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Apex Trader Funding (ATF) - News

Heritage Commerce Corp Reports Increased Average Loans and Average Deposits and Enhanced Credit Quality

SAN JOSE, Calif., July 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 second quarter 2024 net income was $9.2 million, or $0.15 per average diluted common share, compared to $10.2 million, or $0.17 per average diluted common share, for the first quarter of 2024, and $16.4 million, or $0.27 per average diluted common share, for the second quarter of 2023. For the six months ended June 30, 2024, net income was $19.4 million, or $0.32 per average diluted common share, compared to $35.3 million, or $0.58 per average diluted common share, for the six months ended June 30, 2023. All data are unaudited. "In the first six months of 2024, we continued to invest in people and technology to achieve our Company's growth, security and client service goals," said Clay Jones, President and Chief Executive Officer. "Our strong credit quality metrics further improved, as nonperforming assets and classified assets were both down at the end of the second quarter of 2024 from the linked quarter. We continued to strengthen our allowance for credit losses on loans during the second quarter of 2024, which was driven by prudent credit risk management and the increase in loan balances." "Our loan portfolio, excluding loans held-for-sale, increased by $43.7 million at June 30, 2024, from the preceding quarter and increased by $91.0 million year-over-year," said Mr. Jones. "Our total deposits remained steady at $4.4 billion at June 30, 2024, while average deposits increased during the second quarter of 2024 from the linked quarter." "On behalf of the Board of Directors, I would like to thank our dedicated bank team members for all they do to support our loyal clients, communities and dedicated shareholders, and we look forward to continued success in the second half of the year," Mr. Jones said. "It is because of them that we remain well-positioned to execute on our growth objectives." Second Quarter Ended June 30, 2024 Operating Results, Liquidity Position, Financial Condition, Credit Quality, and Capital Management (as of, or for the periods ended June 30, 2024, compared to March 31, 2024, and June 30, 2023, except as noted): Operating Results: The following table indicates the ratios for the annualized return on average equity, average tangible common equity, average assets and average tangible assets for the periods indicated:     For the Quarter Ended:   For the Six Months Ended:     June 30,    March 31,    June 30,    June 30,    June 30,  (unaudited)   2024   2024   2023   2024   2023 Return on average equity   5.50 %   6.08 %   10.12 %   5.79 %   11.06 % Return on average tangible common equity(1)   7.43 %   8.24 %   13.93 %   7.84 %   15.29 % Return on average assets   0.71 %   0.79 %   1.25 %   0.75 %   1.35 % Return on average tangible assets(1)   0.74 %   0.82 %   1.29 %   0.78 %   1.40 %     (1)   This is a non-GAAP financial measure as defined and discussed under "Non-GAAP Financial Measures" below.             Net Interest Income: Net interest income decreased (2%) to $39.5 million for the second quarter of 2024, compared to $40.1 million for the first quarter of 2024. The non-GAAP fully tax equivalent ("FTE") net interest margin contracted 8 basis points to 3.26% for the second quarter of 2024 from 3.34% for the first quarter of 2024, primarily due to higher rates paid on client deposits, partially offset by maturing securities invested in higher yielding overnight funds and higher average yields on loans. Net interest income decreased (15%) to $39.5 million for the second quarter of 2024, compared to $46.3 million for the second quarter of 2023. The non-GAAP FTE net interest margin contracted 50 basis points to 3.26% for the second quarter of 2024, from 3.76% for the second quarter of 2023, primarily due to higher rates paid on client deposits, a decrease in the average balance of noninterest-bearing demand deposits, a decrease in average interest earning assets, and a decrease in the average balance of higher yielding Bay View Funding factored receivables, partially offset by an increase in the rate on core loans and overnight funds. For the first six months of 2024, net interest income decreased (17%) to $79.5 million, compared to $95.6 million for the first six months of 2023. The non-GAAP FTE net interest margin decreased 62 basis points to 3.30% for the first six months of 2024, from 3.92% for the first six months of 2023, primarily due to higher rates paid on client deposits, a decrease in the average balance of noninterest-bearing demand deposits, a decrease in average interest earning assets, and a decrease in the average balances of higher yielding Bay View Funding factored receivables, partially offset by an increase in the rate on core loans and overnight funds. The following tables set forth the estimated changes in the Company's annual net interest income and economic value of equity (a non-GAAP financial measure) 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 June 30, 2024:     Increase/(Decrease) in       Estimated Net   CHANGE IN INTEREST RATES (basis points)   Interest Income(1)   (in $000's, unaudited)   Amount   Percent   +400   $ 15,815     8.5   % +300   $ 11,832     6.4   % +200   $ 7,879     4.2   % +100   $ 3,953     2.1   % 0     —     —     −100   $ (5,545 )   (3.0 ) % −200   $ (12,865 )   (6.9 ) % −300   $ (22,246 )   (12.0 ) % −400   $ (36,316 )   (19.6 ) %     Increase/(Decrease) in       Estimated Economic   CHANGE IN INTEREST RATES (basis points)   Value of Equity(1)   (in $000's, unaudited)   Amount   Percent   +400   $ 108,119     9.1   % +300   $ 91,506     7.7   % +200   $ 68,864     5.8   % +100   $ 38,972     3.3   % 0     —     —     −100   $ (63,527 )   (5.4 ) % −200   $ (154,537 )   (13.0 ) % −300   $ (272,094 )   (22.9 ) % −400   $ (410,354 )   (34.6 ) %     (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 affect any actual impact on net interest income.             The following tables present the average balance of loans outstanding, interest income, and the average yield for the periods indicated:   • The average yield on the total loan portfolio increased to 5.49% for the second quarter of 2024, compared to 5.44% for the first quarter of 2024, primarily due to higher loan yields on the core bank.     For the Quarter Ended   For the Quarter Ended       June 30, 2024   March 31, 2024       Average   Interest   Average   Average   Interest   Average   (in $000's, unaudited)   Balance   Income   Yield   Balance   Income   Yield   Loans, core bank   $ 2,830,260     $ 38,496   5.47 % $ 2,795,351     $ 37,721   5.43 % Prepayment fees     —       54   0.01 %   —       24   0.00 % Bay View Funding factored receivables     54,777       2,914   21.40 %   53,511       2,838   21.33 % Purchased residential mortgages     447,687       3,739   3.36 %   454,240       3,788   3.35 % Loan fair value mark / accretion     (2,863 )     267   0.04 %   (3,113 )     229   0.03 % Total loans (includes loans held-for-sale)   $ 3,329,861     $ 45,470   5.49 % $ 3,299,989     $ 44,600   5.44 %   • The average yield on the total loan portfolio increased to 5.49% for the second quarter of 2024, compared to 5.47% for the second quarter of 2023, primarily due to increases in the prime rate, partially offset by a lower average balance of higher yielding Bay View Funding factored receivables for the second quarter of 2024.     For the Quarter Ended   For the Quarter Ended       June 30, 2024   June 30, 2023       Average   Interest   Average   Average   Interest   Average   (in $000's, unaudited)   Balance   Income   Yield   Balance   Income   Yield   Loans, core bank   $ 2,830,260     $ 38,496   5.47 % $ 2,688,370     $ 35,996   5.37 % Prepayment fees     —       54   0.01 %   —       73   0.01 % Bay View Funding factored receivables     54,777       2,914   21.40 %   68,680       3,847   22.47 % Purchased residential mortgages     447,687       3,739   3.36 %   478,220       3,829   3.21 % Loan fair value mark / accretion     (2,863 )     267   0.04 %   (3,929 )     283   0.04 % Total loans (includes loans held-for-sale)   $ 3,329,861     $ 45,470   5.49 % $ 3,231,341     $ 44,028   5.47 %   • The average yield on the total loan portfolio remained flat at 5.46% for both the first six months of 2024 and 2023, as a lower average balance of higher yielding Bay View Funding factored receivables, a decrease in the accretion of loan purchase discount into interest income from acquired loans, and lower prepayment fees, were offset by increases in the prime rate for the first six months of 2024.     For the Six Months Ended   For the Six Months Ended       June 30, 2024   June 30, 2023       Average   Interest   Average   Average   Interest   Average   (in $000's, unaudited)   Balance   Income   Yield   Balance   Income   Yield   Loans, core bank   $ 2,812,805     $ 76,217   5.45 % $ 2,702,291     $ 71,590   5.34 % Prepayment fees     —       78   0.01 %   —       211   0.02 % Bay View Funding factored receivables     54,144       5,752   21.36 %   73,193       7,848   21.62 % Purchased residential mortgages     450,964       7,527   3.36 %   482,964       7,686   3.21 % Loan fair value mark / accretion     (2,988 )     496   0.04 %   (4,143 )     805   0.06 % Total loans (includes loans held-for-sale)   $ 3,314,925     $ 90,070   5.46 % $ 3,254,305     $ 88,140   5.46 %   • During the second quarter of 2024, the Asset-based Lending division was reorganized into the core bank.         • In aggregate, the unamortized net purchase discount on total loans acquired was $2.7 million at June 30, 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       June 30, 2024   March 31, 2024       Average   Interest   Average   Average   Interest   Average   (in $000's, unaudited)   Balance   Expense   Rate   Balance   Expense   Rate   Deposits:                                   Demand, noninterest-bearing   $ 1,127,145             $ 1,177,078                                                 Demand, interest-bearing     932,100   $ 1,719   0.74 %   920,048   $ 1,554   0.68 % Savings and money market     1,104,589     7,867   2.86 %   1,067,581     6,649   2.50 % Time deposits - under $100     10,980     46   1.68 %   10,945     42   1.54 % Time deposits - $100 and over     228,248     2,245   3.96 %   221,211     2,064   3.75 % Insured Cash Sweep ("ICS")/Certificate of Deposit Registry                                   Service ("CDARS") - interest-bearing demand, money market                                   and time deposits     991,483     7,207   2.92 %   963,287     6,611   2.76 % Total interest-bearing deposits     3,267,400     19,084   2.35 %   3,183,072     16,920   2.14 % Total deposits     4,394,545     19,084   1.75 %   4,360,150     16,920   1.56 %                                     Short-term borrowings     19     —   0.00 %   15     —   0.00 % Subordinated debt, net of issuance costs     39,553     538   5.47 %   39,516     538   5.48 % Total interest-bearing liabilities     3,306,972     19,622   2.39 %   3,222,603     17,458   2.18 % Total interest-bearing liabilities and demand,                                   noninterest-bearing / cost of funds   $ 4,434,117   $ 19,622   1.78 % $ 4,399,681   $ 17,458   1.60 %   • The average cost of total deposits increased to 1.75% for the second quarter of 2024, compared to 1.56% for the first quarter of 2024. The average cost of funds increased to 1.78% for the second quarter of 2024, compared to 1.60% for the first quarter of 2024. The average cost of deposits was 0.97% and the average cost of funds was 1.07% for the second quarter of 2023.                 • While the cost of deposits increased for the second quarter of 2024, the cost of deposits remained relatively flat during the quarter.             • The average cost of total deposits increased to 1.65% for the first six months of 2024, compared to 0.76% for the first six months of 2023. The average cost of funds increased to 1.69% for the first six months of 2024, compared to 0.85% for the first six months of 2023.             • The increase in the average cost of total deposits and the average cost of funds for the second quarter and first six months of 2024 was primarily due to clients seeking higher yields and moving noninterest-bearing deposits to the Bank's interest-bearing ICS/CDARS deposits and interest-bearing money market accounts and increases in market rates.           Provision for Credit Losses on Loans: During the second quarter of 2024, we recorded a provision for credit losses on loans of $471,000, compared to a $184,000 provision for credit losses on loans for the first quarter of 2024, and a provision for credit losses on loans of $260,000 for the second quarter of 2023. There was a provision for credit losses on loans of $655,000 for the six months ended June 30, 2024, compared to a $292,000 provision for credit losses on loans for the six months ended June 30, 2023. Noninterest Income: Total noninterest income increased 11% to $2.3 million for the second quarter of 2024, compared to $2.0 million for the first quarter of 2024, and increased 10% from $2.1 million for the second quarter of 2023, primarily due to a higher gain on proceeds from company-owned life insurance and higher termination fees, partially offset by a lower gain on sales of SBA loans during the second quarter of 2024. Total noninterest income decreased (11%) to $4.3 million for the first six months of 2024, compared to $4.8 million for the first six months of 2023, primarily due to lower service charges and fees on deposit accounts, partially offset by a higher gain on proceeds from company-owned life insurance and higher termination fees for the first six months of 2024. Noninterest Expense: Total noninterest expense for the second quarter of 2024 increased to $28.2 million, compared to $27.5 million for the first quarter of 2024, primarily due to higher salaries and employee benefits as a result of annual merit increases and staff additions, and higher information technology related expenses, partially offset by lower professional fees and marketing related expenses for the second quarter of 2024. Total noninterest expense for the second quarter of 2024 increased to $28.2 million, compared to $25.0 million for the second quarter of 2023, primarily due to higher salaries and employee benefits, rent expense included in occupancy and equipment, and information technology related expenses included in other noninterest expense. Total noninterest expense for the first six months of 2024 increased to $55.7 million, compared to $50.4 million for the first six months of 2023, primarily due to higher salaries and employee benefits, and information technology related expenses, homeowner association vendor payments, regulatory assessments, and ICS/CDARS fee expense included in other noninterest expense.    Full time equivalent employees were 353 at June 30, 2024, compared to 351 at March 31, 2024, and 347 at June 30, 2023.   The efficiency ratio increased to 67.55% for the second quarter of 2024, compared to 65.34% for the first quarter of 2024, and 51.67% for the second quarter of 2023. The efficiency ratio increased to 66.44% for the six months ended June 30, 2024 compared to 50.20% for the six months ended June 30, 2023. The increase in the efficiency ratio for the second quarter of 2024 and six months ended June 30, 2024 was due to both higher noninterest expense and lower net revenue. The efficiency ratio is a non-GAAP financial measure. Income Tax Expense: Income tax expense was $3.8 million for the second quarter of 2024, compared to $4.3 million for the first quarter of 2024, and $6.7 million for the second quarter of 2023. The effective tax rate for the second quarter of 2024 was 29.4%, compared to 29.5% for the first quarter of 2024, and 29.0% for the second quarter of 2023. Income tax expense for the six months ended June 30, 2024 was $8.1 million, compared to $14.4 million for the six months ended June 30, 2023. The effective tax rate for six months ended June 30, 2024 was 29.4%, compared to 28.9% for the six months ended June 30, 2023. 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 June 30, 2024: LIQUIDITY AND AVAILABLE LINES OF CREDIT   Total       Remaining (in $000's, unaudited)   Available   Outstanding   Available Excess funds at the Federal Reserve Bank ("FRB")   $ 589,600   $ —   $ 589,600 FRB discount window collateralized line of credit     1,404,998     —     1,404,998 Federal Home Loan Bank collateralized borrowing capacity     792,027     —     792,027 Unpledged investment securities (at fair value)     52,319     —     52,319 Federal funds purchase arrangements     90,000     —     90,000 Holding company line of credit     20,000     —     20,000 Total   $ 2,948,944   $ —   $ 2,948,944   • The Company's total available liquidity and borrowing capacity was $3.0 billion at both June 30, 2024 and March 31, 2024, and $3.1 billion at June 30, 2023.         • The available liquidity and borrowing capacity was 66% of the Company's total deposits and approximately 148% of the Bank's estimated uninsured deposits at June 30, 2024. 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 69% of the Company's total deposits and approximately 145% of the Bank's estimated uninsured deposits at June 30, 2023.         • The loan to deposit ratio was 76.04% at June 30, 2024, compared to 75.06% at March 31, 2024, and 73.07% at June 30, 2023.       Total assets remained flat at $5.3 billion at June 30, 2024, March 31, 2024, and June 30, 2023. Investment Securities: Investment securities totaled $894.2 million at June 30, 2024, of which $273.0 million were in the securities available-for-sale portfolio (at fair value), and $621.2 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 $527.4 million at June 30, 2024. The following table shows the balances of securities available-for-sale, at fair value, and the related pre-tax unrealized (loss) at the dates indicated: SECURITIES AVAILABLE-FOR-SALE   June 30,    March 31,    June 30,  (in $000's, unaudited)   2024   2024   2023 Balance (at fair value):                   U.S. Treasury   $ 218,682     $ 347,453     $ 421,146   Agency mortgage-backed securities     54,361       57,021       64,912   Total   $ 273,043     $ 404,474     $ 486,058                       Pre-tax unrealized (loss):                   U.S. Treasury   $ (3,578 )   $ (4,784 )   $ (10,903 ) Agency mortgage-backed securities     (4,815 )     (4,895 )     (5,659 ) Total   $ (8,393 )   $ (9,679 )   $ (16,562 )                     Weighted average life (years)     1.39       1.15       1.64     • The pre-tax unrealized loss on the securities available-for-sale portfolio was ($8.4) million, or ($6.0) million net of taxes, which equaled 1% of total shareholders' equity at June 30, 2024.         • The reduction in the securities available-for-sale portfolios was due to maturities and not due to any securities sold since June 30, 2023.       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 at the dates indicated: SECURITIES HELD-TO-MATURITY   June 30,    March 31,    June 30,  (in $000's, unaudited)   2024   2024   2023 Balance (at amortized cost):                   Agency mortgage-backed securities   $ 589,386     $ 604,458     $ 648,337   Municipals — exempt from Federal tax(1)     31,804       31,803       33,771   Total(1)   $ 621,190     $ 636,261     $ 682,108                       Pre-tax unrecognized (loss):                   Agency mortgage-backed securities   $ (92,058 )   $ (92,332 )   $ (95,285 ) Municipals — exempt from Federal tax     (1,694 )     (1,071 )     (1,052 ) Total   $ (93,752 )   $ (93,403 )   $ (96,337 )                     Allowance for credit losses on municipal securities   $ (12 )   $ (12 )   $ (13 )                     Weighted average life (years)     6.57       6.59       7.12           (1)   Gross of the allowance for credit losses of ($12,000) at both June 30, 2024, and March 31, 2024, and ($13,000) at June 30, 2023.           • The pre-tax unrecognized loss on the securities held-to-maturity portfolio was ($93.8) million, or ($66.0) million net of taxes, which equaled 10% of total shareholders' equity at June 30, 2024.         • The weighted average life of the securities held-to-maturity portfolio was 6.57 years at June 30, 2024, which includes Community Reinvestment Act mortgage-backed securities with longer maturities.       The unrealized and unrecognized losses in both the available-for-sale and held-to-maturity portfolios were due to higher interest rates at June 30, 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 Third quarter of 2024   $ 37,500   $ 21,455   $ 58,955 Fourth quarter of 2024     9,000     19,436     28,436 First quarter of 2025     35,000     18,847     53,847 Second quarter of 2025     118,000     18,379     136,379 Third quarter of 2025     25,500     19,585     45,085 Fourth quarter of 2025     —     18,039     18,039 First quarter of 2026     —     17,341     17,341 Second quarter of 2026     —     16,630     16,630 Total   $ 225,000   $ 149,712   $ 374,712                       • The weighted average life of the total investment securities portfolio was 4.95 years at June 30, 2024, compared to 4.44 years at March 31, 2024, and 4.79 years at June 30, 2023.         • The increase in the weighted average life of the total investment securities portfolio at June 30, 2024 was due to short-term securities maturing.       Loans: The following table summarizes the distribution of loans, excluding loans held-for-sale, and the percentage of distribution in each category at the dates indicated: LOANS   June 30, 2024   March 31, 2024   June 30, 2023   (in $000's, unaudited)   Balance   % to Total   Balance   % to Total   Balance   % to Total   Commercial   $ 477,929     14 % $ 452,231     14 % $ 466,354     14 % Real estate:                                 CRE(1) - owner occupied     594,504     18 %   585,031     17 %   608,031     18 % CRE(1) - non-owner occupied     1,283,323     38 %   1,271,184     38 %   1,147,313     35 % Land and construction     125,374     4 %   129,712     4 %   162,816     5 % Home equity     126,562     4 %   122,794     4 %   128,009     4 % Multifamily     268,968     8 %   269,263     8 %   244,959     7 % Residential mortgages     484,809     14 %   490,035     15 %   514,064     16 % Consumer and other     18,758     < 1 %   16,439     < 1 %   17,635     1 % Total Loans     3,380,227     100 %   3,336,689     100 %   3,289,181     100 % Deferred loan costs (fees), net     (434 )   —     (587 )   —     (397 )   —   Loans, net of deferred costs and fees   $ 3,379,793     100 % $ 3,336,102     100 % $ 3,288,784     100 %   (1)   Commercial Real Estate     • Loans, excluding loans held-for-sale, increased $43.7 million, or 1%, to $3.4 billion at June 30, 2024, compared to $3.3 billion at March 31, 2024, and increased $91.0 million, or 3%, from $3.3 billion at June 30, 2023. Loans, excluding residential mortgages, increased $48.9 million, or 2%, to $2.89 billion at June 30, 2024, compared to $2.85 billion at March 31, 2024, and increased $120.3 million, or 4%, from $2.77 billion at June 30, 2023.             • Commercial and industrial line utilization was 31% at June 30, 2024, compared to 28% at March 31, 2024, and 29% at June 30, 2023.             • CRE loans totaled $1.9 billion at June 30, 2024, of which 32% were owner occupied and 68% were investor CRE loans. There was also 32% of the CRE loan portfolio secured by owner occupied real estate at March 31, 2024, and 35% at June 30, 2023.                 • During the second quarter of 2024, there were 32 new owner occupied and non-owner occupied CRE loans originated totaling $47 million with a weighted average loan-to-value ("LTV") of 39%; the weighted average debt-service coverage ratio ("DSCR") for the non-owner occupied portfolio was 2.61 times.                 • 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 $403 million, including 32 loans totaling approximately $74 million in San Jose, 21 loans totaling approximately $27 million in San Francisco, and eight loans totaling approximately $16 million, in Oakland, at June 30, 2024. Non-owner occupied CRE with office exposure totaled $312 million at June 30, 2024.                 • At June 30, 2024, the weighted average LTV and DSCR for the entire non-owner occupied office portfolio were 41.8% and 1.78 times, respectively.                 • Total medical/dental office exposure in the non-owner occupied CRE portfolio consisted of 15 loans totaling $12.6 million, with a weighted average LTV and DSCR of 37.8% and 2.39 times, respectively, at June 30, 2024.                 • The following table presents the weighted average LTV and DSCR by collateral type for CRE loans at June 30, 2024:       CRE - Non-owner Occupied   CRE - Owner Occupied   Total CRE Collateral Type   Outstanding   LTV   DSCR   Outstanding   LTV   Outstanding   LTV Retail     25 %     38.3 %     1.93       16 %     46.3 %     23 %     39.8 % Industrial     19 %     40.0 %     2.39       32 %     42.7 %     23 %     41.0 % Mixed-Use, Special                                                         Purpose and Other     18 %     41.7 %     1.91       35 %     40.6 %     22 %     41.2 % Office     20 %     41.8 %     1.78       17 %     43.7 %     19 %     42.3 % Multifamily     17 %     42.4 %     1.94       0 %     0.0 %     13 %     42.4 % Hotel/Motel     1 %     16.5 %     1.44       0 %     0.0 %     < 1 %     16.5 % Total     100 %     40.5 %     1.99       100 %     42.7 %     100 %     41.1 %   • The following table presents the weighted average LTV and DSCR by county for CRE loans at June 30, 2024:     CRE - Non-owner Occupied   CRE - Owner Occupied   Total CRE County   Outstanding   LTV   DSCR   Outstanding   LTV   Outstanding   LTV Santa Clara     24 %     38.1 %     2.24       34 %     40.4 %     27 %     38.9 % Alameda     25 %     44.4 %     1.92       18 %     44.0 %     23 %     44.3 % San Mateo     10 %     36.9 %     2.20       15 %     39.8 %     12 %     38.0 % Out of Area     9 %     42.6 %     2.16       9 %     50.6 %     9 %     44.9 % San Francisco     9 %     37.4 %     1.44       4 %     38.8 %     8 %     37.6 % Contra Costa     7 %     42.0 %     1.73       8 %     48.1 %     7 %     43.8 % Marin     7 %     46.6 %     1.94       2 %     53.1 %     5 %     47.1 % Sonoma     2 %     41.0 %     2.22       2 %     43.3 %     2 %     41.5 % Santa Cruz     2 %     33.3 %     1.74       1 %     45.7 %     2 %     35.2 % Monterey     2 %     44.2 %     1.85       2 %     39.9 %     2 %     42.8 % San Benito     1 %     35.1 %     2.14       3 %     39.4 %     2 %     37.3 % Solano     1 %     32.2 %     1.98       1 %     35.5 %     1 %     33.0 % Napa     1 %     29.4 %     2.24       1 %     52.3 %     < 1 %     37.3 % Total     100 %     40.5 %     1.99       100 %     42.7 %     100 %     41.1 %   The following table presents the maturity distribution of the Company's loans, excluding loans held-for-sale, as of June 30, 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   $ 365,849   40 %   $ 270,487   30 %   $ 267,524   30 %   $ 903,860 Loans with fixed interest rates     89,027   4 %     693,576   28 %     1,693,764   68 %     2,476,367 Loans   $ 454,876   13 %   $ 964,063   29 %   $ 1,961,288   58 %   $ 3,380,227   • At June 30, 2024, approximately 27% of the Company's loan portfolio consisted of floating interest rate loans, compared to 26% at March 31, 2024, and 29% at June 30, 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:   At or For the Six Months Ended:   ALLOWANCE FOR CREDIT LOSSES ON LOANS   June 30,    March 31,    June 30,    June 30,    June 30,    (in $000's, unaudited)   2024   2024   2023   2024   2023   Balance at beginning of period   $ 47,888     $ 47,958     $ 47,273     $ 47,958     $ 47,512     Charge-offs during the period     (510 )     (358 )     (24 )     (868 )     (404 )   Recoveries during the period     105       104       294       209       403     Net (charge-offs) recoveries during the period     (405 )     (254 )     270       (659 )     (1 )   Provision for credit losses on loans during the period     471       184       260       655       292     Balance at end of period   $ 47,954     $ 47,888     $ 47,803     $ 47,954     $ 47,803                                       Total loans, net of deferred fees   $ 3,379,793     $ 3,336,102     $ 3,288,784     $ 3,379,793     $ 3,288,784     Total nonperforming loans   $ 6,030     $ 7,871     $ 5,537     $ 6,030     $ 5,537     ACLL to total loans     1.42   %   1.44   %   1.45   %   1.42   %   1.45   % ACLL to total nonperforming loans     795.26   %   608.41   %   863.34   %   795.26   %   863.34   %   • Net charge-offs of $405,000 for the second quarter of 2024 primarily consisted of $412,000 in advances associated with past due factored receivables at Bay View Funding due from a municipality.         • The following table shows the drivers of change in ACLL for the first and second quarters 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   Portfolio changes during the second quarter of 2024     616   Qualitative and quantitative changes during the second       quarter of 2024 including changes in economic forecasts     (550 ) ACLL at June 30, 2024   $ 47,954     The following is a breakout of nonperforming assets ("NPAs") at the dates indicated: NONPERFORMING ASSETS   June 30, 2024   March 31, 2024   June 30, 2023   (in $000's, unaudited)      Balance      % of Total      Balance      % of Total      Balance      % of Total   Land and construction loans   $ 4,774   79 % $ 4,673   59 % $ —   0 % Commercial loans     900   15 %   1,127   14 %   1,306   23 % Loans over 90 days past due and still accruing     248   4 %   1,951   25 %   2,262   41 % Home equity and other loans     108   2 %   120   2 %   96   2 % Residential mortgages     —   0 %   —   0 %   1,873   34 % CRE loans     —   0 %   —   0 %   —   0 % Total nonperforming assets   $ 6,030   100 % $ 7,871   100 % $ 5,537   100 %   • There were 10 borrowers included in NPAs totaling $6.0 million, or 0.11% of total assets, at June 30, 2024, compared to 13 borrowers totaling $7.9 million, or 0.15% of total assets at March 31, 2024, and 13 borrowers totaling $5.5 million, or 0.10% of total assets, at June 30, 2023.         • There were no CRE loans included in NPAs at June 30, 2024, March 31, 2024, or June 30, 2023.         • There were no foreclosed assets on the balance sheet at June 30, 2024, March 31, 2024, or June 30, 2023.         • There were no Shared National Credits ("SNCs") or material purchased participations included in NPAs or total loans at June 30, 2024, March 31, 2024, or June 30, 2023.       Classified assets totaled $33.6 million, or 0.64% of total assets, at June 30, 2024, compared to $35.4 million, or 0.67% of total assets, at March 31, 2024, and $30.5 million, or 0.57% of total assets, at June 30, 2023. Deposits: The following table summarizes the distribution of deposits and the percentage of distribution in each category at the dates indicated: DEPOSITS   June 30, 2024   March 31, 2024   June 30, 2023   (in $000's, unaudited)   Balance   % to Total   Balance   % to Total   Balance   % to Total   Demand, noninterest-bearing   $ 1,187,320   27 % $ 1,242,059   28 % $ 1,319,844   29 % Demand, interest-bearing     928,246   21 %   925,100   21 %   1,064,638   24 % Savings and money market     1,126,520   25 %   1,124,900   25 %   1,075,835   24 % Time deposits — under $250     39,046   1 %   38,105   1 %   44,520   1 % Time deposits — $250 and over     203,886   4 %   200,739   4 %   171,852   4 % ICS/CDARS — interest-bearing demand,                                 money market and time deposits     959,592   22 %   913,757   21 %   824,083   18 % Total deposits   $ 4,444,610   100 % $ 4,444,660   100 % $ 4,500,772   100 %   • Total deposits remained flat at $4.4 billion at both June 30, 2024 and March 31, 2024, and decreased ($56.2) million, or (1%) from $4.5 billion at June 30, 2023.         • Average deposits increased to $4.39 billion for the second quarter of 2024, compared to $4.36 billion for the first quarter of 2024, and remained relatively flat compared to $4.42 billion for the second quarter of 2023.         • Migration of client deposits into interest-bearing accounts resulted in an increase in ICS/CDARS deposits to $959.6 million at June 30, 2024, compared to $913.8 million at March 31, 2024, and $824.1 million at June 30, 2023.         • Noninterest-bearing demand deposits decreased ($54.7) million, or (4%), to $1.19 billion at June 30, 2024 from $1.24 billion at March 31, 2024, and decreased ($132.5) million, or (10%), from $1.32 billion at June 30, 2023, largely in response to the increasing interest rate environment.         • The Company had 25,033 deposit accounts at June 30, 2024, with an average balance of $178,000. At March 31, 2024, the Company had 24,730 deposit accounts, with an average balance of $180,000. At June 30, 2023, the Company had 24,404 deposit accounts, with an average balance of $187,000.         • Deposits from the Bank's top 100 client relationships, representing 21% of the total number of accounts, totaled $2.1 billion, representing 47% of total deposits, with an average account size of $388,000 at June 30, 2024. At March 31, 2024, deposits from the Bank's top 100 client relationships, representing 22% of the total number of accounts, totaled $2.1 billion, representing 46% of total deposits, with an average account size of $384,000. At June 30, 2023, deposits from the Bank's top 100 client relationships, representing 22% of the total number of accounts, totaled $2.1 billion, representing 47% of total deposits, with an average account size of $401,000.         • The Bank's uninsured deposits were approximately $1.99 billion, or 45% of the Company's total deposits, at June 30, 2024, compared to $2.02 billion, or 45% of the Company's total deposits, at March 31, 2024, and $2.15 billion, or 48% of the Company's total deposits, at June 30, 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 June 30, 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 %   10.3 %   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.           The following table reflects the components of accumulated other comprehensive loss, net of taxes, at the dates indicated: ACCUMULATED OTHER COMPREHENSIVE LOSS   June 30,    March 31,    June 30,  (in $000's, unaudited)   2024   2024   2023 Unrealized loss on securities available-for-sale   $ (6,022 )   $ (6,936 )   $ (11,822 ) Split dollar insurance contracts liability     (2,913 )     (2,861 )     (3,187 ) Supplemental executive retirement plan liability     (2,856 )     (2,874 )     (2,352 ) Unrealized gain on interest-only strip from SBA loans     76       83       103   Total accumulated other comprehensive loss   $ (11,715 )   $ (12,588 )   $ (17,258 )                     Tangible common equity was $504.0 million at June 30, 2024, compared to $500.6 million at March 31, 2024, and $476.2 million at June 30, 2023. Tangible book value per share was $8.22 at June 30, 2024, compared to $8.17 at March 31, 2024, and $7.80 at June 30, 2023. Tangible common equity and tangible book value per share are non-GAAP financial measures. 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. Non-GAAP Financial Measures Financial results are presented in accordance with accounting principles generally accepted in the United States of America ("GAAP") and prevailing practices in the banking industry. However, certain non-GAAP performance measures and ratios are used by management to evaluate and measure the Company's performance. Management believes these non-GAAP financial measures are common in the banking industry, and may enhance comparability for peer comparison purposes. These non-GAAP financial measures should be supplemental to primary GAAP financial measures and should not be read in isolation or relied upon as a substitute for primary GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures are presented in the tables at the end of this earnings release under "Reconciliation of Non-GAAP Financial Measures." 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, Item 1A of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2024, and the following: (1) factors that affect our liquidity and our ability to meet client 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 clients; (8) factors that affect the relative strength or weakness of loan guarantees and the ability of the guarantors to fulfill the obligations of their guaranty agreements; (9) 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 Clients, and which may increase the volatility of financial markets; (10) 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; (11) 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 Clients, whether held in the portfolio or in the secondary market; (12) 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; (13) volatility in credit and equity markets and its effect on the global economy; (14) 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 Clients, employees, businesses, liquidity, financial results and overall condition including severity and duration of the associated uncertainties in U.S. and global markets; (15) 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; (16) our ability to achieve loan growth and attract deposits in our market area; (17) risks associated with concentrations in real estate related loans; (18) 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; (19) 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; (20) regulatory limits and practical factors that affect Heritage Bank of Commerce's ability to pay dividends to the Company; (21) 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; (22) 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 Clients and adversely affect our business, results of operations and growth prospects; (23) possible adjustment of the valuation of our deferred tax assets or of the goodwill associated with previous acquisitions; (24) 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; (25) inability of our framework to manage risks associated with our business, including operational risk and credit risk; (26) risks of loss of funding of the Small Business Administration ("SBA") or SBA loan programs, or changes in those programs; (27) 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; (28) 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; (29) the expense and uncertain resolution of litigation matters whether occurring in the ordinary course of business or otherwise; (30) availability of and competition for acquisition opportunities; (31) geographic and sociopolitical factors that arise by virtue of the fact that we operate primarily in the general San Francisco Bay Area of Northern California; (32) risks of natural disasters (including earthquakes, fires, and flooding) and other events beyond our control; (33) 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 (34) 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:     Percent Change From:     For the Six Months Ended: CONSOLIDATED INCOME STATEMENTS      June 30,         March 31,         June 30,         March 31,       June 30,         June 30,         June 30,         Percent   (in $000's, unaudited)   2024     2024     2023     2024   2023     2024     2023     Change   Interest income   $ 59,077     $ 57,551     $ 58,341     3   % 1   %   $ 116,628     $ 114,615     2   % Interest expense     19,622       17,458       12,048     12   % 63   %     37,080       19,064     95   % Net interest income before provision                                                         for credit losses on loans     39,455       40,093       46,293     (2 ) % (15 ) %     79,548       95,551     (17 ) % Provision for credit losses on loans     471       184       260     156   % 81   %     655       292     124   % Net interest income after provision                                                         for credit losses on loans     38,984       39,909       46,033     (2 ) % (15 ) %     78,893       95,259     (17 ) % Noninterest income:                                                         Service charges and fees on deposit