustment(3)           (60 )               (66 )      
Net interest income         $ 40,093               $ 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 $160,000 for the first quarter of 2024, compared to $300,000 for the first quarter of 2023. Prepayment fees totaled $24,000 for the first quarter of 2024, 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 Quarter Ended   For the Quarter Ended  
    March 31, 2024   December 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)   $ 3,299,989   $ 44,600     5.44 % $ 3,282,429   $ 44,635     5.39 %
Securities – taxable     1,042,484     6,183     2.39 %   1,074,638     6,516     2.41 %
Securities – exempt from Federal tax(3)     31,939     286     3.60 %   32,244     288     3.54 %
Other investments and interest-bearing deposits                                  
in other financial institutions     467,867     6,542     5.62 %   534,271     7,514     5.58 %
Total interest earning assets(3)     4,842,279     57,611     4.79 %   4,923,582     58,953     4.75 %
Cash and due from banks     33,214               35,214            
Premises and equipment, net     10,015               9,843            
Goodwill and other intangible assets     176,039               176,641            
Other assets     117,089               119,625            
Total assets   $ 5,178,636             $ 5,264,905            
                                   
Liabilities and shareholders’ equity:                                  
Deposits:                                  
Demand, noninterest-bearing   $ 1,177,078             $ 1,243,222            
                                   
Demand, interest-bearing     920,048     1,554     0.68 %   948,061     1,661     0.70 %
Savings and money market     1,067,581     6,649     2.50 %   1,096,962     6,216     2.25 %
Time deposits – under $100     10,945     42     1.54 %   11,389     37     1.29 %
Time deposits – $100 and over     221,211     2,064     3.75 %   234,140     2,130     3.61 %
ICS/CDARS – interest-bearing demand, money market                                  
and time deposits     963,287     6,611     2.76 %   920,976     6,009     2.59 %
Total interest-bearing deposits     3,183,072     16,920     2.14 %   3,211,528     16,053     1.98 %
Total deposits     4,360,150     16,920     1.56 %   4,454,750     16,053     1.43 %
                                   
Short-term borrowings     15         0.00 %   29         0.00 %
Subordinated debt, net of issuance costs     39,516     538     5.48 %   39,477     538     5.41 %
Total interest-bearing liabilities     3,222,603     17,458     2.18 %   3,251,034     16,591     2.02 %
Total interest-bearing liabilities and demand,                                  
noninterest-bearing / cost of funds     4,399,681     17,458     1.60 %   4,494,256     16,591     1.46 %
Other liabilities     106,663               106,011            
Total liabilities     4,506,344               4,600,267            
Shareholders’ equity     672,292               664,638            
Total liabilities and shareholders’ equity   $ 5,178,636             $ 5,264,905            
                                   
Net interest income(3)/ margin           40,153     3.34 %         42,362     3.41 %
Less tax equivalent adjustment(3)           (60 )               (61 )      
Net interest income         $ 40,093               $ 42,301        
___________________________
(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 $160,000 for the first quarter of 2024, compared to $147,000 for the fourth quarter of 2023. Prepayment fees totaled $24,000 for the first quarter of 2024, compared to $91,000 for the fourth quarter of 2023.
(3)  Reflects the FTE adjustment for Federal tax-exempt income based on a 21% tax rate. 

The following tables summarize components of the non-GAAP financial measures for the periods indicated:

                     
RETURN ON AVERAGE TANGIBLE ASSETS                    
AND AVERAGE TANGIBLE COMMON EQUITY   March 31,    December 31,    March 31,   
(in $000’s, unaudited)   2024
  2023
  2023
 
Net income   $ 10,166     $ 13,328     $ 18,917    
                     
Average tangible assets components:                    
Average Assets   $ 5,178,636     $ 5,264,905     $ 5,235,506    
Less: Goodwill     (167,631 )     (167,631 )     (167,631 )  
Less: Other Intangible Assets     (8,408 )     (9,010 )     (10,812 )  
Total Average Tangible Assets   $ 5,002,597     $ 5,088,264     $ 5,057,063    
                     
Annualized return on average tangible assets     0.82   %   1.04   %   1.52   %
                     
Average tangible common equity components:                    
Average Equity   $ 672,292     $ 664,638     $ 637,597    
Less: Goodwill     (167,631 )     (167,631 )     (167,631 )  
Less: Other Intangible Assets     (8,408 )     (9,010 )     (10,812 )  
Total Average Tangible Common Equity   $ 496,253     $ 487,997     $ 459,154    
                     
Annualized return on average common equity     8.24   %   10.84   %   16.71   %
                     
TANGIBLE COMMON EQUITY TO TANGIBLE ASSETS   March 31,    December 31,    March 31,   
(in $000’s, unaudited)   2024
  2023
  2023  
Heritage Commerce Corp:                    
Capital components:                    
Total Equity   $ 676,296     $ 672,901     $ 647,208    
Less: Preferred Stock                    
Total Common Equity     676,296       672,901       647,208    
Less: Goodwill     (167,631 )     (167,631 )     (167,631 )  
Less: Other Intangible Assets     (8,074 )     (8,627 )     (10,431 )  
  Total Tangible Common Equity   $ 500,591     $ 496,643     $ 469,146    
                     
Asset components:                    
Total Assets   $ 5,256,074     $ 5,194,095     $ 5,536,540    
Less: Goodwill     (167,631 )     (167,631 )     (167,631 )  
Less: Other Intangible Assets     (8,074 )     (8,627 )     (10,431 )  
Total Tangible Assets   $ 5,080,369     $ 5,017,837     $ 5,358,478    
                     
Tangible common equity/tangible assets     9.85   %   9.90   %   8.76   %
                     
TANGIBLE COMMON EQUITY TO TANGIBLE ASSETS   March 31,    December 31,    March 31,   
(in $000’s, unaudited)   2024
  2023
  2023  
Heritage Bank of Commerce:                    
Capital components:                    
Total Equity   $ 694,543     $ 690,918     $ 664,163    
Less: Preferred Stock                    
Total Common Equity     694,543       690,918       664,163    
Less: Goodwill     (167,631 )     (167,631 )     (167,631 )  
Less: Other Intangible Assets     (8,074 )     (8,627 )     (10,431 )  
  Total Tangible Common Equity   $ 518,838     $ 514,660     $ 486,101    
                     
Asset components:                    
Total Assets   $ 5,254,044     $ 5,190,829     $ 5,538,878    
Less: Goodwill     (167,631 )     (167,631 )     (167,631 )  
Less: Other Intangible Assets     (8,074 )     (8,627 )     (10,431 )  
Total Tangible Assets   $ 5,078,339     $ 5,014,571     $ 5,360,816    
                     
Tangible common equity/tangible assets     10.22   %   10.26   %   9.07   %
                     
TANGIBLE BOOK VALUE PER SHARE   March 31,    December 31,    March 31,   
(in $000’s, unaudited)   2024
  2023
  2023  
Capital components:                    
Total Equity   $ 676,296     $ 672,901     $ 647,208    
Less: Preferred Stock                    
Total Common Equity     676,296       672,901       647,208    
Less: Goodwill     (167,631 )     (167,631 )     (167,631 )  
Less: Other Intangible Assets     (8,074 )     (8,627 )     (10,431 )  
Total Tangible Common Equity   $ 500,591     $ 496,643     $ 469,146    
                     
Common shares outstanding at period-end     61,253,625       61,146,835       60,948,607    
                     
Tangible book value per share   $ 8.17     $ 8.12     $ 7.70    


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