10q10k10q10k.net

What changed in HERITAGE COMMERCE CORP's 10-K — 2022 vs 2023

vs

Paragraph-level year-over-year comparison of HERITAGE COMMERCE CORP's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+498 added−453 removedSource: 10-K (2024-03-11) vs 10-K (2023-03-09)

Top changes in HERITAGE COMMERCE CORP's 2023 10-K

498 paragraphs added · 453 removed · 375 edited across 8 sections

Item 1. Business

Business — how the company describes what it does

99 edited+27 added−30 removed171 unchanged
Biggest changeThe locations of HBC’s current offices and the administrative office of CSNK Working Capital Finance Corp. d/b/a Bay View Funding (“Bay View Funding”) are: 5 ​ Table of Contents ​ San Jose: Administrative Office Main Branch 224 Airport Parkway, Suite 100 San Jose, CA 95110 Los Altos: Branch Office 419 South San Antonio Road Los Altos, CA 94022 ​ ​ ​ ​ ​ ​ ​ Danville: ​ Branch Office 387 Diablo Road Danville, CA 94526 ​ Los Gatos: ​ Branch Office 15575 Los Gatos Boulevard Suite B Los Gatos, CA 95032 ​ ​ ​ ​ ​ ​ ​ Fremont: ​ Branch Office 3137 Stevenson Boulevard Fremont, CA 94538 ​ Morgan Hill: ​ Branch Office 18625 Sutter Boulevard Suite 100 Morgan Hill, CA 95037 ​ ​ ​ ​ ​ ​ ​ Gilroy: ​ Branch Office 7598 Monterey Street Suite 110 Gilroy, CA 95020 ​ Oakland: ​ Branch Office 1111 Broadway Suite 1650 Oakland, CA 94607 ​ ​ ​ ​ ​ ​ ​ Hollister: ​ Branch Office 351 Tres Pinos Road Suite 102A Hollister, CA 95023 ​ Palo Alto: ​ Branch Office 325 Lytton Avenue Suite 100 Palo Alto, CA 94301 ​ ​ ​ ​ ​ ​ ​ Livermore ​ Branch Office 1987 First Street Livermore, CA 94550 ​ Pleasanton: ​ Branch Office 300 Main Street Pleasanton, CA 94566 ​ ​ ​ ​ ​ ​ ​ Redwood City: ​ Branch Office 2400 Broadway Suite 100 Redwood City, CA 94063 ​ Sunnyvale:* ​ Branch Office 333 W.
Biggest changeThe locations of HBC’s current offices and the administrative office of CSNK Working Capital Finance Corp. d/b/a Bay View Funding (“Bay View Funding”) are: ​ 6 ​ Table of Contents ​ ​ ​ ​ ​ ​ San Jose: Administrative Office ​ Oakland: Branch Office ​ Main Branch ​ ​ 1111 Broadway ​ 224 Airport Parkway ​ ​ Suite 1650 ​ Suite 100 ​ ​ Oakland, CA 94607 ​ San Jose, CA 95110 ​ ​ ​ ​ ​ ​ ​ ​ Danville: Branch Office ​ Palo Alto: Branch Office ​ 387 Diablo Road ​ ​ 325 Lytton Avenue ​ Danville, CA 94526 ​ ​ Suite 100 ​ ​ ​ ​ Palo Alto, CA 94301 ​ ​ ​ ​ ​ Fremont: Branch Office ​ Pleasanton: Branch Office ​ 3137 Stevenson Boulevard ​ ​ 300 Main Street ​ Fremont, CA 94538 ​ ​ Pleasanton, CA 94566 ​ ​ ​ ​ ​ Gilroy: Branch Office ​ Redwood City: Branch Office ​ 7598 Monterey Street ​ ​ 2400 Broadway ​ Suite 110 ​ ​ Suite 100 ​ Gilroy, CA 95020 ​ ​ Redwood City, CA 94063 ​ ​ ​ ​ ​ Hollister: Branch Office ​ San Francisco: Branch Office ​ 351 Tres Pinos Road ​ ​ 120 Kearny Street ​ Suite 102A ​ ​ Suite 2300 ​ Hollister, CA 95023 ​ ​ San Francisco, CA 94108 ​ ​ ​ ​ ​ Livermore: Branch Office ​ San Mateo: Branch Office ​ 1987 First Street ​ ​ 400 S.
The Sarbanes Oxley Act of 2002 . HCC is subject to the accounting oversight and corporate governance requirements of the Sarbanes Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”).
HCC is subject to the accounting oversight and corporate governance requirements of the Sarbanes Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”).
Federal law prohibits a bank holding company and any subsidiary banks from engaging in certain tie in arrangements in connection with the extension of credit.
Tie in Arrangements . Federal law prohibits a bank holding company and any subsidiary banks from engaging in certain tie in arrangements in connection with the extension of credit.
While no specific industry concentration is considered significant, our lending operations are located in market areas dependent on technology and real estate industries and their supporting companies. Commercial and Industrial Loans. Our commercial loan portfolio is comprised of operating secured and unsecured loans advanced for working capital, equipment purchases and other business purposes.
While no specific industry concentration is considered significant, our lending operations are located in market areas dependent on technology and real estate industries and their supporting companies. Commercial Loans. Our commercial loan portfolio is comprised of operating secured and unsecured loans advanced for working capital, equipment purchases and other business purposes.
Finally, we may also establish banking offices in other states by merging with banks or by purchasing banking offices of other banks in other states, subject to certain regulatory restrictions. Community Reinvestment Act (“CRA”) . The CRA is intended to encourage insured depository institutions, while operating safely and soundly, to help meet the credit needs of their communities.
Finally, we may also establish banking offices in other states by merging with banks or by purchasing banking offices of other banks in other states, subject to certain regulatory restrictions. Community Reinvestment Act . The CRA is intended to encourage insured depository institutions, while operating safely and soundly, to help meet the credit needs of their communities.
Consequently, HCC is subject to examination by, and may be required to file reports with, the DFPI. SEC and NASDAQ. HCC’s stock is traded on the NASDAQ Global Select Market (under the trading symbol “HTBK”), and HCC is subject to rules and regulations of The NASDAQ Stock Market, including those related to corporate governance.
Consequently, HCC is subject to examination by, and may be required to file reports with, the DFPI. SEC and Nasdaq. HCC’s stock is traded on the Nasdaq Global Select Market (under the trading symbol “HTBK”), and HCC is subject to rules and regulations of The Nasdaq Stock Market LLC, including those related to corporate governance.
Our home equity line portfolio is comprised of home equity lines of credit to customers in our markets. Home equity lines of credit are underwritten in a manner such that they result in credit risk that is substantially similar to that of residential mortgage loans.
Our home equity line portfolio is comprised of home equity lines of credit (“HELOCs”) to customers in our markets. Home equity lines of credit are underwritten in a manner such that they result in credit risk that is substantially similar to that of residential mortgage loans.
As a result, the growth and earnings performance of the Company and its subsidiaries may be affected not only by management decisions and general economic conditions, but also by the requirements of federal and state statutes and by the regulations and policies of various bank regulatory agencies, including the California Department of Financial Protection and Innovation (“DFPI”), the Federal Reserve, the FDIC, and the Consumer Financial Protection Bureau 14 ​ Table of Contents ​ (“CFPB”).
As a result, the growth and earnings performance of the Company and its subsidiaries may be affected not 16 ​ Table of Contents ​ only by management decisions and general economic conditions, but also by the requirements of federal and state statutes and by the regulations and policies of various bank regulatory agencies, including the California Department of Financial Protection and Innovation (“DFPI”), the Federal Reserve, the FDIC, and the Consumer Financial Protection Bureau (“CFPB”).
In addition, in order to pay a dividend, the Capital Rules generally require that a financial institution must maintain over a 2.5% in common equity tier 1 capital attributable to the Capital Conservation Buffer. See “—Regulatory Capital Requirements.” As described above, HBC exceeded its minimum capital requirements under applicable regulatory guidelines as of December 31, 2022. Transactions with Affiliates .
In addition, in order to pay a dividend, the Capital Rules generally require that a financial institution must maintain over a 2.5% in common equity tier 1 capital attributable to the Capital Conservation Buffer. See “—Regulatory Capital Requirements.” As described above, HBC exceeded its minimum capital requirements under applicable regulatory guidelines as of December 31, 2023. Transactions with Affiliates .
As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company should eliminate, defer or significantly reduce dividends to shareholders if: (i) the bank holding company’s net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (ii) the prospective rate of earnings retention is inconsistent with the bank holding company’s capital needs and overall current and prospective financial condition; or (iii) the bank holding company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.
As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company should eliminate, defer or significantly reduce dividends to shareholders if: (i) the bank holding company’s net income 19 ​ Table of Contents ​ available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (ii) the prospective rate of earnings retention is inconsistent with the bank holding company’s capital needs and overall current and prospective financial condition; or (iii) the bank holding company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.
The SBA “Express” Loans or lines of credit are for businesses that want to improve cash flow, refinance debt, or fund improvements, equipment, or real estate. It features an abbreviated SBA application process and accelerated approval times, plus it can offer longer terms and lower down payment requirements than conventional loans.
The SBA “Express” Loans or lines of credit are for businesses that want to improve cash flow, refinance debt, or fund improvements, equipment, or real estate. It features an abbreviated SBA application process and accelerated approval times, plus it can offer longer terms and lower down payment requirements than conventional loans. The U.S.
Other Banking Services We offer a multitude of other products and services to complement our lending and deposit services. These include cashier’s checks, bank by mail, night depositories, safe deposit boxes, direct deposit, automated payroll services, electronic funds transfers, online bill pay, homeowner association services, and other customary banking services. HBC currently operates ATMs at six different locations.
Other Banking Services We offer a multitude of other products and services to complement our lending and deposit services. These include cashier’s checks, bank by mail, night depositories, safe deposit boxes, direct deposit, automated payroll services, electronic funds transfers, online bill pay, homeowner association services, and other customary banking services. HBC currently operates ATMs at five different locations.
As an FHLB member, HBC is required to own a certain amount of capital stock in the FHLB. As of December 31, 2022, HBC was in compliance with the FHLB’s stock ownership requirement. FHLB stock is carried at cost and classified as a restricted security. Both cash and stock dividends are reported as income.
As an FHLB member, HBC is required to own a certain amount of capital stock in the FHLB. As of December 31, 2023, HBC was in compliance with the FHLB’s stock ownership requirement. FHLB stock is carried at cost and classified as a restricted security. Both cash and stock dividends are reported as income.
Furthermore, in accordance with Dodd-Frank, bank holding companies must be well-capitalized and well-managed in order to complete interstate mergers or acquisitions. For a discussion of the capital requirements, see “—Regulatory Capital Requirements” above. The FDIC and the U.S.
Furthermore, in accordance with Dodd-Frank, bank holding companies must be well-capitalized and well-managed in order to complete interstate mergers or acquisitions. For a discussion of the capital requirements, see “—Regulatory Capital Requirements” above. In July 2023, the FDIC and the U.S.
The Company used the net proceeds of the Sub Debt due 2032 for general corporate purposes, including the repayment on June 1, 2022 of the Company’s $40.0 million aggregate principal amount of 5.25% fixed-to-floating rate subordinated notes due June 1, 2027 (“Sub Debt due 2027”).
The Company used the net proceeds of the Sub Debt due 2032 for general corporate purposes, including the repayment on June 1, 2022 of the Company’s $40.0 million aggregate principal amount of 5.25% fixed-to-floating rate subordinated notes due June 1, 2027.
The consumer protection laws applicable to us, among other things, require disclosures of the cost of credit and terms of deposit accounts, provide substantive consumer rights, prohibit discrimination in credit transactions, regulate the use of credit report information, provide financial privacy protections, 23 ​ Table of Contents ​ prohibit UDAAP practices, restrict our ability to raise interest rates and subject us to substantial regulatory oversight.
The consumer protection laws applicable to us, among other things, require disclosures of the cost of credit and terms of deposit accounts, provide substantive consumer rights, prohibit discrimination in credit transactions, regulate the use of credit report information, provide financial privacy protections, prohibit UDAAP practices, restrict our ability to raise interest rates and subject us to substantial regulatory oversight.
We operate through 18 full service branch offices located entirely in the general San Francisco Bay Area of California in the counties of Alameda, Contra Costa, Marin, San Benito, San Francisco, San Mateo, and Santa Clara.
We operate through seventeen full service branch offices located entirely in the general San Francisco Bay Area of California in the counties of Alameda, Contra Costa, Marin, San Benito, San Francisco, San Mateo, and Santa Clara.
These include, among others: (i) required executive certification of financial presentations; (ii) increased requirements for board audit committees and their members; (iii) enhanced disclosure of controls and procedures and internal control over financial reporting; (iv) 16 ​ Table of Contents ​ enhanced controls over and reporting of insider trading; and (v) increased penalties for financial crimes and forfeiture of executive bonuses in certain circumstances.
These include, among others: (i) required executive certification of financial presentations; (ii) increased requirements for board audit committees and their members; (iii) enhanced disclosure of controls and procedures and internal control over financial reporting; (iv) enhanced controls over and reporting of insider trading; and (v) increased penalties for financial crimes and forfeiture of executive bonuses in certain circumstances.
These laws include, among others, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, the Service Members Civil Relief Act, the Military Lending Act, and these laws’ respective state law counterparts, as well as state usury laws and laws regarding unfair, deceptive or abusive acts and practices (“UDAAP”).
These laws include, among others, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate 25 ​ Table of Contents ​ Settlement Procedures Act, the Fair Debt Collection Practices Act, the Service Members Civil Relief Act, the Military Lending Act, and these laws’ respective state law counterparts, as well as state usury laws and laws regarding unfair, deceptive or abusive acts and practices (“UDAAP”).
This guidance requires financial institutions to design multiple layers of security controls to establish lines of defense and ensure that their risk management processes address the risk posed by compromised customer credentials and include security measures to authenticate customers accessing internet-based services of the financial institution.
This guidance requires financial institutions to design multiple layers of security controls to establish lines of defense and 26 ​ Table of Contents ​ ensure that their risk management processes address the risk posed by compromised customer credentials and include security measures to authenticate customers accessing internet-based services of the financial institution.
Additional Tier 1 capital generally includes non-cumulative preferred stock and related surplus subject to certain adjustments and limitations. Tier 2 capital generally includes certain capital instruments (such as subordinated debt) and portions of the amounts of the allowance for credit losses, subject to certain requirements and deductions.
Additional Tier 1 capital generally includes non-cumulative preferred stock and related surplus subject to certain adjustments and limitations. Tier 2 capital generally 17 ​ Table of Contents ​ includes certain capital instruments (such as subordinated debt) and portions of the amounts of the allowance for credit losses, subject to certain requirements and deductions.
Failure to adhere to these policies could cause 17 ​ Table of Contents ​ the Federal Reserve to prohibit or limit the payment of dividends by the banking organization because doing so would constitute an unsafe or unsound practice in light of the financial condition of the banking organization.
Failure to adhere to these policies could cause the Federal Reserve to prohibit or limit the payment of dividends by the banking organization because doing so would constitute an unsafe or unsound practice in light of the financial condition of the banking organization.
The PATRIOT Act is designed to deny terrorists and criminals the ability to obtain access to the U.S. financial system and has significant implications for depository institutions, brokers, 22 ​ Table of Contents ​ dealers and other businesses involved in the transfer of money.
The PATRIOT Act is designed to deny terrorists and criminals the ability to obtain access to the U.S. financial system and has significant implications for depository institutions, brokers, dealers and other businesses involved in the transfer of money.
In addition, some of the financial laws and regulations aiming to ease regulatory and compliance burden on financial institutions that were adopted during the last presidential administration could be repealed or eliminated going forward.
In addition, some of the financial laws and regulations aiming to ease regulatory 27 ​ Table of Contents ​ and compliance burden on financial institutions that were adopted during the last presidential administration could be repealed or eliminated going forward.
If the cash flow from the project decreases, or if leases are not obtained or renewed, the borrower’s ability to repay the loan may be impaired. 7 ​ Table of Contents ​ Construction Loans. We make commercial construction loans for rental properties, commercial buildings and homes built by developers on speculative, undeveloped property.
If the cash flow from the project decreases, or if leases are not obtained or renewed, the borrower’s ability to repay the loan may be impaired. Construction Loans. We make commercial construction loans for rental properties, commercial buildings and homes built by developers on speculative, undeveloped property.
These receivables are acquired from a variety of companies, including but not limited to service providers, transportation companies, manufacturers, distributors, wholesalers, apparel companies, advertisers, and temporary staffing companies. The average life of the factored receivables was 38 days for the year ended December 31, 2022.
These receivables are acquired from a variety of companies, including but not limited to service providers, transportation companies, manufacturers, distributors, wholesalers, apparel companies, advertisers, and temporary staffing companies. The average life of the factored receivables was 37 days for the year ended December 31, 2023.
Institutions with less than $10 billion in assets generally have an assessment rate that can range from 1.5 to 30 basis points. However, the FDIC has flexibility to adopt assessment rates without additional rule-making provided that the total base assessment rate increase or decrease does not exceed 2 basis points.
Institutions with less than $10 billion in assets generally have an assessment rate that can range from 2.5 to 32 basis points. However, the FDIC has flexibility to adopt assessment rates without additional rule-making provided that the total base assessment rate increase or decrease does not exceed 2 basis points. Supervisory Assessments .
Competition The banking and financial services business in California generally, and in the Company’s market areas specifically, is highly competitive. The industry continues to consolidate and unregulated competitors have entered banking markets with products targeted at highly profitable customer segments.
Competition The banking and financial services business in California generally, and in the Company’s market areas specifically, is highly competitive. The industry continues to consolidate and unregulated competitors have entered 11 ​ Table of Contents ​ banking markets with products targeted at highly profitable customer segments.
Commercial real estate loans comprise two segments differentiated by owner occupied commercial real estate and non-owner commercial real estate. Owner occupied commercial real estate loans are secured by commercial properties that are at least 50% occupied by the borrower or borrower affiliate.
CRE loans comprise two segments differentiated by owner occupied commercial real estate and non-owner occupied commercial real estate. Owner occupied CRE loans are secured by commercial properties that are at least 50% occupied by the borrower or borrower affiliate. Non-owner occupied CRE loans are secured by commercial properties that are less than 50% occupied by the borrower or borrower affiliate.
HBC ranks seventeenth with 0.53% share of total deposits based on June 30, 2022 market share data. Larger institutions have, among other advantages, the ability to finance wide-ranging advertising campaigns and to allocate their resources to regions of highest yield and demand. Larger banks are seeking to expand lending to small businesses, which are traditionally community bank customers.
HBC ranks fourteenth with 0.72% share of total deposits based on June 30, 2023 market share data. Larger institutions have, among other advantages, the ability to finance wide-ranging advertising campaigns and to allocate their resources to regions of highest yield and demand. Larger banks are seeking to expand lending to small businesses, which are traditionally community bank customers.
HCC is subject to additional regulations including, but not limited to, the proxy and tender offer rules promulgated by the SEC under Sections 13 and 14 of the Exchange Act, the reporting requirements of directors, executive officers and principal shareholders regarding transactions in HCC’s common stock and short swing profits rules promulgated by the SEC under Section 16 of the Exchange Act, and certain additional reporting requirements by principal shareholders of HCC promulgated by the SEC under Section 13 of the Exchange Act.
HCC is subject to additional regulations including, but not limited to, the proxy and tender offer rules promulgated by the SEC under Sections 13 and 14 of the Exchange Act, the reporting requirements of directors, executive officers and principal shareholders regarding transactions in HCC’s common stock and short swing profits rules promulgated by the SEC under Section 16 of the Exchange Act, and certain additional reporting requirements by principal shareholders of HCC promulgated by the SEC under Section 13 of the Exchange Act. 18 ​ Table of Contents ​ The Sarbanes Oxley Act of 2002 .
HBC offers both fixed and floating rate loans. Maturities on such loans are generally restricted to between five and ten years (with amortization ranging from fifteen to twenty-five years and a balloon payment due at maturity); however, SBA and certain real estate loans that can be sold in the secondary market may be advanced for longer maturities.
Maturities on such loans are generally restricted to between five and ten years (with amortization ranging from fifteen to twenty-five years and a balloon payment due at maturity); however, SBA and certain real estate loans that can be sold in the secondary market may be advanced for longer maturities.
With certain limited exceptions, the maximum amount that a California bank may lend to any borrower at any one time (including the obligations to the bank of certain related entities of the borrower) may not exceed 25% (and unsecured loans may not exceed 15%) of the bank’s shareholders’ equity, allowance for credit losses on loans, and any capital notes and debentures of the bank. 19 ​ Table of Contents ​ Tie in Arrangements .
With certain limited exceptions, the maximum amount that a California bank may lend to any borrower at any one time (including the obligations to the bank of certain related entities of the borrower) may not exceed 25% (and unsecured loans may not exceed 15%) of the bank’s shareholders’ equity, allowance for credit losses on loans, and any capital notes and debentures of the bank.
Concentration risk exists when a financial institution deploys too many assets to a specific industry or segment of the economy with the potential to produce losses large enough to threaten the financial institution’s health. Concentration stemming from commercial real estate (“CRE”) is one area of regulatory concern.
Concentration risk exists when a financial institution deploys too many assets to a specific industry or segment of the economy with the potential to produce losses large enough to threaten the financial institution’s health. Concentration stemming from CRE is one area of regulatory concern.
The impact of any future legislative or regulatory changes cannot be predicted, but they could affect the Company and HBC’s business and operations. ​ ​ 25 ​ Table of Contents ​
The impact of any future legislative or regulatory changes cannot be predicted, but they could affect the Company and HBC’s business and operations. ​ ​
The term “Tier 1 capital” means common equity Tier 1 capital plus additional Tier 1 capital, and the term “total capital” means Tier 1 capital plus Tier 2 capital. 15 ​ Table of Contents ​ The Capital Rules generally measure an institution’s capital using four capital measures or ratios.
The term “Tier 1 capital” means common equity Tier 1 capital plus additional Tier 1 capital, and the term “total capital” means Tier 1 capital plus Tier 2 capital. The Capital Rules generally measure an institution’s capital using four capital measures or ratios.
For the combined Alameda, Contra Costa, Marin, San Benito, San Francisco, San Mateo, and Santa Clara county region, the seven counties within which the Company operates, the top three institutions are all multi-billion dollar entities with an aggregate of 382 offices that control a combined 59.21% of deposit market share based on June 30, 2022 FDIC market share data.
For the combined Alameda, Contra Costa, Marin, San Benito, San Francisco, San Mateo, and Santa Clara county region, the seven counties within which the Company operates, the top three institutions are all multi-billion dollar entities with an aggregate of 572 offices that control a combined 69.29% of deposit market share based on June 30, 2023 FDIC market share data.
As of December 31, 2022, using regulatory definitions in the CRE Concentration Guidance, our CRE loans represented 295% of HBC total risk-based capital, as compared to 284% as of December 31, 2021.
As of December 31, 2023, using regulatory definitions in the CRE Concentration Guidance, our CRE loans represented 306% of HBC total risk-based capital, as compared to 295% as of December 31, 2022.
Additionally, all “undercapitalized” banks are required to implement capital restoration plans to restore capital to at least the “adequately capitalized” level, and the FDIC is generally required to close “critically undercapitalized” banks within a 90-day period. HBC meets the definition of a “well capitalized” institution. Dividend Payments . The primary source of funds for HCC is dividends from HBC.
Additionally, all “undercapitalized” banks are required to implement capital restoration plans to restore capital to at least the “adequately capitalized” level, and the FDIC is generally required to close “critically undercapitalized” banks within a 90-day period. HBC meets the definition of a “well capitalized” institution. Dividend Payments .
Repayment of construction loans on non-residential properties is normally expected from the property’s eventual rental income, income from the borrower’s operating entity or the sale of the subject property. In the case of income-producing property, repayment is usually expected from permanent financing upon completion of construction.
Repayment of construction loans on non-residential properties is normally expected from the property’s eventual rental income, income from the borrower’s operating entity or the sale of the subject property. In the case of income-producing property, repayment is usually expected from permanent financing upon completion of construction. At times we provide permanent mortgage financing on our construction loans on income-producing property.
Through self-identification, the Culture Ambassadors represent 73% female and 64% ethnic/racial diversity. Culture Ambassadors serve an important role to work on enterprise initiatives such as creation of corporate values, promoting awareness of various cultures, as well as provide timely and ongoing feedback to the DEIB Steering Committee.
Through self-identification, the Culture Ambassadors represent 77% female and 62% ethnic/racial diversity. Culture Ambassadors serve an important role to help shape enterprise initiatives such as creation of corporate values, promoting awareness of various cultures, as well as provide timely and ongoing feedback to the DEIB Steering Committee.
As part of that framework, federal banking regulators are required to take “prompt corrective action” with respect to any FDIC-insured depository institutions that do not meet certain capital adequacy standards.
The FDIA establishes a framework for regulation of insured depository institutions by federal banking regulators. As part of that framework, federal banking regulators are required to take “prompt corrective action” with respect to any FDIC-insured depository institutions that do not meet certain capital adequacy standards.
Electronic Banking While personalized, service-oriented banking is the cornerstone of our business plan, we use technology and the Internet as a secondary means for servicing customers, to compete with larger banks and to provide a convenient platform for customers to review and transact business.
HBC also receives reciprocal deposits from other participating financial institutions. Electronic Banking While personalized, service-oriented banking is the cornerstone of our business plan, we use technology and the Internet as a secondary means for servicing customers, to compete with larger banks and to provide a convenient platform for customers to review and transact business.
When we refer to “HCC” or the “holding company”, we are referring to Heritage Commerce Corp on a standalone basis. When we use the “Bank” or “HBC”, we mean Heritage Bank of Commerce on a standalone basis.
When we use “we”, “us”, “our” or the “Company”, we mean the Company on a consolidated basis with Heritage Bank of Commerce. When we refer to “HCC” or the “holding company”, we are referring to Heritage Commerce Corp on a standalone basis. When we use the “Bank” or “HBC”, we mean Heritage Bank of Commerce on a standalone basis.
We have a zero tolerance, non-retaliation policy. ​ Health and Safety ​ Our employees are our most valuable resource, and their safety, health, and wellbeing is of paramount to our Company’s success. We support the wellness of all colleagues through various programs, including Employee Assistance Program “EAP”, health seminars, education programs and health club memberships.
Health, Safety and Wellbeing Our employees are our most valuable resource, and their safety, health, and wellbeing are key to our Company’s success. We support the wellness of all colleagues through various programs, including Employee Assistance Program (“EAP”), health seminars, education programs and health club memberships.
As of December 31, 2022, HBC was eligible to accept brokered deposits without limitations. Loans to One Borrower .
As of December 31, 2023, HBC was eligible to accept brokered deposits without limitations. 21 ​ Table of Contents ​ Loans to One Borrower .
All of HBC’s electronic banking services allow customers to review transactions and statements, review images of paid items, transfer funds between accounts at HBC, place stop orders, pay bills and export to various business and personal software applications.
HBC offers multiple electronic banking options to its customers. It does not allow the origination of deposit accounts through online banking. All of HBC’s electronic banking services allow customers to review transactions and statements, review images of paid items, transfer funds between accounts at HBC, place stop orders, pay bills and export to various business and personal software applications.
HBC continues to investigate products and 9 ​ Table of Contents ​ services that it believes addresses the growing needs of its customers and to analyze other markets for potential expansion opportunities. Investments Our investment policy is established by the Board of Directors (the “Board”).
HBC continues to investigate products and services that it believes address the growing needs of its customers and to analyze other markets for potential expansion opportunities. Investments Our investment policy is established by the Board of Directors (the “Board”). The general investment strategies are developed and authorized by our Finance and Investment Committee of the Board.
If we fail to observe the regulatory guidance, we could be subject to various regulatory sanctions, including financial penalties. As of May 1, 2022, financial institutions are required to comply with the final rule issued by the federal bank regulatory agencies to improve sharing of information about cyber incidents that may affect the U.S. banking system.
As of May 1, 2022, financial institutions are required to comply with the final rule issued by the federal bank regulatory agencies to improve sharing of information about cyber incidents that may affect the U.S. banking system.
The repayment of construction loans is dependent upon the successful and timely completion of the construction of the subject property, as well as the sale of the property to third parties or the availability of permanent financing upon completion of all improvements.
We review and inspect properties before disbursement of funds during the term of the construction loan. The repayment of construction loans is dependent upon the successful and timely completion of the construction of the subject property, as well as the sale of the property to third parties or the availability of permanent financing upon completion of all improvements.
The general investment strategies are developed and authorized by our Finance and Investment Committee of the Board. The investment policy is reviewed annually by the Finance and Investment Committee, and any changes to the policy are subject to approval by the full Board of Directors.
The investment policy is reviewed annually by the Finance and Investment Committee, and any changes to the policy are subject to approval by the full Board.
State regulators have also been increasingly active in implementing privacy and cybersecurity standards and regulations. Recently, several states, notably including California where we conduct substantially all our banking business, have adopted laws and/or regulations requiring certain financial institutions to implement cybersecurity programs and providing detailed requirements with respect to these programs, including data encryption requirements.
Recently, several states, notably including California where we conduct substantially all our banking business, have adopted laws and/or regulations requiring certain financial institutions to implement cybersecurity programs and providing detailed requirements with respect to these programs, including data encryption requirements. Many such states (including California) have also recently implemented or modified their data breach notification and data privacy requirements.
HBC has established policies and procedures that it believes comply with these requirements. Treasury’s Office of Foreign Assets Control (“OFAC”), administers and enforces economic and trade sanctions against targeted foreign countries and regimes under authority of various laws, including designated foreign countries, nationals and others. OFAC publishes lists of specially designated targets and countries.
Treasury’s Office of Foreign Assets Control (“OFAC”), administers and enforces economic and trade sanctions against targeted foreign countries and regimes under authority of various laws, including designated foreign countries, nationals and others. OFAC publishes lists of specially designated targets and countries.
For customers requiring full Federal Deposit Insurance Corporation (“FDIC”) insurance on certificates of deposit in excess of $250,000, we offer the Certificate of Deposit Account Registry Service (“CDARS”) program, which allows HBC to place the certificates of deposit with other participating banks to maximize the customers’ FDIC insurance. HBC also receives reciprocal deposits from other participating financial institutions.
For customers seeking full Federal Deposit Insurance Corporation (“FDIC”) insurance on certificates of deposit in excess of $250,000, we offer the Insured Cash Sweep (“ICS”) and Certificate of Deposit Account Registry Service (“CDARS”) programs, which allows HBC to place the deposits with other participating banks to maximize the customers’ FDIC insurance.
Supervisory actions under the “prompt corrective action” rules generally depend upon an institution’s classification within five capital categories, under which a bank is classified as: ● “well capitalized” if it has a total risk-based capital ratio of 10.0% or more, a Tier 1 risk-based capital ratio of 8.0% or more, a common equity Tier 1 risk-based ratio of 6.5% or more, and a leverage capital ratio of 5.0% or more, and is not subject to any written agreement, order or capital directive to meet and maintain a specific capital level for any capital measure; ● “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based capital ratio of 6.0% or more, a common equity Tier 1 risk-based ratio of 4.5% or more, and a leverage capital ratio of 4.0% or more; ● “undercapitalized” if it has a total risk-based capital ratio less than 8.0%, a Tier 1 risk-based capital ratio less than 6.0%, a common equity risk-based ratio less than 4.5% or a leverage capital ratio less than 4.0%; ● “significantly undercapitalized” if it has a total risk-based capital ratio less than 6.0%, a Tier 1 risk-based capital ratio less than 4.0%, a common equity risk-based ratio less than 3.0% or a leverage capital ratio less than 3.0%; or ● “critically undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%.
Supervisory actions under the “prompt corrective action” rules generally depend upon an institution’s classification within five capital categories, under which a bank is classified as: ● “well capitalized” if it has a total risk-based capital ratio of 10.0% or more, a Tier 1 risk-based capital ratio of 8.0% or more, a common equity Tier 1 risk-based ratio of 6.5% or more, and a leverage capital ratio of 5.0% or more, and is not subject to any written agreement, order or capital directive to meet and maintain a specific capital level for any capital measure; ● “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based capital ratio of 6.0% or more, a common equity Tier 1 risk-based ratio of 4.5% or more, and a leverage capital ratio of 4.0% or more; ● “undercapitalized” if it has a total risk-based capital ratio less than 8.0%, a Tier 1 risk-based capital ratio less than 6.0%, a common equity risk-based ratio less than 4.5% or a leverage capital ratio less than 4.0%; ● “significantly undercapitalized” if it has a total risk-based capital ratio less than 6.0%, a Tier 1 risk-based capital ratio less than 4.0%, a common equity risk-based ratio less than 3.0% or a leverage capital ratio less than 3.0%; or ● “critically undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. 22 ​ Table of Contents ​ A bank that, based upon its capital levels, is classified as “well capitalized,” “adequately capitalized” or “undercapitalized” may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for a hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment.
SBA lending is subject to federal legislation that can affect the availability and funding of the program. From time to time, this dependence on legislative funding causes limitations and uncertainties with regard to the continued funding of such programs, which could potentially have an adverse financial impact on our business. Home Equity Loans.
From time to time, this dependence on legislative funding causes limitations and uncertainties with regard to the continued funding of such programs, which could potentially have an adverse financial impact on our business. 9 ​ Table of Contents ​ Home Equity Loans.
ITEM 1. BUSINESS General Heritage Commerce Corp, a California corporation organized in 1997, is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. We provide a wide range of banking services through Heritage Bank of Commerce, our wholly-owned subsidiary.
ITEM 1. BUSINESS General Heritage Commerce Corp, a California corporation organized in 1997, is a bank holding company registered under the Bank Holding Company Act of 1956, as amended.
In October 2022, the SEC adopted final rules on “clawback” of executive compensation, which direct the stock exchanges to establish listing standards requiring listed companies to develop and implement a policy providing for the recovery of erroneously awarded incentive-based compensation received by current or former executive officers.
By December 1, 2023, listed companies were required to develop and implement a policy providing for the recovery of erroneously awarded incentive-based compensation received by current or former executive officers, as required under the SEC’s final rules on “clawback” of executive compensation, which directed the stock exchanges to establish listing standards requiring such policy.
A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network 24 ​ Table of Contents ​ capabilities and restoring data if the institution or its critical service providers fall victim to a cyber-attack.
A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to a cyber-attack. If we fail to observe the regulatory guidance, we could be subject to various regulatory sanctions, including financial penalties.
HBC does not originate first trust deed home mortgage loans or home improvement loans, other than HELOCS. 8 ​ Table of Contents ​ ​ Consumer and Other Loans. The consumer loan portfolio is composed of miscellaneous consumer loans including loans for financing automobiles, various consumer goods and other personal purposes. Consumer loans are generally secured.
Residential Mortgage Loans. From time to time the Company has purchased single family residential mortgage loans. HBC does not originate first trust deed home mortgage loans or home improvement loans, other than HELOCS. ​ Consumer and Other Loans. The consumer loan portfolio is composed of miscellaneous consumer loans including loans for financing automobiles, various consumer goods and other personal purposes.
In the event creditworthy loan customers’ borrowing needs exceed our legal lending limit, we have the ability to sell participations in those loans to other banks. We encourage relationship banking, obtaining a substantial portion of each borrower’s banking business, including deposit accounts.
In the event creditworthy loan customers’ borrowing needs exceed our legal lending limit, we have the ability to sell participations in those loans to other banks. Our focus on relationship banking allows us to obtain a substantial portion of each borrower’s banking business, including deposit accounts, and provide long-term credit and deposit solutions to support our customers and their businesses.
We expect employees to treat, clients and stakeholders with common courtesy and respect at all times. We take all complaints seriously and promptly investigate concerns. Employees have the ability to report concerns through a variety of channels including their immediate manager, any leader at the company, Human Resources or through our external anonymous complaints hotline.
Employees have the ability to report concerns through a variety of channels including their immediate manager, any leader at the company, Human Resources or through our external anonymous complaints telephone hotline and/or internet site. We take all complaints seriously and promptly investigate concerns. We have a zero tolerance, anti-retaliation policy.
Heritage Bank of Commerce is a California state-chartered bank headquartered in San Jose, California and has been conducting business since 1994. Heritage Bank of Commerce is a multi-community independent bank that offers a full range of commercial banking services to small and medium-sized businesses and their owners, managers and employees.
Heritage Bank of Commerce is a multi-community independent bank that offers a full range of commercial banking services to small and medium-sized businesses and their owners, managers and employees.
See Item 1 — “Business — Correspondent Banks.” HUMAN CAPITAL ​ We strive to be the employer of choice in our markets where every employee has the opportunity to thrive. We deeply believe that employees fuel the success of our Company.
See Item 1 — “Business — Correspondent Banks.” HUMAN CAPITAL ​ We strive to be the employer of choice among banks in our markets, by building a reputation as a place where every employee can thrive. We believe deeply that employees drive our Company’s stability and success.
Many such states (including California) have also recently implemented or modified their data breach notification and data privacy requirements. We expect this trend of state-level activity in those areas to continue, and we continue to monitor relevant legislative and regulatory developments in California where nearly all our customers are located. Incentive Compensation .
We expect this trend of state-level activity in those areas to continue, and we continue to monitor relevant legislative and regulatory developments in California where nearly all our customers are located. Incentive Compensation .
The Company makes these reports available on its website on the same day they appear on the Securities and Exchange Commission (“SEC”) website. Heritage Bank of Commerce HBC is a California state-chartered bank headquartered in San Jose, California. It was incorporated in November 1993 and opened for business in June 1994. HBC operates through eighteen* full service branch offices.
Heritage Bank of Commerce HBC is a California state-chartered bank headquartered in San Jose, California. It was incorporated in November 1993 and opened for business in June 1994. HBC operates through seventeen full-service branch offices.
The DFPI also has broad enforcement powers over us, including the power to impose orders, remove officers and directors, impose fines and appoint supervisors and conservators. Further Legislative and Regulatory Initiatives.
Failure to comply with applicable laws and regulations could subject us and our officers and directors to administrative sanctions and potentially substantial civil money penalties. The DFPI also has broad enforcement powers over us, including the power to impose orders, remove officers and directors, impose fines and appoint supervisors and conservators. Further Legislative and Regulatory Initiatives.
As a California chartered bank, Heritage Bank of Commerce is subject to primary supervision, periodic examination, and regulation by the California Department of Financial Protection and Innovation, and by the Federal Reserve, as its primary federal regulator. Our principal executive office is located at 224 Airport Parkway, San Jose, California 95110, telephone number: (408) 947-6900.
As a California chartered bank, Heritage Bank of Commerce is subject to primary supervision, periodic examination, and regulation by the California Department of Financial Protection and Innovation, and by the Federal Reserve, as its primary federal regulator.
The Internet address of the Company’s website is “http://www.heritagecommercecorp.com,” and the Bank’s website is “http://www.heritagebankofcommerce.com.” The Company makes available free of charge through the Company’s website, the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports.
The Company makes available free of charge through the Company’s website, the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports. The Company makes these reports available on its website on the same day they appear on the SEC’s website.
These loans are generally advanced based on the borrower’s cash flow, and the underlying collateral provides a secondary source of payment. HBC generally restricts real estate term loans to no more than 75% of the property’s appraised value or the purchase price of the property, depending on the type of property and its utilization.
HBC generally restricts real estate term loans to no more than 75% of the property’s appraised value or the purchase price of the property, depending on the type of property and its utilization. HBC offers both fixed and floating rate loans.
Many larger unregulated competitors are able to compete across geographic boundaries, and provide customers with meaningful alternatives to most significant banking services and products. These consolidation trends are likely to continue.
Many larger unregulated competitors are able to compete across geographic boundaries, and provide customers with meaningful alternatives to most significant banking services and products. These consolidation trends are likely to continue. The increasingly competitive environment is a result primarily of changes in regulation, changes in technology and product delivery systems, and the consolidation among financial service providers.
El Camino Real Suite 150 San Mateo, CA 94402 ​ Bay View Funding ​ Administrative Office 224 Airport Parkway Suite 200 San Jose, CA 95110 ​ ​ ​ ​ ​ ​ ​ San Rafael: ​ Branch Office 999 5th Avenue Suite 100 San Rafael, CA 94901 ​ ​ ​ ​ ​ *The Sunnyvale branch office is closing on April 28, 2023. 6 ​ Table of Contents ​ Lending Activities We offer a diversified mix of business loans encompassing the following loan products: (i) commercial and industrial loans; (ii) commercial real estate loans; (iii) construction loans; and (iv) SBA loans.
California Boulevard ​ Suite B ​ ​ Suite 100 ​ Los Gatos, CA 95032 ​ ​ Walnut Creek, CA 94596 ​ ​ ​ ​ ​ Morgan Hill: Branch Office ​ Bay View Funding: Administrative Office ​ 18625 Sutter Boulevard ​ ​ 224 Airport Parkway ​ Suite 100 ​ ​ Suite 200 ​ Morgan Hill, CA 95037 ​ ​ San Jose, CA 95110 ​ ​ ​ ​ 7 ​ Table of Contents ​ Lending Activities We offer a diversified mix of business loans encompassing the following loan products: (i) commercial and industrial loans; (ii) commercial real estate loans; (iii) construction loans; and (iv) SBA loans.
In August 2022, the SEC finalized the pay versus performance regulations, which require disclosure of information that shows the relationship between executive compensation actually paid and the company’s financial performance in annual proxy statements. The pay versus performance regulations are effective for fiscal years ending on or after December 16, 2022.
The SEC’s final pay versus performance regulations require disclosure of information that shows the relationship between executive compensation actually paid and the company’s financial performance in annual proxy statements.
HBC online commercial banking also allows customers to initiate domestic wire transfers and ACH transactions, with the added security and functionality of assigning discrete access and levels of security to different employees of the client and division of functions to allow separation of duties, such as input and release.
HBC online commercial banking also allows customers to initiate domestic wire transfers and ACH transactions, with the added security and functionality of assigning discrete access and levels of security to different employees of the client and division of functions to allow separation of duties, such as input and release. 10 ​ Table of Contents ​ We also offer our internet banking customers an additional third party product designed to assist in mitigating fraud risk to both the customer and the Bank in internet banking and other internet activities conducted by the customer, at no cost to the customer.
The amount of the assessment paid by a California bank to the DFPI is calculated on the basis of the institution’s total assets, including consolidated subsidiaries, as reported to the DFPI. During the year ended December 31, 2022, HBC paid supervisory assessments to the DFPI totaling $324,000. Capital Requirements .
California-chartered banks are required to pay supervisory assessments to the DFPI to fund its operations. The amount of the assessment paid by a California bank to the DFPI is calculated on the basis of the institution’s total assets, including consolidated subsidiaries, as reported to the DFPI.
At times we provide the permanent mortgage financing on our construction loans on income-producing property. Construction loans are interest-only loans during the construction period, which typically do not exceed 18 months. If HBC provides permanent financing the short-term loan converts to permanent, amortizing financing following the completion of construction.
Construction loans are interest-only loans during the construction period, which typically does not exceed 18 months. If HBC provides permanent financing the short-term loan converts to permanent, amortizing financing following the completion of construction. Generally, before making a commitment to fund a construction loan, we require an appraisal of the property by a state-certified or state-licensed appraiser.
Adopted as part of the 2021 revisions of the anti-money laundering laws, the Corporate Transparency Act (the “CTA”) requires the creation of a national registry of beneficial ownership information. When the final CTA rules go into effect in 2024, they may impact the AMLA/BSA procedures and reporting requirements of financial institutions.
Adopted as part of the 2021 revisions of the anti-money laundering laws, and effective January 1, 2024, the Corporate Transparency Act (the “CTA”) requires the creation of a national registry of beneficial ownership information.
Each insured depository institution must implement a comprehensive written information security program that includes administrative, technical and physical safeguards appropriate to the institution’s size and complexity and the 21 ​ Table of Contents ​ nature and scope of its activities.
The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director, or principal shareholder. 23 ​ Table of Contents ​ Each insured depository institution must implement a comprehensive written information security program that includes administrative, technical and physical safeguards appropriate to the institution’s size and complexity and the nature and scope of its activities.
Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan, and the remaining deficiency may not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections are dependent on the borrower’s continued financial stability, which can be adversely affected by job loss, divorce, illness or personal bankruptcy.
Consumer loans are generally secured. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan, and the remaining deficiency may not warrant further substantial collection efforts against the borrower.
We developed a robust Succession Planning roadmap that clearly outlines a plan for unexpected vacancies and a longer term executive talent development plan for executive ranks and key roles. Additionally, we’ve embedded a discipline of building a strong 13 ​ Table of Contents ​ external diverse talent pipeline for executive and board seats.
We further refined our Talent Management and Succession Planning framework, and progress updates are provided to the Board throughout the year. We created a robust Succession Planning roadmap that clearly outlines a plan for executive ranks and key roles. Additionally, we’ve embedded a discipline of building an external diverse talent pipeline for executive and board seats.

… 76 more changes not shown on this page.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

108 edited+52 added−11 removed248 unchanged
Biggest changeSummary of Risk Factors Risks Related to Our Business ● Unfavorable general business, economic and market conditions ● Ongoing effects of the COVID-19 pandemic ● Geographic concentration in the Greater San Francisco Bay Area ● Monetary policies and regulations ● Fluctuations in interest rates ● Losses on our securities portfolio, particularly from increases in interest rates in our securities available-for-sale portfolio ● Liquidity risks ● Competition for customer deposits ​ Risks Related to Our Loans ● Negative changes in the economy affecting real estate values and liquidity ● Risks involved with construction and land development loans ● Increased scrutiny by regulators of commercial real estate concentrations ● Unreliability of loan appraisals used in real property loan decisions ● Commercial loans are more sensitive to the borrower’s successful operations or property development ● Small and medium business loans are subject to greater risks from adverse business developments ● Underwriting criteria and practices may not prevent poor loan performance ​ ​ Risks Related to Our SBA Loan Program ● Dependence on U.S. federal government SBA loan program ● Recognition of gains on sale of loans and servicing asset valuations reflect certain assumptions we use ● Credit risks from non-guaranteed portion of SBA loans we retain and do not sell ● Credit risks from SBA loans we sell as a result of repurchase obligations ​ Risks Related to Our Credit Quality ● Managing credit risk ● Nonperforming assets require management time to resolve and can affect our financial results ● The allowance for credit losses on loans may be insufficient to absorb potential losses in our loan portfolio ● Real estate market volatility may have an adverse effect on disposition of other real estate owned ● Exposure to environmental liabilities on foreclosed real estate collateral ​ Risks Related to our Growth Strategy ● General risks associated with acquisitions, including availability of suitable targets and integration risks ● Dilution affect resulting from the issuance of common stock consideration for acquisitions ● Impairment of the goodwill recorded from an acquisition ● Incorrect estimate of fair value for assets acquired in an acquisitions ● Managing our branch growth strategy ● Managing risks of adding new lines of business and new products ​ Risks Related to Our Capital ● More stringent capital requirements 26 ​ Table of Contents ​ ● Raising new capital in conditions beyond our control ​ Risks Related to Management ● Our success depends on the skills and retention of our management ● Competition for skilled and experienced management level and senior level employees ​ Risks Related to Our Reputation and Operations ● Failure to maintain a favorable reputation with our customers and communities ● Failure of our risk management framework ● Interruptions, cyber-attacks, fraud and other security breaches ● Difficulties from our third-party providers ● Employee misconduct ● Inaccurate information provided to us by customers or counterparties ● Environmental, social and governance practices ​ Risks from Competition ● Competition from financial service companies and other companies that offer commercial banking services ● Competitive need to implement new technology and related operational challenges ​ Risks Related to Other Business ● Costs and effects of litigation, investigations or similar matters ● Phasing out of and uncertainty related to London Interbank Offered Rate (“LIBOR”) ● The soundness of other financial institutions ● Severe weather, natural disasters (including fire and earthquakes, pandemics, acts of war, terrorism, and social unrest) ● Climate change ​ Risks Related to Finance and Accounting ● Reliance on estimates and risk management processes and analytical and forecasting models ● Changes in accounting standards ● Failure to maintain effective internal controls over financial reporting ● Realization of our deferred tax assets ​ Risks Related to Legislative and Regulatory Developments ● Extensive government regulation that could limit or restrict our activities ● Legislative and regulatory actions now or in the future increase our costs, and impact our business ● Federal and state regulatory exams ● Noncompliance with the BSA and other anti-money laundering statutes and regulations ● Consumer protection laws and regulations ● Failure to comply with privacy, data protection and information security legal requirements ​ Risks Related to Our Common Stock ● Investment in common stock is not an insured deposit ● Volatile trading price of our common stock ● Limited trading volume ● Changes in dividend policy ● Limitations on director liability for monetary damages for failure to exercise their fiduciary duty ● Potential dilution from issuance of additional equity securities ● Issuance of preferred stock which may have rights and preferences over our common stock ● Failure to satisfy our obligations under our subordinated notes would preclude the payment of dividends ● Our charter documents and California law may have an anti-takeover effect limiting changes of control ​ 27 ​ Table of Contents ​ Risks Relating to Our Business Our Business could be adversely affected by unfavorable economic and market conditions.
Biggest changeSummary of Risk Factors Risks Related to Our Business ● Unfavorable general business, economic and market conditions ● Effects related to pandemics, epidemics and other infectious disease outbreaks, including the COVID-19 pandemic ● Geographic concentration in the Greater San Francisco Bay Area ● Monetary policies and regulations ● Competition for customer deposits ● Rapid technological developments in the financial services industry ​ Risks Related to Our Loans ● Negative changes in the economy affecting real estate values and liquidity ● Risks involved with construction and land development loans ● Increased scrutiny by regulators of commercial real estate concentrations ● Unreliability of loan appraisals used in real property loan decisions ● Commercial loans are more sensitive to the borrower’s successful operations or property development ● Small and medium business loans are subject to greater risks from adverse business developments ● Underwriting criteria and practices may not prevent poor loan performance ​ Risks Related to Our SBA Loan Program ● Dependence on U.S. federal government SBA loan program ● Recognition of gains on sale of loans and servicing asset valuations reflect certain assumptions we use ● Credit risks from non-guaranteed portion of SBA loans we retain and do not sell ● Credit risks from SBA loans we sell as a result of repurchase obligations ​ Risks Related to Our Credit Quality ● Managing credit risk ● Nonperforming assets require management time to resolve and can affect our financial results ● The allowance for credit losses on loans may be insufficient to absorb potential losses in our loan portfolio ● Real estate market volatility may have an adverse effect on disposition of other real estate owned ● Exposure to environmental liabilities on foreclosed real estate collateral ​ Risks Related to our Growth Strategy ● General risks associated with acquisitions, including availability of suitable targets and integration risks ● Dilution affect resulting from the issuance of common stock consideration for acquisitions ● Impairment of the goodwill recorded from an acquisition ● Incorrect estimate of fair value for assets acquired in an acquisitions ● Managing our branch growth strategy ● Managing risks of adding new lines of business and new products ​ 28 ​ Table of Contents ​ Risks Related to Our Financial Strength and Liquidity ● Fluctuations in interest rates and increased challenges in credit markets ● Unrealized losses on our securities portfolio, particularly from the impact of increased interest rates on our securities available-for-sale portfolio ● Liquidity risks, particularly from limited access to lines of credit, deposits, and other traditional forms of funding ​ Risks Related to Our Capital ● More stringent capital requirements ● Raising new capital in conditions beyond our control ​ Risks Related to Management ● Our success depends on the skills and retention of our management ● Competition for skilled and experienced management level and senior level employees ​ Risks Related to Our Reputation and Operations ● Failure to maintain a favorable reputation with our customers and communities ● Effects from failures of non-related banks and reputation of the banking industry and financial institutions as a whole ● Failure of our risk management framework ● Interruptions, cyber-attacks, fraud and other security breaches ● Difficulties from our third-party providers ● Employee misconduct ● Inaccurate information provided to us by customers or counterparties ● Environmental, social and governance practices ​ Risks from Competition ● Competition from financial service companies and other companies that offer commercial banking services ● Competitive need to implement new technology and related operational challenges ​ Risks Related to Other Business ● Costs and effects of litigation, investigations or similar matters ● The soundness of other financial institutions ● Severe weather, natural disasters (including fire and earthquakes, pandemics, acts of war, terrorism, and social unrest) ​ Risks Related to Finance and Accounting ● Reliance on estimates and risk management processes and analytical and forecasting models ● Changes in accounting standards ● Failure to maintain effective internal controls over financial reporting ● Realization of our deferred tax assets ​ Risks Related to Legislative and Regulatory Developments ● Extensive government regulation that could limit or restrict our activities ● Legislative and regulatory actions taken now or in the future increase our costs, and impact our business ● Federal and state regulatory exams ● Noncompliance with the BSA and other anti-money laundering statutes and regulations ● Consumer protection laws and regulations ● Failure to comply with privacy, data protection and information security legal requirements ​ Risks Related to Our Common Stock ● Investment in common stock is not an insured deposit ● Volatile trading price of our common stock 29 ​ Table of Contents ​ ● Limited trading volume ● Limitations on director liability for monetary damages for failure to exercise their fiduciary duty ● Potential dilution from issuance of additional equity securities ● Issuance of preferred stock which may have rights and preferences over our common stock ● Failure to satisfy our obligations under our subordinated notes would preclude the payment of dividends ● Our charter documents and California law may have an anti-takeover effect limiting changes of control ​ Risks Relating to Our Business Our Business could be adversely affected by unfavorable economic and market conditions.
We operate primarily in in the general San Francisco Bay Area of California in the counties of Alameda, Contra Costa, Marin, San Benito, San Francisco, San Mateo, and Santa Clara and, as a result, our business, financial condition and results of operations are subject to the demand for our products in those areas and is also subject to changes in the economic conditions in those areas.
We operate primarily in the general San Francisco Bay Area of California in the counties of Alameda, Contra Costa, Marin, San Benito, San Francisco, San Mateo, and Santa Clara and, as a result, our business, financial condition and results of operations are subject to the demand for our products in those areas and is also subject to changes in the economic conditions in those areas.
Competition among U.S. banks for customer deposits is intense, may increase the cost of retaining current deposits or procuring new deposits, and may otherwise negatively affect our ability to grow our deposit base.
Competition among U.S. banks for customer deposits is intense, may increase the cost of retaining current deposits or procuring new deposits, and may otherwise negatively affect our ability to grow our deposit base.
Further, when we place a loan on nonaccrual status, we reverse any accrued but unpaid interest receivable, which decreases interest income. Subsequently, we continue to have a cost to fund the loan, which is reflected as interest expense, without any interest income to offset the associated funding expense.
Further, when we place a loan on nonaccrual status, we reverse any accrued but unpaid interest receivable, which decreases interest income. Subsequently, we continue to have a cost to fund the loan, which is reflected as interest expense, without any interest income to offset the associated funding expense.
The holders of our debt obligations will have priority over our common stock with respect to payment in the event of liquidation, dissolution or winding up and with respect to the payment of interest and dividends.
The holders of our debt obligations will have priority over our common stock with respect to payment in the event of liquidation, dissolution or winding up and with respect to the payment of interest and dividends.
Among the factors that could affect our stock price are: ● changes in business and economic condition; 47 ​ Table of Contents ​ ● actual or anticipated quarterly fluctuations in our operating results and financial condition; ● actual occurrence of one or more of the risk factors outlined above; ● recommendations by securities analysts or failure to meet, securities analysts’ estimates of our financial and operating performance, or lack of research reports by industry analysts or ceasing of coverage; ● speculation in the press or investment community generally or relating to our reputation, our operations, our market area, our competitors or the financial services industry in general; ● strategic actions by us or our competitors, such as acquisitions, restructurings, dispositions or financings; ● actions by institutional investors; ● fluctuations in the stock price and operating results of our competitors; ● future sales of our equity, equity related or debt securities; ● proposed or adopted regulatory changes or developments; ● anticipated or pending investigations, proceedings, or litigation that involve or affect us; ● the level and extent to which we do or are allowed to pay dividends; ● trading activities in our common stock, including short selling; ● deletion from well-known index or indices; ● domestic and international economic factors unrelated to our performance; and ● general market conditions and, in particular, developments related to market conditions for the financial services industry. ​ The trading volume in our common stock is less than that of other larger financial services companies.
Among the factors that could affect our stock price are: ● changes in business and economic condition; ● actual or anticipated quarterly fluctuations in our operating results and financial condition; ● actual occurrence of one or more of the risk factors outlined above; ● recommendations by securities analysts or failure to meet, securities analysts’ estimates of our financial and operating performance, or lack of research reports by industry analysts or ceasing of coverage; ● speculation in the press or investment community generally or relating to our reputation, our operations, our market area, our competitors or the financial services industry in general; ● strategic actions by us or our competitors, such as acquisitions, restructurings, dispositions or financings; ● actions by institutional investors; ● fluctuations in the stock price and operating results of our competitors; ● future sales of our equity, equity related or debt securities; ● proposed or adopted regulatory changes or developments; ● anticipated or pending investigations, proceedings, or litigation that involve or affect us; ● the level and extent to which we do or are allowed to pay dividends; ● trading activities in our common stock, including short selling; ● deletion from well-known index or indices; ● domestic and international economic factors unrelated to our performance; and ● general market conditions and, in particular, developments related to market conditions for the financial services industry. ​ 52 ​ Table of Contents ​ The trading volume in our common stock is less than that of other larger financial services companies.
However, we have no obligation to continue doing so and may change our dividend policy at any time without notice to holders of our common stock. Holders of our common stock are only entitled to receive such cash dividends as our board of directors, in its discretion, may declare out of funds legally available for such payments.
However, we have no obligation to continue doing so and may change our dividend policy at any time without notice to holders of our common stock. Holders of our common stock are only entitled to receive such cash dividends as our Board, in its discretion, may declare out of funds legally available for such payments.
Given the lower trading volume of our common stock, significant sales of our common stock, or the expectation of these sales, could cause our stock price to fall. Our dividend policy may change without notice, and our future ability to pay dividends is subject to restrictions. Historically, our board of directors has declared quarterly dividends on our common stock.
Given the lower trading volume of our common stock, significant sales of our common stock, or the expectation of these sales, could cause our stock price to fall. Our dividend policy may change without notice, and our future ability to pay dividends is subject to restrictions. Historically, our Board has declared quarterly dividends on our common stock.
Regulations relating to privacy, information security and data protection could increase our costs, affect or limit how we collect and use personal information. We are subject to various privacy, information security and data protection laws, including requirements concerning security breach notification, and we could be negatively impacted by these laws.
Regulations relating to privacy, information security, cybersecurity and data protection could increase our costs and affect or limit how we collect and use personal information. We are subject to various privacy, information security, cybersecurity and data protection laws, including requirements concerning security breach notification, and we could be negatively impacted by these laws.
As a result, shareholders who might desire to participate in such transactions may not have an opportunity to do so. In addition, these provisions will also render the removal of our board of directors or management more difficult.
As a result, shareholders who might desire to participate in such transactions may not have an opportunity to do so. In addition, these provisions will also render the removal of our Board or management more difficult.
In addition, the ability of our board of directors to issue shares of preferred stock without any action on the part of our shareholders may impede a takeover of us and prevent a transaction perceived to be favorable to our shareholders.
In addition, the ability of our Board to issue shares of preferred stock without any action on the part of our shareholders may impede a takeover of us and prevent a transaction perceived to be favorable to our shareholders.
If we identify any material weaknesses in our internal control over financial reporting or are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors, counterparties and customers may lose confidence in the accuracy and completeness of our financial statements and reports; our liquidity, access to capital markets and perceptions of our 44 ​ Table of Contents ​ creditworthiness could be adversely affected; and the market price of our common stock could decline.
If we identify any material weaknesses in our internal control over financial reporting or are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors, counterparties and customers may lose confidence in the accuracy and completeness of our financial statements and reports; our liquidity, access to capital markets and perceptions of our creditworthiness could be adversely affected; and the market price of our common stock could decline.
These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil money penalties, to fine or remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance and place us into receivership or conservatorship.
These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil money penalties, to fine or 50 ​ Table of Contents ​ remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance and place us into receivership or conservatorship.
As of December 31, 2022 we had no other real estate owned (“OREO”) on our financial statements, but in the ordinary course of our business we expect to hold some level of OREO from time to time. OREO typically consists of properties that we obtain through foreclosure or through an in-substance foreclosure in satisfaction of an outstanding loan.
As of December 31, 2023 we had no other real estate owned (“OREO”) on our financial statements, but in the ordinary course of our business we expect to hold some level of OREO from time to time. OREO typically consists of properties that we obtain through foreclosure or through an in-substance foreclosure in satisfaction of an outstanding loan.
As a result, these non-bank competitors have certain advantages over us in accessing funding and in providing various services. We anticipate intense competition will continue for the coming year due to the recent consolidation of many financial institutions and more changes in legislature, regulation and technology.
As a result, these non-bank competitors have certain advantages over us in accessing funding and in providing various services. We anticipate intense competition will continue for the coming year due to the recent consolidation of many financial institutions and more changes in legislation, regulation and technology.
We are required to comply with the SEC’s rules implementing Section 302, Section 404, and Section 906 of the Sarbanes-Oxley Act, which will require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of controls over financial reporting.
We are required to comply with the SEC’s rules implementing Section 302, Section 404, and Section 906 of the Sarbanes-Oxley Act, which will require management to certify financial and other information in our quarterly and annual reports and provide an annual management report as to the effectiveness of controls over financial reporting.
In any liquidation, dissolution or winding up of the Company, our common stock would rank below all claims of the holders of outstanding debt issued by the Company. As of December 31, 2022, we had $40.0 million principal amount of subordinated notes outstanding due May 15, 2032.
In any liquidation, dissolution or winding up of the Company, our common stock would rank below all claims of the holders of outstanding debt issued by the Company. As of December 31, 2023, we had $40.0 million principal amount of subordinated notes outstanding due May 15, 2032.
Furthermore, with certain limited exceptions, federal regulations prohibit a person or company or a group of persons deemed to be “acting in concert” from, directly or indirectly, acquiring more than 10% (5% if the acquirer is a bank holding company) of any class of our voting stock or obtaining the ability to control in any manner the election of a majority of our directors or otherwise direct the management or policies of our company without prior notice or application to and the approval of the Federal Reserve.
Furthermore, with certain limited exceptions, federal regulations prohibit a person or company or a group of persons deemed to be “acting in concert” from, directly or indirectly, acquiring more than 10% (5% if the acquirer is a bank holding 54 ​ Table of Contents ​ company) of any class of our voting stock or obtaining the ability to control in any manner the election of a majority of our directors or otherwise direct the management or policies of our company without prior notice or application to and the approval of the Federal Reserve.
These businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities, frequently have smaller market shares than their competition, may be more vulnerable to economic downturns, often need substantial additional capital to expand or compete and may experience substantial volatility in operating results, any of which may impair a borrower’s ability to repay a loan.
These businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities, frequently have smaller market shares than their competition, may be more vulnerable to economic downturns, often need substantial additional capital to expand or compete and may experience 33 ​ Table of Contents ​ substantial volatility in operating results, any of which may impair a borrower’s ability to repay a loan.
We cannot determine all potential events, facts and circumstances that could result in loss and our investigation or mitigation efforts may be insufficient to protect against any such loss. In addition, we must generally satisfy a number of meaningful conditions prior to completing any acquisition, including, in certain cases, federal and state bank regulatory approval.
We cannot determine all potential events, facts and circumstances that could result in loss and our investigation or mitigation efforts may be insufficient to protect against any such loss. 37 ​ Table of Contents ​ In addition, we must generally satisfy a number of meaningful conditions prior to completing any acquisition, including, in certain cases, federal and state bank regulatory approval.
Regulations adopted by these agencies, which are generally intended to provide protection for depositors and customers rather than for the benefit of shareholders, govern a comprehensive range of matters relating to ownership and control of our shares, our acquisition of other companies and businesses, permissible activities for us to engage in, maintenance of adequate capital levels, and other aspects of our operations.
Regulations adopted by these agencies, which are generally intended to provide protection for depositors and customers rather than for the benefit of shareholders, govern a comprehensive range of matters relating to ownership and control of our shares, our acquisition of 49 ​ Table of Contents ​ other companies and businesses, permissible activities for us to engage in, maintenance of adequate capital levels, and other aspects of our operations.
We have significant deferred tax assets and cannot assure that it will be fully realized. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between the carrying amounts and tax basis of assets and liabilities computed using enacted tax rates.
We have significant deferred tax assets and cannot assure that they will be fully realized. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between the carrying amounts and tax basis of assets and liabilities computed using enacted tax rates.
Banking regulators are giving commercial real estate lending greater scrutiny, and may require banks with higher levels of commercial real estate loans to implement improved underwriting, internal controls, risk management policies and portfolio stress testing, as well as possibly higher levels of allowances for credit losses on loans and capital levels as 31 ​ Table of Contents ​ a result of commercial real estate lending growth and exposures.
Banking regulators are giving commercial real estate lending greater scrutiny, and may require banks with higher levels of commercial real estate loans to implement improved underwriting, internal controls, risk management policies and portfolio stress testing, as well as possibly higher levels of allowances for credit losses on loans and capital levels as a result of commercial real estate lending growth and exposures.
The occurrence of any failures or 39 ​ Table of Contents ​ interruptions of our communications, information and technology systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our business, financial condition or results of operations.
The occurrence of any failures or interruptions of our communications, information and technology systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our business, financial condition or results of operations.
Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. The costs of defending, and any adverse outcome from, any such 46 ​ Table of Contents ​ challenge could damage our reputation or could have a material adverse effect on our business, financial condition and results of operations.
Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. The costs of defending, and any adverse outcome from, any such challenge could damage our reputation or could have a material adverse effect on our business, financial condition and results of operations.
Maintaining and attracting new deposits is integral to our business and a major decline in deposits or failure to attract deposits in the 30 ​ Table of Contents ​ future, including any such decline or failure related to an increase in interest rates paid by our competitors on interest-bearing accounts, could have an adverse effect on our business, financial conditions and results of operations.
Maintaining and attracting new deposits is integral to our business and a major decline in deposits or failure to attract deposits in the future, including any such decline or failure related to an increase in interest rates paid by our competitors on interest-bearing accounts, could have an adverse effect on our business, financial conditions and results of operations.
Generally, in determining “fair value,” an orderly disposition of the property is assumed, unless a different disposition strategy is expected. Significant judgment is required in estimating the fair value 35 ​ Table of Contents ​ of OREO property, and the period of time within which such estimates can be considered current is significantly shortened during periods of market volatility.
Generally, in determining “fair value,” an orderly disposition of the property is assumed, unless a different disposition strategy is expected. Significant judgment is required in estimating the fair value of OREO property, and the period of time within which such estimates can be considered current is significantly shortened during periods of market volatility.
Ongoing legislative or regulatory uncertainties and changes regarding climate risk management and practices may result in higher regulatory, compliance, credit, and reputational risks and costs. 43 ​ Table of Contents ​ With the increased importance and focus on climate change, we are making efforts to enhance our governance of climate change-related risks and integrate climate considerations into our risk governance framework.
Ongoing legislative or regulatory uncertainties and changes regarding climate risk management and practices may result in higher regulatory, compliance, credit, and reputational risks and costs. With the increased importance and focus on climate change, we are making efforts to enhance our governance of climate change-related risks and integrate climate considerations into our risk governance framework.
If required payments on our debt obligations are not made or are deferred, or dividends on any preferred stock we may issue are not paid, we will be prohibited from paying dividends on our common stock. 48 ​ Table of Contents ​ The Capital Rules also introduced a new capital conservation buffer on top of the minimum risk-based capital ratios.
If required payments on our debt obligations are not made or are deferred, or dividends on any preferred stock we may issue are not paid, we will be prohibited from paying dividends on our common stock. The Capital Rules also introduced a new capital conservation buffer on top of the minimum risk-based capital ratios.
In such event, holders of our common stock would not be entitled to receive any payment or other distribution of assets upon the liquidation, dissolution or winding up of the Company until after all of the Company’s obligations to the debt holders were satisfied and holders of the subordinated debt had received 49 ​ Table of Contents ​ any payment or distribution due to them.
In such event, holders of our common stock would not be entitled to receive any payment or other distribution of assets upon the liquidation, dissolution or winding up of the Company until after all of the Company’s obligations to the debt holders were satisfied and holders of the subordinated debt had received any payment or distribution due to them.
To the extent that we are able to open additional offices, we are likely to experience the effects of higher operating expenses relative to operating income from the new operations for a period of time which could have a material adverse effect on our business, financial condition and results of operations.
To the extent that we are able to open additional 38 ​ Table of Contents ​ offices, we are likely to experience the effects of higher operating expenses relative to operating income from the new operations for a period of time which could have a material adverse effect on our business, financial condition and results of operations.
These types of third party relationships are subject to increasingly demanding regulatory requirements where we must maintain and continue to enhance our due diligence and ongoing monitoring and control over our third party vendors. We may be required to renegotiate our agreements to meet these enhanced requirements, which could increase our costs.
These types of third party relationships are subject to increasingly demanding regulatory requirements where we must maintain and 44 ​ Table of Contents ​ continue to enhance our due diligence and ongoing monitoring and control over our third party vendors. We may be required to renegotiate our agreements to meet these enhanced requirements, which could increase our costs.
An increase in interest rates that adversely affects the ability of borrowers to pay the principal or interest on loans may lead to an increase in nonperforming assets and a reduction of income recognized, which could have a material adverse 29 ​ Table of Contents ​ effect on our results of operations and cash flows.
An increase in interest rates that adversely affects the ability of borrowers to pay the principal or interest on loans may lead to an increase in nonperforming assets and a reduction of income recognized, which could have a material adverse effect on our results of operations and cash flows.
If we experience increases in nonperforming loans and nonperforming assets, our net interest income may be negatively impacted and our loan administration costs could increase, each of which could have a material adverse effect on our business, financial condition and results of operations.
If we experience increases in nonperforming loans and nonperforming assets, our net interest income may be negatively 36 ​ Table of Contents ​ impacted and our loan administration costs could increase, each of which could have a material adverse effect on our business, financial condition and results of operations.
As a result, construction loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property, rather than the ability of the borrower or guarantor to repay principal and interest.
As a result, construction loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property, rather than the ability of the borrower or guarantor to 32 ​ Table of Contents ​ repay principal and interest.
The value of retained unguaranteed loans and servicing rights are determined based on market derived factors such as prepayment rates, 33 ​ Table of Contents ​ current market conditions and recent loan sales. Deferred fees and costs are determined using internal analysis of the cost to originate loans.
The value of retained unguaranteed loans and servicing rights are determined based on market derived factors such as prepayment rates, current market conditions and recent loan sales. Deferred fees and costs are determined using internal analysis of the cost to originate loans.
If we are unable to attract and retain banking customers and expand our loan and 41 ​ Table of Contents ​ deposit growth, then we may be unable to continue to grow our business which could have a material adverse effect on our financial condition and results of operations.
If we are unable to attract and retain banking customers and expand our loan and deposit growth, then we may be unable to continue to grow our business which could have a material adverse effect on our financial condition and results of operations.
Our access to funding sources in amounts adequate to finance or capitalize our activities on terms that are acceptable to us could be impaired by factors that affect us directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry.
Our access to funding sources in amounts adequate to finance or capitalize our activities on terms that are acceptable to us could be 41 ​ Table of Contents ​ impaired by factors that affect us directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry.
Also, we have entered into agreements with our officers and directors in which we similarly agreed to provide indemnification that is otherwise discretionary. Such indemnification may be available for liabilities arising in connection with future offerings. Future equity issuances could result in dilution, which could cause our common stock price to decline.
Also, we have entered into agreements with our officers and directors in which we similarly agreed to provide indemnification that is otherwise discretionary. Such indemnification may be available for liabilities arising in connection with future offerings. 53 ​ Table of Contents ​ Future equity issuances could result in dilution, which could cause our common stock price to decline.
An economic recession or a downturn in various markets could have one or more of the following adverse effects on our business: ● a decrease in the demand for our loan or other products and services offered by us; ● a decrease in our deposit balances due to an overall reduction in customer balances; ● a decrease in the value of our investment securities and loans; ● an increase in the level of nonperforming and classified loans; ● an increase in the provision for credit losses and loan and lease charge-offs; ● a decrease in net interest income derived from our lending and deposit gathering activities; ● a decrease in the Company’s stock price; ● an increase in our operating expenses associated with attending to the effects of the above-listed circumstances; and/or ● a decrease in real estate values or a general decrease in capital available to finance real estate transactions, which could have a negative impact on borrowers’ ability to pay off their loans as they mature. ​ The COVID-19 pandemic has in the past negatively affected, and could in the future negatively affect, the global and U.S. economies could harm our business and results of operations, and such effects will depend on future developments, which are highly uncertain and are difficult to predict.
An economic recession or a downturn in various markets could have one or more of the following adverse effects on our business: ● a decrease in the demand for our loan or other products and services offered by us; ● a decrease in our deposit balances due to an overall reduction in customer balances; ● a decrease in the value of our investment securities and loans; ● an increase in the level of nonperforming and classified loans; ● an increase in the provision for credit losses and loan charge-offs; ● a decrease in net interest income derived from our lending and deposit gathering activities; ● a decrease in the Company’s stock price; ● an increase in our operating expenses associated with attending to the effects of the above-listed circumstances; and/or ● a decrease in real estate values or a general decrease in capital available to finance real estate transactions, which could have a negative impact on borrowers’ ability to pay off their loans as they mature. ​ 30 ​ Table of Contents ​ The COVID-19 pandemic has in the past negatively affected, and future pandemics, epidemics, disease outbreaks and other public health crises could negatively affect the global and U.S. economies and could harm our business and results of operations, and such effects will depend on future developments, which are highly uncertain and are difficult to predict.
In connection with our growth strategy, we have issued, and may issue in the future, shares of our common 36 ​ Table of Contents ​ stock to acquire additional banks or bank holding companies that may complement our organizational structure.
In connection with our growth strategy, we have issued, and may issue in the future, shares of our common stock to acquire additional banks or bank holding companies that may complement our organizational structure.
Any such failure in our analytical models could result in losses that could have a material adverse effect on our business, financial condition and results of operations. Changes in accounting standards could materially impact our financial statements.
Any such failure in our analytical models could result in losses that could have a material adverse effect on our business, financial condition and results of operations. 48 ​ Table of Contents ​ Changes in accounting standards could materially impact our financial statements.
At December 31, 2022, $2.5 million, or 6.1%, consisted of the guaranteed portion of SBA loans which we intend to sell in 2023. The non-guaranteed portion of SBA loans have a higher degree of credit risk and risk of loss as compared to the guaranteed portion of such loans and make up a substantial majority of our remaining SBA loans.
At December 31, 2023, $2.2 million, or 6.2%, consisted of the guaranteed portion of SBA loans which we intend to sell in 2024. The non-guaranteed portion of SBA loans have a higher degree of credit risk and risk of loss as compared to the guaranteed portion of such loans and make up a substantial majority of our remaining SBA loans.
Although our customers' business and financial interests may extend well beyond these market areas, adverse economic conditions that affect these market areas could reduce our growth rate, affect the ability of our customers to repay their loans to us and generally affect our business, financial condition and results of operations.
Although our subsidiary’s, Bay View Funding, and our customers' business and financial interests may extend well beyond these market areas, adverse economic conditions that affect these market areas could reduce our growth rate, affect the ability of our customers to repay their loans to us and generally affect our business, financial condition and results of operations.
In addition, we evaluate all loans identified as impaired loans and allocate an allowance based upon our estimation of the potential loss associated with those problem loans.
In addition, we evaluate all loans identified as individually evaluated loans and allocate an allowance based upon our estimation of the potential loss associated with those problem loans.
Significant errors in assumptions used to compute gains on sale of loans or servicing asset valuations could result in material revenue misstatements, which may have a material adverse effect on our business, financial condition and results of operations. We originated $21.2 million of SBA loans for the year ended December 31, 2022.
Significant errors in assumptions used to compute gains on sale of loans or servicing asset valuations could result in material revenue misstatements, which may have a material adverse effect on our business, financial condition and results of operations. We originated $19.4 million of SBA loans for the year ended December 31, 2023.
Generally, we do not maintain reserves or loss allowances for such potential claims and any such claims could materially adversely affect our business, financial condition and results of operations. In addition, the Company’s SBA loans include loans under the U.S. Department of Agriculture guaranteed lending programs.
Generally, we do not maintain reserves or loss allowances for such potential claims and any such claims could materially adversely affect our business, financial condition and results of operations. In addition, the Company’s SBA loans include loans under the U.S.
We expect that gains on the sale of U.S. government guaranteed loans will contribute to noninterest income. The gains on such sales recognized for the year ended December 31, 2022 was $491,000.
We expect that gains on the sale of U.S. government guaranteed loans will contribute to noninterest income. The gains on such sales recognized for the year ended December 31, 2023 was $482,000.
The Federal Reserve and the DFPI periodically examine our business, including our compliance with laws and regulations.
The Federal Reserve and the DFPI annually examine our business, including our compliance with laws and regulations.
Real estate lending (including commercial, land development and construction, home equity, multifamily, and residential mortgage loans) is a large portion of our loan portfolio. At December 31, 2022, approximately $2.748 billion, or 83% of our loan portfolio, was comprised of loans with real estate as a primary or secondary component of collateral.
Real estate lending (including commercial, land development and construction, home equity, multifamily, and residential mortgage loans) is a large portion of our loan portfolio. At December 31, 2023, approximately $2.87 billion, or 85% of our loan portfolio, was comprised of loans with real estate as a primary or secondary component of collateral.
Included in CRE loans were owner occupied loans of $614.7 million, or 19% of total loans. The real estate securing our loan portfolio is concentrated in California. The market value of real estate can fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located.
Included in CRE loans were owner occupied loans of $583.3 million, or 17% of total loans. The real estate securing our loan portfolio is concentrated in California. The market value of real estate can fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located.
We sold $7.2 million of the guaranteed portion of our SBA loans for the year ended December 31, 2022. We generally retain the non-guaranteed portions of the SBA loans that we originate.
We sold $7.5 million of the guaranteed portion of our SBA loans for the year ended December 31, 2023. We generally retain the non-guaranteed portions of the SBA loans that we originate.
We may not be able to effectively implement new, technology-driven products and services or be successful in marketing these products and services to our customers.
We may not be able to effectively 46 ​ Table of Contents ​ implement new, technology-driven products and services or be successful in marketing these products and services to our customers.
We may not detect all misrepresented information in 40 ​ Table of Contents ​ our originations or from service providers we engage to assist in the approval process.
We may not detect all misrepresented information in our originations or from service providers we engage to assist in the approval process.
Many of our loans are to commercial borrowers, which may have a higher degree of risk than other types of borrowers. At December 31, 2022, commercial loans totaled $533.9 million or 16% of our loan portfolio (including SBA loans, PPP loans, asset-based lending, and factored receivables). Commercial loans represented 22% of our total loan portfolio at December 31, 2021.
Many of our loans are to commercial borrowers, which may have a higher degree of risk than other types of borrowers. At December 31, 2023, commercial loans totaled $463.8 million or 14% of our loan portfolio (including SBA loans, PPP loans, asset-based lending, and factored receivables). Commercial loans represented 16% of our total loan portfolio at December 31, 2022.
The processes we use to estimate probable incurred loan losses and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on our financial condition and results of operations, depends upon the use of analytical models.
The processes we use to estimate the allowance for credit losses on loans and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on our financial condition and results of operations, depends upon the use of analytical models.
The extent to which the COVID-19 pandemic could adversely affect our business, financial condition and results of operations, as well as our liquidity and capital profile, and provisions for credit 28 ​ Table of Contents ​ losses, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic, any resurgence of COVID-19 cases and the emergence of new variants, the widespread availability, use and effectiveness of vaccines, actions taken by governmental authorities and other third parties in response to the pandemic and the direct and indirect impact of the pandemic on us, our clients and customers, our service providers and other market participants.
The extent to which the COVID-19 pandemic or any future pandemic, epidemic, disease outbreak or other public health crisis could adversely affect our business, financial condition and results of operations, as well as our liquidity and capital profile, and provisions for credit losses, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the widespread availability, use and effectiveness of vaccines, actions taken by governmental authorities and other third parties in response to the pandemic and the direct and indirect impact of the pandemic on us, our clients and customers, our service providers and other market participants.
Risks Related to Our Growth Strategy There are risks related to acquisitions. We plan to continue to grow our business organically. However, from time to time, we may consider opportunistic strategic acquisitions that we believe support our long-term business strategy.
Risks Related to Our Growth Strategy We face risks related to any future acquisitions we may make. We plan to continue to grow our business organically. However, from time to time, we may consider opportunistic strategic acquisitions that we believe support our long-term business strategy.
The COVID-19 pandemic has in the past negatively affected, and could in the future negatively affect, the global and U.S. economies, including by increasing unemployment levels, disrupting supply chains and businesses in many industries, lowering equity market valuations, decreasing liquidity in fixed income markets, and creating significant volatility and disruption in financial markets.
Pandemics, epidemics or disease outbreaks, such as the COVID-19 pandemic, in the U.S. or globally have in the past negatively affected, and could in the future negatively affect, the global and U.S. economies, including by increasing unemployment levels, disrupting supply chains and businesses in many industries, lowering equity market valuations, decreasing liquidity in fixed income markets, and creating significant volatility and disruption in financial markets.
Our SBA lending program is dependent upon the U.S. federal government. As an approved participant in the SBA Preferred Lender’s Program (an “SBA Preferred Lender”), we enable our clients to obtain SBA loans without being subject to the potentially lengthy SBA approval process necessary for lenders that are not SBA Preferred Lenders.
As an approved participant in the SBA Preferred Lender’s Program (an “SBA Preferred Lender”), we enable our clients to obtain SBA loans without being subject to the potentially lengthy SBA approval process necessary for lenders that are not SBA Preferred Lenders.
We face significant competition from numerous other financial services institutions, many of which will have greater financial resources than we do, when considering acquisition opportunities. Accordingly, attractive acquisition opportunities may not be available to us. We may not be successful in identifying or completing any future acquisitions.
We face significant competition from numerous other financial services institutions, many of which will have greater financial resources than we do, when considering acquisition opportunities. Accordingly, attractive acquisition opportunities may not be available to us.
Our SBA lending program is dependent upon the U.S. federal government, and we face specific risks associated with originating SBA loans. At December 31, 2022, SBA loans totaled $40.2 million, which are included in the commercial loan portfolio, and SBA loans held-for-sale totaled $2.4 million. In addition, the Company had $1.2 million of SBA PPP loans at December 31, 2022.
Our SBA lending program is dependent upon the U.S. federal government, and we face specific risks associated with originating SBA loans. At December 31, 2023, SBA loans totaled $34.4 million, which are included in the commercial loan portfolio. SBA loans held-for-sale totaled $2.2 million at December 31, 2023.
Moreover, certain of these regulations contain significant punitive sanctions for violations, including monetary penalties and limitations on a bank’s ability to implement components of its business plan, such as expansion through mergers and acquisitions or the opening of new branch offices.
Increased regulation could increase our cost of compliance and adversely affect profitability. Moreover, certain of these regulations contain significant punitive sanctions for violations, including monetary penalties and limitations on a bank’s ability to implement components of its business plan, such as expansion through mergers and acquisitions or the opening of new branch offices.
The laws, regulations and standard operating procedures that are applicable to SBA loan products may change in the future. We cannot predict the effects of these changes on our business and profitability.
Department of Agriculture guaranteed lending programs. 34 ​ Table of Contents ​ The laws, regulations and standard operating procedures that are applicable to SBA loan products may change in the future. We cannot predict the effects of these changes on our business and profitability.
Interruptions, cyber-attacks, fraudulent activity or other security breaches could have a material adverse effect on our business. In the normal course of business, we directly or through third parties collect, store, share, process and retain sensitive and confidential information regarding our customers.
We may also be subject to potentially adverse regulatory consequences. 43 ​ Table of Contents ​ Interruptions, cyber-attacks, fraudulent activity or other security breaches could have a material adverse effect on our business. In the normal course of business, we directly or through third parties collect, store, share, process and retain sensitive and confidential information regarding our customers.
There can be no assurance that our future evaluations of goodwill will not result in findings of impairment and related write-downs, which may have a material adverse effect on our financial condition and results of operations.
Any such adjustments are reflected in our results of operations in the periods in which they become known. There can be no assurance that our future evaluations of goodwill will not result in findings of impairment and related write-downs, which may have a material adverse effect on our financial condition and results of operations.
Our risk management framework may not be effective in mitigating risks and/or losses to us. Our risk management framework is comprised of various processes, systems and strategies, and is designed to manage the types of risk to which we are subject, including, among others, credit, market, liquidity, interest rate and compliance.
Our risk management framework is comprised of various processes, systems and strategies, and is designed to manage the types of risk to which we are subject, including, among others, credit, market, liquidity, interest rate and compliance. Our risk management framework may not be effective under all circumstances and may not adequately mitigate any risk or loss to us.
Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on our business, financial condition and results of operations. Risks Related to Our Capital We may be subject to more stringent capital requirements in the future.
Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on our business, financial condition and results of operations.
If customers move money out of bank deposits and into other investments, we could lose a relatively low cost source of funds, thereby increasing our funding costs and reducing net interest income and net income. We could have to raise interest rates to retain deposits, thereby increasing our funding costs and reducing net interest income and net income.
If customers move money out of bank deposits and into other investments, we could face a material decrease in the volume of our deposits and lose a relatively low cost source of funds, thereby increasing our funding costs and reducing net interest income and net income.
External factors, such as regulatory compliance obligations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service.
External factors, such as regulatory compliance obligations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of our system of internal controls.
In addition, our customers and loan collateral may be severely impacted by such events, resulting in losses. Operations in our market could be disrupted by both the evacuation of large portions of the population as well as damage to and/or lack of access to our banking and operation facilities.
Operations in our market could be disrupted by both the evacuation of large portions of the population as well as damage to and/or lack of access to our banking and operation facilities.
Because of changing economic and market conditions affecting interest rates, we may recognize realized and/or unrealized losses in future periods, which could have a material adverse effect on our business, financial condition and results of operations. Liquidity risks could affect operations and jeopardize our business, financial condition, and results of operations. Liquidity is essential to our business.
Because of changing economic and market conditions affecting interest rates, we may recognize realized and/or unrealized losses in future periods, which could have a material adverse effect on our business, financial condition and results of operations. Adverse changes to our credit ratings could limit our access to funding and increase our borrowing costs.
Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical 38 ​ Table of Contents ​ practices, employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies, and questionable or fraudulent activities of our customers.
We are a community bank, and our reputation is one of the most valuable components of our business. Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical practices, employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies, and questionable or fraudulent activities of our customers.
At December 31, 2022, land and construction loans, (including land acquisition and development loans) totaled $163.6 million or 5% of our portfolio. Of these loans, 9% were comprised of owner occupied and 91% non-owner occupied construction and land loans.
At December 31, 2023, land and construction loans, (including land acquisition and development loans) totaled $140.5 million or 4% of our portfolio. Of these loans, 13% were comprised of owner occupied and 87% non-owner occupied construction and land loans.
As of December 31, 2022, our nonperforming loans (which consist of nonaccrual loans, loans past due 90 days or more and still accruing interest and loans modified under troubled debt restructurings) totaled $2.4 million, or 0.07% of our loan portfolio, and our nonperforming assets (which include nonperforming loans plus other real estate owned) totaled $2.4 million, or 0.05% of total assets.
As of December 31, 2023, our nonperforming loans (which consist of nonaccrual loans, loans past due 90 days or more and still accruing interest) totaled $7.7 million, or 0.23% of our loan portfolio, and our nonperforming assets (which include nonperforming loans plus other real estate owned) also totaled $7.7 million, or 0.15% of total assets.
Federal and state regulatory agencies also frequently adopt changes to their regulations or change the manner in which existing regulations are applied. Presently, in addition to refining existing regulations implemented after the 2008-2010 financial crisis, the banking regulators are also focusing their attention on certain policy areas, such as climate risk, digital currencies, and technological innovation.
Presently, in addition to refining existing regulations implemented after the 2008-2010 financial crisis, the banking regulators are also focusing their attention on certain policy areas, such as climate risk, capital requirements, digital currencies, and technological innovation and artificial intelligence.
Consequently, as of December 31, 2022, we held $40.2 million of SBA loans (including loans held-for-sale) on our balance sheet, $24.0 million of which consisted of the non-guaranteed portion of SBA loans, and $16.1 million of which consisted of the guaranteed portion of SBA loans.
Consequently, as of December 31, 2023, we held $36.6 million of SBA loans (including loans held-for-sale) on our balance sheet, $21.5 million of which consisted of the non-guaranteed portion of SBA loans, and $15.1 million of which consisted of the guaranteed portion of SBA loans.
Fluctuations in interest rates may reduce net interest income and otherwise negatively affect our business, financial condition and results of operations. Shifts in short-term interest rates may reduce net interest income, which is the principal component of our earnings.
These outcomes, alone or in combination with other factors, may have a material adverse effect on our results of operations. Fluctuations in interest rates may reduce net interest income and otherwise negatively affect our business, financial condition and results of operations. Shifts in short-term interest rates may reduce net interest income, which is the principal component of our earnings.
At December 31, 2022, we had a net deferred tax asset of $32.2 million.
At December 31, 2023, we had a net deferred tax asset of $29.8 million.
Compliance with current or future privacy, data protection and information security laws (including those regarding security breach notification) affecting customer or employee data to which we are subject could result in higher compliance and technology costs and could restrict our ability to provide certain products and services, which could have a material adverse effect on our business, financial condition and results of operations.
Moreover, legislators and regulators in the United States are increasingly adopting or revising privacy, information security and data protection laws that potentially could have a significant impact on our current and planned privacy, data protection and information security-related practices, our collection, use, sharing, retention and safeguarding of consumer or employee information. 51 ​ Table of Contents ​ Compliance with current or future privacy, data protection and information security laws (including those regarding security breach notification) affecting customer or employee data to which we are subject could result in higher compliance and technology costs and could restrict our ability to provide certain products and services, which could have a material adverse effect on our business, financial condition and results of operations.

… 91 more changes not shown on this page.

Item 2. Properties

Properties — owned and leased real estate

27 edited+1 added−2 removed6 unchanged
Biggest changeIn December of 2021, the Company entered into a new lease agreement for approximately 4,099 square feet on the sixteenth floor in a multi-tenant office building located at 1111 Broadway in Oakland, CA. The current monthly rent payment is $23,569, subject to annual increases of 3% until the lease expires on June 30, 2029.
Biggest changeThe Company has reserved the right to extend the term of the lease for one additional period of five years. In December of 2021, the Company entered into a new lease agreement for approximately 4,099 square feet on the sixteenth floor in a multi-tenant office building located at 1111 Broadway in Oakland, California.
In January of 2023, the Company extended its lease for approximately 5,213 square feet on the first floor in a two-story multi-tenant office building located at 419 S. San Antonio Road in Los Altos, California. The current monthly rent payment is $31,968, subject to annual increases of 3% until the lease expires on April 30, 2030.
In January of 2023, the Company extended its lease for approximately 5,213 square feet on the first floor in a two-story multi-tenant office building located at 419 S. San Antonio Road in Los Altos, California. The current monthly rent payment is $32,927, subject to annual increases of 3% until the lease expires on April 30, 2030.
In May of 2019, the Company amended its lease for approximately 4,096 square feet in a one-story stand-alone office building located at 300 Main Street in Pleasanton, California. The current monthly rent payment is $22,374, subject to 3% annual increases until the lease expires on April 30, 2026.
In May of 2019, the Company amended its lease for approximately 4,096 square feet in a one-story stand-alone office building located at 300 Main Street in Pleasanton, California. The current monthly rent payment is $23,045, subject to 3% annual increases, until the lease expires on April 30, 2026.
The Company has reserved the right to extend the term of the lease for one additional period of five years. In May of 2021, the Company extended its lease for approximately 2,505 square feet on the first floor in a three-story multi-tenant multi-use building located at 7598 Monterey Street in Gilroy, California.
The Company has reserved the right to extend the term of the lease for one additional period of five years. In September of 2023, the Company extended its lease for approximately 2,505 square feet on the first floor in a three-story multi-tenant multi-use building located at 7598 Monterey Street in Gilroy, California.
In May of 2021, the Company extended its lease for approximately 4,716 square feet in a one-story multi-tenant office building located at 18625 Sutter Boulevard in Morgan Hill, California. The current monthly rent payment is $6,013, subject to annual increases of 2% until the lease expires on October 31, 2026.
In May of 2021, the Company extended its lease for approximately 4,716 square feet in a one-story multi-tenant office building located at 18625 Sutter Boulevard in Morgan Hill, California. The current monthly rent payment is $6,133, 58 ​ Table of Contents ​ subject to annual increases of 2%, until the lease expires on October 31, 2026.
The current monthly rent payment is $17,704, subject to annual increases of 3% until the lease expires on December 31, 2027. The Company has reserved the right to extend the lease for one additional period of five years.
The current monthly rent payment is $21,533, subject to annual increases of 3%, until the lease expires on December 31, 2027. The Company has reserved the right to extend the lease for one additional period of five years.
The current monthly rent payment is $29,733, subject to annual increases of 3% until the lease expires December 31, 2027. The Company has reserved the right to extend the lease for one additional period of five years.
The current monthly rent payment is $30,646, subject to annual increases of 3%, until the lease expires December 31, 2027. The Company has reserved the right to extend the lease for one additional period of five years.
The current monthly rent payment is $45,475, subject to annual increases of 3% until the lease expires on March 31, 2026. The Company has reserved the right to extend the term of the lease for one additional period or five years.
The current monthly rent payment is $46,839, subject to annual increases of 3%, until the lease expires on March 31, 2026. The Company has reserved the right to extend the term of the lease for one additional period of five years.
The Company has reserved the right to extend the term of the lease for one additional period of three years. 51 ​ Table of Contents ​ In January of 2021, the Company amended and extended its lease for approximately 6,233 square feet on the twenty third floor in a multi-tenant office building located at 120 Kearny Street in San Francisco, California.
The Company has reserved the right to extend the lease for two additional period of five years. In January of 2021, the Company amended and extended its lease for approximately 6,233 square feet on the twenty third floor in a multi-tenant office building located at 120 Kearny Street in San Francisco, California.
The current monthly rent payment is $6,104 until the lease expires on September 30, 2023. The Company has reserved the right to extend the term of the lease for one additional period of two years.
The current monthly rent payment is $6,104, subject to annual increases of 3%, until the lease expires on September 30, 2025. The Company has reserved the right to extend the term of the lease for one additional period of two years.
Main Offices The main office of HBC, the San Jose branch office of HBC and the Bay View Funding administrative office are located at 224 Airport Parkway in San Jose, consisting of approximately 54,910 square feet in a six-story Class-A type office building, which are subject to a direct lease dated June 27, 2019, which expires on July 31, 2030.
Bay View Funding’s administrative offices are located at 224 Airport Parkway, San Jose, California 95110. 57 ​ Table of Contents ​ Main Offices The main office of HBC, the San Jose branch office of HBC and the Bay View Funding administrative office are located at 224 Airport Parkway in San Jose, consisting of approximately 56,235 square feet in a six-story Class-A type office building, which are subject to a direct lease dated June 27, 2019, which expires on July 31, 2030.
In October of 2019, as part of the acquisition of Presidio Bank, the Company assumed a lease for approximately 4,154 square feet on the first floor in a multi-tenant office building located at 325 Lytton Avenue in Palo Alto, California.
The Company intends to renew the lease for one additional period of five years. In October of 2019, as part of the acquisition of Presidio Bank, the Company assumed a lease for approximately 4,154 square feet on the first floor in a multi-tenant office building located at 325 Lytton Avenue in Palo Alto, California.
The current monthly rent payment is $5,213, subject to 3% annual increases until the lease expires on June 30, 2024. In August of 2019, the Company extended its lease for approximately 3,772 square feet on the first and second floors in a two-story multi-tenant multi-use building located at 1987 First Street in Livermore, California.
In August of 2019, the Company extended its lease for approximately 3,772 square feet on the first and second floors in a two-story multi-tenant multi-use building located at 1987 First Street in Livermore, California. The current monthly rent payment is $9,045, until the lease expires on September 30, 2024.
California Boulevard in Walnut Creek, California 94596, at 1987 First Street in Livermore, California 94550, at 18625 Sutter Boulevard in Morgan Hill, California 95037, at 7598 Monterey Street in Gilroy, California 95020, at 351 Tres Pinos Road in Hollister, California 95023, at 419 S. San Antonio Road in Los Altos, California 94022, at 333 W.
California Boulevard in Walnut Creek, California 94596, at 1987 First Street in Livermore, California 94550, at 18625 Sutter Boulevard in Morgan Hill, California 95037, at 7598 Monterey Street in Gilroy, California 95020, at 351 Tres Pinos Road in Hollister, California 95023, at 419 S.
The current monthly rent payment is $7,563, subject to annual increases of 3% until the lease expires on November 30, 2023. The Company has reserved the right to extend the term of the lease for one additional period of five years.
The current monthly rent payment is $24,276, subject to annual increases of 3%, until the lease expires on June 30, 2029. The Company has reserved the right to extend the term of the lease for one additional period of five years.
The current 50 ​ Table of Contents ​ monthly rent payment is $216,006, subject to 3% annual increases. The Company has reserved the right to extend the term of the lease for one additional period of five years.
The current monthly rent payment is $227,985, subject to 3% annual increases. The Company has reserved the right to extend the term of the lease for one additional period of five years.
The current monthly rent payment is $40,966, subject to annual increases of 3% until the lease expires on January 31, 2025. The Company has reserved the right to extend the lease for one additional period of five years.
The current monthly rent payment is $42,195, until the lease expires on January 31, 2025. The Company has reserved the right to extend the lease for one additional period of five years.
El Camino Real in San Mateo, California, 94402, at 2400 Broadway in Redwood City, California 94063, at 120 Kearny Street in San Francisco, California 94108, at 999 5 th Avenue in San Rafael, California 94901 and at 1111 Broadway in Oakland, California 94607. Bay View Funding’s administrative offices are located at 224 Airport Parkway, San Jose, California 95110.
El Camino Real in San Mateo, California, 94402, at 2400 Broadway in Redwood City, California 94063, at 120 Kearny Street in San Francisco, California 94108, at 999 5 th Avenue in San Rafael, California 94901 and at 1111 Broadway in Oakland, California 94607.
The current monthly rent payment is $9,045, until the lease expires on September 30, 2024. The Company has reserved the right to extend the term of the lease for one additional period of five years.
The current monthly rent payment is $5,369, until the lease expires on June 30, 2024. The Company intends to renew the lease for one additional period of five years.
In January 2020, The Company amended the lease expiration date to October 31, 2030 and executed a new lease for an additional space on the tenth floor for approximately 5,023 square feet.
In January 2020, The Company amended the lease expiration date to October 31, 2030, and executed a new lease for additional space on the tenth floor for approximately 5,023 square feet. The current monthly rent payment for the combined space of approximately 8,086 square feet is $61,722, subject to annual increases of 3%, until the lease expires October 31, 2030.
The Company has reserved the right to extend the term of the lease for one additional period of five years. In April of 2022, the Company extended its lease for approximately 2,369 square feet on the first floor of a two-story multi-tenant multi-use building located at 2400 Broadway in Redwood City, California.
The Company has reserved the right to extend the term of the lease for one additional period of five years. In February 2024, the Company extended its lease for approximately 3,172 square feet in a one-story multi-tenant multi-use building located at 3137 Stevenson Boulevard in Fremont, California.
The current monthly rent payment is $14,398 until the lease expires on October 31, 2024. In August of 2022, the Company extended its lease for approximately 4,188 square feet on the first floor in a multi-tenant office building located at 999 5 th Avenue in San Rafael, California.
In August of 2022, the Company extended its lease for approximately 4,188 square feet on the first floor in a multi-tenant office building located at 999 5 th Avenue in San Rafael, California. In May of 2023, the Company amended the lease to include an additional 916 square feet, for a total of 5,104 square feet.
In March of 2018, the Company extended its lease for approximately 3,022 square feet on the first floor of a three-story multi-tenant office building located at 333 West El Camino Real in Sunnyvale, California. The current monthly rent payment is $18,805, subject to annual increases of 3% until the lease expires on May 31, 2023.
In October of 2023, the Company extended its lease for approximately 2,369 square feet on the first floor of a two-story multi-tenant multi-use building located at 2400 Broadway in Redwood City, California. The current monthly rent payment is $12,437, subject to annual increases of 3%, until the lease expires on October 31, 2028.
The Company has announced that it is closing the Sunnyvale branch office on April 28, 2023. In November of 2018, the Company extended its lease for approximately 1,920 square feet in a one-story stand-alone building located in an office complex at 15575 Los Gatos Boulevard in Los Gatos, California.
In November of 2023, the Company extended its lease for approximately 1,920 square feet in a one-story stand-alone building located in an office complex at 15575 Los Gatos Boulevard in Los Gatos, California. The current monthly rent payment is $6,816, subject to annual increases of 3%, until the lease expires on November 30, 2028.
El Camino Real in Sunnyvale, California 94087, at 325 Lytton Avenue in Palo Alto, California 94301, at 400 S.
San Antonio Road in Los Altos, California 94022, at 325 Lytton Avenue in Palo Alto, California 94301, at 400 S.
The current monthly rent payment is $29,968, which is included in the main office of HBC’s total rent of $216,006, subject to 3% annual increases until the sublease expires July 31, 2030. For additional information on operating leases and rent expense, refer to Note 7 to the Consolidated Financial Statements following “Item 15 — Exhibits and Financial Statement Schedules .”
For additional information on operating leases and rent expense, refer to Note 7 to the Consolidated Financial Statements following “Item 15 — Exhibits and Financial Statement Schedules .” 59 ​ Table of Contents ​
In February 2020, the Company extended its lease for approximately 3,172 square feet in a one-story multi-tenant multi-use building located at 3137 Stevenson Boulevard in Fremont, California. The current monthly rent payment is $10,432, subject to annual increases of 3% until the lease expires on February 29, 2024.
The current monthly rent payment is $10,848, subject to annual increases of 3%, until the lease expires on February 28, 2027.
Removed
The current monthly rent payment for the combined space of approximately 8,086 square feet is $59,928, subject to annual increases of 3% until the lease expires October 31, 2030. The Company has reserved the right to extend the lease for two additional period of five years.
Added
The current monthly rent payment is $30,867, which is included in the main office of HBC’s total rent of $227,985, subject to 3% annual increases, until the sublease expires July 31, 2030.
Removed
The Company has reserved the right to extend the term of the lease for one additional period of five years.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

1 edited+0 added−0 removed2 unchanged
Biggest changeFor more information regarding legal proceedings, see Note 15 “Commitments and Contingencies” to the consolidated financial statements. 52 ​ Table of Contents ​ ITEM 4. MINE SAFETY DISCLOSURES Not Applicable. PART II
Biggest changeFor more information regarding legal proceedings, see Note 15 “Commitments and Contingencies” to the consolidated financial statements. ITEM 4. MINE SAFETY DISCLOSURES Not Applicable. PART II

Item 4. Mine Safety Disclosures

Mine Safety Disclosures — required of mining issuers

1 edited+0 added−0 removed0 unchanged
Biggest changeItem 4. Mine Safety Disclosures 53 ​ PART II. ​ Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 53 Item 6. [RESERVED] 55 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 56 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 87
Biggest changeItem 4. Mine Safety Disclosures 60 ​ PART II. ​ Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 60 Item 6. [RESERVED] 61 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 62 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 98

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

5 edited+0 added−1 removed6 unchanged
Biggest changeFor information on the statutory and regulatory limitations on the ability of the Company to pay dividends and on HBC to pay dividends to HCC see “ Item 1 — Business — Supervision and Regulation — Heritage Commerce Corp – Dividend Payments, Stock Redemptions, and Repurchases and – Heritage Bank of Commerce – Dividend Payments. ” ​ Performance Graph ​ The following graph compares the stock performance of the Company from December 31, 2017 to December 31, 2022, to the performance of several specific industry indices.
Biggest changeThe decision whether to pay dividends will be made by our Board in light of conditions then existing, including factors such as our results of operations, financial condition, business conditions, regulatory capital requirements and covenants under any applicable contractual arrangements, including agreements with regulatory authorities. 60 ​ Table of Contents ​ For information on the statutory and regulatory limitations on the ability of the Company to pay dividends and on HBC to pay dividends to HCC see “ Item 1 — Business — Supervision and Regulation — Heritage Commerce Corp – Dividend Payments, Stock Redemptions, and Repurchases and – Heritage Bank of Commerce – Dividend Payments. ” Performance Graph ​ The following graph compares the stock performance of the Company from December 31, 2018 to December 31, 2023, to the performance of several specific industry indices.
As of February 9, 2023, there were approximately 808 holders of record of common stock. There are no other classes of common equity outstanding. Dividend Policy The amount of future dividends will depend upon our earnings, financial condition, capital requirements and other factors, and will be determined by our Board of Directors on a quarterly basis.
As of February 14, 2024, there were approximately 785 holders of record of common stock. There are no other classes of common equity outstanding. Dividend Policy The amount of future dividends will depend upon our earnings, financial condition, capital requirements and other factors, and will be determined by our Board on a quarterly basis.
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information The Company’s common stock is listed on the NASDAQ Global Select Market under the symbol “HTBK.” The closing price of our common stock on February 9, 2023 was $12.17 per share as reported by the NASDAQ Global Select Market.
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information The Company’s common stock is listed on the Nasdaq Global Select Market under the symbol “HTBK.” The closing price of our common stock on February 14, 2024 was $8.14 per share as reported by the Nasdaq Global Select Market.
Management believes that a performance comparison to these indices provides meaningful information and has therefore included those comparisons in the following graph. ​ 53 ​ Table of Contents ​ ​ ​ 54 ​ Table of Contents ​ The following chart compares the stock performance of the Company from December 31, 2017 to December 31, 2022, to the performance of several specific industry indices.
Management believes that a performance comparison to these indices provides meaningful information and has therefore included those comparisons in the following graph. ​ ​ The following chart compares the stock performance of the Company from December 31, 2018 to December 31, 2023, to the performance of several specific industry indices.
The performance of the S&P 500 Index, NASDAQ Stock Index and NASDAQ Bank Stocks were used as comparisons to the Company’s stock performance. ​ ​ ​ ​ ​ ​ ​ ​ Period Ending Index 12/31/17 12/31/18 12/31/19 12/31/20 12/31/21 12/31/22 Heritage Commerce Corp * 100 74 84 58 78 85 S&P 500 * 100 94 121 140 178 144 NASDAQ - Total US* 100 96 130 187 227 152 NASDAQ Bank Index* 100 82 100 89 124 101 ​ * Source: S&P Global — (434) 977-1600 ​
The performance of the S&P 500 Index, Nasdaq Stock Index and Nasdaq Bank Stocks were used as comparisons to the Company’s stock performance. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Period Ending Index 12/31/18 12/31/19 12/31/20 12/31/21 12/31/22 12/31/23 Heritage Commerce Corp * ​ 100 ​ 118 ​ 87 ​ 122 ​ 139 ​ 112 S&P 500 * 100 131 ​ 156 ​ 200 ​ 164 ​ 207 Nasdaq - Total US* 100 137 ​ 198 ​ 242 ​ 163 ​ 236 Nasdaq Bank Index* 100 136 ​ 122 ​ 169 ​ 133 ​ 132 * Source: S&P Global Market Intelligence — (434) 977-1600 ​
Removed
The decision whether to pay dividends will be made by our board of directors in light of conditions then existing, including factors such as our results of operations, financial condition, business conditions, regulatory capital requirements and covenants under any applicable contractual arrangements, including agreements with regulatory authorities.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

131 edited+43 added−34 removed83 unchanged
Biggest changeNo assurance of the ultimate level of credit losses can be given with any certainty. ​ Changes in the allowance for credit losses on loans were as follows for the periods indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2022 2021 2020 2019 2018 ​ ​ (Dollars in thousands) Beginning of year balance ​ $ 43,290 ​ $ 44,400 ​ $ 23,285 ​ $ 27,848 ​ $ 19,658 Charge-offs: ​ ​ ​ ​ ​ Commercial ​ (434) ​ (520) ​ ​ (1,776) ​ ​ (6,609) ​ ​ (2,002) Consumer and other ​ — ​ — ​ ​ (104) ​ ​ (14) ​ ​ (24) Total charge-offs ​ (434) ​ (520) ​ (1,880) ​ (6,623) ​ (2,026) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Recoveries: ​ ​ ​ ​ ​ Commercial ​ 427 ​ 1,354 ​ ​ 998 ​ ​ 1,045 ​ ​ 2,645 Real estate: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ CRE - owner occupied ​ ​ 15 ​ ​ 16 ​ ​ 1 ​ ​ — ​ ​ — Land and construction ​ — ​ ​ 884 ​ ​ 70 ​ ​ 76 ​ ​ 114 Home equity ​ 105 ​ ​ 93 ​ ​ 93 ​ ​ 93 ​ ​ 36 Consumer and other ​ 3,343 ​ ​ 197 ​ ​ 30 ​ ​ — ​ ​ — Total recoveries ​ 3,890 ​ 2,544 ​ 1,192 ​ 1,214 ​ 2,795 Net (charge-offs) recoveries ​ 3,456 ​ ​ 2,024 ​ (688) ​ (5,409) ​ 769 Impact of adopting Topic 326 ​ ​ — ​ ​ — ​ ​ 8,570 ​ ​ — ​ ​ — Provision for credit losses on loans (1) ​ 766 ​ (3,134) ​ 13,233 ​ 846 ​ 7,421 End of year balance ​ $ 47,512 ​ $ 43,290 ​ $ 44,400 ​ $ 23,285 ​ $ 27,848 (1) Provision for credit losses on loans for the year ended December 31, 2022, 2021 and 2020, Provision for loan losses for 2019 and 2018.
Biggest changeNo assurance of the ultimate level of credit losses can be given with any certainty. 84 ​ Table of Contents ​ ​ Changes in the allowance for credit losses on loans were as follows for the periods indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2023 2022 2021 2020 2019 ​ ​ (Dollars in thousands) Beginning of year balance ​ $ 47,512 ​ $ 43,290 ​ $ 44,400 ​ $ 23,285 ​ $ 27,848 Charge-offs: ​ ​ ​ ​ ​ Commercial ​ (750) ​ (434) ​ ​ (520) ​ ​ (1,776) ​ ​ (6,609) Real estate: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ CRE - owner occupied ​ — ​ — ​ ​ — ​ ​ — ​ ​ — CRE - non-owner occupied ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — Home equity ​ (246) ​ — ​ ​ — ​ ​ — ​ ​ — Consumer and other ​ (15) ​ — ​ ​ — ​ ​ (104) ​ ​ (14) Total charge-offs ​ (1,011) ​ (434) ​ (520) ​ (1,880) ​ (6,623) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Recoveries: ​ ​ ​ ​ ​ Commercial ​ 346 ​ 427 ​ ​ 1,354 ​ ​ 998 ​ ​ 1,045 Real estate: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ CRE - owner occupied ​ ​ 11 ​ ​ 15 ​ ​ 16 ​ ​ 1 ​ ​ — CRE - non-owner occupied ​ — ​ — ​ ​ — ​ ​ — ​ ​ — Land and construction ​ — ​ ​ — ​ ​ 884 ​ ​ 70 ​ ​ 76 Home equity ​ 351 ​ ​ 105 ​ ​ 93 ​ ​ 93 ​ ​ 93 Consumer and other ​ — ​ ​ 3,343 ​ ​ 197 ​ ​ 30 ​ ​ — Total recoveries ​ 708 ​ 3,890 ​ 2,544 ​ 1,192 ​ 1,214 Net (charge-offs) recoveries ​ (303) ​ ​ 3,456 ​ 2,024 ​ (688) ​ ​ (5,409) Impact of adopting Topic 326 ​ ​ — ​ ​ — ​ ​ — ​ ​ 8,570 ​ ​ — Provision for (recapture of) credit losses on loans (1) ​ 749 ​ 766 ​ (3,134) ​ 13,233 ​ 846 End of year balance ​ $ 47,958 ​ $ 47,512 ​ $ 43,290 ​ $ 44,400 ​ $ 23,285 (1) Provision for credit losses on loans for the year ended December 31, 2023, 2022, 2021 and 2020, Provision for loan losses for 2019. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, 2023 ​ ​ ​ ​ ​ CRE ​ CRE ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Owner ​ Non-owner ​ Land & ​ Home ​ Multi- ​ Residential ​ Consumer ​ ​ ​ ​ Commercial Occupied ​ Occupied Construction ​ Equity ​ Family ​ Mortgages ​ and Other ​ Total ​ ​ (Dollars in thousands) Beginning of period balance ​ $ 6,617 ​ $ 5,751 ​ $ 22,135 ​ $ 2,941 ​ $ 666 ​ $ 3,366 ​ $ 5,907 ​ $ 129 ​ $ 47,512 Charge-offs ​ ​ (750) ​ ​ — ​ ​ — ​ ​ — ​ ​ (246) ​ ​ — ​ ​ — ​ ​ (15) ​ ​ (1,011) Recoveries ​ ​ 346 ​ ​ 11 ​ ​ — ​ ​ — ​ ​ 351 ​ ​ — ​ ​ — ​ ​ — ​ ​ 708 Net (charge-offs) recoveries ​ ​ (404) ​ ​ 11 ​ ​ — ​ ​ — ​ ​ 105 ​ ​ — ​ ​ — ​ ​ (15) ​ ​ (303) Provision for (recapture of) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ credit losses on loans ​ ​ (360) ​ ​ (641) ​ ​ 3,188 ​ ​ (589) ​ ​ (127) ​ ​ 1,687 ​ ​ (2,482) ​ ​ 73 ​ ​ 749 End of period balance ​ $ 5,853 ​ $ 5,121 ​ $ 25,323 ​ $ 2,352 ​ $ 644 ​ $ 5,053 ​ $ 3,425 ​ $ 187 ​ $ 47,958 Percent of ACLL to Total ACLL ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ at end of period ​ ​ 12% ​ ​ 11% ​ ​ 53% ​ ​ 5% ​ ​ 1% ​ ​ 11% ​ ​ 7% ​ ​ 0% ​ ​ 100% ​ 85 ​ Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, 2022 ​ ​ ​ ​ ​ CRE ​ CRE ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Owner ​ Non-owner ​ Land & ​ Home ​ Multi- ​ Residential ​ Consumer ​ ​ ​ ​ Commercial Occupied ​ Occupied Construction ​ Equity ​ Family ​ Mortgages ​ and Other ​ Total ​ ​ (Dollars in thousands) Beginning of period balance ​ $ 8,414 ​ $ 7,954 ​ $ 17,125 ​ $ 1,831 ​ $ 864 ​ $ 2,796 ​ $ 4,132 ​ $ 174 ​ $ 43,290 Charge-offs ​ ​ (434) ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ (434) Recoveries ​ ​ 427 ​ ​ 15 ​ ​ — ​ ​ — ​ ​ 105 ​ ​ — ​ ​ — ​ ​ 3,343 ​ ​ 3,890 Net (charge-offs) recoveries ​ ​ (7) ​ ​ 15 ​ ​ — ​ ​ — ​ ​ 105 ​ ​ — ​ ​ — ​ ​ 3,343 ​ ​ 3,456 Provision for (recapture of) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ credit losses on loans ​ ​ (1,790) ​ ​ (2,218) ​ ​ 5,010 ​ ​ 1,110 ​ ​ (303) ​ ​ 570 ​ ​ 1,775 ​ ​ (3,388) ​ ​ 766 End of period balance ​ $ 6,617 ​ $ 5,751 ​ $ 22,135 ​ $ 2,941 ​ $ 666 ​ $ 3,366 ​ $ 5,907 ​ $ 129 ​ $ 47,512 Percent of ACLL to Total ACLL ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ at end of period ​ ​ 14% ​ ​ 12% ​ ​ 47% ​ ​ 6% ​ ​ 1% ​ ​ 7% ​ ​ 13% ​ ​ 0% ​ ​ 100% ​ The increase in the allowance for credit losses on loans of $446,000 for the year ended December 31, 2023 was primarily attributed to a net increase of $439,000 in the reserve for pooled loans, driven by deterioration in forecasted macroeconomic conditions, an increase in the loan portfolio, and a net increase of $7,000 in specific reserves for individually evaluated loans compared to December 31, 2022.
The Company’s market includes the cities of Oakland, San Francisco and San Jose and the headquarters of a number of technology based companies in the region known commonly as Silicon Valley. The Company’s customers are primarily closely held businesses and professionals.
The Company’s market includes the cities of Oakland, San Francisco, and San Jose, the headquarters of a number of technology based companies in the region known commonly as Silicon Valley. The Company’s customers are primarily closely held businesses and professionals.
Net interest income can also be impacted by the reversal of interest on loans placed on nonaccrual status, and recovery of interest on loans that have been on nonaccrual and are either sold or returned to accrual status. To maintain its net interest margin, the Company must manage the relationship between interest earned and paid.
Net interest income can also be impacted by the reversal of interest on loans placed on nonaccrual status, and recovery of interest on loans that have been on nonaccrual and are either sold or returned to accrual status. To maintain its net interest margin, the Company must manage the relationship between interest earned and interest paid.
Subsequent recoveries, if any, are credited to the allowance for credit losses on loans. ​ The following provides a summary of the risks associated with various segments of the Company’s loan portfolio, which are factors management regularly considers when evaluating the adequacy of the allowance: ​ Commercial ​ Commercial loans primarily rely on the identified cash flows of the borrower for repayment and secondarily on the value of underlying collateral provided by the borrower.
Subsequent recoveries, if any, are credited to the allowance for credit losses on loans. ​ The following provides a summary of the risks associated with various segments of the Company’s loan portfolio, which are factors management regularly considers when evaluating the adequacy of the allowance: ​ Commercial ​ Commercial loans rely primarily on the identified cash flows of the borrower for repayment and secondarily on the value of underlying collateral provided by the borrower.
Repayment of these loans depends primarily on the personal income of the borrower and secondarily by the value of the property securing the loan which can be impacted by changes in economic conditions such as the unemployment rate and property values. ​ Consumer and Other ​ Consumer and other loans are secured by personal property or are unsecured and rely primarily on the income of the borrower for repayment and secondarily on the collateral value for secured loans.
Repayment of these loans depends primarily on the personal income of the borrower and secondarily on the value of the property securing the loan which can be impacted by changes in economic conditions such as the unemployment rate and property values. ​ Consumer and Other ​ Consumer and other loans are secured by personal property or are unsecured and rely primarily on the income of the borrower for repayment and secondarily on the collateral value for secured loans.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion provides information about the results of operations, financial condition, liquidity, and capital resources of Heritage Commerce Corp (the “Company” or “HCC”), its wholly-owned subsidiary, Heritage Bank of Commerce (the “Bank” or “HBC”), and HBC’s wholly-owned subsidiary, CSNK Working Capital Finance Corp, a California Corporation, dba Bay View Funding.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion provides information about the consolidated results of operations, financial condition, liquidity, and capital resources of Heritage Commerce Corp (the “Company” or “HCC”), its wholly-owned subsidiary, Heritage Bank of Commerce (the “Bank” or “HBC”), and HBC’s wholly-owned subsidiary, CSNK Working Capital Finance Corp, a California Corporation, dba Bay View Funding.
These loans are monitored by on-site inspections and are considered to have higher risk than other real estate loans due to the final repayment dependent on numerous factors including general economic conditions. ​ Home Equity ​ Home equity loans are secured by 1-4 family residences that are generally owner occupied.
These loans are monitored through on-site inspections and are considered to have higher risk than other real estate loans due to the final repayment dependent on numerous factors including general economic conditions. ​ Home Equity ​ Home equity loans are secured by 1-4 family residences that are generally owner occupied.
The Federal Reserve Board and the California Department of Financial Protection and Innovation (“DFPI”) also review the allowance for credit losses on loans as an integral part of the examination process. Based on information currently available, management believes that the allowance for credit losses on loans is adequate.
The Federal Reserve Board and the California Department of Financial Protection and Innovation also review the allowance for credit losses on loans as an integral part of the examination process. Based on information currently available, management believes that the allowance for credit losses on loans is adequate.
Banking institutions with a ratio of common equity Tier 1 to risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. ​ At December 31, 2022, the Company’s consolidated capital ratio exceeded regulatory guidelines and HBC’s capital ratios exceed the highest regulatory capital requirement of “well-capitalized” under Basel III prompt corrective action provisions.
Banking institutions with a ratio of common equity Tier 1 to risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. ​ At December 31, 2023, the Company’s consolidated capital ratio exceeded regulatory guidelines and HBC’s capital ratios exceed the highest regulatory capital requirement of “well-capitalized” under Basel III prompt corrective action provisions.
CRE loans comprise two segments differentiated by owner occupied CRE and non-owner CRE. Owner occupied CRE loans are secured by commercial properties that are at least 50% occupied by the borrower or borrower affiliate. Non-owner occupied CRE loans are secured by commercial properties that are less than 50% occupied by the borrower or borrower affiliate.
CRE loans comprise two segments differentiated by owner occupied CRE and non-owner occupied CRE. Owner occupied CRE loans are secured by commercial properties that are at least 50% occupied by the borrower or borrower affiliate. Non-owner occupied CRE loans are secured by commercial properties that are less than 50% occupied by the borrower or a borrower affiliate.
RESULTS OF OPERATIONS The Company earns income from two primary sources. The first is interest income, which is interest income generated by earning assets less interest expense on interest-bearing liabilities.
RESULTS OF OPERATIONS The Company earns income from two primary sources. The first is net interest income, which is interest income generated by earning assets less interest expense on interest-bearing liabilities.
Since loans are the most significant assets of the Company and generate the largest portion of its revenues, the Company’s management of credit quality risk is focused primarily on loan quality.
Since loans are the Company’s most significant assets and generate the largest portion of its revenues, the Company’s management of credit quality risk is focused primarily on loan quality.
Government sponsored entities’ debt securities for liquidity and pledging; (ii) mortgage-backed securities, which in many instances can also be used for pledging, and which generally enhance the yield of the portfolio; (iii) municipal obligations, which provide tax free income and limited pledging potential; (iv) single entity issue trust preferred securities, which generally enhance the yield on the 67 ​ Table of Contents ​ portfolio; (v) corporate bonds, which also enhance the yield on the portfolio; (vi) money market mutual funds; (vii) certificates of deposit; (viii) commercial paper; (ix) bankers acceptances; (x) repurchase agreements; (xi) collateralized mortgage obligations; and (xii) asset-backed securities.
Government sponsored entities’ debt securities for liquidity and pledging; (ii) mortgage-backed securities, which in many instances can also be used for pledging, and which generally enhance the yield of the portfolio; (iii) municipal obligations, which provide tax free income and limited pledging potential; (iv) single entity issue trust preferred securities, which generally enhance the yield on the portfolio; (v) corporate bonds, which also enhance the yield on the portfolio; (vi) money market mutual funds; (vii) certificates of deposit; (viii) commercial paper; (ix) bankers acceptances; (x) repurchase agreements; (xi) collateralized mortgage obligations; and (xii) asset-backed securities.
There were no securities sold under agreements to repurchase at December 31, 2022 and 2021. Capital Resources The Company uses a variety of measures to evaluate capital adequacy. Management reviews various capital measurements on a regular basis and takes appropriate action to ensure that such measurements are within established internal and external guidelines.
There were no securities sold under agreements to repurchase at December 31, 2023 and 2022. Capital Resources The Company uses a variety of measures to evaluate capital adequacy. Management reviews various capital measurements on a regular basis and takes appropriate action to ensure that such measurements are within established internal and external guidelines.
There were no Federal funds purchased outstanding at December 31, 2022 and 2021. The Company has a $20.0 million line of credit with a correspondent bank, of which none was outstanding at December 31, 2022. HBC may also utilize securities sold under repurchase agreements to manage our liquidity position.
There were no Federal funds purchased outstanding at December 31, 2023 and 2022. The Company has a $20.0 million line of credit with a correspondent bank, of which none was outstanding at December 31, 2023 and 2022. HBC may also utilize securities sold under repurchase agreements to manage our liquidity position.
Borrower income and collateral value can vary dependent on economic conditions. ​ Allocation of Allowance for Credit Losses on Loans As a result of the matters mentioned above, changes in the financial condition of individual borrowers, economic conditions, historical loss experience and the condition of the various markets in which collateral may be sold may all affect the required level of the allowance for credit losses on loans and the associated provision for credit losses on loans. ​ On an ongoing basis, we have engaged an outside firm to perform independent credit reviews of our loan portfolio.
Borrower income and collateral value can vary dependent on economic conditions. ​ Allocation of Allowance for Credit Losses on Loans As a result of the matters mentioned above, changes in the financial condition of individual borrowers, economic conditions, historical loss experience and the condition of the various markets in which collateral may be sold may all affect the required level of the allowance for credit losses on loans and the associated provision for credit losses on loans. ​ On an ongoing basis, we use an outside firm to perform independent credit reviews of our loan portfolio.
The Company used the net proceeds of the Sub Debt due 2032 for general corporate purposes, including the repayment on June 1, 2022 of the Company’s $40.0 million aggregate principal amount of 5.25% fixed-to-floating rate subordinated notes due June 1, 2027 (“Sub Debt due 2027”).
The Company used the net proceeds of the Sub Debt due 2032 for general corporate purposes, including the repayment on June 1, 2022 of the Company’s $40.0 million aggregate principal amount of 5.25% fixed-to-floating rate subordinated notes due June 1, 2027.
The Company’s internal credit risk controls are centered in underwriting practices, credit granting procedures, training, risk management techniques, and familiarity with loan customers as well as the relative diversity and geographic concentration of our loan portfolio. ​ The Company’s credit risk may also be affected by external factors such as the level of interest rates, employment, general economic conditions, real estate values, and trends in particular industries or geographic markets.
The Company’s internal credit risk controls are centered in underwriting practices, credit granting procedures, training, risk management techniques, and familiarity with loan customers as well as the relative diversity and geographic concentration of our loan portfolio. 80 ​ Table of Contents ​ ​ The Company’s credit risk also may be affected by external factors such as the level of interest rates, employment, general economic conditions, real estate values, and trends in particular industries or geographic markets.
At that point, the Company stops accruing interest income, and reverses any uncollected interest that had been accrued as income. The Company begins recognizing interest income only as cash interest payments are received and it has been determined the collection of all outstanding principal is not in doubt.
At that point, the Company stops accruing interest income, and reverses any uncollected interest that had been accrued as income. The Company resumes recognizing interest income only as cash interest payments are received and it has been determined the collection of all outstanding principal is not in doubt.
In future periods, evaluations of the overall loan portfolio in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and credit loss expense in those future periods. 75 ​ Table of Contents ​ ​ The allowance level is influenced by loan volumes, loan risk rating migration or delinquency status, changes in historical loss experience, and other conditions influencing loss expectations, such as reasonable and supportable forecasts of economic conditions.
In future periods, evaluations of the overall loan portfolio in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and credit loss expense in those future periods. ​ The allowance level is influenced by loan volumes, loan risk rating migration or delinquency status, changes in historical loss experience, and other conditions influencing loss expectations, such as reasonable and supportable forecasts of economic conditions.
These risks include loan performance trends, collateral value risk and portfolio growth characteristics. Changes in the assessment of these qualitative factors could significantly impact the calculated estimated credit loss. ​ Other key assumptions in the calculation of the ACLL include the forecast and reversion to mean time periods for the economic factor inputs, and prepayment and curtailment assumptions.
These risks include loan performance trends, collateral value risk and portfolio growth characteristics. Changes in the assessment of these qualitative factors could significantly impact the calculated estimated credit loss. ​ Other key assumptions used to calculate the ACLL include the forecast and reversion to mean time periods for the economic factor inputs, and prepayment and curtailment assumptions.
(3) Reflects tax equivalent adjustment for Federal tax exempt income based on a 21% tax rate for the years ended December 31, 2022, 2021 and 2020. 61 ​ Table of Contents ​ The Volume and Rate Variances table below sets forth the dollar difference in interest earned and paid for each major category of interest-earning assets and interest-bearing liabilities for the noted periods, and the amount of such change attributable to changes in average balances (volume) or changes in average interest rates.
(3) Reflects tax equivalent adjustment for Federal tax exempt income based on a 21% tax rate for the years ended December 31, 2023, 2022 and 2021. 68 ​ Table of Contents ​ The Volume and Rate Variances table below sets forth the dollar difference in interest earned and paid for each major category of interest-earning assets and interest-bearing liabilities for the noted periods, and the amount of such change attributable to changes in average balances (volume) or changes in average interest rates.
Management believes that, as of December 31, 2022, December 31, 2021, and December 31, 2020, the Company and HBC met all capital adequacy guidelines to which they were subject.
Management believes that, as of December 31, 2023, December 31, 2022, and December 31, 2021, the Company and HBC met all capital adequacy guidelines to which they were subject.
These receivables are acquired from a variety of companies, including, but not limited to, service providers, transportation companies, manufacturers, distributors, wholesalers, apparel companies, advertisers, and temporary staffing companies. The portfolio of factored 69 ​ Table of Contents ​ receivables is included in the Company’s commercial loan portfolio.
These receivables are acquired from a variety of companies, including, but not limited to, service providers, transportation companies, manufacturers, distributors, wholesalers, apparel companies, advertisers, and temporary staffing companies. The portfolio of factored receivables is included in the Company’s commercial loan portfolio.
The cash flows of these borrowers can fluctuate along with the values of the underlying property depending on general economic conditions. ​ 76 ​ Table of Contents ​ Residential Mortgages ​ Residential mortgage loans are secured by 1-4 family residences which are generally owner-occupied.
The cash flows of these borrowers can fluctuate along with the values of the underlying property depending on general economic conditions. ​ Residential Mortgages ​ Residential mortgage loans are secured by 1-4 family residences which are generally owner-occupied.
(3) Represents distributed and undistributed earnings allocated to common shareholders, divided by the average number of shares of common stock and common stock-equivalents outstanding for the respective period. See Note 16 to the consolidated financial statements. (4) Allowance for credit losses on loans at December 31, 2022, 2021, and 2020. Allowance for loan losses for previous years.
(3) Represents distributed and undistributed earnings allocated to common shareholders, divided by the average number of shares of common stock and common stock-equivalents outstanding for the respective period. See Note 16 to the consolidated financial statements. (4) Allowance for credit losses on loans at December 31, 2023, 2022, 2021, and 2020. Allowance for loan losses for 2019.
Provision for loan losses for previous years. (2) Represents distributed and undistributed earnings allocated to common shareholders, divided by the average number of shares of common stock outstanding for the respective period. See Note 16 to the consolidated financial statements.
Provision for loan losses for 2019. (2) Represents distributed and undistributed earnings allocated to common shareholders, divided by the average number of shares of common stock outstanding for the respective period. See Note 16 to the consolidated financial statements.
During 2022, SBA loan sales resulted in a $491,000 gain, compared to a $1.7 million gain on sales of SBA loans in 2021, and an $839,000 gain on sales of SBA loans in 2020. ​ The servicing assets that result from the sales of SBA loans with servicing retained are amortized over the expected term of the loans using a method approximating the interest method.
During 2023, SBA loan sales resulted in a $482,000 gain, compared to a $491,000 gain on sales of SBA loans in 2022, and an $1.7 million gain on sales of SBA loans in 2021. ​ The servicing assets that result from the sales of SBA loans with servicing retained are amortized over the expected term of the loans using a method approximating the interest method.
Rate scenarios consisting of key rate and yield curve projections are run against the Company’s investment, loan, deposit and borrowed funds portfolios.
Rate scenarios consisting of key rate and yield curve projections are run against the Company’s investment, loan, deposit and borrowed funds’ portfolios.
When the guaranteed portion of an SBA loan is sold the Company retains the servicing rights for the sold portion. During 2022, loans were sold resulting in a gain on sales of SBA loans of $491,000, compared to a gain on sales of SBA loans of $1.7 million for 2021, and $839,000 for 2020.
When the guaranteed portion of an SBA loan is sold the Company retains the servicing rights for the sold portion. During 2023, loans were sold resulting in a gain on sales of SBA loans of $482,000, compared to a gain on sales of SBA loans of $491,000 for 2022, and $1.7 million for 2021.
The provision for credit losses on loans and level of allowance for each period are also dependent on forecast data for the state of California including GDP and unemployment rate projections. ​ There was a $766,000 provision for credit losses on loans for the year ended December 31, 2022, compared to a $3.1 million negative provision for credit losses on loans for the year ended December 31, 2021, and a $13.2 million provision for credit losses on loans for the year ended December 31, 2020.
The provision for credit losses on loans and level of allowance for each period are also dependent on forecast data for the state of California including GDP and unemployment rate projections. ​ There was a $749,000 provision for credit losses on loans for the year ended December 31, 2023, compared to a $766,000 provision for credit losses on loans for the year ended December 31, 2022, and a ($3.1) million negative provision for credit losses on loans for the year ended December 31, 2021.
Unused commitments represented 34% and 37% of outstanding gross loans at December 31, 2022 and December 31, 2021, respectively. The effect on the Company’s revenues, expenses, cash flows and liquidity from the unused portion of the commitments to provide credit cannot be reasonably predicted, because there is no certainty that the lines of credit will ever be fully utilized.
Unused commitments represented 34% of outstanding gross loans at both December 31, 2023 and December 31, 2022. The effect on the Company’s revenues, expenses, cash flows and liquidity from the unused portion of the commitments to provide credit cannot be reasonably predicted, because there is no certainty that the lines of credit will ever be fully utilized.
The judgment and assumptions made are based upon historical experience, future forecasts, or other factors that management believes to be reasonable under the circumstances. Because of the nature of the judgment and assumptions, actual results could differ from estimates, which could have a material effect on our financial condition and results of operations.
These judgments and assumptions are based upon historical experience, future forecasts, or other factors that management believes to be reasonable under the circumstances. Because of the nature of the judgments and assumptions, actual results could differ from management’s estimates, which could have a material effect on our financial condition and results of operations.
After consideration of the matters in the preceding paragraph, the Company determined that it is more likely than not that the net deferred tax assets at December 31, 2022 and December 31, 2021 will be fully realized in future years.
After consideration of the matters in the preceding paragraph, management determined that it is more likely than not that the net deferred tax assets at December 31, 2023 and December 31, 2022 will be fully realized in future years.
Certain of these accounting policies require management to use significant judgment and estimates, which can have a material impact on the carrying value of certain assets and liabilities, and we consider these policies to be our critical accounting estimates.
Certain of these accounting policies require management to use significant judgment and estimates, which can have a material impact on reported income or loss and on the carrying value of certain assets and liabilities, and we consider these policies to be our critical accounting estimates.
The amortized cost basis of collateral-dependent commercial loans collateralized by business assets totaled $324,000 and $1.0 million at December 31, 2022 and December 31, 2021, respectively. ​ When management determines that foreclosures are probable, expected credit losses for collateral-dependent loans are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.
The amortized cost basis of collateral-dependent commercial loans collateralized by business assets totaled $290,000 and $324,000 at December 31, 2023 and December 31, 2022, respectively. ​ When management determines that foreclosures are probable, expected credit losses for collateral-dependent loans are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.
These commitments are obligations that represent a potential credit risk to the Company, yet are not reflected in any form within the Company’s consolidated balance sheets. Total unused commitments to extend credit were $1.1 billion and $1.2 billion at December 31, 2022 and December 31, 2021, respectively.
These commitments are obligations that represent a potential credit risk to the Company, yet are not reflected in any form within the Company’s consolidated balance sheets. Total unused commitments to extend credit were $1.15 billion and $1.13 billion at December 31, 2023 and December 31, 2022, respectively.
Finally, this methodology does not measure or reflect the impact that higher rates may have on adjustable-rate loan borrowers’ ability to service their debt. All of these factors are considered in monitoring the Company’s exposure to interest rate risk.
Finally, this methodology does not measure or reflect the impact that higher rates may have on adjustable-rate loan clients’ ability to service their debt. All of these factors are considered in monitoring the Company’s exposure to interest rate risk. 97 ​ Table of Contents ​
The Company’s factoring receivables are from the operations of Bay View Funding whose primary business is purchasing and collecting factored receivables. Factored receivables are receivables that have been transferred by the originating organization and typically have not been subject to previous collection efforts.
The Company’s factoring receivables are from the operations of Bay View Funding, whose primary business is purchasing and collecting factored receivables on a nation-wide basis. Factored receivables are receivables that have been transferred by the originating organization and typically have not been subject to previous collection efforts.
Activity for loan servicing rights was as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ ​ December 31, ​ 2022 2021 2020 ​ ​ (Dollars in thousands) Beginning of period balance ​ $ 655 ​ $ 531 ​ $ 583 Additions ​ 124 ​ 384 ​ 213 Amortization ​ (230) ​ (260) ​ (265) End of period balance ​ $ 549 ​ $ 655 ​ $ 531 ​ Loan servicing rights are included in accrued interest receivable and other assets on the consolidated balance sheets and reported net of amortization.
Activity for loan servicing rights was as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ ​ December 31, ​ 2023 2022 2021 ​ ​ (Dollars in thousands) Beginning of period balance ​ $ 549 ​ $ 655 ​ $ 531 Additions ​ 126 ​ 124 ​ 384 Amortization ​ (260) ​ (230) ​ (260) End of period balance ​ $ 415 ​ $ 549 ​ $ 655 ​ Loan servicing rights are included in accrued interest receivable and other assets on the consolidated balance sheets and reported net of amortization.
The Company does not have any concentrations by industry or group of industries in its loan portfolio, however, 83% of its gross loans were secured by real property as of December 31, 2022, compared to 77% as of December 31, 2021.
The Company does not have any material concentrations by industry or group of industries in its loan portfolio; however, 85% of its gross loans were secured by real property as of December 31, 2023, compared to 83% as of December 31, 2022.
At various times the Company requires funds to meet short-term cash requirements brought about by loan growth or deposit outflows, the purchase of assets, or liability repayments.
At various times the Company requires funds to meet short term cash requirements brought about by loan growth or deposit outflows, the purchase of assets, or repayment of liabilities.
There were also $261,000 and $2.2 million loans less than 30 days past due included in nonaccrual loans held- 73 ​ Table of Contents ​ for-investment, at December 31, 2022 and December 31, 2021, respectively. ​ Management’s classification of a loan as “nonaccrual” is an indication that there is reasonable doubt as to the full recovery of principal or interest on the loan.
There were also $718,000 and $261,000 loans less than 30 days past due included in nonaccrual loans held-for-investment, at December 31, 2023 and December 31, 2022, respectively. ​ Management’s classification of a loan as “nonaccrual” is an indication that there is reasonable doubt as to the full recovery of principal or interest on the loan.
Total assets and liabilities at December 31, 2022 and December 31, 2021 included $33.0 million and $34.9 million, respectively, of right-of-use assets, included in other assets, and lease liabilities, included in other liabilities, related to non-cancelable operating lease agreements for office space.
Total assets and liabilities at December 31, 2023 and December 31, 2022 included $31.7 million and $33.0 million, respectively, of right-of-use assets, included in other assets, and lease liabilities, included in other liabilities, related to non-cancelable operating lease agreements for office space.
The Company generally restricts real estate term loans to no more than 75% of the property’s appraised value or the purchase price of the property depending on the type of property and its utilization. The Company offers both fixed and floating rate loans.
The Company generally restricts real estate term loans to no more than 75% of the property’s appraised value or the purchase price of the property depending on the type of property and its utilization.
The allocation presented should not be interpreted as an indication that charges to the allowance for credit losses on loans will be incurred in these amounts or proportions, or that the portion of the allowance allocated to each category represents the total amount available for charge-offs that may occur within these classes. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ​ ​ ​ 2022 ​ 2021 ​ 2020 ​ 2019 ​ 2018 ​ ​ ​ ​ ​ Percent ​ ​ ​ Percent ​ ​ ​ Percent ​ ​ ​ Percent ​ ​ ​ Percent ​ ​ ​ ​ of Loans ​ ​ ​ of Loans ​ ​ ​ of Loans ​ ​ ​ of Loans ​ ​ ​ of Loans ​ ​ ​ ​ in each ​ ​ ​ in each ​ ​ ​ in each ​ ​ ​ in each ​ ​ ​ in each ​ ​ ​ ​ category ​ ​ ​ category ​ ​ ​ category ​ ​ ​ category ​ ​ ​ category ​ ​ ​ ​ to total ​ ​ ​ to total ​ ​ ​ to total ​ ​ ​ to total ​ ​ ​ to total ​ Allowance loans Allowance loans Allowance loans Allowance loans Allowance loans ​ ​ (Dollars in thousands) Commercial ​ $ 6,617 16 % $ 8,414 22 % $ 11,587 32 % $ 10,453 24 % $ 17,061 ​ 29 % Real estate: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ CRE - owner occupied ​ 5,751 19 % 7,954 19 % 8,560 21 % ​ 3,825 ​ 22 % ​ 2,907 ​ 23 % CRE - non-owner occupied ​ 22,135 32 % 17,125 29 % 16,416 27 % 3,760 30 % 3,456 ​ 25 % Land and construction ​ 2,941 5 % 1,831 5 % 2,509 6 % 2,621 6 % 2,008 ​ 7 % Home equity ​ ​ 666 ​ 4 % ​ 864 ​ 4 % ​ 1,297 ​ 4 % ​ 2,244 ​ 6 % ​ 1,609 ​ 5 % Multifamily ​ 3,366 7 % 2,796 7 % 2,804 6 % 57 7 % 374 ​ 5 % Residential mortgages ​ ​ 5,907 ​ 16 % ​ 4,132 ​ 13 % ​ 943 ​ 3 % ​ 243 ​ 4 % ​ 317 ​ 5 % Consumer and other ​ 129 1 % 174 1 % 284 1 % 82 1 % 116 ​ 1 % Total ​ $ 47,512 100 % $ 43,290 100 % $ 44,400 100 % $ 23,285 100 % $ 27,848 100 % ​ The ACLL totaled $47.5 million, or 1.44% of total loans, at December 31, 2022, compared to $43.3 million, or 1.40% of total loans at December 31, 2021.
The allocation presented should not be interpreted as an indication that charges to the allowance for credit losses on loans will be incurred in these amounts or proportions, or that the portion of the allowance allocated to each category represents the total amount available for charge-offs that may occur within these classes. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ​ ​ ​ 2023 ​ 2022 ​ 2021 ​ 2020 ​ 2019 ​ ​ ​ ​ ​ Percent ​ ​ ​ Percent ​ ​ ​ Percent ​ ​ ​ Percent ​ ​ ​ Percent ​ ​ ​ ​ of Loans ​ ​ ​ of Loans ​ ​ ​ of Loans ​ ​ ​ of Loans ​ ​ ​ of Loans ​ ​ ​ ​ in each ​ ​ ​ in each ​ ​ ​ in each ​ ​ ​ in each ​ ​ ​ in each ​ ​ ​ ​ category ​ ​ ​ category ​ ​ ​ category ​ ​ ​ category ​ ​ ​ category ​ ​ ​ ​ to total ​ ​ ​ to total ​ ​ ​ to total ​ ​ ​ to total ​ ​ ​ to total ​ Allowance loans Allowance loans Allowance loans Allowance loans Allowance loans ​ ​ (Dollars in thousands) Commercial ​ $ 5,853 14 % $ 6,617 16 % $ 8,414 22 % $ 11,587 32 % $ 10,453 ​ 24 % Real estate: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ CRE - owner occupied ​ 5,121 17 % 5,751 19 % 7,954 19 % ​ 8,560 ​ 21 % ​ 3,825 ​ 22 % CRE - non-owner occupied ​ 25,323 37 % 22,135 32 % 17,125 29 % 16,416 27 % 3,760 ​ 30 % Land and construction ​ 2,352 4 % 2,941 5 % 1,831 5 % 2,509 6 % 2,621 ​ 6 % Home equity ​ ​ 644 ​ 4 % ​ 666 ​ 4 % ​ 864 ​ 4 % ​ 1,297 ​ 4 % ​ 2,244 ​ 6 % Multifamily ​ 5,053 8 % 3,366 7 % 2,796 7 % 2,804 6 % 57 ​ 7 % Residential mortgages ​ ​ 3,425 ​ 15 % ​ 5,907 ​ 16 % ​ 4,132 ​ 13 % ​ 943 ​ 3 % ​ 243 ​ 4 % Consumer and other ​ 187 1 % 129 1 % 174 1 % 284 1 % 82 ​ 1 % Total ​ $ 47,958 100 % $ 47,512 100 % $ 43,290 100 % $ 44,400 100 % $ 23,285 100 % ​ The ACLL totaled $48.0 million, or 1.43% of total loans, at December 31, 2023, compared to $47.5 million, or 1.44% of total loans at December 31, 2022.
(2) Included in the “Other noninterest expense” category in the Consolidated Statements of Income. ​ ​ ​ ​ Noninterest expense for the year ended December 31, 2022 increased to $94.9 million, compared to $93.1 million for the year ended December 31, 2021, primarily due to higher salaries and employee benefits, higher rent included in occupancy and equipment expense, and higher insurance and information technology related expenses during the year ended December 31, 2022.
Noninterest expense for the year ended December 31, 2022 increased 2% to $94.9 million, compared to $93.1 million for the year ended December 31, 2021, primarily due to higher salaries and employee benefits, higher rent included in occupancy and equipment expense, and higher insurance and information technology related expenses during the year ended December 31, 2022.
HBC had approximately $1.0 billion of loans pledged to the FRB as collateral on an available line of credit of approximately $676.9 million at December 31, 2022, none of which was outstanding. HBC had Federal funds purchase arrangements available of $80.0 million and $90.0 million at December 31, 2022 and 2021, respectively.
HBC had approximately $1.66 billion of loans and securities pledged to the FRB as collateral on an available line of credit of approximately $1.24 billion at December 31, 2023, none of which was outstanding. HBC had Federal funds purchase arrangements available of $90.0 million and $80.0 million at December 31, 2023 and 2022, respectively.
The following table shows the effective tax rate for the dates indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ 2022 2021 2020 Effective income tax rate 29.5% ​ 27.6% ​ 28.1% ​ ​ ​ ​ The Company’s Federal and state income tax expense in 2022 was $27.8 million, compared to $18.2 million in 2021, and $13.8 million in 2020.
The following table shows the effective tax rate for the dates indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ 2023 2022 2021 Effective income tax rate 28.7% ​ 29.5% ​ 27.6% ​ The Company’s Federal and state income tax expense in 2023 was $26.0 million, compared to $27.8 million in 2022, and $18.2 million in 2021.
At December 31, 2022, key economic assumptions and the sensitivity of the 72 ​ Table of Contents ​ fair value of the I/O strip receivables to immediate changes to the CPR assumption of 10% and 20%, and changes to the discount rate assumption of 1% and 2%, are as follows: ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) Carrying amount/fair value of Interest-Only (I/O) strip ​ $ 152 Prepayment speed assumption (annual rate) ​ 15.1% Impact on fair value of 10% adverse change in prepayment speed (CPR 16.6%) ​ $ (1) Impact on fair value of 20% adverse change in prepayment speed (CPR 18.1%) ​ $ (3) Residual cash flow discount rate assumption (annual) ​ ​ 20.7% Impact on fair value of 1% adverse change in discount rate (21.0% discount rate) ​ $ (3) Impact on fair value of 2% adverse change in discount rate (21.2% discount rate) ​ $ (6) ​ Off-Balance Sheet Arrangements In the normal course of business, the Company makes commitments to extend credit to its customers as long as there are no violations of any conditions established in contractual arrangements.
At December 31, 2023, key economic assumptions and the sensitivity of the fair value of the I/O strip receivables to immediate changes to the CPR assumption of 10% and 20%, and changes to the discount rate assumption of 1% and 2%, are as follows: ​ ​ ​ ​ ​ ​ (Dollars in thousands) Carrying amount/fair value of Interest-Only (I/O) strip ​ $ 117 Prepayment speed assumption (annual rate) ​ 17.2% Impact on fair value of 10% adverse change in prepayment speed (CPR 18.9%) ​ $ (1) Impact on fair value of 20% adverse change in prepayment speed (CPR 20.9%) ​ $ (3) Residual cash flow discount rate assumption (annual) ​ ​ 16.6% Impact on fair value of 1% adverse change in discount rate (16.8% discount rate) ​ $ (2) Impact on fair value of 2% adverse change in discount rate (16.9% discount rate) ​ $ (4) ​ Off-Balance Sheet Arrangements In the normal course of business, the Company makes commitments to extend credit to its customers as long as there are no violations of any conditions established in contractual arrangements.
Prepayment fees totaled $1.3 million for the year ended December 31, 2022, compared to $2.7 million for the year ended December 31, 2021, and $1.1 million for the year ended December 31, 2020.
Prepayment fees totaled $484,000 for the year ended December 31, 2023, compared to $1.3 million for the year ended December 31, 2022, and $2.7 million for the year ended December 31, 2021.
The Company completed its merger with Tri-Valley Bank (“Tri-Valley”) on April 6, 2018, and the Company completed its merger with United American Bank (“United American”) on May 4, 2018. The Company completed its merger with Presidio Bank (“Presidio”) on October 11, 2019.
The Company completed its merger with Focus Business Bank (“Focus”) on August 20, 2015, its merger with Tri-Valley Bank (“Tri-Valley”) on April 6, 2018, its merger with United American Bank (“United American”) on May 4, 2018, and its merger with Presidio Bank (“Presidio”) on October 11, 2019.
The Company had the net deferred tax assets of $32.2 million and $28.8 million at December 31, 2022, and December 31, 2021, respectively.
The Company had the net deferred tax assets of $29.8 million and $32.2 million at December 31, 2023, and December 31, 2022, respectively.
Interest Rate Management Market risk arises from changes in interest rates, exchange rates, commodity prices and equity prices. The Company’s market risk exposure is primarily that of interest rate risk, and it has established policies and procedures to monitor and limit earnings and balance sheet exposure to changes in interest rates.
Interest Rate Management The Company’s market risk exposure is primarily that of interest rate risk, and it has established policies and procedures to monitor and limit earnings and balance sheet exposure to changes in interest rates.
Unless we state otherwise or the context indicates otherwise, references to the “Company,” “Heritage,” “we,” “us,” and “our,” in this Report on Form 10-K refer to Heritage Commerce Corp and its subsidiaries. The Company completed its acquisition of Bay View Funding on November 1, 2014. The Company completed its merger with Focus Business Bank (“Focus”) on August 20, 2015.
Unless we state otherwise or the context indicates otherwise, references to the “Company,” “Heritage,” “we,” “us,” and “our,” in this Report on Form 10-K refer to Heritage Commerce Corp and its subsidiaries. The Company completed its acquisition of Bay View Funding on November 1, 2014.
The following table reflects the components of accumulated other comprehensive loss, net of taxes, for the periods indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ​ December 31, ​ Accumulated Other Comprehensive Loss ​ 2022 ​ 2021 ​ ​ ​ (Dollars in thousands) Unrealized (loss) gain on securities available-for-sale ​ $ (11,506) ​ $ 1,991 ​ Split dollar insurance contracts liability ​ (3,091) ​ (5,480) ​ Supplemental executive retirement plan liability ​ (2,371) ​ (7,669) ​ Unrealized gain on interest-only strip from SBA loans ​ 112 ​ 162 ​ Total accumulated other comprehensive loss ​ $ (16,856) ​ $ (10,996) ​ 83 ​ Table of Contents ​ Selected Financial Data The following table presents a summary of selected financial information that should be read in conjunction with the Company’s Consolidated Financial Statements and notes thereto following Item 15 — Exhibits and Financial Statement Schedules.
The following table reflects the components of accumulated other comprehensive loss, net of taxes, for the periods indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ​ Accumulated Other Comprehensive Loss ​ 2023 ​ 2022 ​ ​ ​ (Dollars in thousands) Unrealized loss on securities available-for-sale ​ $ (7,116) ​ $ (11,506) ​ Split dollar insurance contracts liability ​ (2,809) ​ (3,091) ​ Supplemental executive retirement plan liability ​ (2,892) ​ (2,371) ​ Unrealized gain on interest-only strip from SBA loans ​ 87 ​ 112 ​ Total accumulated other comprehensive loss ​ $ (12,730) ​ $ (16,856) ​ 93 ​ Table of Contents ​ Selected Financial Data The following table presents a summary of selected financial information that should be read in conjunction with the Company’s Consolidated Financial Statements and notes thereto following Item 15 — Exhibits and Financial Statement Schedules.
Classified loans decreased to $14.5 million, or 0.28% of total assets, at December 31, 2022, compared to $33.8 million, or 0.61% of total assets at December 31, 2021. ​ In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification.
Classified loans increased to $31.8 million, or 0.61% of total assets, at December 31, 2023, compared to what would be considered a historically low balance of $14.5 million, or 0.28% of total assets at December 31, 2022. ​ In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification.
SELECTED FINANCIAL DATA ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ AT OR FOR YEAR ENDED DECEMBER 31, ​ 2022 2021 2020 2019 2018 ​ ​ (Dollars in thousands, except per share data) INCOME STATEMENT DATA: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest income ​ $ 188,828 ​ $ 153,256 ​ $ 150,471 ​ $ 142,659 ​ $ 129,845 ​ Interest expense ​ 8,948 ​ 7,131 ​ 8,581 ​ 10,847 ​ 7,822 ​ Net interest income before provision for credit losses on loans(1) ​ 179,880 ​ 146,125 ​ 141,890 ​ 131,812 ​ 122,023 ​ Provision for (recapture of )credit losses on loans(1) ​ 766 ​ (3,134) ​ 13,233 ​ 846 ​ 7,421 ​ Net interest income after provision for credit losses on loans(1) ​ 179,114 ​ 149,259 ​ 128,657 ​ 130,966 ​ 114,602 ​ Noninterest income ​ 10,111 ​ 9,688 ​ 9,922 ​ 10,244 ​ 9,574 ​ Noninterest expense ​ 94,859 ​ 93,077 ​ 89,511 ​ 84,898 ​ 75,521 ​ Income before income taxes ​ 94,366 ​ 65,870 ​ 49,068 ​ 56,312 ​ 48,655 ​ Income tax expense ​ 27,811 ​ 18,170 ​ 13,769 ​ 15,851 ​ 13,324 ​ Net income ​ 66,555 ​ 47,700 ​ 35,299 ​ 40,461 ​ 35,331 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ PER COMMON SHARE DATA: ​ ​ ​ ​ ​ ​ Basic net income(2) ​ $ 1.10 ​ $ 0.79 ​ $ 0.59 ​ $ 0.87 ​ $ 0.85 ​ Diluted net income(3) ​ $ 1.09 ​ $ 0.79 ​ $ 0.59 ​ $ 0.84 ​ $ 0.84 ​ Book value per common share ​ $ 10.39 ​ $ 9.91 ​ $ 9.64 ​ $ 9.71 ​ $ 8.49 ​ Tangible book value per common share ​ $ 7.46 ​ $ 6.91 ​ $ 6.57 ​ $ 6.55 ​ $ 6.28 ​ Dividend payout ratio ​ 47.32 % 65.56 % 88.04 % 56.16 % 52.26 % Weighted average number of shares outstanding — basic ​ 60,602,962 ​ 60,133,821 ​ 59,478,343 ​ 46,684,384 ​ 41,469,211 ​ Weighted average number of shares outstanding — diluted ​ 61,090,290 ​ 60,689,062 ​ 60,169,139 ​ 47,906,229 ​ 42,182,939 ​ Common shares outstanding at period end ​ 60,852,723 ​ 60,339,837 ​ 59,917,457 ​ 59,368,156 ​ 43,288,750 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ BALANCE SHEET DATA: ​ ​ ​ ​ ​ ​ Securities (available-for sale and held-to-maturity) ​ $ 1,204,586 ​ $ 760,649 ​ $ 533,163 ​ $ 771,385 ​ $ 836,241 ​ Net loans ​ $ 3,251,038 ​ $ 3,044,036 ​ $ 2,574,861 ​ $ 2,510,559 ​ $ 1,858,557 ​ Allowance for credit losses on loans(4) ​ $ 47,512 ​ $ 43,290 ​ $ 44,400 ​ $ 23,285 ​ $ 27,848 ​ Goodwill and other intangible assets ​ $ 178,664 ​ $ 181,299 ​ $ 184,295 ​ $ 187,835 ​ $ 95,760 ​ Total assets ​ $ 5,157,580 ​ $ 5,499,409 ​ $ 4,634,114 ​ $ 4,109,463 ​ $ 3,096,562 ​ Total deposits ​ $ 4,389,604 ​ $ 4,759,412 ​ $ 3,914,486 ​ $ 3,414,768 ​ $ 2,637,532 ​ Subordinated debt, net of issuance costs ​ $ 39,350 ​ $ 39,925 ​ $ 39,740 ​ $ 39,554 ​ $ 39,369 ​ Short-term borrowings ​ $ — ​ $ — ​ $ — ​ $ 328 ​ $ — ​ Total shareholders’ equity ​ $ 632,456 ​ $ 598,028 ​ $ 577,889 ​ $ 576,708 ​ $ 367,466 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ SELECTED PERFORMANCE RATIOS:(5) ​ ​ ​ ​ ​ ​ Return on average assets ​ 1.23 % 0.92 % 0.80 % 1.21 % 1.16 % Return on average tangible assets ​ 1.27 % 0.96 % 0.83 % 1.25 % 1.19 % Return on average equity ​ 10.95 % 8.15 % 6.12 % 9.51 % 10.79 % Return on average tangible common equity ​ 15.57 % 11.86 % 9.04 % 13.09 % 14.41 % Net interest margin (fully tax equivalent) ​ 3.57 % 3.05 % 3.50 % 4.28 % 4.31 % Efficiency ratio (6) ​ 49.93 % 59.74 % 58.96 % 59.76 % 57.39 % Average net loans (excludes loans held-for-sale) as a percentage of ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ average deposits ​ 66.10 % 61.39 % 69.58 % 69.65 % 67.35 % Average total shareholders’ equity as a percentage of average total assets ​ 11.25 % 11.33 % 13.00 % 12.69 % 10.72 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ SELECTED ASSET QUALITY DATA:(7) ​ ​ ​ ​ ​ ​ Net charge-offs (recoveries) to average loans ​ (0.11) % (0.07) % 0.03 % 0.27 % (0.04) % Allowance for credit losses on loans to total loans (4) ​ 1.44 % 1.40 % 1.70 % 0.92 % 1.48 % Nonperforming loans to total loans ​ 0.07 % 0.12 % 0.30 % 0.39 % 0.79 % Nonperforming assets ​ $ 2,425 ​ $ 3,738 ​ $ 7,869 ​ $ 9,828 ​ $ 14,887 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ HERITAGE COMMERCE CORP CAPITAL RATIOS: ​ ​ ​ ​ ​ ​ ​ ​ Total capital ratio ​ 14.8 % 14.4 % 16.5 % 14.6 % 15.0 % Tier 1 capital ratio ​ 12.7 % 12.3 % 14.0 % 12.5 % 12.0 % Common equity Tier 1 capital ratio ​ 12.7 % 12.3 % 14.0 % 12.5 % 12.0 % Tier 1 leverage ratio ​ 9.2 % 7.9 % 9.1 % 9.7 % 8.9 % ​ ​ ​ ​ ​ ​ ​ 84 ​ Table of Contents ​ ​ Notes: (1) Provision for (recapture of) credit losses on loans for the years ended December 31, 2022, 2021 and 2020.
SELECTED FINANCIAL DATA ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ AT OR FOR YEAR ENDED DECEMBER 31, ​ 2023 2022 2021 2020 2019 ​ ​ (Dollars in thousands, except per share data) INCOME STATEMENT DATA: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest income ​ $ 234,298 ​ $ 188,828 ​ $ 153,256 ​ $ 150,471 ​ $ 142,659 ​ Interest expense ​ 51,074 ​ 8,948 ​ 7,131 ​ 8,581 ​ 10,847 ​ Net interest income before provision for credit losses on loans (1) ​ 183,224 ​ 179,880 ​ 146,125 ​ 141,890 ​ 131,812 ​ Provision for credit losses on loans (1) ​ 749 ​ 766 ​ (3,134) ​ 13,233 ​ 846 ​ Net interest income after provision for credit losses on loans (1) ​ 182,475 ​ 179,114 ​ 149,259 ​ 128,657 ​ 130,966 ​ Noninterest income ​ 8,998 ​ 10,111 ​ 9,688 ​ 9,922 ​ 10,244 ​ Noninterest expense ​ 101,054 ​ 94,859 ​ 93,077 ​ 89,511 ​ 84,898 ​ Income before income taxes ​ 90,419 ​ 94,366 ​ 65,870 ​ 49,068 ​ 56,312 ​ Income tax expense ​ 25,976 ​ 27,811 ​ 18,170 ​ 13,769 ​ 15,851 ​ Net income ​ $ 64,443 ​ $ 66,555 ​ $ 47,700 ​ $ 35,299 ​ $ 40,461 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ PER COMMON SHARE DATA: ​ ​ ​ ​ ​ ​ Basic net income (2) ​ $ 1.06 ​ $ 1.10 ​ $ 0.79 ​ $ 0.59 ​ $ 0.87 ​ Diluted net income (3) ​ $ 1.05 ​ $ 1.09 ​ $ 0.79 ​ $ 0.59 ​ $ 0.84 ​ Book value per common share ​ $ 11.00 ​ $ 10.39 ​ $ 9.91 ​ $ 9.64 ​ $ 9.71 ​ Tangible book value per common share ​ $ 8.12 ​ $ 7.46 ​ $ 6.91 ​ $ 6.57 ​ $ 6.55 ​ Dividend payout ratio ​ 49.25 % 47.32 % 65.56 % 88.04 % 56.16 % Weighted average number of shares outstanding — basic ​ 61,038,857 ​ 60,602,962 ​ 60,133,821 ​ 59,478,343 ​ 46,684,384 ​ Weighted average number of shares outstanding — diluted ​ 61,311,318 ​ 61,090,290 ​ 60,689,062 ​ 60,169,139 ​ 47,906,229 ​ Common shares outstanding at period end ​ 61,146,835 ​ 60,852,723 ​ 60,339,837 ​ 59,917,457 ​ 59,368,156 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ BALANCE SHEET DATA: ​ ​ ​ ​ ​ ​ Securities (available-for sale and held-to-maturity) ​ $ 1,093,201 ​ $ 1,204,586 ​ $ 760,649 ​ $ 533,163 ​ $ 771,385 ​ Net loans ​ $ 3,302,420 ​ $ 3,251,038 ​ $ 3,044,036 ​ $ 2,574,861 ​ $ 2,510,559 ​ Allowance for credit losses on loans (4) ​ $ 47,958 ​ $ 47,512 ​ $ 43,290 ​ $ 44,400 ​ $ 23,285 ​ Goodwill and other intangible assets ​ $ 176,258 ​ $ 178,664 ​ $ 181,299 ​ $ 184,295 ​ $ 187,835 ​ Total assets ​ $ 5,194,095 ​ $ 5,157,580 ​ $ 5,499,409 ​ $ 4,634,114 ​ $ 4,109,463 ​ Total deposits ​ $ 4,378,458 ​ $ 4,389,604 ​ $ 4,759,412 ​ $ 3,914,486 ​ $ 3,414,768 ​ Subordinated debt, net of issuance costs ​ $ 39,502 ​ $ 39,350 ​ $ 39,925 ​ $ 39,740 ​ $ 39,554 ​ Short-term borrowings ​ $ — ​ $ — ​ $ — ​ $ — ​ $ 328 ​ Total shareholders’ equity ​ $ 672,901 ​ $ 632,456 ​ $ 598,028 ​ $ 577,889 ​ $ 576,708 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ SELECTED PERFORMANCE RATIOS: (5) ​ ​ ​ ​ ​ ​ Return on average assets ​ 1.21 % 1.23 % 0.92 % 0.80 % 1.21 % Return on average tangible assets ​ 1.26 % 1.27 % 0.96 % 0.83 % 1.25 % Return on average equity ​ 9.88 % 10.95 % 8.15 % 6.12 % 9.51 % Return on average tangible equity ​ 13.57 % 15.57 % 11.86 % 9.04 % 13.09 % Net interest margin (fully tax equivalent) ​ 3.70 % 3.57 % 3.05 % 3.50 % 4.28 % Efficiency ratio (6) ​ 52.57 % 49.93 % 59.74 % 58.96 % 59.76 % Average net loans (excludes loans held-for-sale) as a percentage of ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ average deposits ​ 71.89 % 66.10 % 61.39 % 69.58 % 69.65 % Average total shareholders’ equity as a percentage of average total assets ​ 12.29 % 11.25 % 11.33 % 13.00 % 12.69 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ SELECTED ASSET QUALITY DATA: (7) ​ ​ ​ ​ ​ ​ Net charge-offs (recoveries) to average loans ​ 0.01 % (0.11) % (0.07) % 0.03 % 0.27 % Allowance for credit losses on loans to total loans (4) ​ 1.43 % 1.44 % 1.40 % 1.70 % 0.92 % Nonperforming loans to total loans ​ 0.23 % 0.07 % 0.12 % 0.30 % 0.39 % Nonperforming assets ​ $ 7,707 ​ $ 2,425 ​ $ 3,738 ​ $ 7,869 ​ $ 9,828 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ HERITAGE COMMERCE CORP CAPITAL RATIOS: ​ ​ ​ ​ ​ ​ Total risk-based ​ 15.5 % 14.8 % 14.4 % 16.5 % 14.6 % Tier 1 risk-based ​ 13.3 % 12.7 % 12.3 % 14.0 % 12.5 % Common equity Tier 1 risk-based capital ​ 13.3 % 12.7 % 12.3 % 14.0 % 12.5 % Leverage ​ 10.0 % 9.2 % 7.9 % 9.1 % 9.7 % ​ ​ ​ ​ ​ ​ ​ 94 ​ Table of Contents ​ ​ Notes: (1) Provision for (recapture of) credit losses on loans for the years ended December 31, 2023, 2022, 2021, and 2020.
Consumer and other loans increased $289,000, or 2%, to $17.0 million at December 31, 2022, compared to $16.7 million at December 31, 2021. ​ With certain exceptions, state chartered banks are permitted to make extensions of credit to any one borrowing entity up to 15% of the bank’s capital and reserves for unsecured loans and up to 25% of the bank’s capital and reserves for secured loans.
Consumer and other loans increased $3.9 million, or 23%, to $20.9 million at December 31, 2023, compared to $17.0 million at December 31, 2022. ​ With certain exceptions, state chartered banks are permitted to make extensions of credit to any one borrowing entity up to 15% of the bank’s capital and reserves for unsecured loans and up to 25% of the bank’s capital and reserves for secured loans.
These segments are further disaggregated into loan classes, the level at which credit risk is monitored. When computing the level of expected credit losses, credit loss assumptions are estimated using a model that categorizes loan pools based on loss history, delinquency status, and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future.
When computing the level of expected credit losses, credit loss assumptions are estimated using a model that categorizes loan pools based on loss history, delinquency status, and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future.
Foreclosed assets consist of properties and other assets acquired by foreclosure or similar means that management is offering or will offer for sale. ​ The following table summarizes the Company’s nonperforming assets at the dates indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ​ ​ 2022 2021 ​ ​ ​ (Dollars in thousands) Nonaccrual loans — held-for-investment ​ ​ $ 740 ​ $ 3,460 ​ Restructured and loans 90 days past due and ​ ​ ​ ​ ​ ​ ​ ​ still accruing ​ ​ 1,685 ​ 278 ​ Total nonperforming loans ​ ​ 2,425 ​ 3,738 ​ Foreclosed assets ​ ​ — ​ — ​ Total nonperforming assets ​ ​ $ 2,425 ​ $ 3,738 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nonperforming assets as a percentage of loans ​ ​ ​ ​ ​ ​ ​ ​ plus foreclosed assets ​ ​ ​ 0.07 % ​ 0.12 % Nonperforming assets as a percentage of total assets ​ ​ 0.05 % 0.07 % ​ The following table presents the amortized cost basis of nonperforming loans and loans past due over 90 days and still accruing at the periods indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2022 ​ ​ ​ ​ ​ ​ ​ Restructured ​ ​ ​ ​ Nonaccrual ​ Nonaccrual ​ and Loans ​ ​ ​ ​ with no Special ​ with Special ​ over 90 Days ​ ​ ​ ​ ​ Allowance for ​ Allowance for ​ Past Due ​ ​ ​ ​ ​ Credit ​ Credit ​ and Still ​ ​ ​ Losses Losses ​ Accruing Total ​ ​ (Dollars in thousands) Commercial ​ $ 318 ​ $ 324 ​ $ 349 ​ $ 991 Real estate: ​ ​ ​ ​ ​ ​ ​ ​ ​ CRE - Non-Owner Occupied ​ ​ — ​ ​ — ​ ​ 1,336 ​ ​ 1,336 Home equity ​ ​ 98 ​ ​ — ​ ​ — ​ ​ 98 Total ​ $ 416 ​ $ 324 ​ $ 1,685 ​ $ 2,425 ​ ​ ​ ​ ​ 74 ​ Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2021 ​ ​ ​ ​ ​ ​ ​ Restructured ​ ​ ​ ​ Nonaccrual ​ Nonaccrual ​ and Loans ​ ​ ​ ​ with no Special ​ with Special ​ over 90 Days ​ ​ ​ ​ ​ Allowance for ​ Allowance for ​ Past Due ​ ​ ​ ​ ​ Credit ​ Credit ​ and Still ​ ​ ​ Losses Losses ​ Accruing Total ​ ​ (Dollars in thousands) Commercial ​ $ 94 ​ $ 1,028 ​ $ 278 ​ $ 1,400 Real estate: ​ ​ ​ ​ ​ ​ ​ ​ ​ CRE - Owner Occupied ​ ​ 1,126 ​ ​ — ​ ​ — ​ ​ 1,126 Home equity ​ ​ 84 ​ ​ — ​ ​ — ​ ​ 84 Multifamily ​ ​ 1,128 ​ ​ — ​ ​ — ​ ​ 1,128 Total ​ $ 2,432 ​ $ 1,028 ​ $ 278 ​ $ 3,738 ​ Loans with a well-defined weakness, which are characterized by the distinct possibility that the Company will sustain a loss if the deficiencies are not corrected, are categorized as “classified.” Classified loans include all loans considered as substandard, substandard nonaccrual, and doubtful and may result from problems specific to a borrower’s business or from economic downturns that affect the borrower’s ability to repay or that cause a decline in the value of the underlying collateral (particularly real estate).
Foreclosed assets consist of properties and other assets acquired by foreclosure or similar means that management is 81 ​ Table of Contents ​ offering or will offer for sale. ​ The following table summarizes the Company’s nonperforming assets at the dates indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ​ ​ 2023 2022 ​ ​ (Dollars in thousands) Nonaccrual loans — held-for-investment ​ $ 6,818 ​ $ 740 ​ Loans 90 days past due and still accruing ​ 889 ​ 1,685 ​ Total nonperforming loans ​ 7,707 ​ 2,425 ​ Foreclosed assets ​ — ​ — ​ Total nonperforming assets ​ $ 7,707 ​ $ 2,425 ​ ​ ​ ​ ​ ​ ​ ​ ​ Nonperforming assets as a percentage of loans ​ ​ ​ ​ ​ ​ ​ plus foreclosed assets ​ ​ 0.23 % ​ 0.07 % Nonperforming assets as a percentage of total assets ​ 0.15 % 0.05 % ​ The following table presents the amortized cost basis of nonperforming loans and loans past due over 90 days and still accruing at the periods indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2023 ​ ​ Nonaccrual ​ Nonaccrual ​ Loans ​ ​ ​ ​ with no Special ​ with Special ​ over 90 Days ​ ​ ​ ​ ​ Allowance for ​ Allowance for ​ Past Due ​ ​ ​ ​ ​ Credit ​ Credit ​ and Still ​ ​ ​ Losses Losses ​ Accruing Total ​ ​ (Dollars in thousands) Commercial ​ $ 946 ​ $ 290 ​ $ 889 ​ $ 2,125 Real estate: ​ ​ ​ ​ ​ ​ ​ ​ ​ CRE - Owner Occupied ​ ​ — ​ ​ — ​ ​ — ​ ​ — CRE - Non-Owner Occupied ​ ​ — ​ ​ — ​ ​ — ​ ​ — Land and construction ​ ​ 4,661 ​ ​ — ​ ​ — ​ ​ 4,661 Home equity ​ ​ 142 ​ ​ — ​ ​ — ​ ​ 142 Residential mortgages ​ ​ 779 ​ ​ — ​ ​ — ​ ​ 779 Total ​ $ 6,528 ​ $ 290 ​ $ 889 ​ $ 7,707 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2022 ​ ​ ​ ​ ​ ​ ​ Restructured ​ ​ ​ ​ Nonaccrual ​ Nonaccrual ​ and Loans ​ ​ ​ ​ with no Special ​ with Special ​ over 90 Days ​ ​ ​ ​ ​ Allowance for ​ Allowance for ​ Past Due ​ ​ ​ ​ ​ Credit ​ Credit ​ and Still ​ ​ ​ Losses Losses ​ Accruing Total ​ ​ (Dollars in thousands) Commercial ​ $ 318 ​ $ 324 ​ $ 349 ​ $ 991 Real estate: ​ ​ ​ ​ ​ ​ ​ ​ ​ CRE - Owner Occupied ​ ​ — ​ ​ — ​ ​ — ​ ​ — CRE - Non-Owner Occupied ​ ​ — ​ ​ — ​ ​ 1,336 ​ ​ 1,336 Home equity ​ ​ 98 ​ ​ — ​ ​ — ​ ​ 98 Total ​ $ 416 ​ $ 324 ​ $ 1,685 ​ $ 2,425 ​ Loans with a well-defined weakness, which are characterized by the distinct possibility that the Company will sustain a loss if the deficiencies are not corrected, are categorized as “classified.” Classified loans include all loans considered as substandard, substandard-nonaccrual, and doubtful, and may result from problems specific to a borrower’s business or from economic downturns that affect the borrower’s ability to repay or that cause a decline in the value of the 82 ​ Table of Contents ​ underlying collateral (particularly real estate).
The principal objective of interest rate risk management (often referred to as “asset/liability management”) is to manage the financial components of the Company in a manner that will optimize the risk/reward equation for earnings and capital in relation to changing interest rates.
The Company does not engage in the trading of financial instruments, nor does the Company have exposure to currency exchange rates. ​ The principal objective of interest rate risk management (often referred to as “asset/liability management”) is to manage the financial components of the Company in a manner that will optimize the risk/reward equation for earnings and capital in relation to changing interest rates.
Full-time equivalent employees were 340 at December 31, 2022, and 326 at December 31, 2021, and 331 at December 31, 2020. Income Tax Expense The Company computes its provision for income taxes on a monthly basis.
Full-time equivalent employees were 349 at December 31, 2023, and 340 at December 31, 2022, and 326 at December 31, 2021. 72 ​ Table of Contents ​ Income Tax Expense The Company computes its provision for income taxes on a monthly basis.
The Company classifies its securities as either available-for-sale or held-to-maturity at the time of purchase. Accounting guidance requires available-for-sale securities to be marked to fair value with an offset to accumulated other comprehensive income (loss), a component of shareholders’ equity. Monthly adjustments are made to reflect changes in the fair value of the Company’s available-for-sale securities.
The Company classifies its securities as either available-for-sale or held-to-maturity at the time of purchase. Accounting guidance requires available-for-sale securities to be marked to fair value with an offset to accumulated other 74 ​ Table of Contents ​ comprehensive income (loss), a component of shareholders’ equity.
The Company’s commercial loans are made for working capital, financing the purchase of equipment or for other business purposes. Commercial loans include loans with maturities ranging from thirty days to one year and “term loans” with maturities normally ranging from one to five years.
Stress testing and debt service on commercial real estate loans are reviewed quarterly. The Company’s commercial loans are made for working capital, financing the purchase of equipment or for other business purposes. Commercial loans include loans with maturities ranging from thirty days to two years and “term loans” with maturities normally ranging from one to five years.
Credit Quality and Allowance for Credit Losses on Loans ​ Financial institutions generally have a certain level of exposure to credit quality risk, and could potentially receive less than a full return of principal and interest if a debtor becomes unable or unwilling to repay.
Credit Quality and Allowance for Credit Losses on Loans ​ Like all financial institutions, HBC has exposure to credit quality risk, which generally arises because we could potentially receive less than a full return of principal and interest if a debtor becomes unable or unwilling to repay.
Performance Overview For the year ended December 31, 2022, net income was $66.6 million, or $1.09 per average diluted common share, compared to $47.7 million, or $0.79 per average diluted common share, for the year ended December 31, 2021, and $35.3 million, or $0.59 per average diluted common share for the year ended December 31, 2020.
For the year ended December 31, 2023, net income was $64.4 million, or $1.05 per average diluted common share, compared to $66.6 million, or $1.09 per average diluted common share, for the year ended December 31, 2022, and $47.7 million, or $0.79 per average diluted common share for the year ended December 31, 2021.
The average yield on the total loan portfolio decreased to 5.03% for the year ended December 31, 2021, compared to 5.06% for the year ended December 31, 2020, primarily due to a decline in the average yield on core bank loans, and increases in the average balances of lower yielding purchased residential mortgages, partially offset by increases in interest and fees on PPP loans, higher loan prepayment fees, and an increase in the accretion of the loan purchase discount into interest income from acquired loans.
The average yield on the total loan portfolio decreased to 4.91% for the year ended December 31, 2022, compared to 5.03% for the year ended December 31, 2021, primarily due to a decrease in interest and fees on PPP loans, a decrease in the accretion of the loan purchase discount into interest income from acquired loans, lower prepayment fees, and an increase in the average balance of lower yielding purchased residential mortgages.
The tangible book value per common share was $7.46 at December 31, 2022, compared to $6.91 at December 31, 2021.
The tangible book value per common share was $8.12 at December 31, 2023, compared to $7.46 at December 31, 2022.
Most of the Company’s consumer loans are secured by the personal property being purchased or, in the instances of home equity loans or lines of credit, real property.
Consumer loans generally provide for the monthly payment of principal and interest. Most of the Company’s consumer loans are secured by the personal property being purchased or, in the instances of home equity loans or lines of credit, real property.
Land and construction loans increased $15.7 million, or 11%, to $163.6 million at December 31, 2022, from $147.9 million at December 31, 2021. ​ The Company makes home equity lines of credit available to its existing customers. Home equity lines of credit are underwritten initially with a maximum 75% loan to value ratio.
Land and construction loans decreased ($23.1) million, or (14%), to $140.5 million at December 31, 2023, from $163.6 million at December 31, 2022. ​ The Company makes home equity lines of credit available to its existing customers. Home equity lines of credit are underwritten initially with a maximum 75% loan to value ratio.
Even with perfectly matched repricing of assets and liabilities, risks remain in the form of prepayment of loans or securities or in the form of delays in the adjustment of rates of interest applying to either earning assets with floating rates or to interest bearing liabilities.
Even with perfectly matched repricing of assets and liabilities, risks remain in the form of prepayment of loans or securities or in the form of delays in the adjustment of rates of interest applying to either earning assets with floating rates or to interest-bearing liabilities. ​ Interest rate changes do not affect all categories of assets and liabilities equally or at the same time.
The effective tax rate for the year ended December 31, 2022 was 29.5%, compared to 27.6% for the year ended December 31, 2021.
The effective tax rate for the year ended December 31, 2023 was 28.7%, compared to 29.5% for the year ended December 31, 2022.
The Company’s exposure to market risk is reviewed on a regular basis by the Strategic Initiatives, Finance and Investment Committee. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values.
Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values.
Net interest income increased 23% to $179.9 million for the year ended December 31, 2022, compared to $146.1 million for the year ended December 31, 2021.
Net interest income increased 2% to $183.2 million for the year ended December 31, 2023, compared to $179.9 million for the year ended December 31, 2022.
The accretion of net deferred loan fees into loan interest income was $3.4 million for the year ended December 31, 2022 (of which $2.1 million was from PPP loans), compared to $11.3 million for the year ended December 31, 2021 (of which $10.0 million was from PPP loans), and $4.5 million for the year ended December 31, 2020 (of which $3.9 million were from PPP loans).
The accretion of net deferred loan fees into loan interest income was $742,000 (of which $39,000 was from Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans) for the year ended December 31, 2023, compared to $3.4 million for the year ended December 31, 2022 (of which $2.1 million was from PPP loans), and $11.3 million for the year ended December 31, 2021 (of which $10.0 million were from PPP loans).
The allowance for credit losses on loans to total nonperforming loans increased to 1,959.26% at December 31, 2022, compared to 1,158.11% at December 31, 2021.
The allowance for credit losses on loans to total nonperforming loans decreased to 622.27% at December 31, 2023, compared to 1,959.26% at December 31, 2022.
The Company’s business is not generally seasonal in nature. Public funds were less than 1% of deposits at December 31, 2022 and December 31, 2021. Total deposits decreased ($369.8) million, or (8%), to $4.390 billion at December 31, 2022, compared to $4.759 billion at December 31, 2021.
The Company’s business is not generally seasonal in nature. Public funds were less than 1% of deposits at December 31, 2023 and December 31, 2022. Total deposits were consistent at $4.38 billion at December 31, 2023, compared to $4.39 billion at December 31, 2022.
The Company uses modeling software for asset/liability management in order to simulate the effects of potential interest rate changes on the Company’s net interest margin, and to calculate the estimated fair values of the Company’s financial instruments under different interest rate scenarios.
Because of these factors, an interest sensitivity GAP report may not provide a complete assessment of the exposure to changes in interest rates. ​ The Company uses modeling software for asset/liability management in order to simulate the effects of potential interest rate changes on the Company’s net interest margin, and to calculate the estimated fair values of the Company’s financial instruments under different interest rate scenarios.
Average balances are based on daily averages. ​ 60 ​ Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ ​ 2022 ​ 2021 ​ 2020 ​ ​ ​ ​ Interest ​ Average ​ ​ ​ Interest ​ Average ​ ​ ​ Interest ​ Average ​ ​ Average ​ Income / ​ Yield / ​ Average ​ Income / ​ Yield / ​ Average ​ Income / ​ Yield / ​ Balance Expense Rate Balance Expense Rate Balance Expense Rate ​ ​ (Dollars in thousands) Assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Loans, gross (1)(2) ​ $ 3,119,006 ​ $ 153,010 ​ 4.91 % $ 2,766,321 ​ $ 139,244 ​ 5.03 % $ 2,631,495 ​ $ 133,169 ​ 5.06 % Securities — taxable ​ 983,137 ​ 20,666 ​ 2.10 % 534,387 ​ ​ 8,678 ​ 1.62 % 578,506 ​ ​ 11,637 ​ 2.01 % Securities — exempt from Federal tax (3) ​ 40,478 ​ 1,372 ​ 3.39 % 60,566 ​ ​ 1,995 ​ 3.29 % 74,849 ​ ​ 2,415 ​ 3.23 % Other investments, interest-bearing deposits ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ in other financial institutions and Federal funds sold ​ 908,931 ​ 14,068 ​ 1.55 % 1,444,356 ​ ​ 3,758 ​ 0.26 % 786,955 ​ ​ 3,757 ​ 0.48 % Total interest earning assets (3) ​ 5,051,552 ​ ​ 189,116 3.74 % 4,805,630 ​ ​ 153,675 3.20 % 4,071,805 ​ ​ 150,978 3.71 % Cash and due from banks ​ 37,287 ​ ​ ​ ​ ​ 39,841 ​ ​ ​ ​ ​ 40,401 ​ ​ ​ Premises and equipment, net ​ 9,574 ​ ​ ​ ​ ​ 10,056 ​ ​ ​ ​ ​ 9,497 ​ ​ ​ Goodwill and other intangible assets ​ 180,061 ​ ​ ​ ​ ​ 182,887 ​ ​ ​ ​ ​ 186,239 ​ ​ ​ Other assets ​ 122,746 ​ ​ ​ ​ ​ 127,880 ​ ​ ​ ​ ​ 126,387 ​ ​ ​ Total assets ​ $ 5,401,220 ​ ​ ​ ​ ​ $ 5,166,294 ​ ​ ​ ​ ​ $ 4,434,329 ​ ​ ​ Liabilities and shareholders’ equity: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Deposits: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Demand, noninterest-bearing ​ $ 1,863,928 ​ ​ ​ ​ $ 1,834,909 ​ ​ ​ ​ ​ $ 1,638,055 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Demand, interest-bearing ​ 1,224,676 ​ ​ 2,415 ​ 0.20 % 1,164,556 ​ ​ 1,988 ​ 0.17 % 891,513 ​ ​ 2,035 0.23 % Savings and money market ​ 1,394,283 ​ ​ 3,720 ​ 0.27 % 1,251,438 ​ ​ 2,195 ​ 0.18 % 1,026,319 ​ ​ 3,144 0.31 % Time deposits — under $100 ​ 12,587 ​ ​ 21 ​ 0.17 % 14,924 ​ ​ 29 ​ 0.19 % 17,659 ​ ​ 67 0.38 % Time deposits — $100 and over ​ 122,018 ​ ​ 609 ​ 0.50 % 128,753 ​ ​ 598 ​ 0.46 % 128,461 ​ ​ 1,009 0.79 % CDARS — interest-bearing demand, money ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ market and time deposits ​ ​ 29,708 ​ ​ 5 ​ 0.02 % ​ 32,305 ​ ​ 6 ​ 0.02 % ​ 17,889 ​ ​ 5 ​ 0.03 % Total interest-bearing deposits ​ 2,783,272 ​ ​ 6,770 ​ 0.24 % 2,591,976 ​ ​ 4,816 ​ 0.19 % 2,081,841 ​ ​ 6,260 ​ 0.30 % Total deposits ​ 4,647,200 ​ ​ 6,770 0.15 % 4,426,885 ​ ​ 4,816 0.11 % 3,719,896 ​ 6,260 0.17 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Subordinated debt, net of issuance costs ​ ​ 41,739 ​ ​ 2,178 ​ 5.22 % ​ 39,827 ​ ​ 2,314 ​ 5.81 % ​ 39,641 ​ ​ 2,320 ​ 5.85 % Short-term borrowings ​ 24 ​ ​ — ​ — % 45 ​ ​ 1 ​ 2.22 % 139 ​ ​ 1 ​ 0.72 % Total interest-bearing liabilities ​ 2,825,035 ​ ​ 8,948 ​ 0.32 % 2,631,848 ​ ​ 7,131 ​ 0.27 % 2,121,621 ​ 8,581 0.40 % Total interest-bearing liabilities and demand, ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ noninterest-bearing / cost of funds ​ 4,688,963 ​ ​ 8,948 0.19 % 4,466,757 ​ ​ 7,131 0.16 % 3,759,676 ​ ​ 8,581 0.23 % Other liabilities ​ 104,654 ​ ​ ​ ​ ​ 114,381 ​ ​ ​ ​ ​ 97,978 ​ ​ ​ ​ ​ Total liabilities ​ 4,793,617 ​ ​ ​ ​ ​ 4,581,138 ​ ​ ​ ​ ​ 3,857,654 ​ ​ ​ Shareholders’ equity ​ 607,603 ​ ​ ​ ​ ​ 585,156 ​ ​ ​ ​ ​ 576,675 ​ ​ ​ Total liabilities and shareholders’ equity ​ $ 5,401,220 ​ ​ ​ ​ ​ $ 5,166,294 ​ ​ ​ ​ ​ $ 4,434,329 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net interest income (3) / margin ​ ​ ​ ​ 180,168 3.57 % ​ ​ ​ 146,544 3.05 % ​ 142,397 3.50 % Less tax equivalent adjustment (3) ​ ​ ​ ​ (288) ​ ​ ​ ​ (419) ​ ​ (507) ​ Net interest income ​ ​ ​ $ 179,880 ​ ​ ​ $ 146,125 ​ ​ $ 141,890 ​ (1) Includes loans held-for-sale.
Average balances are based on daily averages. ​ 67 ​ Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ ​ 2023 ​ 2022 ​ 2021 ​ ​ ​ ​ Interest ​ Average ​ ​ ​ Interest ​ Average ​ ​ ​ Interest ​ Average ​ ​ Average ​ Income / ​ Yield / ​ Average ​ Income / ​ Yield / ​ Average ​ Income / ​ Yield / ​ Balance Expense Rate Balance Expense Rate Balance Expense Rate ​ ​ (Dollars in thousands) Assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Loans, gross (1)(2) ​ $ 3,262,194 ​ $ 177,628 ​ 5.45 % $ 3,119,006 ​ $ 153,010 ​ 4.91 % $ 2,766,321 ​ $ 139,244 ​ 5.03 % Securities — taxable ​ 1,124,190 ​ 27,351 ​ 2.43 % 983,137 ​ ​ 20,666 ​ 2.10 % 534,387 ​ ​ 8,678 ​ 1.62 % Securities — exempt from Federal tax (3) ​ 33,806 ​ 1,196 ​ 3.54 % 40,478 ​ ​ 1,372 ​ 3.39 % 60,566 ​ ​ 1,995 ​ 3.29 % Other investments, interest-bearing deposits ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ in other financial institutions and Federal funds sold ​ 534,828 ​ 28,374 ​ 5.31 % 908,931 ​ ​ 14,068 ​ 1.55 % 1,444,356 ​ ​ 3,758 ​ 0.26 % Total interest earning assets (3) ​ 4,955,018 ​ ​ 234,549 4.73 % 5,051,552 ​ ​ 189,116 3.74 % 4,805,630 ​ ​ 153,675 3.20 % Cash and due from banks ​ 35,955 ​ ​ ​ ​ ​ 37,287 ​ ​ ​ ​ ​ 39,841 ​ ​ ​ Premises and equipment, net ​ 9,421 ​ ​ ​ ​ ​ 9,574 ​ ​ ​ ​ ​ 10,056 ​ ​ ​ Goodwill and other intangible assets ​ 177,536 ​ ​ ​ ​ ​ 180,061 ​ ​ ​ ​ ​ 182,887 ​ ​ ​ Other assets ​ 111,445 ​ ​ ​ ​ ​ 122,746 ​ ​ ​ ​ ​ 127,880 ​ ​ ​ Total assets ​ $ 5,289,375 ​ ​ ​ ​ ​ $ 5,401,220 ​ ​ ​ ​ ​ $ 5,166,294 ​ ​ ​ Liabilities and shareholders’ equity: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Deposits: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Demand, noninterest-bearing ​ $ 1,393,949 ​ ​ ​ ​ $ 1,863,928 ​ ​ ​ ​ ​ $ 1,834,909 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Demand, interest-bearing ​ 1,074,523 ​ ​ 6,655 ​ 0.62 % 1,224,676 ​ ​ 2,415 ​ 0.20 % 1,164,556 ​ ​ 1,988 0.17 % Savings and money market ​ 1,144,032 ​ ​ 19,857 ​ 1.74 % 1,394,283 ​ ​ 3,720 ​ 0.27 % 1,251,438 ​ ​ 2,195 0.18 % Time deposits — under $100 ​ 11,809 ​ ​ 97 ​ 0.82 % 12,587 ​ ​ 21 ​ 0.17 % 14,924 ​ ​ 29 0.19 % Time deposits — $100 and over ​ 218,131 ​ ​ 6,874 ​ 3.15 % 122,018 ​ ​ 609 ​ 0.50 % 128,753 ​ ​ 598 0.46 % ICS/CDARS — interest-bearing demand, money ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ market and time deposits ​ ​ 625,045 ​ ​ 14,074 ​ 2.25 % ​ 29,708 ​ ​ 5 ​ 0.02 % ​ 32,305 ​ ​ 6 ​ 0.02 % Total interest-bearing deposits ​ 3,073,540 ​ ​ 47,557 ​ 1.55 % 2,783,272 ​ ​ 6,770 ​ 0.24 % 2,591,976 ​ ​ 4,816 ​ 0.19 % Total deposits ​ 4,467,489 ​ ​ 47,557 1.06 % 4,647,200 ​ ​ 6,770 0.15 % 4,426,885 ​ 4,816 0.11 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Short-term borrowings ​ 27,145 ​ ​ 1,365 ​ 5.03 % 24 ​ ​ — ​ — % 45 ​ ​ 1 ​ 2.22 % Subordinated debt, net of issuance costs ​ ​ 39,420 ​ ​ 2,152 ​ 5.46 % ​ 41,739 ​ ​ 2,178 ​ 5.22 % ​ 39,827 ​ ​ 2,314 ​ 5.81 % Total interest-bearing liabilities ​ 3,140,105 ​ ​ 51,074 ​ 1.63 % 2,825,035 ​ ​ 8,948 ​ 0.32 % 2,631,848 ​ 7,131 0.27 % Total interest-bearing liabilities and demand, ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ noninterest-bearing / cost of funds ​ 4,534,054 ​ ​ 51,074 1.13 % 4,688,963 ​ ​ 8,948 0.19 % 4,466,757 ​ ​ 7,131 0.16 % Other liabilities ​ 102,872 ​ ​ ​ ​ ​ 104,654 ​ ​ ​ ​ ​ 114,381 ​ ​ ​ ​ ​ Total liabilities ​ 4,636,926 ​ ​ ​ ​ ​ 4,793,617 ​ ​ ​ ​ ​ 4,581,138 ​ ​ ​ Shareholders’ equity ​ 652,449 ​ ​ ​ ​ ​ 607,603 ​ ​ ​ ​ ​ 585,156 ​ ​ ​ Total liabilities and shareholders’ equity ​ $ 5,289,375 ​ ​ ​ ​ ​ $ 5,401,220 ​ ​ ​ ​ ​ $ 5,166,294 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net interest income (3) / margin ​ ​ ​ ​ 183,475 3.70 % ​ ​ ​ 180,168 3.57 % ​ 146,544 3.05 % Less tax equivalent adjustment (3) ​ ​ ​ ​ (251) ​ ​ ​ ​ ​ (288) ​ ​ (419) ​ Net interest income ​ ​ ​ $ 183,224 ​ ​ ​ ​ $ 179,880 ​ ​ $ 146,125 ​ (1) Includes loans held-for-sale.

… 128 more changes not shown on this page.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

3 edited+0 added−0 removed2 unchanged
Biggest changeFluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of the Company’s assets 87 ​ Table of Contents ​ and liabilities and the market value of all interest-earning assets, other than those which have a short term to maturity.
Biggest changeFluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of the Company’s assets and liabilities and the market value of all interest-earning assets, other than those which have a short term to maturity.
Based upon the nature of the Company’s operations, the Company is not subject to foreign exchange or commodity price risk. The Company has no market risk sensitive instruments held for trading purposes. As of December 31, 2022, the Company did not use interest rate derivatives to hedge its interest rate risk.
Based upon the nature of the Company’s operations, the Company is not subject to foreign exchange or commodity price risk. The Company has no market risk sensitive instruments held for trading purposes. As of December 31, 2023, the Company did not use interest rate derivatives to hedge its interest rate risk.
The information concerning quantitative and qualitative disclosure or market risk called for by Item 305 of Regulation S-K is included as part of Item 7 of this report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and report of the Independent Registered Public Accounting Firm are set forth on pages 94 through 145. ITEM 9.
The information concerning quantitative and qualitative disclosure or market risk called for by Item 305 of Regulation S-K is included as part of Item 7 of this report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and report of the Independent Registered Public Accounting Firm are set forth on pages 105 through 157. ITEM 9.

Other HTBK 10-K year-over-year comparisons