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: Diluted earnings per share were $0.17 for the first quarter of 2024, compared to $0.31 for the first quarter of 2023, and $0.22 for the fourth quarter of 2023. The following table indicates the ratios for the return on average tangible assets and the return on average tangible common equity for the periods indicated:                           For the Quarter Ended:       March 31,   December 31,   March 31,   (unaudited)   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: Net interest income decreased (19%) to $40.1 million for the first quarter of 2024, compared to $49.3 million for the first quarter of 2023. The fully tax equivalent ("FTE") net interest margin contracted (75 basis points) to 3.34% for the first quarter of 2024, from 4.09% for the first quarter of 2023, primarily due to higher rates paid on customer deposits, a decrease in the average balances of noninterest-bearing demand deposits, a decrease in average interest earning assets, and decreases in average balances of higher yielding asset-based loans and Bay View Funding factored receivables, partially offset by an increase in the rate on overnight funds.  Net interest income decreased (5%) to $40.1 million for the first quarter of 2024, compared to $42.3 million for the fourth quarter of 2023.  The FTE net interest margin contracted (7 basis points) to 3.34% for the first quarter of 2024 from 3.41% for the fourth quarter of 2023, primarily due to higher rates paid on customer deposits, and a decrease in the average balances of noninterest-bearing demand deposits resulting in a lower average balance of overnight funds, partially offset by higher average yields on loans and overnight funds, and an increase in the average balance of loans. The following tables set forth the estimated changes in the Company's annual net interest income and economic value of equity that would result from the designated instantaneous parallel shift in interest rates noted, and assuming a flat balance sheet with consistent product mix, as of March 31, 2024:                   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. _______________________   The following tables present the average balance of loans outstanding, interest income, and the average yield for the periods indicated:     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.       The following table presents the average balance of deposits and interest-bearing liabilities, interest expense, and the average rate for the periods indicated:                                         For the Quarter Ended   For the Quarter Ended       March 31, 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: During the first quarter of 2024, we recorded a provision for credit losses on loans of $184,000, compared to a $32,000 provision for credit losses on loans for the first quarter of 2023, and a provision for credit losses on loans of $289,000 for the fourth quarter of 2023. Noninterest Income: Total noninterest income decreased (26%) to $2.0 million for the first quarter of 2024, compared to $2.8 million for the first quarter of 2023, primarily due to lower service charges and fees on deposit accounts during the first quarter of 2024. Total noninterest income remained relatively flat for the first quarter of 2024, compared to the fourth quarter of 2023. Noninterest Expense: Total noninterest expense for the first quarter of 2024 increased to $27.5 million, compared to $25.4 million for the first quarter of 2023,  primarily due to higher salaries and employee benefits which are seasonal in nature, and higher marketing related expenses, insurance costs, regulatory assessments, information technology related expenses, and ICS/CDARS fee expense included in other noninterest expense. Total noninterest expense for the first quarter of 2024 increased to $27.5 million, compared to $25.5 million for the fourth quarter of 2023, primarily due to higher employee benefits.    Full time equivalent employees were 351 at March 31, 2024, and 339 at March 31, 2023, and 349 at December 31, 2023.   The efficiency ratio increased to 65.34% for the first quarter of 2024, compared to 48.83% for the first quarter of 2023, and 57.62% for the fourth quarter of 2023, primarily due to lower total revenue and higher noninterest expense during the first quarter of 2024. Income Tax Expense: Income tax expense was $4.3 million for the first quarter of 2024, compared to $7.7 million for the first quarter of 2023, and $5.1 million for the fourth quarter of 2023. The effective tax rate for the first quarter of 2024 was 29.5%, compared to 28.9% for the first quarter of 2023, and 27.8% for the fourth quarter of 2023. Current Liquidity Position, Financial Condition, Credit Quality, and Capital Management: Liquidity and Available Lines of Credit: The following table shows our liquidity, available lines of credit and the amounts outstanding at March 31, 2024:                     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.       Total assets declined (5%) to $5.26 billion at March 31, 2024, compared to $5.54 billion at March 31, 2023, and increased 1% from $5.19 billion at December 31, 2023. Investment Securities: Investment securities totaled $1.04 billion at March 31, 2024, of which $404.5 million were in the securities available-for-sale portfolio (at fair value), and $636.2 million were in the securities held-to-maturity portfolio (at amortized cost, net of allowance for credit losses of $12,000). The fair value of the securities held-to-maturity portfolio was $542.9 million at March 31, 2024. The following table shows the balances of securities available-for-sale, at fair value, and the related pre-tax unrealized (loss) for the periods indicated:                     SECURITIES AVAILABLE-FOR-SALE   March 31,   December 31,   March 31, (in $000's, unaudited)   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.       The following table shows the balances of securities held-to-maturity, at amortized cost, and the related pre-tax unrecognized (loss) and allowance for credit losses for the periods indicated:                     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.       The unrealized and unrecognized losses in both the available-for-sale and held-to-maturity portfolios were due to higher interest rates at March 31, 2024 compared to when the securities were purchased. The issuers are of high credit quality and all principal amounts are expected to be repaid when the securities mature. The fair value is expected to recover as the securities approach their maturity date and/or market rates decline. The following are the projected cash flows from paydowns and maturities in the investment securities portfolio for the periods indicated based on the current interest rate environment:                               Agency                 Mortgage-       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: The following table summarizes the distribution of loans, excluding loans held-for-sale, and the percentage of distribution in each category for the periods indicated:                                   LOANS   March 31, 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 %   The following table presents the maturity distribution of the Company's loans, excluding loans held-for-sale, as of March 31, 2024. The table shows the distribution of such loans between those loans with predetermined (fixed) interest rates and those with variable (floating) interest rates. Floating rates generally fluctuate with changes in the prime rate as reflected in the Western Edition of The Wall Street Journal, and contractual repricing dates.                                                 Due in   Over One Year But                   LOAN MATURITIES   One Year or Less   Less than Five Years   Over Five Years       (in $000's, unaudited)   Balance   % to Total   Balance   % to Total   Balance   % to Total   Total Loans with variable interest rates   $ 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:  The following table summarizes the allowance for credit losses on loans ("ACLL") for the periods indicated:                           At or For the Quarter Ended:   ALLOWANCE FOR CREDIT LOSSES ON LOANS   March 31,   December 31,   March 31,   (in $000's, unaudited)   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     The following is a breakout of nonperforming assets ("NPAs") at the periods indicated:                                   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.       Classified assets totaled $35.4 million, or 0.67% of total assets, at March 31, 2024, compared to $26.8 million, or 0.48% of total assets, at March 31, 2023, and $31.8 million, or 0.61% of total assets, at December 31, 2023. The increase in classified assets during the first quarter of 2024 was primarily due to the downgrade of one CRE investor loan, which is well collateralized, fully leased, cash-flowing, and personally guaranteed by the principals. Deposits: The following table summarizes the distribution of deposits and the percentage of distribution in each category for the periods indicated:                                   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: The Company's consolidated capital ratios exceeded regulatory guidelines and the Bank's capital ratios exceeded regulatory guidelines under the prompt corrective action ("PCA") regulatory guidelines for a well-capitalized financial institution, and the Basel III minimum regulatory requirements at March 31, 2024, as reflected in the following table:                                           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. _____________________________   The following table reflects the components of accumulated other comprehensive loss, net of taxes, for the periods indicated:                     ACCUMULATED OTHER COMPREHENSIVE LOSS   March 31,   December 31,   March 31, (in $000's, unaudited)   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 ReuterEVP, Corporate SecretaryDirect: (408)                                   For the Quarter Ended: