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HERITAGE COMMERCE CORP

HERITAGE COMMERCE CORPHTBKEarnings & Financial Report

Nasdaq · Financials · State Commercial Banks

The United States Chamber of Commerce (USCC) is a business association advocacy group and is the largest lobbying group in the United States. The group was founded in April 23, 1912, out of local chambers of commerce at the urging of President William Howard Taft and his secretary of commerce and labor Charles Nagel. President Taft's belief was that the "government needed to deal with a group that could speak with authority for the interests of business."

What changed in HERITAGE COMMERCE CORP's 10-K — 2023 vs 2024

Top changes in HERITAGE COMMERCE CORP's 2024 10-K

543 paragraphs added · 778 removed · 428 edited across 8 sections

Item 1. Business

Business — how the company describes what it does

80 edited+34 added−182 removed35 unchanged
Bank regulatory agencies have increasingly emphasized the importance of sound risk management processes and strong internal controls when evaluating the activities of the financial institutions they supervise.
Risk Management . Bank regulatory agencies have increasingly emphasized the importance of sound risk management processes and strong internal controls when evaluating the activities of the financial institutions they supervise.
The 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 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: ​ ​ ​ ​ ​ ​ 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 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 8 ​ Table of Contents 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.
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.
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 and related persons 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.
El Camino Real ​ Livermore, CA 94550 ​ ​ Suite 150 ​ ​ ​ ​ San Mateo, CA 94402 ​ ​ ​ ​ ​ Los Altos: Branch Office ​ San Rafael: Branch Office ​ 419 South Sn Antonio Road ​ ​ 999 5th Avenue ​ Los Altos, CA 94022 ​ ​ Suite 100 ​ ​ ​ ​ San Rafael, CA 94901 ​ ​ ​ ​ ​ Los Gatos: Branch Office ​ Walnut Creek: Branch Office ​ 15575 Los Gatos Boulevard ​ ​ 1990 N.
El Camino Real ​ Livermore, CA 94550 ​ ​ Suite 150 ​ ​ ​ ​ San Mateo, CA 94402 ​ ​ ​ ​ ​ Los Altos: Branch Office ​ San Rafael: Branch Office ​ 419 South San Antonio Road ​ ​ 999 5th Avenue ​ Los Altos, CA 94022 ​ ​ Suite 100 ​ ​ ​ ​ San Rafael, CA 94901 ​ ​ ​ ​ ​ Los Gatos: Branch Office ​ Walnut Creek: Branch Office ​ 15575 Los Gatos Boulevard ​ ​ 1990 N.
Federal Reserve policy historically required bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. Dodd-Frank codified this policy as a statutory requirement.
Source of Strength Doctrine . Federal Reserve policy historically required bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. Dodd-Frank codified this policy as a statutory requirement.
For example, HBC may not extend credit, lease or sell property, furnish any services, fix or vary the consideration for any of the foregoing on the condition that: (i) the customer must obtain or provide some additional credit, property or services from or to HBC other than a loan, discount, deposit or trust services; (ii) the customer must obtain or provide some additional credit, property or service from or to HCC or HBC; or (iii) the customer must not obtain some other credit, property or services from competitors, except reasonable requirements to assure soundness of credit extended.
For example, HBC may not extend credit, lease or sell property, furnish any services, fix or vary the consideration for any of the foregoing on the condition that: (i) the client must obtain or provide some additional credit, property or services from or to HBC other than a loan, discount, deposit or trust services; (ii) the client must obtain or provide some additional credit, property or service from or to HCC or HBC; or (iii) the client must not obtain some other credit, property or services from competitors, except reasonable requirements to assure soundness of credit extended.
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.
Many larger unregulated competitors are able to compete across geographic boundaries, and provide clients 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.
In addition, many customers now expect a choice of delivery channels, including telephone and smart phones, mail, personal computer, ATMs, self-service branches, and/or in-store branches. Strong competition for deposits and loans among financial institutions and non-banks alike affects interest rates and other terms on which financial products are offered to customers.
In addition, many clients now expect a choice of delivery channels, including telephone and smart phones, mail, personal computer, ATMs, self-service branches, and/or in-store branches. Strong competition for deposits and loans among financial institutions and non-banks alike affects interest rates and other terms on which financial products are offered to clients.
New products and services, third-party risk management and cybersecurity are critical sources of operational risk that financial institutions are expected to address in the current environment. HBC is expected to have active board and senior management oversight; adequate policies, procedures, and limits; adequate risk measurement, monitoring, and management information systems; and comprehensive internal controls. Branching Authority .
New products and services, third-party risk management and cybersecurity are critical sources of operational risk that financial institutions are expected to address in the current environment. HBC is expected to have active board and senior management oversight; adequate policies, procedures, and limits; adequate risk measurement, monitoring, and management information systems; and comprehensive internal controls.
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.
HBC continues to investigate products and services that it believes address the growing needs of its clients 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.
Technological innovations have lowered traditional barriers of entry and enabled many of these companies to compete in financial services markets. Such innovation has, for example, made it possible for non-depository institutions to offer customers automated transfer payment services that previously were considered traditional banking products.
Technological innovations have lowered traditional barriers of entry and enabled many of these companies to compete in financial services markets. Such innovation has, for example, made it possible for non-depository institutions to offer clients automated transfer payment services that previously were considered traditional banking products.
Deposit Insurance . HBC is a member of the Deposit Insurance Fund (“DIF”) administered by the FDIC, which insures customer deposit accounts. The amount of federal deposit insurance coverage is $250,000 per depositor, for each account ownership category at each depository institution. The $250,000 amount is subject to periodic adjustments.
Deposit Insurance . HBC is a member of the Deposit Insurance Fund (“DIF”) administered by the FDIC, which insures client deposit accounts. The amount of federal deposit insurance coverage is $250,000 per depositor, for each account ownership category at each depository institution. The $250,000 amount is subject to periodic adjustments.
In those instances where the Company is unable to accommodate a customer’s needs, the Company seeks to arrange for such loans on a participation basis with other financial institutions or to have those services provided in whole or in part by its correspondent banks.
In those instances where the Company is unable to accommodate a client’s needs, the Company seeks to arrange for such loans on a participation basis with other financial institutions or to have those services provided in whole or in part by its correspondent banks.
Many states and local jurisdictions have consumer protection laws analogous to those listed above. Violations of applicable consumer protection laws can result in significant potential liability from litigation brought by customers, including actual and statutory damages, restitution and attorneys’ fees.
Many states and local jurisdictions have consumer protection laws analogous to those listed above. Violations of applicable consumer protection laws can result in significant potential liability from litigation brought by clients, including actual and statutory damages, restitution and attorneys’ fees.
In addition, we have established a convenient customer service group accessible by toll free telephone to answer questions and promote a high level of customer service. HBC does not have a trust department. In addition to the traditional financial services offered, HBC offers remote deposit capture, automated clearing house origination, electronic data interchange and check imaging.
In addition, we have established a convenient client service group accessible by toll free telephone to answer questions and promote a high level of client service. HBC does not have a trust department. In addition to the traditional financial services offered, HBC offers remote deposit capture and mobile deposit capture, automated clearing house origination, electronic data interchange and check imaging.
Federal bank regulators, state attorneys general, and state and local consumer protection agencies may also seek to enforce consumer protection requirements and obtain these and other remedies, including regulatory sanctions, customer rescission rights, and civil money penalties.
Federal bank regulators, state attorneys general, and state and local consumer protection agencies may also seek to enforce consumer protection requirements and obtain these and other remedies, including regulatory sanctions, client rescission rights, and civil money penalties.
For customers whose needs exceed our legal lending limit, we arrange for the sale, or “participation,” of some of the balances to financial institutions that are not within our geographic footprint.
For clients whose needs exceed our legal lending limit, we arrange for the sale, or “participation,” of some of the balances to financial institutions that are not within our geographic footprint.
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”).
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”).
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.
In the event creditworthy loan clients’ 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 clients and their businesses.
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.
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.
We also encourage employees to submit suggestions through our “Big Idea” electronic portal. Furthermore, multiple executives facilitate periodic cross-functional focus groups to gather input on our strengths and areas where we can further improve.
We also encourage team members to submit suggestions through our “Big Idea” electronic portal. Furthermore, multiple executives facilitate periodic cross-functional focus groups to gather input on our strengths and areas where we can further improve.
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.
For clients 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 clients’ FDIC insurance.
We are subject to a number of federal and state consumer protection laws that extensively govern our relationship with our customers.
We are subject to a number of federal and state consumer protection laws that extensively govern our relationship with our clients.
We continued to expand on existing communication efforts such as our anonymous “Ask CEO” portal with our Chief Executive Officer (“CEO”), providing answers and updates during regularly scheduled all-hands meetings throughout the year. In 2023, we also introduced a CEO welcome luncheon so all new team members can establish a direct connection to the CEO.
We continued to expand on existing communication efforts such as our anonymous “Ask CEO” portal with our Chief Executive Officer providing answers and updates during regularly scheduled all-hands meetings throughout the year. In 2024, we continued our CEO welcome luncheon so all new team members can establish a direct connection to the CEO.
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.
HBC also receives reciprocal deposits from other participating financial institutions. ​ 6 ​ Table of Contents 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 clients, to compete with larger banks and to provide a convenient platform for clients to review and transact business.
In 2023, we launched our inaugural Leadership Essentials Workshop series with modules consisting of (1) Recruiting and Hiring and Retaining Top Talent; (2) Leveraging Individual and Team Strengths; (3) Talent Development, Performance Management and Effective Coaching; (4) Handling Employee Relations Matters, Decision Making and Accountability; and (5) Communicating Effectively and Inspiring Positive Change.
In 2024, we continued our Leadership Essentials Workshop series with modules consisting of (1) Recruiting and Hiring and Retaining Top Talent; (2) Leveraging Individual and Team Strengths; (3) Talent Development, Performance Management and Effective Coaching; (4) Handling Employee Relations Matters, Decision Making and Accountability; and (5) Communicating Effectively and Inspiring Positive Change.
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.
HBC ranks fourteenth with 0.74% share of total deposits based on June 30, 2024 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 clients.
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 .
Institutions with less than $10 billion in assets generally have an assessment rate that can range from 2.5 to 32 basis points per annum. 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. Dividend Payments .
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.
As of December 31, 2024, using regulatory definitions in the CRE Concentration Guidance, our CRE loans represented 311% of HBC total risk-based capital, as compared to 306% as of December 31, 2023.
If the regulatory agencies become concerned about our CRE loan concentrations, it could limit our ability to grow by restricting approvals for the establishment or acquisition of branches, or approvals of mergers or other acquisition opportunities. Consumer Financial Services .
If the regulatory agencies become concerned about our CRE loan concentrations, they could limit our ability to grow by restricting approvals for the establishment or acquisition of branches, or approvals of mergers or other acquisition opportunities.
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.
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 520 offices that control 7 ​ Table of Contents a combined 69.45% of deposit market share based on June 30, 2024 FDIC market share data.
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.
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 client segments.
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.
Failure to comply with applicable laws and regulations could subject us and our officers and directors to administrative sanctions and potentially substantial civil 16 ​ Table of Contents 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.
In order to compete with the other financial service providers, the Company principally relies upon community-oriented, personalized service, local promotional activities, personal relationships established by officers, directors, and employees with its customers, and specialized services tailored to meet its customers’ needs.
In order to compete with the other financial service providers, the Company principally relies upon community-oriented, personalized service, local promotional activities, personal relationships established by officers, directors, and team members with its clients, and specialized services tailored to meet its clients’ needs.
Non-compliance with consumer protection requirements may also result in our failure to obtain any required bank regulatory approval for merger or acquisition transactions we may wish to pursue or prohibition from engaging in such transactions even if approval is not required.
Non-compliance with consumer protection requirements may also result in our failure to obtain any required bank regulatory approval for merger or acquisition transactions we may wish to pursue or prohibition from engaging in such transactions even if approval is not required. Enforcement Powers of Federal and State Banking Agencies.
We have paid a quarterly dividend to our shareholders every quarter since 2013. The primary source of funds for HCC is dividends from HBC.
Heritage Commerce Corp has paid a quarterly dividend to our shareholders every quarter since 2013. The primary source of funds for HCC is dividends from HBC.
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.
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.
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.
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.
As of December 31, 2023, HBC was eligible to accept brokered deposits without limitations. 21 ​ Table of Contents ​ Loans to One Borrower .
As of December 31, 2024, HBC was eligible to accept brokered deposits without limitations. Loans to One Borrower .
With this in mind, we are dedicated to recruiting, nurturing, advancing and retaining a workforce that embraces and cultivates a culture of excellence, teamwork, customer focus, diversity, equity, inclusivity, belonging, and accountability. We constantly work on finding ways to improve our culture, recruitment strategies, training and retention.
We believe deeply that team members drive our Company’s stability and success. With this in mind, we are dedicated to recruiting, nurturing, advancing and retaining a workforce that embraces and cultivates a culture of excellence, teamwork, client focus, engagement, equity, inclusivity, belonging, and accountability. We constantly work on finding ways to improve our culture, recruitment strategies, training and retention.
When we identify chances to enhance pay equity, we proactively take steps to address them. We adhere to the Senate Bill 1162 CA Pay Transparency Regulations, both as to specific requirements and the spirit behind the bill. We use a balanced performance evaluation approach to assess four core areas: Business Results, Internal/External Client Experience, Teamwork/Leadership and Risk/Compliance/Controls.
We adhere to the California Senate Bill 1162 Pay Transparency Regulations, both as to specific requirements and the spirit behind the bill. We use a balanced performance evaluation approach to assess four core areas: Business Results, Internal/External Client Experience, Teamwork/Leadership and Risk/Compliance/Controls.
An institution’s federal regulator may require the institution to hold more capital than would otherwise be required under the Capital Rules if the regulator determines that the institution’s capital requirements under the Capital Rules are not commensurate with the institution’s credit, market, operational or other risks.
An institution’s federal regulator also may require the institution to hold more capital than would otherwise be required under the Capital Rules if the regulator determines that the institution’s capital requirements under the Capital Rules are not commensurate with the institution’s credit, market, operational or other risks. ​ 13 ​ Table of Contents Supervision and Regulation of Heritage Commerce Corp General .
We offer a “remote deposit capture” product that allows deposits to be made via computer at the customer’s business location. We also offer customers “e-statements” that allows customers to receive statements electronically, which is more convenient and secure than receiving paper statements.
We offer “remote deposit capture” and “mobile deposit capture” products that allow deposits to be made via computer at the client’s business location or the client’s mobile phone. We also offer clients “e-statements” that allows clients to receive statements electronically, which is more convenient and secure than receiving paper statements.
Talent Development and Succession Planning Throughout the year, employees are offered a variety of opportunities to participate in learning and education programs such as attending internal and external seminars/workshops, on-line training courses, panel discussions and trade group conferences to enrich one’s own development. Additionally, we offer a generous tuition reimbursement to support employees’ desire to pursue higher education degrees.
Talent Development and Succession Planning Throughout the year, team members are offered a variety of opportunities to participate in learning and education programs such as attending internal and external seminars/workshops, on-line training courses, panel discussions and trade group conferences to enrich one’s own development.
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.
In addition to the requirements of the California Corporations Code, which imposes certain solvency tests and board-level approval requirements, the Federal Reserve may require a bank holding company to 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.
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.
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 critical roles.
In accordance with Federal Reserve laws and regulations, HCC is required to act as a source of financial strength to HBC and to commit resources to support HBC in circumstances where HCC might not otherwise do so. HCC is also a bank holding company within the meaning of Section 1280 of the California Financial Code.
In accordance with Federal Reserve laws and regulations, HCC is required to act as a source of financial strength to HBC and to commit resources to support HBC in circumstances where HCC might not otherwise do so. Permitted Activities .
The policy dictates that investment decisions take into consideration the safety of principal, liquidity requirements and interest rate risk management. All securities transactions are reported to the Board’s Finance and Investment Committee on a monthly basis. Sources of Funds Deposits traditionally have been our primary source of funds for our investment and lending activities.
The policy dictates that investment decisions take into consideration the safety of principal, liquidity requirements and interest rate risk management. All securities transactions are reported to the Board’s Finance and Investment Committee on a quarterly basis.
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.
We generally do not have banking relationships that approach these limitations. 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.
The Company adopted its Executive Incentive Compensation Recovery Policy effective October 1, 2023. ​ Enforcement Powers of Federal and State Banking Agencies. The federal bank regulatory agencies have broad enforcement powers, including the power to terminate deposit insurance, impose substantial fines and other civil and criminal penalties, and appoint a conservator or receiver for financial institutions.
The federal bank regulatory agencies have broad enforcement powers, including the power to terminate deposit insurance, impose substantial fines and other civil and criminal penalties, and appoint a conservator or receiver for financial institutions.
We are subject to federal laws aiming to counter money laundering and terrorist financing, as well as transactions with persons, companies and foreign governments sanctioned by the United States. These laws include the PATRIOT Act, the Bank Secrecy Act (“BSA”), and the Anti-Money Laundering Act (“AMLA”), among others.
Anti-Money Laundering and Office of Foreign Assets Control Regulation . We are subject to federal laws aiming to counter money laundering and terrorist financing, as well as transactions with persons, companies and foreign governments sanctioned by the United States.
Progress on these human capital efforts and programming are shared regularly with the Board’s Personnel and Compensation Committee throughout the 12 ​ Table of Contents ​ year because we believe their perspective and feedback is invaluable to our continuous improvement. Our ultimate goal is to deepen client and community relationships and deliver an exceptional experience to all whom we serve.
Progress on these human capital efforts and programming are shared regularly with the Board’s Personnel and Compensation Committee throughout the year because we believe their perspective and feedback are invaluable to our continuous improvement.
The Federal Reserve has the power to order any bank holding company or its subsidiaries to terminate any activity or to terminate its ownership or control of any subsidiary when the Federal Reserve has reasonable grounds to believe that continuing such activity, ownership or control constitutes a serious risk to the financial soundness, safety or stability of any bank subsidiary of the bank holding company.
The BHCA generally prohibits HCC from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company that is not a bank or whose business is not “closely related to banking.” The Federal Reserve has the power to order any bank holding company or its subsidiaries to terminate any activity or to terminate its ownership or control of any subsidiary when the Federal Reserve has reasonable grounds to believe that continuing such activity, ownership or control constitutes a serious risk to a subsidiary’s financial soundness, safety or stability.
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.
All of HBC’s electronic banking services allow clients 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 online commercial banking also allows clients to initiate domestic wire transfers and ACH transactions.
Every director and employee must now annually confirm their acknowledgement of the Company’s Code of Ethics and Conduct, and senior leadership team members are subject to a more restrictive Executive and Principal Financial Officer Code of Ethics, as well.
Every team member must annually confirm their acknowledgement of the Company’s Code of Ethics and Conduct, and senior leadership team members are subject to a more restrictive Executive and Principal Financial Officer Code of Ethics, as well. Team members can report concerns to their manager, any company leader, Human Resources, or via the anonymous hotline and intranet site.
These statutes, regulations, regulatory policies and rules are significant to the financial condition and results of operations of the Company and its subsidiaries, including HBC. The nature and extent of future legislative, regulatory or other changes affecting financial institutions are impossible to predict with any certainty.
These statutes, regulations, regulatory policies and rules are significant to the financial condition and results of operations of the Company and its subsidiaries, including HBC.
Compensation Our Company’s pay for performance compensation philosophy offers all employees the opportunity to earn annual bonuses in addition to base salaries depending on individual, team, and Company performance results. We are 14 ​ Table of Contents ​ committed to pay equity and regularly review our compensation model to ensure fair pay practices across our Company.
Compensation Our Company’s pay-for-performance compensation philosophy offers all team members the opportunity to earn annual bonuses in addition to base salaries depending on individual, team, and company performance results. The company reviews its compensation model regularly to ensure equitable pay practices. When we identify chances to enhance pay equity, we proactively take steps to address them.
We offer sophisticated electronic or “internet banking” opportunities that permit commercial customers to conduct much of their banking business remotely from their home or business. However, our customers always have the opportunity to personally discuss specific banking needs with knowledgeable bank officers and staff who are directly accessible in the branches and offices as well as by telephone and email.
However, our clients always have the opportunity to personally discuss specific banking needs with knowledgeable bank officers and staff who are directly accessible in the branches and offices as well as by telephone and email. Other Banking Services We offer a multitude of other products and services to complement our lending and deposit services.
In 2023, grounded in our Core Values, we significantly overhauled our Company’s Code of Ethics and Conduct to offer more specificity to directors and employees. This update introduced revisions and additional clarity across different sections, such as workplace safety, protection of client and team member information, conflict of interest guidelines, anti-retaliation policy, and procedures for reporting concerns.
We expect team members always to treat clients and stakeholders with courtesy and respect. Our Company’s Code of Ethics and Conduct continues to offer specificity to directors and team members across different sections, embodying such principles as workplace safety, protection of client and team member information, conflict of interest guidelines, anti-retaliation policy, and procedures for reporting concerns.
Mergers between financial institutions have placed additional pressure on other banks within the industry to remain competitive by streamlining operations, reducing expenses, and increasing revenues. Competition has also intensified due to Federal and state interstate banking laws enacted in the mid-1990’s, which permit banking organizations to expand into other states.
Mergers between financial institutions have placed additional pressure on other banks within the industry to remain competitive by streamlining operations, reducing expenses, and increasing revenues.
Our broad outreach efforts cover a variety of focus areas like economic development, education, financial literacy, health and human services, housing and homelessness, small business and entrepreneurship support, animal services, environmental, and arts and culture.
In 2024, we contributed more than 2,100 hours to strengthen our relationship with local nonprofit organizations. More than 40 team members serve on over 55 boards. Our broad outreach efforts cover a variety of focus areas like economic development, education, financial literacy, health and human services, housing and homelessness, small business and entrepreneurship support, animal services, environmental, arts and culture.
Heritage Commerce Corp General . As a bank holding company, HCC is subject to regulation, supervision and periodic examination by the Federal Reserve under the Bank Holding Company Act of 1956, as amended (the “BHCA”). HCC is required to file with the Federal Reserve periodic reports of its operations and such additional information as the Federal Reserve may require.
As a bank holding company, HCC is subject to regulation, supervision and periodic examination by the Federal Reserve under the Bank Holding Company Act of 1956, as amended (the “BHCA”), and by the DFPI in accordance with the California Financial Code.
An institution that does not meet the conservation buffer will be subject to restrictions on certain activities including payment of dividends, stock repurchases and discretionary bonuses to executive officers. The Capital Rules set forth the manner in which certain capital elements are determined, including but not limited to, requiring certain deductions related to mortgage servicing rights and deferred tax assets.
An institution that does not meet the conservation buffer will be subject to restrictions on certain activities including payment of dividends, stock repurchases and discretionary bonuses to executive officers. The Capital Rules also prescribe the methods for mitigating the impact of intangible assets on our capital ratios, and for calculating risk-based assets and ratios.
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.
We also offer home equity lines of credit, to accommodate the needs of business owners and individual clients, as well as consumer loans (both secured and unsecured). 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.
Employees also have the opportunity to earn industry related and/or role related professional certifications and our Company reimburses for classes, materials, test fees, and ongoing required education costs. Each year, we also offer certain identified leaders an opportunity to attend Pacific Coast Banking School as part of their career development plan.
Each year, we also offer certain identified leaders an opportunity to attend Pacific Coast Banking School as part of their career development plan.
Common equity Tier 1 capital generally consists of retained earnings and common stock instruments (subject to certain adjustments), as well as accumulated other comprehensive income (“AOCI”) except to the extent that the Company and HBC exercise a one-time irrevocable option to exclude certain components of AOCI. Both the Company and HBC made this election in 2015.
The Capital Rules generally recognize three components, or tiers, of capital: common equity Tier 1 capital, additional Tier 1 capital and Tier 2 capital. Common equity Tier 1 capital generally consists of retained earnings and common stock instruments (subject to certain adjustments), as well as accumulated other comprehensive income (“AOCI”).
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.
Regulatory authorities have imposed cease and desist orders and civil money penalties against institutions found to be violating these obligations. Concentrations in Commercial Real Estate . 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.
HBC is subject to regulation, supervision, and regular examination by the DFPI and the Federal Reserve as HBC’s primary federal regulator. The regulations of these agencies govern most aspects of a bank’s business.
HBC is a California state-chartered commercial bank that is a member of the Federal Reserve System and whose deposits are insured by the FDIC. HBC is thus subject to regulation, supervision, and regular examination by the DFPI and the Federal Reserve as HBC’s primary federal regulator.
We could see continued attention and resources devoted by the Company to ensure compliance with the statutory and regulatory requirements engendered by Dodd-Frank. Regulatory Capital Requirements The Company and HBC are subject to a comprehensive capital framework (the “Capital Rules”) adopted by Federal banking regulators (including the Federal Reserve and the FDIC).
Regulatory Capital Requirements The Company and HBC are subject to a comprehensive capital framework (the “Capital Rules”) adopted by Federal banking regulators (including the Federal Reserve and the FDIC). The Capital Rules implement the Basel III framework for strengthening the regulation, supervision and risk management of banks, as well as certain provisions of Dodd-Frank.
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.
We support the wellness of all colleagues through various programs, including Employee Assistance Program (“EAP”), health seminars, education programs and health club memberships. All team members are eligible to take advantage of our EAP programs which offer counseling services, family support, help on financial and legal issues, and mental health support.
In 2023, we launched the inaugural enterprise Core Values created by the partnership of the DEIB Steering Committee and Culture Ambassadors that was approved by our Board: ​ Further demonstrating our core value of serving with purpose and passion, our Heritage Hearts Committee relaunched with a mission to source nonprofit volunteer and board opportunities for Company employees across the Bay Area.
Culture Ambassadors serve an important role to help shape enterprise initiatives such as creation of corporate values. ​ 10 ​ Table of Contents In 2024, our Core Values focus continued: ​ Continuing in our core value of serving with purpose and passion, our Heritage Hearts Committee continued with a mission to source nonprofit volunteer and board opportunities for Company team members across the Bay Area.
We achieved 100% participation (excluding Q4 new hires). 13 ​ Table of Contents ​ Management continued to provide Company-wide listening sessions to solicit feedback, enhance engagement, and cultivate positive culture. Based on feedback from listening sessions, we also created a Culture Ambassador Group (akin to employee resource groups for larger organizations) comprised of non-executive employees from various departments and locations.
Based on feedback from listening sessions, we also created a Culture Ambassador Group (akin to employee resource groups for larger organizations) comprised of non-executive team members from various departments and locations. Through self-identification, the Culture Ambassadors represent 77% female and 62% ethnic/racial diversity.
The CEO highlights and broadly shares Core Value Champions’ stories, celebrating their exemplary accomplishments and contributions. We continually promote a speak-up culture, so our workplace feels welcoming and safe. We expect employees always to treat clients and stakeholders with courtesy and respect.
Throughout the year, team members are encouraged to nominate colleagues who go above and beyond their regular duties in showcasing one or more of our core values. The CEO highlights and publicly applauds Core Value Champions’ stories, celebrating their exemplary accomplishments and contributions. We continually promote a speak-up culture, so our workplace feels welcoming and safe.
Internal career mobility continues to be an important part of employee engagement and development. In 2023, 66% of promotions identified as female and 41% were racially or ethnically diverse. ​ 15 ​ Table of Contents ​ PROMOTIONS (internal career mobility) ​ ​ Culture and Conduct Teamwork is not only promoted but celebrated through various recognition programs.
Additionally, career mobility continues to be an important part of team member engagement and development. ​ Culture and Conduct Teamwork is not only promoted but celebrated through various recognition programs. Our “Core Values Champions” continues to recognize individuals who demonstrate our Company’s Core Values through their work and interactions.
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.
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 ​ ​ ​ ​ 9 ​ Table of Contents HUMAN CAPITAL ​ We strive to be the employer of choice among banks in our markets, by building a reputation as a place where every team member can thrive.
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.
We have an extensive suite of online banking services, but our business is based largely on our network of seventeen full-service branches around the San Francisco Bay and Silicon Valley areas of coastal Central California, including locations in Alameda, Contra Costa, Marin, San Benito, San Francisco, San Mateo and Santa Clara counties.
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.
We provide a full line of banking services and products to business and individual clients, with a focus on small and medium-sized business and their owners, managers and employees.
Our market includes the headquarters of a number of technology based companies in the region commonly known as “Silicon Valley.” Our lending activities are diversified and include commercial, real estate, construction and land development, consumer and Small Business Administration (“SBA”) guaranteed loans. We generally lend in markets where we have a physical presence through our branch offices.
We believe our loan portfolio is well-diversified among the commercial, real estate, construction and land development, consumer and Small Business Administration (“SBA”) sectors. Both our loan and deposit bases are originated primarily on the basis of our physical presence through our branch offices. We offer a wide range of deposit products and loans for business banking and retail markets.
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 .
The Capital Rules also require that a holding company seeking to pay dividends must maintain 2.5% in common equity Tier 1 capital attributable to the capital conservation buffer. See “Supervision and Regulation—Regulatory Capital Requirements,” above. Acquisitions, Activities and Change in Control . The BHCA and the California Financial Code also substantially govern an institution’s ability to grow by acquisition.
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.
ITEM 1. BUSINESS General We are a bank holding company formed in 1997 as the sole shareholder of Heritage Bank of Commerce (“HBC” or the “Bank”), a California-chartered, FDIC-insured community-focused business bank headquartered in San Jose, California, since its formation in 1994.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Resales of substantial amounts of common stock in the public market and the potential of such sales could adversely affect the prevailing market price of our common stock and impair our ability to raise additional capital through the sale of equity securities.
Sales and resales of substantial amounts of common stock in the public market and the potential of such sales could adversely affect the prevailing market price of our common stock and impair the market price of our stock and our ability to raise additional capital through the sale of equity securities.
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.
The risks discussed below are those that we believe are the most significant risks, although additional risks not presently known to us or that we currently deem less significant may also adversely affect our business, financial condition and results of operations, perhaps materially.
The risks discussed below are those that we believe are the most significant risks, although additional risks not presently known to us or that we currently deem less significant may also materially and adversely affect our business, financial condition and results of operations.
We cannot assure that such breaches, failures or interruptions will not occur or, if they do occur, that they will be adequately addressed by us or the third parties on which we rely. Our insurance may not fully cover all types of losses.
We cannot assure readers that such breaches, failures or interruptions will not occur or, if they do occur, that they will be adequately addressed by us or the third parties on which we rely. Our insurance may not fully cover all types of losses.
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.
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 clients 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.
Risks Related to Our Loans Because a significant portion of our loan portfolio is comprised of real estate loans, negative changes in the economy affecting real estate values and liquidity could impair the value of collateral securing our real estate loans and result in loan and other losses.
Risks Related to Our Loans Because a significant portion of our loan portfolio is comprised of real estate loans, negative changes affecting real estate values and liquidity could impair the value of collateral securing our loans and result in loan and other losses.
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.
Our access to funding sources in amounts adequate to finance or capitalize our activities on terms that are acceptable to us could be 31 ​ 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.
When our customers move money into higher yielding deposits or in favor of alternative investments, we can lose a relatively inexpensive source of funds, thus increasing our funding costs. New technology and other changes are allowing parties to effectuate financial transactions that previously required the involvement of banks.
When our clients move money into higher yielding deposits or in favor of alternative investments, we can lose a relatively inexpensive source of funds, thus increasing our funding costs. New technology and other changes are allowing parties to effectuate financial transactions that previously required the involvement of banks.
Such declines and losses would have a material adverse effect on our business, financial condition, and results of operations. Our construction and land development loans are based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate and we may be exposed to more losses on these projects than on other loans.
Such declines and losses would have a material adverse effect on our business, financial condition, and results of operations. Our land and construction development loans are based upon estimates of costs and value associated with the completed project. These estimates may be inaccurate and we may be exposed to more losses on these projects than on other loans.
If we experience diminished financial strength or stability, actual or perceived, including due to market or regulatory developments, announced or rumored business developments or results of operations, or a decline in stock price, customers may withdraw their deposits or otherwise seek services from other banking institutions and prospective customers may select other service providers.
If we experience diminished financial strength or stability, actual or perceived, including due to market or regulatory developments, announced or rumored business developments or results of operations, or a decline in stock price, clients may withdraw their deposits or otherwise seek services from other banking institutions and prospective clients may select other service providers.
Liquidity risks could affect operations and jeopardize our business, financial condition, and results of operations. Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and/or investment securities, and from other sources could have a substantial negative effect on our liquidity. Our most important source of funds consists of our customer deposits.
Liquidity risks could affect operations and jeopardize our business, financial condition, and results of operations. Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and/or investment securities, and from other sources could have a substantial negative effect on our liquidity. Our most important source of funds consists of our client deposits.
If customers reduce their deposits with us or select other service providers for all or a portion of the services that we provide them, net interest income and fee revenues will decrease accordingly, and could have a material adverse effect on our results of operations.
If clients reduce their deposits with us or select other service providers for all or a portion of the services that we provide them, net interest income and fee revenues will decrease accordingly, and could have a material adverse effect on our results of operations.
Risks Related to Our Financial Strength and Liquidity An actual or perceived reduction in our financial strength may cause others to reduce or cease doing business with us, which could result in a decrease in our net interest income and fee revenues. Our customers rely upon our financial strength and stability and evaluate the risks of doing business with us.
Risks Related to Our Financial Strength and Liquidity An actual or perceived reduction in our financial strength may cause others to reduce or cease doing business with us, which could result in a decrease in our net interest income and fee revenues. Our clients rely upon our financial strength and stability and evaluate the risks of doing business with us.
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.
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, 2024, we had $40.0 million principal amount of subordinated notes outstanding due May 15, 2032.
We expect we may see tighter competition in the industry as banks seek to take market share in the most profitable customer segments, particularly the small business segment and the mass affluent segment, which offers a rich source of deposits as well as more profitable and less risky customer relationships.
We expect we may see tighter competition in the industry as banks seek to take market share in the most profitable client segments, particularly the small business segment and the mass affluent segment, which offers a rich source of deposits as well as more profitable and less risky client relationships.
Although our common stock is listed for trading on the Nasdaq, its trading volume is less than that of other, larger financial services companies, and investors are not assured that a liquid market will exist at any given time for our common stock.
Although our common stock is listed for trading on The Nasdaq Stock Market LLC (“Nasdaq”), its trading volume is less than that of other, larger financial services companies, and investors are not assured that a liquid market will exist at any given time for our common stock.
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.
If clients 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.
The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. Increased competition in our markets may result in reduced loans, deposits, and fee income, as well as reduced net interest margin and profitability.
The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of client deposits and the related income generated from those deposits. Increased competition in our markets may result in reduced loans, deposits, and fee income, as well as reduced net interest margin and profitability.
Provisions of our charter documents and the California General Corporation Law, or the CGCL, could make it more difficult for a third party to acquire us, even if doing so would be perceived to be beneficial by our shareholders.
Provisions of our charter documents and the California General Corporation Law could make it more difficult for a third party to acquire us, even if doing so would be perceived to be beneficial by our shareholders.
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.
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 fluctuations have in the past resulted in declines, and in the future may cause further declines, in the carrying value of our available-for-sale securities portfolio and our portfolio of fixed rate loans, as well as the value of securities pledged as collateral for certain borrowing lines.
Such fluctuations have in the past resulted in declines, and in the future may cause further declines, in the carrying value of our available-for-sale securities portfolio and our portfolio of fixed rate loans, as well as the value of securities pledged as collateral for certain borrowing lines.
Acquisitions of financial institutions involve operational risks and uncertainties and acquired companies may have unforeseen liabilities, exposure to asset quality problems, key employee and customer retention problems and other problems that could negatively affect our organization.
Acquisitions of financial institutions involve operational risks and uncertainties and acquired companies may have unforeseen liabilities, exposure to asset quality problems, key employee and client retention problems and other problems that could negatively affect our organization.
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.
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 or to raise capital.
Our operations could be interrupted by our third-party service providers experiencing difficulty in providing their services, terminating their services or failing to comply with banking regulations. We depend to a significant extent on relationships with third party service providers.
Our operations could be disrupted by our third-party service providers experiencing difficulty in providing their services, terminating their services or failing to comply with banking regulations. We depend to a significant extent on relationships with third-party service providers.
If we lose our status as an SBA Preferred Lender, we may lose some or all of our customers to lenders who are SBA Preferred Lenders, and as a result we could experience a material adverse effect to our financial results.
If we lose our status as an SBA Preferred Lender, we may lose some or all of our clients to lenders who are SBA Preferred Lenders, and as a result we could experience a material adverse effect to our financial results.
If our internal controls against operational risks fail to prevent or detect an occurrence of such employee error or misconduct, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, financial condition and results of operations.
If our internal controls against operational risks fail to prevent or detect an occurrence of such team member error or misconduct, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, financial condition and results of operations.
From time to time, the FASB or the SEC, may change the financial accounting and reporting standards that govern the preparation of our financial statements. Such changes may result in us being subject to new or changing accounting and reporting standards.
From time to time, the Financial Accounting Standards Board or the SEC, may change the financial accounting and reporting standards that govern the preparation of our financial statements. Such changes may result in us being subject to new or changing accounting and reporting standards.
In deciding whether to extend credit or to enter into other transactions with customers and counterparties, we may rely on information furnished to us by or on behalf of customers and counterparties, including financial statements and other financial information.
In deciding whether to extend credit or to enter into other transactions with clients and counterparties, we may rely on information furnished to us by or on behalf of clients and counterparties, including financial statements and other financial information.
These recent events may also result in potentially adverse changes to laws or regulations governing banks and bank holding companies or result in the imposition of restrictions through supervisory or enforcement activities, including higher capital requirements, which could have a material impact on our business.
Events such as these may also result in potentially adverse changes to laws or regulations governing banks and bank holding companies or result in the imposition of restrictions through supervisory or enforcement activities, including higher capital requirements, which could have a material impact on our business.
Unlike home mortgage loans, which generally are made on the basis of the borrowers’ ability to make repayment from their employment and other income and which are secured by real property whose value tends to be more easily ascertainable, commercial loans typically are made on the basis of the borrowers’ ability to make repayment from the cash flow of the commercial venture.
Unlike home mortgage loans, which generally are made on the basis of the borrowers’ ability to make repayment from their employment and other income and which are secured by real property whose value tends to be more easily ascertainable, commercial loans typically are made on the basis of the borrowers’ 23 ​ Table of Contents ability to make repayment from the cash flow of the commercial venture.
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.
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.
The guidance provides that we inform and consult with the Federal Reserve prior to declaring and paying a dividend that exceeds earnings for the period for which the dividend is being paid or that could result in an adverse change to our capital structure, including interest on our debt obligations.
The guidance provides that we inform and consult with the Fed prior to declaring and paying a dividend that exceeds earnings for the period for which the dividend is being paid or that could result in an adverse change to our capital structure, including interest on our debt obligations.
Further, significant economic fluctuations, or customers’ expectations about such events (whether or not those expectations materialize) may exacerbate depositors’ sensitivity to the availability of cash to fund immediate withdrawals.
Further, significant economic fluctuations, or clients’ expectations about such events (whether or not those expectations materialize) may exacerbate depositors’ sensitivity to the availability of cash to fund immediate withdrawals.
We receive substantially all of our revenue from dividends paid to us by HBC, which we use as the principal source of funds to pay our expenses and to pay dividends to our shareholders, if any. Various federal and/or state laws and regulations limit the amount of dividends that HBC may pay us.
We receive substantially all of our revenue from dividends 36 ​ Table of Contents paid to us by HBC, which we use as the principal source of funds to pay our expenses and to pay dividends to our shareholders, if any. Various federal and/or state laws and regulations limit the amount of dividends that HBC may pay us.
As a result, our inability to successfully manage credit risk could have a material adverse effect on our business, financial condition and results of operations. 35 ​ Table of Contents ​ Our allowance for credit losses on loans may prove to be insufficient to absorb potential losses in our loan portfolio.
As a result, our inability to successfully manage credit risk could have a material adverse effect on our business, financial condition and results of operations. Our allowance for credit losses on loans may prove to be insufficient to absorb potential losses in our loan portfolio.
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.
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.
As a bank holding company, we are subject to regulation by the Federal Reserve. The Federal Reserve has indicated that bank holding companies should carefully review their dividend policy in relation to the organization’s overall asset quality, current and prospective earnings and level, composition and quality of capital.
As a bank holding company, we are subject to regulation by the Fed. The Fed has indicated that bank holding companies should carefully review their dividend policy in relation to the organization’s overall asset quality, current and prospective earnings and level, composition and quality of capital.
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.
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.
We depend on the accuracy and completeness of information provided by customers and counterparties and any misrepresented information could adversely affect our business, financial condition and results of operations.
We depend on the accuracy and completeness of information provided by clients and counterparties and any misrepresented information could adversely affect our business, financial condition and results of operations.
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.
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 Fed.
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.
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.
We expect that our regulators will hold us responsible for deficiencies of our third party relationships which could result in enforcement actions, including civil money penalties or other administrative or judicial penalties or fines, or customer remediation, any of which could have a material adverse effect on our business, financial condition and results of operations.
We expect that our regulators would hold us responsible for deficiencies of our third-party relationships which could result in enforcement actions, including civil money penalties or other administrative or judicial penalties or fines, or client remediation, any of which could have a material adverse effect on our business, financial condition and results of operations.
The failure to meet applicable regulatory capital requirements could result in one or more of our regulators placing limitations or conditions on our activities, including our growth initiatives, or restricting the commencement of new activities, and could affect customer and investor confidence, our costs of funds and FDIC insurance costs, our ability to pay dividends on our common stock, our ability to make acquisitions, and could materially adversely affect our business, financial condition and results of operations.
The failure to meet applicable regulatory capital requirements could result in one or more of our regulators placing limitations or conditions on our activities, including our growth initiatives, or restricting the commencement of new activities, and could affect client and investor confidence, our costs of funds and FDIC insurance costs, our ability to pay dividends on our common stock, our ability to fund share repurchases, our ability to make acquisitions, and could materially adversely affect our business, financial condition and results of operations.
The weakening of these standards for any reason, a lack of discipline or diligence by our employees in underwriting and monitoring loans, the inability of our employees to adequately adapt policies and procedures to changes in economic or any other conditions affecting borrowers and the quality of our loan portfolio, may result in loan defaults, foreclosures and additional charge-offs and may necessitate that we significantly increase our allowance for credit losses on loans, each of which could adversely affect our net income.
The weakening of these standards for any reason, a lack of 25 ​ Table of Contents discipline or diligence by our team members in underwriting and monitoring loans, the inability of our team members to adequately adapt policies and procedures to changes in economic or any other conditions affecting borrowers and the quality of our loan portfolio, may result in loan defaults, foreclosures and additional charge-offs and may necessitate that we significantly increase our allowance for credit losses on loans, each of which could adversely affect our net income.
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.
Included in CRE loans were owner occupied loans of $601.6 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.
In addition, improper use or disclosure of confidential information by our employees, even if inadvertent, could result in serious harm to our reputation, financial condition and current and future business relationships.
In addition, improper use or disclosure of confidential information by our team members, even if inadvertent, could result in serious harm to our reputation, financial condition and current and future business relationships.
Risks Related to Our Common Stock An investment in our common stock is not an insured deposit. An investment in our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity.
An investment in our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity.
A third party provider may fail to provide the services we require, or meet contractual requirements, comply with applicable laws and regulations, or suffer a cyber-attack or other security breach.
A third-party provider may fail to provide the services we require, or meet contractual requirements, comply with applicable laws and regulations, or suffer a cyberattack or other security breach.
The unrealized losses resulting from holding these securities would be recognized in accumulated other comprehensive income and reduce total shareholders’ equity. Unrealized losses do not negatively impact our regulatory capital ratios. However, tangible common equity and the associated ratios would be reduced.
The unrealized losses resulting from holding these securities would be recognized in accumulated other comprehensive income and reduce total shareholders’ equity. Unrealized losses do not negatively impact our regulatory capital ratios. However, tangible 29 ​ Table of Contents common equity and the associated ratios would be reduced.
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.
Accordingly, any failures or interruptions of our communications, information and technology systems could damage our reputation, result in a loss of client 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.
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.
We are required to comply with the Securities and Exchange Commission’s (“SEC”) 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.
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.
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 $38.8 million of SBA loans for the year ended December 31, 2024.
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.
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.
These market developments have negatively impacted customer confidence in the safety and soundness in the financial services industry, which has persisted into early 2024. We cannot offer assurances that the risks underlying negative publicity and public opinion have ameliorated or that adverse media stories, other bank failures, or geopolitical or market conditions will not exacerbate or continue these conditions.
These market developments have negatively impacted client confidence in the safety and soundness in the financial services industry, which persisted throughout 2024. We cannot offer assurances that the risks underlying negative publicity and public opinion have ameliorated or that adverse media stories, other bank failures, or geopolitical and market conditions will not exacerbate or continue these conditions.
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.
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, 2024 was $473,000.
Negative publicity regarding our business, employees, or customers, with or without merit, may result in the loss of customers, investors and employees, costly litigation, a decline in revenues and increased governmental regulation and have a material adverse effect on business, financial condition and results of operations.
Negative publicity regarding our business, team members, or clients, with or without merit, may result in the loss of clients, investors and team members, costly litigation, a decline in revenues and increased governmental regulation and have a material adverse effect on business, financial condition and results of operations.
Issuing additional shares of our common stock to acquire other banks and bank holding companies may result in dilution for existing shareholders and may adversely affect the market price of our stock.
Issuing additional shares of our common stock to acquire other banks and bank holding companies or future equity raises may result in dilution for existing shareholders and may adversely affect the market price of our stock.
ITEM 1A. RISK FACTORS Our business, financial condition and results of operations are subject to various risks, including those discussed below.
ITEM 1A. RIS K FACTORS Our business, financial condition and results of operations are subject to various risks, including those discussed below.
Negative general economic conditions in our markets where we operate that adversely affect our medium-sized business borrowers may impair the borrower’s ability to repay a loan and such impairment could have a material adverse effect on our business, financial condition and results of operation. We may suffer losses in our loan portfolio despite our underwriting practices.
Negative general economic conditions in our markets where we operate that adversely affect our medium-sized business borrowers may impair the borrower’s ability to repay a loan and such impairment could have a material adverse effect on our business, financial condition and results of operation.
Some of the information regarding customers provided to us is also used in our proprietary credit decision making and scoring models, which we use to determine whether to do business with customers and the risk profiles of such customers which are subsequently utilized by counterparties who lend us capital to fund our operations.
Some of the information regarding clients provided to us is also used in our proprietary credit decision making and scoring models, which we use to determine whether to do business with clients, Further, the risk profiles of such clients may subsequently be utilized by counterparties who may lend us capital to fund our operations.
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.
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, 2024, approximately $2.9 billion, or 84% of our loan portfolio, was comprised of loans with real estate as a primary or secondary component of collateral.
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.
At December 31, 2024, $2.4 million, or 7.35%, consisted of the guaranteed portion of SBA loans which we intend to sell in 2025. 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.
We may be held liable to a governmental entity or to third-parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial.
We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property.
However, over the last few years there has been an increase in anti-ESG measures and proposals by investor advocacy groups, shareholders and policymakers. The potential impact of the 2024 presidential election on additional changes in agency personnel, policies and priorities on the 45 ​ Table of Contents ​ financial services industry cannot be predicted at this time.
However, over the last few years there has been an increase in anti-ESG measures and proposals by investor advocacy groups, shareholders and policymakers. The potential impact of the new presidential administration on additional changes in agency personnel, policies and priorities on the financial services industry cannot be predicted at this time.
In addition, we could become subject to investigations by the stock exchange on which our securities are listed, the SEC, the Federal Reserve, the FDIC, the DFPI or other regulatory authorities, which could require additional financial and management resources. These events could have a material adverse effect on our business and stock price.
In addition, we could become subject to investigations by the stock exchange on which our securities are listed, the SEC, the Federal Reserve, the FDIC, the California Department of Financial Protection and Innovation (“DFPI”) or other regulatory authorities, which could require additional financial and management resources. These events could have a material adverse effect on our business and stock price.
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.
As of December 31, 2024, our nonperforming loans (which consist of nonaccrual loans, loans past due 90 days or more and still accruing interest) totaled $7.7 million, or 0.22% of our loan portfolio, and our nonperforming assets (which include nonperforming loans plus other real estate owned) also totaled $7.7 million, or 0.14% of total assets.
When we originate SBA loans, we incur credit risk on the non-guaranteed portion of the loans, and if a customer defaults on a loan, we share any loss and recovery related to the loan pro-rata with the SBA.
When we originate SBA loans, we incur credit risk on the non-guaranteed portion of the loans, and if a client defaults on a loan, we 24 ​ Table of Contents share any loss and recovery related to the loan pro-rata with the SBA.
However, our insurance coverage does not cover any civil monetary penalties or fines imposed by government authorities and may not cover all other claims that might be brought against us, including certain wage and hour class, collective and representative actions brought by customers, employees or former employees, and ponzi schemes.
However, our insurance coverage does not cover any civil monetary penalties, punitive damages or fines imposed by government authorities and may not cover all other claims that might be brought against us, including certain wage and hour class, collective and representative actions brought by clients, team members or former team members, and ponzi schemes.
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 sold $5.9 million of the guaranteed portion of our SBA loans for the year ended December 31, 2024. We generally retain the non-guaranteed portions of the SBA loans that we originate.
We also may rely on customer representations and certifications, or other audit or accountants’ reports, with respect to the business and financial condition of our customers. Whether a misrepresentation is made by the applicant, another third party or one of our employees, we generally bear the risk of loss associated with the misrepresentation.
We also may rely on client representations and certifications, or other audit or accountants’ reports, with respect to the business and financial condition of our clients. Whether a misrepresentation is made by the applicant, another third party or one of our team members, we generally bear the risk of loss associated with the misrepresentation.
Real estate values and real estate markets are generally affected by changes in national, regional or local economic conditions, the rate of unemployment, fluctuations in interest rates and the availability of loans to potential purchasers, fluctuations in vacancy rates, changes in tax laws and other governmental statutes, regulations and policies and acts of nature, such as earthquakes and other natural disasters.
Real estate values and real estate markets are generally affected by changes in national, regional or local economic conditions, the rate of unemployment, fluctuations in interest rates and the availability of loans to potential purchasers, fluctuations in vacancy 22 ​ Table of Contents rates, changes in tax laws and other governmental statutes, regulations and policies, access to insurance coverage, and acts of nature, such as wildfires, earthquakes and other natural disasters or adverse events.
The integration process could result in the loss of key employees or disruption of the combined entity’s ongoing business or inconsistencies in standards, controls, procedures, and policies that adversely affect our ability to maintain relationships with customers and employees or achieve the anticipated benefits of the transaction.
The integration process could result in the loss of key employees or disruption of the combined entity’s ongoing business that adversely affect our ability to maintain relationships with clients and employees or achieve the anticipated benefits of the transaction.
Our measures to mitigate these risks, including correspondent deposit relationships, may not be completely effective in retaining and reassuring customers about their deposits and may increase the costs of maintaining those deposits.
Our measures to mitigate these risks, including correspondent deposit relationships, may not be completely effective in retaining and reassuring clients about their deposits and may increase the costs of maintaining or growing those deposits resulting in higher funding costs.
As a result, defaults by, or even rumors or questions about, one or more financial services companies, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions.
As a result, defaults by, or even rumors or questions about, one or more financial services companies, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions, as well as impact the trading prices of our common stock.
Further, with the rebound of higher interest rates our deposit customers may perceive alternative investment opportunities as providing superior expected returns. Efforts and initiatives we undertake to retain and increase deposits, including deposit pricing, can increase our costs.
Further, if there is a rebound of higher interest rates our deposit clients may perceive alternative investment opportunities as providing superior expected returns. Efforts and initiatives we undertake to retain and increase deposits, including deposit pricing, can increase our costs.
Our nonperforming assets adversely affect our net income in various ways. We do not record interest income on nonaccrual loans or other real estate owned, thereby adversely affecting our net interest income, net income and returns on assets and equity, and our loan administration costs increase, which together with reduced interest income adversely affects our efficiency ratio.
We do not record interest income on nonaccrual loans or other real estate owned, thereby adversely affecting our net interest income, net income and returns 26 ​ Table of Contents on assets and equity, and our loan administration costs increase, which together with reduced interest income adversely affects our efficiency ratio.
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.
These types of third-party relationships are subject to increasingly demanding regulatory requirements that require us to 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 or which may be impracticable.
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.
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.
The trading price of the shares of our common stock will depend on many factors, which may change from time to time and which may be beyond our control, including, without limitation, our financial condition, performance, creditworthiness and prospects, future sales or offerings of our equity or equity related securities, and other factors identified above under “Cautionary Note Regarding Forward Looking Statements” and “Risk Factors” contained in this report.
As a result, the trading volume in our common stock may fluctuate more than usual and cause significant price variations to occur. 35 ​ Table of Contents The trading price of the shares of our common stock will depend on many factors, which may change from time to time and which may be beyond our control, including, without limitation, our financial condition, performance, creditworthiness and prospects, future sales or offerings of our equity or equity related securities, and other factors identified above under “Cautionary Note Regarding Forward Looking Statements” and “Risk Factors” contained in this report.

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Item 1C. Cybersecurity

Cybersecurity — threats and controls disclosure

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Endpoint and network detection tools alert IT staff of security events that warrant further analysis. The Chief Information Security Officer is kept abreast of all active investigations. If an incident is identified, we attempt to contain the threat is immediately, such as if systems could be taken offline to stop the spread of an attack.
Endpoint and network detection tools alert IT staff of security events that warrant further analysis. The Chief Information Security Officer is kept abreast of all active investigations. If an incident is identified, we attempt to contain the threat immediately, such as if systems could be taken offline to stop the spread of an attack.
The Chief Information Security Officer may determine that an incident has the potential to be materially relevant and would escalate that determination to the Cybersecurity Incident Disclosure Team comprised of the senior leaders, including the Chief Executive Officer, Chief Risk Officer, Chief Information Officer, Chief Financial Officer, outside counsel and other leaders and advisors of the Company.
The Chief Information Security Officer may determine that an incident has the potential to be materially relevant and would escalate that determination to the Cybersecurity Incident Disclosure Team comprised of the senior leaders, including the Chief Executive Officer, Chief Risk Officer, Chief Information Officer, Chief Financial Officer, outside counsel and other leaders and advisors to the Company.
In order to mitigate these risks and the potential harm that may result, our Chief Information Security Officer, who reports directly to the Chief Information Officer and who reports regularly to our Board’s Audit Committee, oversees certain policies and procedures that are intended to guard against, detect, and respond to potential breaches of our IT systems.
In order to mitigate these risks and the potential harm that may result, our Chief Information Security Officer, who reports directly to the Chief Operating Officer and who reports regularly to our Board’s Audit Committee, oversees certain policies and procedures that are intended to guard against, detect, and respond to potential breaches of our IT systems.
The Chief Information Security Officer reports to the Chief Information Officer, has a dotted line to the Chief Executive Officer, and maintains independence in reporting on the status and impact of any information security related developments and strategic initiatives to the Audit Committee, and depending on the severity of the situation, directly to the Board of Directors.
The Chief Information Security Officer reports to the Chief Operating Officer, has a dotted line to the Audit Committee and the Chief Information Officer, and maintains independence in reporting on the status and impact of any information security related developments and strategic initiatives to the Audit Committee, and depending on the severity of the situation, directly to the Board of Directors.
Our Company’s Corporate Security Handbook and Information Security Program are the guiding policies over our cybersecurity risk management. Additionally, our IT team uses industry-leading tools to help protect stakeholders against cybercriminals. We leverage the latest encryption practices and cyber technologies on our systems, devices, and third-party connections and further review vendor encryption to ensure proper information security safeguards are maintained.
Our Company’s Information Security Program encompasses the guiding policies over our cybersecurity risk management. Additionally, our IT team uses industry-leading tools to help protect stakeholders against cybercriminals. We leverage the latest encryption practices and cyber technologies on our systems, devices, and third-party connections and further review vendor encryption to ensure proper information security safeguards are maintained.
He reports quarterly to the Audit Committee on a range of topics, including: ● Current cybersecurity landscape and risks; ● Status of ongoing cybersecurity incidents, threats and strategies; ● Cybersecurity incident reporting and post-incident reviews; and ● Compliance with regulatory requirements and evolving industry trends.
He reports quarterly to the Audit Committee on a range of topics, including: ● Current cybersecurity landscape and risks; 39 ​ Table of Contents ● Status of ongoing cybersecurity incidents, threats and strategies; ● Cybersecurity incident reporting and post-incident reviews; and ● Compliance with regulatory requirements and evolving industry trends.
Our IT security team partners with third-parties to perform annual penetration testing, vulnerability scanning, and monitoring of any potentially suspicious activity across the Company. Oversight of Third-party Risk The Company’s Third-Party Relationship Risk Management (“TPRM”) Policy governs of all aspects of third-party risk management.
Our IT security team partners with third-parties to perform annual penetration testing, vulnerability scanning, and monitoring of any potentially suspicious activity across the Company. Oversight of Third-party Risk The Company’s Third-Party Relationship Risk Management (“TPRM”) Policy governs of all aspects of third-party risk management. The Board has ultimate responsibility for providing oversight for third-party risk management and holding management accountable.
The Company’s internal Risk Management Steering Committee also reports directly to the Audit Committee regarding our risk management initiatives. The Audit Committee also receives quarterly reports from the Risk Management Steering Committee, the Company’s Internal Audit department, and IT department in order to say informed on all aspects of cybersecurity risk affecting the Company.
The Audit Committee also receives quarterly reports from the Risk Management Steering Committee, the Company’s Internal Audit department, and IT department in order to stay informed on all aspects of cybersecurity risk affecting the Company.
In addition to regular meetings, the Audit Committee, Chief Information Security Officer, Chief 56 ​ Table of Contents ​ Information Officer, Chief Risk Officer and Chief Executive Officer maintain an ongoing dialogue regarding emerging or potential cybersecurity risks that we face, particularly as a financial institution.
In addition to regular meetings, the Audit Committee, Chief Information Security Officer, Chief Information Officer, Chief Risk Officer and Chief Executive Officer maintain an ongoing dialogue regarding emerging or potential cybersecurity risks that we face, particularly as a financial institution. The Company’s internal Risk Management Steering Committee also reports directly to the Audit Committee regarding our risk management initiatives.
Engaging Third Parties for Risk Management We recognize the complexity and evolving nature of cybersecurity threats, which is why we engage a range of external experts, including cybersecurity consultants, in evaluating and testing our risk management systems.
Our Company team members are responsible for complying with our cybersecurity standards and complete training to understand the behaviors and technical requirements necessary to keep information secure. ​ 38 ​ Table of Contents Engaging Third Parties for Risk Management We recognize the complexity and evolving nature of cybersecurity threats, which is why we engage a range of external experts, including cybersecurity consultants, in evaluating and testing our risk management systems.
The Board reviews the TPRM Policy on at least an annual basis and ensures that appropriate implementation procedures and practices have been established by management.
The Board provides clear guidance to the Audit Committee and management regarding the Company’s strategic goals and acceptable risk appetite with respect to third-party relationships. The Board reviews the TPRM Policy on at least an annual basis and ensures that appropriate implementation procedures and practices have been established by management.
The Audit Committee currently oversees risks relating to cybersecurity, technology, and finance, and in support of this objective has designated an ad hoc committee consisting of both Committee members and non-Committee member directors so as to assure that the Board maintains appropriate expertise to assure the appropriate management of cybersecurity risk.
The Audit Committee currently oversees risks relating to cybersecurity, technology, and finance, and in support of this objective, receives regular reports from the Chief Information Security Officer and other third party advisors, to assure the Board maintains appropriate expertise to assure the appropriate management of cybersecurity risk.
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Our Company team members are responsible for complying with our cybersecurity standards and complete training to understand the behaviors and technical requirements necessary to keep information secure.
Removed
The Board has ultimate responsibility for providing oversight for third-party risk management and 55 ​ Table of Contents ​ holding management accountable. The Board provides clear guidance to the Audit Committee and management regarding the Company’s strategic goals and acceptable risk appetite with respect to third-party relationships.

Item 2. Properties

Properties — owned and leased real estate

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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.
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 $23,736, subject to 3% annual increases, until the lease expires on April 30, 2026.
PROPERTIES The main and executive offices of Heritage Commerce Corp and Heritage Bank of Commerce are located at 224 Airport Parkway in San Jose, California 95110, with branch offices located at 15575 Los Gatos Boulevard in Los Gatos, California 95032, at 3137 Stevenson Boulevard in Fremont, California 94538, at 387 Diablo Road in Danville, California 94526, at 300 Main Street in Pleasanton, California 94566, at 1990 N.
PROPERTIES The main and executive offices of Heritage Commerce Corp and Heritage Bank of Commerce are located at 224 Airport Parkway in San Jose, California 95110, with branch offices located at 15575 Los Gatos Boulevard in Los Gatos, 40 ​ Table of Contents California 95032, at 3137 Stevenson Boulevard in Fremont, California 94538, at 387 Diablo Road in Danville, California 94526, at 300 Main Street in Pleasanton, California 94566, at 1990 N.
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 ​
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 .” 42 ​ Table of Contents
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.
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 $67,998, subject to annual increases of 3%, until the lease expires October 31, 2030.
In October of 2019, also as part of the acquisition of Presidio Bank, the Company assumed a lease for approximately 3,063 square feet on the first floor in a multi-tenant office building located at 400 S. Camino Real in San Mateo, California expiring on October 31,2024.
In October of 2019, also as part of the acquisition of Presidio Bank, the Company assumed a lease for approximately 3,063 square feet on the first floor in a multi-tenant office building located at 400 S. Camino Real in San Mateo, California, with a lease expiration date of October 31,2024.
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.
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 $6,256, subject to annual increases of 2%, until the lease expires on October 31, 2026.
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 current monthly rent payment is $48,244, 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.
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.
In July of 2024, 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 $9,456 until the lease expires on September 30, 2029.
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.
The current monthly rent payment is $13,059, subject to annual increases of 3%, until the lease expires on October 31, 2028. 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 $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 $250,794, 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 Company has reserved the right to extend the term of the lease for two additional periods of five years. In June of 2019, the Company extended its lease for an additional five years for approximately 3,391 square feet in a two-story multi-tenant commercial center located at 351 Tres Pinos in Hollister, California.
The Company has reserved the right to extend the lease for one additional period of five years. In July of 2024, the Company extended its lease for an additional five years for approximately 3,391 square feet in a two-story multi tenant commercial center located at 351 Tres Pinos in Hollister, California.
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.
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 60,278 square feet in a six story Class A type office building, which are subject to a direct lease dated June 27, 2019, as amended, which expires on July 31, 2030.
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.
California Boulevard in Walnut Creek, California. The current monthly rent payment is $31,560, 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 $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 monthly rent payment is $33,915, subject to annual increases of 3% until the lease expires on April 30, 2030. 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 $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.
The current monthly rent payment is $31,793, which is included in the main office of HBC’s total rent of $250,794, and is subject to 3% annual increases, until the sublease expires July 31, 2030.
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.
The current monthly rent payment is $7,020, subject to annual increases of 3%, until the lease expires on November 30, 2028. 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 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.
The Company has reserved the right to extend the term of the lease for one additional period of two years. 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 $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.
The current monthly rent payment is $5,730, 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.
In October of 2019, also as part of the acquisition of Presidio Bank, the Company assumed a lease for approximately 7,029 square feet on the first floor in a multi-tenant office building located at 1990 N. California Boulevard in Walnut Creek, California.
The Company has reserved the right to extend the term of the lease for two additional periods of five years. In October of 2019, as part of the acquisition of Presidio Bank, the Company assumed a lease for approximately 7,029 square feet on the first floor in a multi-tenant office building located at 1990 N.
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.
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 5th 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.
The current monthly rent payment is $10,848, subject to annual increases of 3%, until the lease expires on February 28, 2027.
The current monthly rent payment is $25,005, subject to annual increases of 3%, until the lease expires on June 30, 2029.
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.
The Company has reserved the right to extend the lease for one additional period of five years. 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.
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.
The Company has reserved the right to extend the term of the lease for one additional period of five years. 41 ​ Table of Contents 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 5th Avenue in San Rafael, 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.
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 $11,174, subject to annual increases of 3%, until the lease expires on February 28, 2027.
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.
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. The current monthly rent payment is $6,287 until the lease expires on September 30, 2025.
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.
In May of 2024, the Company extended its lease for an additional seven years 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 $33,855, until the lease expires on January 31, 2032.
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 Company has reserved the right to extend the term of the lease for one additional period of five years.
Removed
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.
Added
In May of 2023, the Company amended the lease to include an additional 916 square feet, for a total of 5,104 square feet. The current monthly rent payment for the combined space is $22,179, subject to annual increases of 3%, until the lease expires on December 31, 2027.

Item 4. Mine Safety Disclosures

Mine Safety Disclosures — required of mining issuers

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Item 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 4. Mine Safety Disclosures 43 ​ PART II. ​ Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 43 Item 6. [RESERVED] 44 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 45 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 82

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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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.
As of February 14, 2025, there were approximately 756 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.
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.
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, 2019 to December 31, 2024, to the performance of several specific industry indices.
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.
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, 2025 was $10.65 per share as reported by the Nasdaq Global Select Market.
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.
The performance of the S&P 500 Index, NASDAQ Composite Index and KBW NASDAQ Bank Index were used as comparisons to the Company’s stock performance.
The 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.
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. ” 43 ​ Table of Contents Performance Graph ​ The following graph compares the stock performance of the Company from December 31, 2019 to December 31, 2024, 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 12/31/18 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 ​
The performance of the S&P 500 Index, NASDAQ Composite Index and KBW NASDAQ Bank Index were used as comparisons to the Company’s stock performance. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Period Ending Index 12/31/19 12/31/20 12/31/21 12/31/22 12/31/23 12/31/24 Heritage Commerce Corp * ​ 100 ​ 74 ​ 104 ​ 118 ​ 96 ​ 96 S&P 500 Index * 100 118 ​ 152 ​ 125 ​ 158 ​ 197 NASDAQ Composite Index* 100 145 ​ 177 ​ 119 ​ 173 ​ 224 KBW NASDAQ Bank Index* 100 90 ​ 124 ​ 98 ​ 97 ​ 133 * Source: S&P Global Market Intelligence — (434) 977-1600 ​
Added
The 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.

Item 7. Management's Discussion & Analysis

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

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For loans which foreclosure is not probable, but for which repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty, management has elected the practical expedient under ASC 326 to estimate expected credit losses based on the fair value of collateral, adjusted for selling costs as appropriate.
For loans for which foreclosure is not probable, but for which repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty, management has elected the practical expedient under ASC 326 to estimate expected credit losses based on the fair value of collateral, adjusted for selling costs as appropriate.
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.
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, 2024, 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.
The portfolio serves the following purposes: (i) it provides a source of pledged assets for securing certain deposits and borrowed funds, as may be required by law or by specific agreement with a depositor or lender; (ii) it provides liquidity to even out cash flows from the loan and deposit activities of customers; (iii) it can be used as an interest rate risk management tool, since it provides a large base of assets, the maturity and interest rate characteristics of which can be changed more readily than the loan portfolio to better match changes in the deposit base and other funding sources of the Company; and (iv) it is an alternative interest-earning use of funds when loan demand is weak or when deposits grow more rapidly than loans.
The securities portfolio serves the following purposes: (i) it provides a source of pledged assets for securing certain deposits and borrowed funds, as may be required by law or by specific agreement with a depositor or lender; (ii) it provides liquidity to even out cash flows from the loan and deposit activities of clients; (iii) it can be used as an interest rate risk management tool, since it provides a large base of assets, the maturity and interest rate characteristics of which can be changed more readily than the loan portfolio to better match changes in the deposit base and other funding sources of the Company; and (iv) it is an alternative interest-earning use of funds when loan demand is weak or when deposits grow more rapidly than loans.
While no specific industry concentration is considered significant, the Company’s lending operations are located in areas that are dependent on the technology and real estate industries and their supporting companies. The Company has established concentration limits in its loan portfolio for commercial real estate loans, commercial loans, construction loans and unsecured lending, among others.
While no specific industry concentration is considered significant, the Company’s bank lending operations are substantially located in areas that are dependent on the technology and real estate industries and their supporting companies. The Company has established concentration limits in its loan portfolio for commercial real estate loans, commercial loans, construction loans and unsecured lending, among others.
Market risk is attributed to all market risk sensitive financial instruments, including securities, loans, deposits and borrowings, as well as the Company’s role as a financial intermediary in customer-related transactions. The objective of market risk management is to avoid excessive exposure of the Company’s earnings and equity to loss and to reduce the volatility inherent in certain financial instruments.
Market risk is attributed to all market risk sensitive financial instruments, including securities, loans, deposits and borrowings, as well as the Company’s role as a financial intermediary in client-related transactions. The objective of market risk management is to avoid excessive exposure of the Company’s earnings and equity to loss and to reduce the volatility inherent in certain financial instruments.
Banks have generally suffered their most severe earnings declines as a result of customers’ inability to generate sufficient cash flow to service their debts and/or downturns in national and regional economies and declines in overall asset values, including real estate.
Banks have generally suffered their most severe earnings declines as a result of clients’ inability to generate sufficient cash flow to service their debts and/or downturns in national and regional economies and declines in overall asset values, including real estate.
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.
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, 2024 and December 31, 2023 will be fully realized in future years.
Potentially, the most volatile deposits in a financial institution are jumbo certificates of deposit, meaning time deposits with balances that equal or exceed $250,000, as customers with balances of that magnitude are typically more rate-sensitive than customers with smaller balances.
Potentially, the most volatile deposits in a financial institution are jumbo certificates of deposit, meaning time deposits with balances that equal or exceed $250,000, as clients with balances of that magnitude are typically more rate-sensitive than clients with smaller balances.
In addition to other tools used to monitor liquidity and funding, the Company prepares liquidity stress scenarios that include lower-probability, higher impact scenarios, with various levels of severity. The liquidity stress scenarios incorporate the impact of moderate risk and higher risk situations, at least on a quarterly basis, or more often if circumstances require it.
In addition to other tools used to monitor liquidity and funding, the Company prepares liquidity stress scenarios that include lower-probability, higher impact scenarios, with various levels of severity. The liquidity stress scenarios incorporate the impact of moderate risk and higher risk situations, at least on a quarterly basis, or more often as circumstances require.
The Company has a detailed Contingency Funding Plan that will be used in the event of a liquidity event defined as a reduction in liquidity such that a normal deposit and liquidity environment cannot meet funding needs.
The Company has a detailed Contingency Funding Plan that will be used in the event of a “Liquidity Event” defined as a reduction in liquidity such that a normal deposit and liquidity environment cannot meet funding needs.
Management has reviewed these critical accounting estimates and related disclosures with our Board’s Audit Committee. ​ Allowance for Credit Losses on Loans (“ACLL”) The allowance for credit losses, or ACLL, on loans represents management’s estimate of all expected credit losses over the expected contractual life of the loan portfolio, utilizing the current expected credit loss (“CECL”) model.
Management has reviewed these critical accounting estimates and related disclosures with our Board of Director’s Audit Committee. ​ Allowance for Credit Losses on Loans (“ACLL”) The allowance for credit losses, or ACLL, on loans represents management’s estimate of all expected credit losses over the expected contractual life of the loan portfolio, utilizing the current expected credit loss (“CECL”) model.
The Basel III capital rules introduce a new “capital conservation buffer,” for banking organizations to maintain a common equity Tier 1 ratio more than 2.5% above these minimum risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress.
The Basel III capital rules introduced a “capital conservation buffer,” for banking organizations to maintain a common equity Tier 1 ratio more than 2.5% above these minimum risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress.
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 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.
The table below summarizes the weighted average life and weighted average yields of securities as of December 31, 2023: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted Average Life ​ ​ ​ ​ ​ ​ After One and ​ After Five and ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Within One ​ Within Five ​ Within Ten ​ After Ten ​ ​ ​ ​ ​ ​ Year or Less ​ Years ​ Years ​ Years ​ Total ​ Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield ​ ​ (Dollars in thousands) Securities available-for-sale (at fair value): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ U.S.
The table below summarizes the weighted average life and weighted average yields of securities at December 31, 2024: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted Average Life ​ ​ ​ ​ ​ ​ After One and ​ After Five and ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Within One ​ Within Five ​ Within Ten ​ After Ten ​ ​ ​ ​ ​ ​ Year or Less ​ Years ​ Years ​ Years ​ Total ​ Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield ​ ​ (Dollars in thousands) Securities available-for-sale (at fair value): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ U.S.
See Note 7 to the consolidated financial statements. ​ Deposits The composition and cost of the Company’s deposit base are important components in analyzing the Company’s net interest margin and balance sheet liquidity characteristics, both of which are discussed in greater detail in other sections in this report.
See Note 7 to the consolidated financial statements. ​ Deposits The composition and cost of the Company’s deposit base are important components in analyzing the Company’s net interest margin and balance sheet liquidity characteristics, both of which are discussed in greater detail in other sections herein.
The regression model uses combinations of variables to assess historical loss correlations to economic factors and these 62 ​ Table of Contents ​ variables become model forecast inputs for economic factors that are updated in the model each period. Management uses an economic forecast provided by a third-party for these model inputs.
The regression model uses combinations of variables to assess historical loss correlations to economic factors and these variables become model forecast inputs for economic factors that are updated in the model each period. Management uses an economic forecast provided by a third-party for these model inputs.
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 securities sold under agreements to repurchase at December 31, 2024 and 20223 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.
For each category of CRE, the Company has set its requirements for loan to appraised 76 ​ Table of Contents ​ value or purchase price to a level that is below supervisory limits. The Company offers both fixed and floating rate loans.
For each category of CRE, the Company has set its requirements for loan to appraised value or purchase price to a level that is below supervisory limits. The Company offers both fixed and floating rate loans.
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.
Unused commitments represented 30% of outstanding gross loans at December 31, 2024 and 34% at December 31, 2023. 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 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.
The Company’s internal credit risk controls are centered in underwriting practices, credit granting procedures, training, risk management techniques, and familiarity with loan clients as well as the relative diversity and geographic concentration of our loan portfolio. ​ 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.
The value of a financial instrument may change as a result of changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market risk sensitive instruments.
The value of a financial instrument may change as a result of changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market risk sensitive 74 ​ Table of Contents instruments.
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.
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 $2.1 million provision for credit losses on loans for the year ended December 31, 2024, compared to a $749,000 provision for credit losses on loans for the year ended December 31, 2023, and $766,000 provision for credit losses on loans for the year ended December 31, 2022.
These projections are forward-looking and should be considered in light of the Cautionary Note Regarding Forward-Looking Statements on page 3. Actual rates paid on deposits may differ from the hypothetical interest rates modeled due to competitive or market factors, which could reduce any actual impact on net interest income.
These projections are forward-looking and should be considered in light of the “ Cautionary Note Regarding Forward-Looking Statements” on page 3. Actual rates paid on deposits may differ from the hypothetical interest rates modeled due to competitive or market factors, which could affect any actual impact on net interest income.
Determining the appropriateness of the ACLL is complex and requires judgement by management about inherently uncertain factors. ​ Management utilizes a discounted cash flow methodology to estimate the ACLL.
Determining the appropriateness of the ACLL is complex and requires judgement by management about inherently uncertain factors. ​ ​ 45 ​ Table of Contents Management utilizes a discounted cash flow methodology to estimate the ACLL.
The second is noninterest income, which primarily consists of gains on the sale of loans, loan servicing fees, customer service charges and fees, the increase in cash surrender value of life insurance, and gains on the sale of securities. The majority of the Company’s noninterest expenses are operating costs that relate to providing banking services to our customers.
The second is noninterest income, which primarily consists of gains on the sale of loans, loan servicing fees, client service charges and fees, and the increase in cash surrender value of life insurance. The majority of the Company’s noninterest expenses are operating costs that relate to providing banking services to our clients.
GAAP”) requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expense in the financial statements. Various elements of our accounting policies, by their nature, involve the application of highly sensitive and judgmental estimates and assumptions.
The preparation of financial statements in accordance with GAAP requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expense in the financial statements. Various elements of our accounting policies, by their nature, involve the application of highly sensitive and judgmental estimates and assumptions.
(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.
(3) Reflects the non-GAAP FTE adjustment for Federal tax exempt income based on a 21% tax rate for the years ended December 31, 2024, 2023 and 2022. ​ 51 ​ Table of Contents Volume and Rate Variances ​ 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.
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.
During 2024, SBA loan sales resulted in a $473,000 gain, compared to a $482,000 gain on sales of SBA loans in 2023, and an $491,000 gain on sales of SBA loans in 2022. ​ 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.
The average life of the factored receivables was 37 days for the year ended December 31, 2023, and 38 days for the year ended December 31, 2022, and 37 days for the year ended December 31, 2021.
The average life of the factored receivables was 34 days for the year ended December 31, 2024, and 37 days for the year ended December 31, 2023, and 38 days for the year ended December 31, 2022.
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.
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 $1.0 billion and $1.2 billion at December 31, 2024 and December 31, 2023, respectively.
There were no brokered deposits at both December 31, 2023 and 2022. ​ At December 31, 2023, the $854.1 million ICS/CDARS deposits were comprised of $425.0 million of interest-bearing demand deposits, $189.9 million of money market accounts and $239.2 million of time deposits.
At December 31, 2023, the $854.1 million ICS/CDARS deposits were comprised of $425.0 million of interest-bearing demand deposits, $189.9 million of money market accounts and $239.2 million of time deposits.
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.
When the guaranteed portion of an SBA loan is sold the Company retains the servicing rights for the sold portion. During 2024, loans were sold resulting in a gain on sales of SBA loans of $473,000, compared to a gain on sales of SBA loans of $482,000 for 2023, and $491,000 for 2022.
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.
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, ​ ​ ​ 2024 ​ 2023 ​ 2022 ​ 2021 ​ 2020 ​ ​ ​ ​ ​ 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 ​ $ 6,060 15 % $ 5,853 14 % $ 6,617 16 % $ 8,414 22 % $ 11,587 32 % Real estate: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ CRE - owner occupied ​ 5,225 17 % 5,121 17 % 5,751 19 % ​ 7,954 19 % ​ 8,560 ​ 21 % CRE - non-owner occupied ​ 26,779 38 % 25,323 37 % 22,135 32 % 17,125 29 % 16,416 27 % Land and construction ​ 1,400 4 % 2,352 4 % 2,941 5 % 1,831 5 % 2,509 6 % Home equity ​ ​ 798 ​ 4 % ​ 644 ​ 4 % ​ 666 ​ 4 % ​ 864 ​ 4 % ​ 1,297 ​ 4 % Multifamily ​ 4,735 8 % 5,053 8 % 3,366 7 % 2,796 7 % 2,804 6 % Residential mortgages ​ ​ 3,618 ​ 14 % ​ 3,425 ​ 15 % ​ 5,907 ​ 16 % ​ 4,132 ​ 13 % ​ 943 ​ 3 % Consumer and other ​ 338 % 187 1 % 129 1 % 174 1 % 284 1 % Total ​ $ 48,953 100 % $ 47,958 100 % $ 47,512 100 % $ 43,290 100 % $ 44,400 100 % ​ The ACLL totaled $49.0 million, or 1.40% of total loans, at December 31, 2024, compared to $48.0 million, or 1.43% of total loans at December 31, 2023.
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.
Full-time equivalent employees were 355 at December 31, 2024, and 349 at December 31, 2023, and 340 at December 31, 2022. ​ 55 ​ Table of Contents Income Tax Expense The Company computes its provision for income taxes on a monthly basis.
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.
Activity for loan servicing rights was as follows for the periods indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ ​ December 31, ​ 2024 2023 2022 ​ ​ (Dollars in thousands) Beginning of period balance ​ $ 415 ​ $ 549 ​ $ 655 Additions ​ 110 ​ 126 ​ 124 Amortization ​ (181) ​ (260) ​ (230) End of period balance ​ $ 344 ​ $ 415 ​ $ 549 ​ Loan servicing rights are included in accrued interest receivable and other assets on the consolidated balance sheets and reported net of amortization.
Migration of client deposits into insured interest-bearing accounts resulted in an increase in ICS/ CDARS deposits to $854.1 million at December 31, 2023, compared to $30.4 million at December 31, 2022.
Migration of client deposits into insured interest-bearing accounts resulted in an increase in ICS/ CDARS deposits to $1.1 billion at December 31, 2024, compared to $854.1 million at December 31, 2023.
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 accretion of net deferred loan fees into loan interest income was $628,000 for the year ended December 31, 2024, compared to $742,000 for the year ended December 31, 2023, and $3.4 million (of which $2.1 million was from Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans) for the year ended December 31, 2022.
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.
Prepayment fees totaled $117,000 for the year ended December 31, 2024, compared to $484,000 for the year ended December 31, 2023, and $1.3 million for the year ended December 31, 2022.
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.
The following table shows the effective tax rate at the dates indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ 2024 2023 2022 Effective income tax rate 28.5% ​ 28.7% ​ 29.5% ​ The Company’s Federal and state income tax expense in 2024 was $16.1 million, compared to $26.0 million in 2023, and $27.8 million in 2022.
Commercial and industrial (“C&I”) line usage was 29% at both December 31, 2023 and December 31, 2022. ​ The Company’s CRE loans consist primarily of loans based on the borrower’s cash flow and are secured by deeds of trust on commercial property to provide a secondary source of repayment.
Commercial and industrial line usage increased to 34% at December 31, 2024, compared to 29% at December 31, 2023. ​ The Company’s CRE loans consist primarily of loans based on the borrower’s cash flow and are secured by deeds of trust on commercial property to provide a secondary source of repayment.
The methodology for estimating the amount of expected credit losses reported in the allowance for credit losses has two basic components: first, an asset-specific component involving individual loans that do not share risk characteristics with other loans and the measurement of expected credit losses for such individual loans; and second, a pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics. ​ Loans are charged-off against the allowance when management believes the uncollectibility of a loan balance is confirmed.
The methodology for estimating the amount of expected credit losses reported in the allowance for credit losses has two basic components: first, an asset-specific component involving individual loans that do not share risk characteristics with other loans and the measurement of expected credit losses for such individual loans; and second, a pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics.
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.
The Company had the net deferred tax assets of $27.8 million and $29.8 million at December 31, 2024, and December 31, 2023, respectively.
For the nine non-owner occupied office loans in San Francisco at December 31, 2023, the weighted average LTV and DSCR were 35% and 1.48 times, respectively. ​ The following table presents the weighted average LTV and DSCR by collateral type for CRE loans at December 31, 2023: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ CRE - Non-owner Occupied ​ CRE - Owner Occupied ​ Total CRE Collateral Type Outstanding LTV DSCR Outstanding LTV Outstanding LTV Industrial ​ ​ 19 % ​ ​ 40.8 % ​ ​ 2.41 ​ ​ ​ 34 % ​ ​ 43.6 % ​ ​ 23 % ​ ​ 41.9 % Retail ​ 25 % ​ ​ 38.9 % ​ ​ 2.00 ​ ​ 16 % ​ ​ 47.6 % ​ 23 % ​ ​ 40.5 % Mixed-Use, Special ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Purpose and Other ​ 18 % ​ ​ 42.9 % ​ ​ 1.94 ​ ​ 34 % ​ ​ 41.3 % ​ 22 % ​ ​ 41.8 % Office ​ 20 % ​ ​ 42.9 % ​ ​ 1.82 ​ ​ 16 % ​ ​ 42.1 % ​ 19 % ​ ​ 42.7 % Multifamily ​ 18 % ​ ​ 43.3 % ​ ​ 1.91 ​ ​ 0 % ​ ​ 0.0 % ​ 13 % ​ ​ 43.3 % Hotel/Motel ​ ​ % ​ ​ 19.9 % ​ ​ 1.66 ​ ​ ​ 0 % ​ ​ 0.0 % ​ ​ % ​ ​ 19.9 % Total ​ ​ 100 % ​ ​ 41.3 % ​ ​ 2.02 ​ ​ ​ 100 % ​ ​ 43.2 % ​ ​ 100 % ​ ​ 41.9 % ​ ​ 77 ​ Table of Contents ​ The following table presents the weighted average LTV and DSCR by county for CRE loans at December 31, 2023: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ CRE - Non-owner Occupied ​ CRE - Owner Occupied ​ Total CRE County Outstanding LTV DSCR Outstanding LTV Outstanding LTV Santa Clara ​ ​ 24 % ​ ​ 38.3 % ​ ​ 2.22 ​ ​ ​ 36 % ​ ​ 40.5 % ​ ​ 27 % ​ ​ 39.1 % Alameda ​ 25 % ​ ​ 45.2 % ​ ​ 1.92 ​ ​ 18 % ​ ​ 45.9 % ​ 23 % ​ ​ 45.4 % San Mateo ​ 11 % ​ ​ 37.1 % ​ ​ 2.08 ​ ​ 16 % ​ ​ 40.5 % ​ 12 % ​ ​ 38.3 % Out of Area ​ 9 % ​ ​ 43.7 % ​ ​ 2.13 ​ ​ 8 % ​ ​ 51.0 % ​ 9 % ​ ​ 45.5 % Contra Costa ​ 7 % ​ ​ 42.8 % ​ ​ 1.77 ​ ​ 9 % ​ ​ 47.6 % ​ 8 % ​ ​ 44.3 % San Francisco ​ ​ 9 % ​ ​ 39.3 % ​ ​ 1.79 ​ ​ 4 % ​ ​ 38.8 % ​ 7 % ​ ​ 39.2 % Marin ​ ​ 7 % ​ ​ 47.2 % ​ ​ 1.95 ​ ​ 1 % ​ ​ 53.2 % ​ 5 % ​ ​ 47.7 % Sonoma ​ ​ 2 % ​ ​ 41.5 % ​ ​ 2.30 ​ ​ 1 % ​ ​ 39.0 % ​ 2 % ​ ​ 41.0 % Santa Cruz ​ ​ 2 % ​ ​ 36.0 % ​ ​ 1.60 ​ ​ 1 % ​ ​ 46.5 % ​ 2 % ​ ​ 37.8 % Monterey ​ ​ 2 % ​ ​ 44.8 % ​ ​ 1.79 ​ ​ 2 % ​ ​ 46.3 % ​ 2 % ​ ​ 45.2 % San Benito ​ ​ 1 % ​ ​ 36.0 % ​ ​ 2.08 ​ ​ 2 % ​ ​ 42.4 % ​ 1 % ​ ​ 38.6 % Solano ​ ​ 1 % ​ ​ 31.7 % ​ ​ 2.41 ​ ​ 1 % ​ ​ 36.5 % ​ 1 % ​ ​ 32.9 % Napa ​ ​ % ​ ​ 29.8 % ​ ​ 2.34 ​ ​ 1 % ​ ​ 53.1 % ​ 1 % ​ ​ 37.8 % Total ​ ​ 100 % ​ ​ 41.3 % ​ ​ 2.02 ​ ​ ​ 100 % ​ ​ 43.2 % ​ ​ 100 % ​ ​ 41.9 % ​ The Company’s land and construction loans are primarily to finance the development/construction of commercial and single family residential properties.
Total medical/dental office exposure in the non-owner occupied CRE portfolio consisted of 15 loans totaling $12.3 million, with a weighted average LTV and DSCR ratio of 37.1% and 3.05 times, respectively, at December 31, 2024. ​ The following table presents the weighted average LTV and DSCR by collateral type for CRE loans at December 31, 2024: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ CRE - Non-owner Occupied ​ CRE - Owner Occupied ​ Total CRE Collateral Type Outstanding LTV DSCR Outstanding LTV Outstanding LTV Retail ​ ​ 26 % ​ ​ 37.4 % ​ ​ 2.18 ​ ​ ​ 16 % ​ ​ 46.1 % ​ ​ 24 % ​ ​ 38.9 % Industrial ​ 18 % ​ ​ 38.7 % ​ ​ 2.98 ​ ​ 33 % ​ ​ 42.9 % ​ 22 % ​ ​ 40.3 % Mixed-Use, Special ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Purpose and Other ​ 19 % ​ ​ 41.6 % ​ ​ 1.99 ​ ​ 35 % ​ ​ 40.6 % ​ 22 % ​ ​ 41.2 % Office ​ 20 % ​ ​ 41.5 % ​ ​ 2.16 ​ ​ 16 % ​ ​ 44.1 % ​ 19 % ​ ​ 42.1 % Multifamily ​ 17 % ​ ​ 42.9 % ​ ​ 1.91 ​ ​ 0 % ​ ​ 0.0 % ​ 13 % ​ ​ 42.9 % Hotel/Motel ​ ​ % ​ ​ 16.3 % ​ ​ 1.32 ​ ​ ​ 0 % ​ ​ 0.0 % ​ ​ % ​ ​ 16.3 % Total ​ ​ 100 % ​ ​ 40.0 % ​ ​ 2.24 ​ ​ ​ 100 % ​ ​ 42.8 % ​ ​ 100 % ​ ​ 40.8 % ​ ​ 60 ​ Table of Contents The following table presents the weighted average LTV and DSCR by county for CRE loans at December 31, 2024: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ CRE - Non-owner Occupied ​ CRE - Owner Occupied ​ Total CRE County Outstanding LTV DSCR Outstanding LTV Outstanding LTV Alameda ​ ​ 25 % ​ ​ 43.8 % ​ ​ 1.92 ​ ​ ​ 19 % ​ ​ 45.3 % ​ ​ 23 % ​ ​ 44.1 % Contra Costa ​ 7 % ​ ​ 41.6 % ​ ​ 1.77 ​ ​ 8 % ​ ​ 46.9 % ​ 7 % ​ ​ 43.1 % Marin ​ 6 % ​ ​ 45.9 % ​ ​ 2.02 ​ ​ 1 % ​ ​ 51.7 % ​ 5 % ​ ​ 46.3 % Monterey ​ 2 % ​ ​ 42.8 % ​ ​ 1.82 ​ ​ 2 % ​ ​ 40.8 % ​ 2 % ​ ​ 42.1 % Napa ​ % ​ ​ 29.1 % ​ ​ 2.40 ​ ​ 1 % ​ ​ 51.6 % ​ % ​ ​ 36.8 % Out of Area ​ ​ 9 % ​ ​ 42.3 % ​ ​ 2.04 ​ ​ 9 % ​ ​ 48.9 % ​ 9 % ​ ​ 44.0 % San Benito ​ ​ 1 % ​ ​ 38.3 % ​ ​ 1.84 ​ ​ 3 % ​ ​ 39.3 % ​ 2 % ​ ​ 38.7 % San Francisco ​ ​ 9 % ​ ​ 37.3 % ​ ​ 2.19 ​ ​ 4 % ​ ​ 39.5 % ​ 8 % ​ ​ 37.6 % San Mateo ​ ​ 11 % ​ ​ 38.1 % ​ ​ 2.33 ​ ​ 15 % ​ ​ 40.0 % ​ 12 % ​ ​ 38.7 % Santa Clara ​ ​ 24 % ​ ​ 36.9 % ​ ​ 2.80 ​ ​ 34 % ​ ​ 40.7 % ​ 27 % ​ ​ 38.3 % Santa Cruz ​ ​ 2 % ​ ​ 32.2 % ​ ​ 1.75 ​ ​ 1 % ​ ​ 49.6 % ​ 2 % ​ ​ 35.5 % Solano ​ ​ 1 % ​ ​ 32.5 % ​ ​ 2.91 ​ ​ 1 % ​ ​ 37.5 % ​ 1 % ​ ​ 33.9 % Sonoma ​ ​ 3 % ​ ​ 38.7 % ​ ​ 2.58 ​ ​ 2 % ​ ​ 42.8 % ​ 2 % ​ ​ 39.6 % Total ​ ​ 100 % ​ ​ 40.0 % ​ ​ 2.24 ​ ​ ​ 100 % ​ ​ 42.8 % ​ ​ 100 % ​ ​ 40.8 % ​ The Company’s land and construction loans are primarily to finance the development/construction of commercial and single family residential properties.
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.
Consumer and other loans decreased ($6.1) million, or (29%), to $14.8 million at December 31, 2024, compared to $20.9 million at December 31, 2023. ​ 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.
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.
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.
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.
At December 31, 2024, key economic assumptions and the sensitivity of the 62 ​ 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 ​ $ 82 Prepayment speed assumption (annual rate) ​ 19.1% Impact on fair value of 10% adverse change in prepayment speed (CPR 21.0%) ​ $ (1) Impact on fair value of 20% adverse change in prepayment speed (CPR 22.9%) ​ $ (2) Residual cash flow discount rate assumption (annual) ​ ​ 14.7% Impact on fair value of 1% adverse change in discount rate (14.9% discount rate) ​ $ (1) Impact on fair value of 2% adverse change in discount rate (15.0% discount rate) ​ $ (2) ​ Off-Balance Sheet Arrangements In the normal course of business, the Company makes commitments to extend credit to its clients as long as there are no violations of any conditions established in contractual arrangements.
The extensions are not reasonably certain to be exercised, therefore it was not considered in the calculation of the ROU asset and lease liability.
The Company's lease agreements include options to renew at the Company's discretion. The extensions are not reasonably certain to be exercised, therefore it was not considered in the calculation of the ROU asset and lease liability.
The Bank’s uninsured deposits were approximately $2.01 billion, representing 46% of total deposits, at December 31, 2023.
The Bank’s uninsured deposits were approximately $2.2 billion, representing 45% of total deposits, at December 31, 2024.
Home equity lines of credit decreased ($1.6) million, or 1%, to $119.1 million at December 31, 2023, from $120.7 million at December 31, 2022. ​ Multifamily loans increased $24.8 million, or 10%, to $269.7 million at December 31, 2023, compared to $244.9 million at December 31, 2022. ​ From time to time the Company has purchased single family residential mortgage loans.
Home equity lines of credit increased $8.8 million, or 7%, to $127.9 million at December 31, 2024, from $119.1 million at December 31, 2023. ​ Multifamily loans increased $5.8 million, or 2%, to $275.5 million at December 31, 2024, compared to $269.7 million at December 31, 2023. ​ From time to time the Company has purchased single family residential mortgage loans.
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.
SELECTED FINANCIAL DATA ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ AT OR FOR THE YEAR ENDED DECEMBER 31, ​ 2024 2023 2022 2021 2020 ​ ​ (Dollars in thousands, except per share data) INCOME STATEMENT DATA: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest income ​ $ 242,699 ​ $ 234,298 ​ $ 188,828 ​ $ 153,256 ​ $ 150,471 ​ Interest expense ​ 79,051 ​ 51,074 ​ 8,948 ​ 7,131 ​ 8,581 ​ Net interest income before provision for credit losses on loans ​ 163,648 ​ 183,224 ​ 179,880 ​ 146,125 ​ 141,890 ​ Provision for (recapture of) credit losses on loans ​ 2,139 ​ 749 ​ 766 ​ (3,134) ​ 13,233 ​ Net interest income after provision for credit losses on loans ​ 161,509 ​ 182,475 ​ 179,114 ​ 149,259 ​ 128,657 ​ Noninterest income ​ 8,748 ​ 8,998 ​ 10,111 ​ 9,688 ​ 9,922 ​ Noninterest expense ​ 113,583 ​ 101,054 ​ 94,859 ​ 93,077 ​ 89,511 ​ Income before income taxes ​ 56,674 ​ 90,419 ​ 94,366 ​ 65,870 ​ 49,068 ​ Income tax expense ​ 16,146 ​ 25,976 ​ 27,811 ​ 18,170 ​ 13,769 ​ Net income ​ $ 40,528 ​ $ 64,443 ​ $ 66,555 ​ $ 47,700 ​ $ 35,299 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ PER COMMON SHARE DATA: ​ ​ ​ ​ ​ ​ Basic earnings per share ​ $ 0.66 ​ $ 1.06 ​ $ 1.10 ​ $ 0.79 ​ $ 0.59 ​ Diluted earnings per share ​ $ 0.66 ​ $ 1.05 ​ $ 1.09 ​ $ 0.79 ​ $ 0.59 ​ Book value per share ​ $ 11.24 ​ $ 11.00 ​ $ 10.39 ​ $ 9.91 ​ $ 9.64 ​ Tangible book value per share (1) ​ $ 8.41 ​ $ 8.12 ​ $ 7.46 ​ $ 6.91 ​ $ 6.57 ​ Dividend payout ratio ​ 78.61 % 49.25 % 47.32 % 65.56 % 88.04 % Weighted average number of shares outstanding — basic ​ 61,270,730 ​ 61,038,857 ​ 60,602,962 ​ 60,133,821 ​ 59,478,343 ​ Weighted average number of shares outstanding — diluted ​ 61,527,372 ​ 61,311,318 ​ 61,090,290 ​ 60,689,062 ​ 60,169,139 ​ Common shares outstanding at period-end ​ 61,348,095 ​ 61,146,835 ​ 60,852,723 ​ 60,339,837 ​ 59,917,457 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ BALANCE SHEET DATA: ​ ​ ​ ​ ​ ​ Securities (available-for sale and held-to-maturity) ​ $ 846,290 ​ $ 1,093,201 ​ $ 1,204,586 ​ $ 760,649 ​ $ 533,163 ​ Total loans, net of deferred fees ​ $ 3,491,937 ​ $ 3,350,378 ​ $ 3,298,550 ​ $ 3,087,326 ​ $ 2,619,261 ​ Allowance for credit losses on loans ​ $ (48,953) ​ $ (47,958) ​ $ (47,512) ​ $ (43,290) ​ $ (44,400) ​ Loans, net ​ $ 3,442,984 ​ $ 3,302,420 ​ $ 3,251,038 ​ $ 3,044,036 ​ $ 2,574,861 ​ Goodwill and other intangible assets ​ $ 174,070 ​ $ 176,258 ​ $ 178,664 ​ $ 181,299 ​ $ 184,295 ​ Total assets ​ $ 5,645,006 ​ $ 5,194,095 ​ $ 5,157,580 ​ $ 5,499,409 ​ $ 4,634,114 ​ Total deposits ​ $ 4,820,031 ​ $ 4,378,458 ​ $ 4,389,604 ​ $ 4,759,412 ​ $ 3,914,486 ​ Subordinated debt, net of issuance costs ​ $ 39,653 ​ $ 39,502 ​ $ 39,350 ​ $ 39,925 ​ $ 39,740 ​ Total shareholders’ equity ​ $ 689,727 ​ $ 672,901 ​ $ 632,456 ​ $ 598,028 ​ $ 577,889 ​ Tangible common equity (1) ​ $ 515,657 ​ $ 496,643 ​ $ 453,792 ​ $ 416,729 ​ $ 393,594 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ SELECTED PERFORMANCE RATIOS: (2) ​ ​ ​ ​ ​ ​ Return on average assets ​ 0.76 % 1.21 % 1.23 % 0.92 % 0.80 % Return on average tangible assets (1) ​ 0.78 % 1.26 % 1.27 % 0.96 % 0.83 % Return on average equity ​ 5.97 % 9.88 % 10.95 % 8.15 % 6.12 % Return on average tangible common equity (1) ​ 8.05 % 13.57 % 15.57 % 11.86 % 9.04 % Net interest margin (FTE) (1) ​ 3.28 % 3.70 % 3.57 % 3.05 % 3.50 % Efficiency ratio (1) ​ 65.88 % 52.57 % 49.93 % 59.74 % 58.96 % Average net loans as a percentage of average deposits (3) ​ 73.01 % 71.89 % 66.10 % 61.39 % 69.58 % Average total shareholders’ equity as a percentage ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ of average total assets ​ 12.71 % 12.29 % 11.25 % 11.33 % 13.00 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ SELECTED CREDIT QUALITY DATA: (4) ​ ​ ​ ​ ​ ​ Net charge-offs (recoveries) to average loans ​ 0.03 % 0.01 % (0.11) % (0.07) % 0.03 % Allowance for credit losses on loans to total loans ​ 1.40 % 1.43 % 1.44 % 1.40 % 1.70 % Nonperforming loans to total loans ​ 0.22 % 0.23 % 0.07 % 0.12 % 0.30 % Nonperforming assets to total assets ​ 0.14 % 0.15 % 0.05 % 0.07 % 0.17 % Nonperforming assets ​ $ 7,667 ​ $ 7,707 ​ $ 2,425 ​ $ 3,738 ​ $ 7,869 ​ Classified assets ​ $ 41,661 ​ $ 31,763 ​ $ 14,544 ​ $ 33,846 ​ $ 34,028 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ HERITAGE COMMERCE CORP CAPITAL RATIOS: ​ ​ ​ ​ ​ ​ Tangible common equity to tangible assets (1) ​ 9.43 % 9.90 % 9.11 % 7.84 % 8.85 % Total capital ratio ​ 15.6 % 15.5 % 14.8 % 14.4 % 16.5 % Tier 1 capital ratio ​ 13.4 % 13.3 % 12.7 % 12.3 % 14.0 % Common equity Tier 1 capital ratio ​ 13.4 % 13.3 % 12.7 % 12.3 % 14.0 % Tier 1 leverage ratio ​ 9.6 % 10.0 % 9.2 % 7.9 % 9.1 % Notes: (1) This is a non-GAAP financial measure.
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.
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 at December 31, 58 ​ Table of Contents 2024, and December 31, 2023.
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.
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.
Provisions for credit losses on loans are charged to operations to bring the allowance for credit losses on loans to a level deemed appropriate by management based on the factors discussed under “Credit Quality and Allowance for Credit Losses on Loans.” ​ 70 ​ Table of Contents ​ Noninterest Income The following table sets forth the various components of the Company’s noninterest income: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Increase ​ ​ Increase ​ ​ Year Ended ​ (decrease) ​ ​ (Decrease) ​ ​ ​ December 31, ​ 2023 versus 2022 ​ ​ 2022 versus 2021 ​ 2023 2022 2021 Amount Percent ​ Amount Percent ​ ​ (Dollars in thousands) ​ ​ ​ ​ ​ ​ Service charges and fees on deposit accounts ​ $ 4,341 ​ $ 4,640 ​ $ 2,488 ​ $ (299) ​ (6) % ​ $ 2,152 ​ 86 % Increase in cash surrender value of life insurance ​ ​ 2,031 ​ ​ 1,925 ​ ​ 1,838 ​ ​ 106 ​ 6 % ​ ​ 87 ​ 5 % Gain on sales of SBA loans ​ 482 ​ 491 ​ 1,718 ​ (9) (2) % ​ (1,227) (71) % Servicing income ​ ​ 400 ​ ​ 508 ​ ​ 553 ​ ​ (108) ​ (21) % ​ ​ (45) ​ (8) % Termination fees ​ ​ 154 ​ ​ 61 ​ ​ 797 ​ ​ 93 ​ 152 % ​ ​ (736) ​ (92) % Gain on proceeds from company owned life insurance ​ ​ 125 ​ ​ 27 ​ ​ 675 ​ ​ 98 ​ 363 % ​ ​ (648) ​ (96) % Gain on warrants ​ ​ — ​ ​ 669 ​ ​ 11 ​ ​ (669) ​ (100) % ​ ​ 658 ​ 5,982 % Other ​ ​ 1,465 ​ ​ 1,790 ​ ​ 1,608 ​ ​ (325) ​ (18) % ​ ​ 182 ​ 11 % Total ​ $ 8,998 ​ $ 10,111 ​ $ 9,688 ​ $ (1,113) (11) % ​ $ 423 ​ 4 % ​ For the year ended December 31, 2023, total noninterest income decreased (11%) to $9.0 million, compared to $10.1 million for the year ended December 31, 2022, primarily due to a $669,000 gain on warrants during the year ended December 31, 2022, and lower service charges and fees on deposit accounts, servicing income, and interchange fee income on credit cards, during the year ended December 31, 2023. ​ For the year ended December 31, 2022, total noninterest income increased 4% to $10.1 million, compared to $9.7 million for the year ended December 31, 2021, primarily due to higher income on off-balance sheet deposits, and a $669,000 gain on warrants, partially offset by a lower gain on sale of SBA loans and a lower gain on proceeds from company-owned life insurance during the year ended December 31, 2022. ​ A portion of the Company’s noninterest income is associated with its SBA lending activity, as gain on sales of loans sold in the secondary market and servicing income from loans sold with servicing rights retained.
Provisions for credit losses on loans are charged to operations to bring the allowance for credit losses on loans to a level deemed appropriate by management based on the factors discussed under “Credit Quality and Allowance for Credit Losses on Loans.” ​ 53 ​ Table of Contents Noninterest Income The following table sets forth the various components of the Company’s noninterest income for the periods indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Increase ​ ​ Increase ​ ​ Year Ended ​ (decrease) ​ ​ (Decrease) ​ ​ ​ December 31, ​ 2024 versus 2023 ​ ​ 2023 versus 2022 ​ 2024 2023 2022 Amount Percent ​ Amount Percent ​ ​ (Dollars in thousands) ​ ​ ​ ​ ​ ​ Service charges and fees on deposit accounts ​ $ 3,561 ​ $ 4,341 ​ $ 4,640 ​ $ (780) ​ (18) % ​ $ (299) ​ (6) % Increase in cash surrender value of life insurance ​ ​ 2,097 ​ ​ 2,031 ​ ​ 1,925 ​ ​ 66 ​ 3 % ​ ​ 106 ​ 6 % Gain on sales of SBA loans ​ 473 ​ 482 ​ 491 ​ (9) (2) % ​ (9) (2) % Servicing income ​ ​ 365 ​ ​ 400 ​ ​ 508 ​ ​ (35) ​ (9) % ​ ​ (108) ​ (21) % Gain on proceeds from company-owned life insurance ​ ​ 219 ​ ​ 125 ​ ​ 27 ​ ​ 94 ​ 75 % ​ ​ 98 ​ 363 % Termination fees ​ ​ 177 ​ ​ 154 ​ ​ 61 ​ ​ 23 ​ 15 % ​ ​ 93 ​ 152 % Gain on warrants ​ ​ — ​ ​ — ​ ​ 669 ​ ​ — ​ N/A ​ ​ ​ (669) ​ (100) % Other ​ ​ 1,856 ​ ​ 1,465 ​ ​ 1,790 ​ ​ 391 ​ 27 % ​ ​ (325) ​ (18) % Total ​ $ 8,748 ​ $ 8,998 ​ $ 10,111 ​ $ (250) (3) % ​ $ (1,113) ​ (11) % ​ For the year ended December 31, 2024, total noninterest income decreased (3%) to $8.7 million, compared to $9.0 million for the year ended December 31, 2023, primarily due to lower service charges and fees on deposit accounts, partially offset by higher income in various other noninterest income categories. ​ For the year ended December 31, 2023, total noninterest income decreased (11%) to $9.0 million, compared to $10.1 million for the year ended December 31, 2022, primarily due to a $669,000 gain on warrants during the year ended December 31, 2022, and lower service charges and fees on deposit accounts, servicing income, and interchange fee income on credit cards, during the year ended December 31, 2023. ​ A portion of the Company’s noninterest income is associated with its SBA lending activity, as gain on sales of loans sold in the secondary market and servicing income from loans sold with servicing rights retained.
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.
Loans held for sale are carried at the lower of cost or estimated fair value, and are not allocated an allowance for credit losses. ​ 65 ​ Table of Contents The amortized cost basis of collateral-dependent commercial loans, collateralized by business assets, totaled $701,000 and $290,000 at December 31, 2024 and December 31, 2023, 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.
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.
Land and construction loans decreased ($12.7) million, or (9%), to $127.8 million at December 31, 2024, from $140.5 million at December 31, 2023. ​ The Company makes home equity lines of credit available to its existing clients. Home equity lines of credit are underwritten initially with a maximum 75% loan to value ratio.
The ACLL at December 31, 2022, was $47.5 million, or 1.44% of total loans, representing 1,959.26% of nonperforming loans. ● Total deposits were consistent at $4.38 billion at December 31, 2023, compared to $4.39 billion at December 31, 2022. ● Migration of client deposits into insured interest-bearing accounts resulted in an increase in ICS/ CDARS deposits to $854.1 million at December 31, 2023, compared to $30.4 million at December 31, 2022. ● Noninterest-bearing demand deposits decreased ($444.2) million, or (26%), to $1.29 billion at December 31, 2023 from $1.74 billion at December 31, 2022, largely in response to the increasing interest rate environment. ● The ratio of noncore funding (which consists of time deposits of $250,000 and over, brokered deposits, securities under agreement to repurchase, subordinated debt and short-term borrowings) to total assets was 4.46% at December 31, 2023, compared to 2.86% at December 31, 2022. ● The loan to deposit ratio was 76.52% at December 31, 2023, compared to 75.14% at December 31, 2022. ​ 66 ​ Table of Contents ​ Capital Adequacy: ● The Company’s consolidated capital ratios exceeded regulatory guidelines and the Bank’s capital ratios exceeded regulatory guidelines for a well-capitalized financial institution under the Basel III regulatory requirements at December 31, 2023. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Well-capitalized ​ ​ ​ ​ Heritage ​ Heritage ​ Financial Institution ​ Basel III Minimum ​ ​ Commerce ​ Bank of ​ Basel III PCA Regulatory ​ Regulatory Capital Ratios Corp Commerce ​ Guidelines ​ Requirement(1) Total Capital ​ ​ 15.5 % ​ ​ 14.9 % ​ ​ 10.0 % ​ ​ 10.5 % Tier 1 Capital ​ 13.3 % ​ ​ 13.8 % ​ ​ 8.0 % ​ ​ 8.5 % Common Equity Tier 1 Capital ​ 13.3 % ​ ​ 13.8 % ​ ​ 6.5 % ​ ​ 7.0 % Tier 1 Leverage ​ 10.0 % ​ ​ 10.4 % ​ ​ 5.0 % ​ ​ 4.0 % Tangible common equity / tangible assets (2) ​ 9.8 % ​ ​ 10.2 % ​ ​ N/A ​ ​ ​ N/A ​ (1) Basel III minimum regulatory requirements for both HCC and HBC include a 2.5% capital conservation buffer, except the leverage ratio.
The ACLL at December 31, 2023, was $48.0 million, or 1.43% of total loans, representing 622.27% of nonperforming loans. ● Total deposits increased $441.6 million or 10% to $4.8 billion at December 31, 2024, compared to $4.4 billion at December 31, 2023. ● Migration of client deposits into insured interest-bearing accounts resulted in an increase in ICS/ CDARS deposits to $1.1 billion at December 31, 2024, compared to $854.1 million at December 31, 2023. ● Noninterest-bearing demand deposits decreased ($78.3) million, or (6%), to $1.2 billion at December 31, 2024 from $1.3 billion at December 31, 2023. ● The ratio of noncore funding (which consists of time deposits of $250,000 and over, brokered deposits, securities under agreement to repurchase, subordinated debt and short-term borrowings) to total assets was 4.37% at December 31, 2024, compared to 4.46% at December 31, 2023. ● The loan to deposit ratio was 72.45% at December 31, 2024, compared to 76.52% at December 31, 2023. ​ ​ ​ 49 ​ Table of Contents Capital Adequacy: ● The Company’s consolidated capital ratios exceeded regulatory guidelines and HBC’s capital ratios exceeded the prompt corrective action (“PCA”) regulatory guidelines for a well-capitalized financial institution, and the Basel III minimum regulatory requirements at December 31, 2024, as reflected in the following table: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Well-capitalized ​ ​ ​ ​ Heritage ​ Heritage ​ Financial Institution ​ Basel III Minimum ​ ​ Commerce ​ Bank of ​ PCA Regulatory ​ Regulatory Capital Ratios Corp Commerce ​ Guidelines ​ Requirements (1) Total Capital ​ ​ 15.6 % ​ ​ 15.1 % ​ ​ 10.0 % ​ ​ 10.5 % Tier 1 Capital ​ 13.4 % ​ ​ 13.9 % ​ ​ 8.0 % ​ ​ 8.5 % Common Equity Tier 1 Capital ​ 13.4 % ​ ​ 13.9 % ​ ​ 6.5 % ​ ​ 7.0 % Tier 1 Leverage ​ 9.6 % ​ ​ 10.0 % ​ ​ 5.0 % ​ ​ 4.0 % Tangible common equity / tangible assets (2) ​ 9.4 % ​ ​ 9.8 % ​ ​ N/A ​ ​ ​ N/A ​ (1) Basel III minimum regulatory requirements for both HCC and HBC include a 2.5% capital conservation buffer, except the Tier 1 Leverage ratio.
There was no valuation allowance as of December 31, 2023 and 2022, as the fair market value of the assets was greater than the carrying value. 79 ​ Table of Contents ​ Activity for the interest-only (“I/O”) strip receivable was as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ ​ ​ December 31, ​ 2023 2022 2021 ​ ​ ​ (Dollars in thousands) Beginning of period balance ​ ​ $ 152 ​ $ 221 ​ $ 305 Unrealized holding loss ​ ​ (35) ​ (69) ​ (84) End of period balance ​ ​ $ 117 ​ $ 152 ​ $ 221 Management reviews the key economic assumptions used to estimate the fair value of I/O strip receivables on a quarterly basis.
Activity for the interest-only (“I/O”) strip receivable was as follows for the periods indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ ​ ​ December 31, ​ 2024 2023 2022 ​ ​ ​ (Dollars in thousands) Beginning of period balance ​ ​ $ 117 ​ $ 152 ​ $ 221 Unrealized holding loss ​ ​ (35) ​ (35) ​ (69) End of period balance ​ ​ $ 82 ​ $ 117 ​ $ 152 Management reviews the key economic assumptions used to estimate the fair value of I/O strip receivables on a quarterly basis.
In the aggregate, the remaining net purchase discount on total loans acquired was $3.2 million at December 31, 2023. ​ The average cost of deposits was 1.06% for the year ended December 31, 2023, compared to 0.15% for the year ended December 31, 2022, and 0.11% for the year ended December 31, 2021. ​ Provision for Credit Losses on Loans ​ Credit risk is inherent in the business of making loans.
In the aggregate, the remaining net purchase discount on total loans acquired was $2.1 million at December 31, 2024. ​ The average cost of deposits was 1.70% for the year ended December 31, 2024, compared to 1.06% for the year ended December 31, 2023, and 0.15% for the year ended December 31, 2022.
The Company’s total liquidity and borrowing capacity at December 31, 2023 was $2.87 billion, all of which remained available. The available liquidity and borrowing capacity was 66% of the Company’s total deposits and approximately 142% of the Bank’s estimated uninsured deposits at December 31, 2023.
The Company’s total liquidity and borrowing capacity at December 31, 2024 was $3.3 billion, all of which remained available. The available liquidity and borrowing capacity was 69% of the Company’s total deposits and approximately 155% of the Bank’s estimated uninsured deposits at December 31, 2024.
No 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.
No assurance of the ultimate level of credit 66 ​ Table of Contents losses can be given with any certainty. ​ Changes in the allowance for credit losses on loans were as follows for the periods indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2024 2023 2022 2021 2020 ​ ​ (Dollars in thousands) Beginning of year balance ​ $ 47,958 ​ $ 47,512 ​ $ 43,290 ​ $ 44,400 ​ $ 23,285 Charge-offs: ​ ​ ​ ​ ​ Commercial ​ (1,305) ​ (750) ​ (434) ​ ​ (520) ​ ​ (1,776) Real estate: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ CRE - owner occupied ​ — ​ — ​ — ​ ​ — ​ ​ — CRE - non-owner occupied ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — Home equity ​ — ​ (246) ​ — ​ ​ — ​ ​ — Consumer and other ​ (299) ​ (15) ​ — ​ ​ — ​ ​ (104) Total charge-offs ​ (1,604) ​ (1,011) ​ (434) ​ (520) ​ (1,880) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Recoveries: ​ ​ ​ ​ ​ Commercial ​ 336 ​ 346 ​ 427 ​ ​ 1,354 ​ ​ 998 Real estate: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ CRE - owner occupied ​ ​ 27 ​ ​ 11 ​ ​ 15 ​ ​ 16 ​ ​ 1 CRE - non-owner occupied ​ — ​ — ​ — ​ ​ — ​ ​ — Land and construction ​ — ​ ​ — ​ ​ — ​ ​ 884 ​ ​ 70 Home equity ​ 97 ​ ​ 351 ​ ​ 105 ​ ​ 93 ​ ​ 93 Consumer and other ​ — ​ ​ — ​ ​ 3,343 ​ ​ 197 ​ ​ 30 Total recoveries ​ 460 ​ 708 ​ 3,890 ​ 2,544 ​ 1,192 Net (charge-offs) recoveries ​ (1,144) ​ ​ (303) ​ ​ 3,456 ​ 2,024 ​ (688) Impact of adopting Topic 326 ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 8,570 Provision for (recapture of) credit losses on loans ​ 2,139 ​ 749 ​ 766 ​ (3,134) ​ 13,233 End of year balance ​ $ 48,953 ​ $ 47,958 ​ $ 47,512 ​ $ 43,290 ​ $ 44,400 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, 2024 ​ ​ ​ ​ ​ 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 ​ $ 5,853 ​ $ 5,121 ​ $ 25,323 ​ $ 2,352 ​ $ 644 ​ $ 5,053 ​ $ 3,425 ​ $ 187 ​ $ 47,958 Charge-offs ​ ​ (1,305) ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ (299) ​ ​ (1,604) Recoveries ​ ​ 336 ​ ​ 27 ​ ​ — ​ ​ — ​ ​ 97 ​ ​ — ​ ​ — ​ ​ — ​ ​ 460 Net (charge-offs) recoveries ​ ​ (969) ​ ​ 27 ​ ​ — ​ ​ — ​ ​ 97 ​ ​ — ​ ​ — ​ ​ (299) ​ ​ (1,144) Provision for (recapture of) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ credit losses on loans ​ ​ 1,176 ​ ​ 77 ​ ​ 1,456 ​ ​ (952) ​ ​ 57 ​ ​ (318) ​ ​ 193 ​ ​ 450 ​ ​ 2,139 End of period balance ​ $ 6,060 ​ $ 5,225 ​ $ 26,779 ​ $ 1,400 ​ $ 798 ​ $ 4,735 ​ $ 3,618 ​ $ 338 ​ $ 48,953 Percent of ACLL to Total ACLL ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ at end of period ​ ​ 12% ​ ​ 11% ​ ​ 55% ​ ​ 3% ​ ​ 1% ​ ​ 10% ​ ​ 7% ​ ​ 1% ​ ​ 100% ​ 67 ​ Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 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 ​ ​ — ​ ​ — ​ ​ 0 ​ ​ 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% ​ The increase in the allowance for credit losses on loans of $995,000 for the year ended December 31, 2024, was primarily attributed to a net increase of $632,000 in specific reserves for individually evaluated loans and net increase of $363,000 in the reserve for pooled loans compared to December 31, 2023.
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).
There were no Shared National Credits or material purchased participations included in NPAs or total loans at December 31, 2024 or December 31, 2023. ​ 64 ​ Table of Contents The following table summarizes the Company’s nonperforming assets at the dates indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ​ ​ 2024 2023 ​ ​ (Dollars in thousands) Nonaccrual loans — held-for-investment ​ $ 7,178 ​ $ 6,818 ​ Loans 90 days past due and still accruing ​ 489 ​ 889 ​ Total nonperforming loans ​ 7,667 ​ 7,707 ​ Foreclosed assets ​ — ​ — ​ Total nonperforming assets ​ $ 7,667 ​ $ 7,707 ​ ​ ​ ​ ​ ​ ​ ​ ​ Nonperforming assets as a percentage of loans ​ ​ ​ ​ ​ ​ ​ plus foreclosed assets ​ ​ 0.22 % ​ 0.23 % Nonperforming assets as a percentage of total assets ​ 0.14 % 0.15 % ​ The following table presents the amortized cost basis of nonperforming loans and loans past due over 90 days and still accruing at the dates indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2024 ​ ​ 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 ​ $ 313 ​ $ 701 ​ $ 489 ​ $ 1,503 Real estate: ​ ​ ​ ​ ​ ​ ​ ​ ​ CRE - Owner Occupied ​ ​ — ​ ​ — ​ ​ — ​ ​ — CRE - Non-Owner Occupied ​ ​ — ​ ​ — ​ ​ — ​ ​ — Land and construction ​ ​ 5,874 ​ ​ — ​ ​ — ​ ​ 5,874 Home equity ​ ​ 77 ​ ​ — ​ ​ — ​ ​ 77 Consumer and other ​ ​ — ​ ​ — ​ ​ — ​ ​ — Total ​ $ 6,264 ​ $ 914 ​ $ 489 ​ $ 7,667 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 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 ​ 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).
Variances attributable to both rate and volume changes are equal to the change in rate multiplied by the change in average balance and are included below in the average volume column. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ ​ Year Ended December 31, ​ ​ 2023 vs. 2022 ​ 2022 vs. 2021 ​ ​ Increase (Decrease) ​ Increase (Decrease) ​ ​ Due to Change in: ​ Due to Change in: ​ ​ Average ​ Average ​ Net ​ Average ​ Average ​ Net ​ Volume Rate Change Volume Rate Change ​ ​ (Dollars in thousands) Income from the interest earning assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Loans, gross ​ $ 7,642 ​ $ 16,976 ​ $ 24,618 ​ $ 17,184 ​ $ (3,418) ​ $ 13,766 Securities — taxable ​ 3,461 ​ 3,224 ​ 6,685 ​ 9,444 ​ 2,544 ​ 11,988 Securities — exempt from Federal tax (1) ​ (237) ​ 61 ​ (176) ​ (681) ​ 58 ​ (623) Other investments, interest-bearing deposits ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ in other financial institutions and Federal funds sold ​ (19,890) ​ 34,196 ​ 14,306 ​ (8,320) ​ 18,630 ​ 10,310 Total interest income on interest-earning assets ​ (9,024) ​ 54,457 ​ 45,433 ​ 17,627 ​ 17,814 ​ 35,441 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Expense from the interest-bearing liabilities: ​ ​ ​ ​ ​ ​ Demand, interest-bearing ​ (938) ​ 5,178 ​ 4,240 ​ 86 ​ 341 ​ 427 Savings and money market ​ (4,404) ​ 20,541 ​ 16,137 ​ 341 ​ 1,184 ​ 1,525 Time deposits — under $100 ​ (6) ​ 82 ​ 76 ​ (4) ​ (4) ​ (8) Time deposits — $100 and over ​ 3,030 ​ 3,235 ​ 6,265 ​ (35) ​ 46 ​ 11 CDARS — interest-bearing demand, money market ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ and time deposits ​ 13,406 ​ 663 ​ 14,069 ​ (1) ​ — ​ (1) Short-term borrowings ​ 1,364 ​ 1 ​ 1,365 ​ — ​ (1) ​ (1) Subordinated debt, net of issuance costs ​ (127) ​ 101 ​ (26) ​ 99 ​ (235) ​ (136) Total interest expense on interest-bearing liabilities ​ 12,325 ​ 29,801 ​ 42,126 ​ 486 ​ 1,331 ​ 1,817 Net interest income ​ $ (21,349) ​ $ 24,656 ​ 3,307 ​ $ 17,141 ​ $ 16,483 ​ 33,624 Less tax equivalent adjustment ​ ​ ​ 37 ​ ​ ​ 131 Net interest income ​ ​ ​ $ 3,344 ​ ​ ​ $ 33,755 (1) 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.
Variances attributable to both rate and volume changes are equal to the change in rate multiplied by the change in average balance and are included below in the average volume column. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ ​ Year Ended December 31, ​ ​ 2024 vs. 2023 ​ 2023 vs. 2022 ​ ​ Increase (Decrease) ​ Increase (Decrease) ​ ​ Due to Change in: ​ Due to Change in: ​ ​ Average ​ Average ​ Net ​ Average ​ Average ​ Net ​ Volume Rate Change Volume Rate Change ​ ​ (Dollars in thousands) Income from the interest earning assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Loans, gross ​ $ 4,541 ​ $ 814 ​ $ 5,355 ​ $ 7,642 ​ $ 16,976 ​ $ 24,618 Securities — taxable ​ (5,039) ​ (1,495) ​ (6,534) ​ 3,461 ​ 3,224 ​ 6,685 Securities — exempt from Federal tax (1) ​ (87) ​ 18 ​ (69) ​ (237) ​ 61 ​ (176) Other investments, interest-bearing deposits ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ in other financial institutions and Federal funds sold ​ 9,663 ​ (28) ​ 9,635 ​ (19,890) ​ 34,196 ​ 14,306 Total interest income on interest-earning assets ​ 9,078 ​ (691) ​ 8,387 ​ (9,024) ​ 54,457 ​ 45,433 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Expense from the interest-bearing liabilities: ​ ​ ​ ​ ​ ​ Demand, interest-bearing ​ (1,083) ​ 867 ​ (216) ​ (938) ​ 5,178 ​ 4,240 Savings and money market ​ 930 ​ 11,947 ​ 12,877 ​ (4,404) ​ 20,541 ​ 16,137 Time deposits — under $100 ​ (12) ​ 99 ​ 87 ​ (6) ​ 82 ​ 76 Time deposits — $100 and over ​ 395 ​ 1,699 ​ 2,094 ​ 3,030 ​ 3,235 ​ 6,265 CDARS — interest-bearing demand, money market ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ and time deposits ​ 10,823 ​ 3,677 ​ 14,500 ​ 13,406 ​ 663 ​ 14,069 Short-term borrowings ​ — ​ (1,365) ​ (1,365) ​ 1,364 ​ 1 ​ 1,365 Subordinated debt, net of issuance costs ​ 8 ​ (8) ​ — ​ (127) ​ 101 ​ (26) Total interest expense on interest-bearing liabilities ​ 11,061 ​ 16,916 ​ 27,977 ​ 12,325 ​ 29,801 ​ 42,126 Net interest income ​ $ (1,983) ​ $ (17,607) ​ (19,590) ​ $ (21,349) ​ $ 24,656 ​ 3,307 Less tax equivalent adjustment ​ ​ ​ 14 ​ ​ ​ 37 Net interest income ​ ​ ​ $ (19,576) ​ ​ ​ $ 3,344 (1) Reflects the non-GAAP FTE adjustment for Federal tax exempt income based on a 21% tax rate for the years ended December 31, 2024, 2023 and 2022.
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 average yield on the total loan portfolio increased to 5.45% for the year ended December 31, 2023, compared to 4.91% for the year ended December 31, 2022, primarily due to increases in the prime rate, partially offset by a decrease in the accretion of the loan purchase discount into interest income from acquired loans, lower prepayment fees, and higher average balances of lower yielding purchased residential mortgages.
A substantial portion of the unguaranteed CRE loans were made to credit-worthy non-profit organizations. Total office exposure in the CRE portfolio was $399 million, including 29 loans totaling approximately $75 million in San Jose, 17 loans totaling approximately $26 million in San Francisco, and eight loans totaling approximately $16 million, in Oakland, at December 31, 2023.
A substantial portion of the unguaranteed CRE loans were made to credit-worthy non-profit organizations. ​ Total office exposure (excluding medical/dental offices) in the CRE portfolio was $413 million, including 34 loans totaling approximately $74 million in San Jose, 18 loans totaling approximately $25 million in San Francisco, and eight loans totaling approximately $16 million in Oakland at December 31, 2024.
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.
Total assets and total liabilities included $30.6 million and $31.7 million at December 31, 2024 and December 31, 2023, respectively, as a result of recognizing right-of-use assets, which are included in other assets, and lease liabilities, included in other liabilities, related to non-cancelable operating lease agreements for office space.
Securities held-to-maturity, at amortized cost, were $650.6 million at December 31, 2023, a decrease of (9%) from $715.0 million at December 31, 2022. Total loans, excluding loans held-for-sale, increased $51.8 million, or 2%, to $3.35 billion at December 31, 2023, compared to $3.30 billion at December 31, 2022.
Securities held-to-maturity, at amortized cost, were $590.0 million at December 31, 2024, a decrease of (9%) from $650.6 million at December 31, 2023. Loans, excluding loans held-for-sale, increased $141.6 million, or 4%, to $3.5 billion at December 31, 2024, compared to $3.4 billion at December 31, 2023.
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.
Average balances are based on daily averages. ​ 50 ​ Table of Contents Distribution, Rate and Yield ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended December 31, ​ ​ 2024 ​ 2023 ​ 2022 ​ ​ ​ ​ 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) ​ $ 3,345,662 ​ $ 182,983 ​ 5.47 % $ 3,262,194 ​ $ 177,628 ​ 5.45 % $ 3,119,006 ​ $ 153,010 ​ 4.91 % Securities — taxable ​ 905,418 ​ 20,817 ​ 2.30 % 1,124,190 ​ 27,351 ​ 2.43 % 983,137 ​ ​ 20,666 ​ 2.10 % Securities — exempt from Federal tax (3) ​ 31,403 ​ 1,127 ​ 3.59 % 33,806 ​ 1,196 ​ 3.54 % 40,478 ​ ​ 1,372 ​ 3.39 % Other investments, interest-bearing deposits ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ in other financial institutions and Federal funds sold ​ 716,880 ​ 38,009 ​ 5.30 % 534,828 ​ 28,374 ​ 5.31 % 908,931 ​ ​ 14,068 ​ 1.55 % Total interest earning assets (3) ​ 4,999,363 ​ ​ 242,936 4.86 % 4,955,018 ​ ​ 234,549 4.73 % 5,051,552 ​ ​ 189,116 3.74 % Cash and due from banks ​ 33,156 ​ ​ ​ ​ ​ 35,955 ​ ​ ​ ​ ​ 37,287 ​ ​ ​ ​ ​ Premises and equipment, net ​ 10,252 ​ ​ ​ ​ ​ 9,421 ​ ​ ​ ​ ​ 9,574 ​ ​ ​ ​ ​ Goodwill and other intangible assets ​ 175,220 ​ ​ ​ ​ ​ 177,536 ​ ​ ​ ​ ​ 180,061 ​ ​ ​ ​ ​ Other assets ​ 120,714 ​ ​ ​ ​ ​ 111,445 ​ ​ ​ ​ ​ 122,746 ​ ​ ​ ​ ​ Total assets ​ $ 5,338,705 ​ ​ ​ ​ ​ $ 5,289,375 ​ ​ ​ ​ ​ $ 5,401,220 ​ ​ ​ ​ ​ Liabilities and shareholders’ equity: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Deposits: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Demand, noninterest-bearing ​ $ 1,174,854 ​ ​ ​ ​ $ 1,393,949 ​ ​ ​ ​ $ 1,863,928 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Demand, interest-bearing ​ 916,466 ​ ​ 6,439 ​ 0.70 % 1,074,523 ​ ​ 6,655 ​ 0.62 % 1,224,676 ​ ​ 2,415 ​ 0.20 % Savings and money market ​ 1,175,391 ​ ​ 32,734 ​ 2.78 % 1,144,032 ​ ​ 19,857 ​ 1.74 % 1,394,283 ​ ​ 3,720 ​ 0.27 % Time deposits — under $100 ​ 11,112 ​ ​ 184 ​ 1.66 % 11,809 ​ ​ 97 ​ 0.82 % 12,587 ​ ​ 21 ​ 0.17 % Time deposits — $100 and over ​ 228,388 ​ ​ 8,968 ​ 3.93 % 218,131 ​ ​ 6,874 ​ 3.15 % 122,018 ​ ​ 609 ​ 0.50 % ICS/CDARS — interest-bearing demand, money ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ market and time deposits ​ ​ 1,007,563 ​ ​ 28,574 ​ 2.84 % ​ 625,045 ​ ​ 14,074 ​ 2.25 % ​ 29,708 ​ ​ 5 ​ 0.02 % Total interest-bearing deposits ​ 3,338,920 ​ ​ 76,899 ​ 2.30 % 3,073,540 ​ ​ 47,557 ​ 1.55 % 2,783,272 ​ ​ 6,770 ​ 0.24 % Total deposits ​ 4,513,774 ​ ​ 76,899 1.70 % 4,467,489 ​ ​ 47,557 1.06 % 4,647,200 ​ ​ 6,770 0.15 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Short-term borrowings ​ 24 ​ ​ — ​ 0.00 % 27,145 ​ ​ 1,365 ​ 5.03 % 24 ​ ​ — ​ — % Subordinated debt, net of issuance costs ​ ​ 39,572 ​ ​ 2,152 ​ 5.44 % ​ 39,420 ​ ​ 2,152 ​ 5.46 % ​ 41,739 ​ ​ 2,178 ​ 5.22 % Total interest-bearing liabilities ​ 3,378,516 ​ ​ 79,051 ​ 2.34 % 3,140,105 ​ ​ 51,074 ​ 1.63 % 2,825,035 ​ ​ 8,948 ​ 0.32 % Total interest-bearing liabilities and demand, ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ noninterest-bearing / cost of funds ​ 4,553,370 ​ ​ 79,051 1.74 % 4,534,054 ​ ​ 51,074 1.13 % 4,688,963 ​ ​ 8,948 0.19 % Other liabilities ​ 106,792 ​ ​ ​ ​ ​ 102,872 ​ ​ ​ ​ ​ 104,654 ​ ​ ​ ​ ​ Total liabilities ​ 4,660,162 ​ ​ ​ ​ ​ 4,636,926 ​ ​ ​ ​ ​ 4,793,617 ​ ​ ​ ​ ​ Shareholders’ equity ​ 678,543 ​ ​ ​ ​ ​ 652,449 ​ ​ ​ ​ ​ 607,603 ​ ​ ​ ​ ​ Total liabilities and shareholders’ equity ​ $ 5,338,705 ​ ​ ​ ​ ​ $ 5,289,375 ​ ​ ​ ​ ​ $ 5,401,220 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net interest income (3) / margin ​ ​ ​ ​ 163,885 3.28 % ​ ​ ​ 183,475 3.70 % ​ ​ ​ 180,168 3.57 % Less tax equivalent adjustment (3) ​ ​ ​ ​ (237) ​ ​ ​ ​ ​ (251) ​ ​ ​ ​ ​ (288) ​ Net interest income ​ ​ ​ $ 163,648 3.27 % ​ ​ $ 183,224 3.70 % ​ ​ $ 179,880 3.56 % (1) Includes loans held-for-sale.
Core loans, excluding residential mortgages, increased $92.8 million, or 3%, to $2.85 billion at December, 2023, compared to $2.76 billion at December 31, 2022. ​ ● There were 12 borrowers included in nonperforming assets (“NPAs”) totaling $7.7 million, or 0.15% of total assets, at December 31, 2023, compared to 9 borrowers totaling $2.4 million, or 0.05% of total assets, at December 31, 2022.
Loans, excluding residential mortgages, increased $166.8 million, or 6%, to $3.0 billion at December, 2024, compared to $2.9 billion at December 31, 2023. ​ ● There were 9 borrowers included in nonperforming assets (“NPAs”) totaling $7.7 million, or 0.14% of total assets, at December 31, 2024, compared to 12 borrowers totaling $7.7 million, or 0.15% of total assets, at December 31, 2023. ● Classified assets totaled $41.7 million, or 0.74% of total assets, at December 31, 2024, compared to $31.8 million, or 0.61% of total assets, at December 31, 2023.
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.
Subsequent recoveries, if any, are credited to the allowance for credit losses on loans. ​ 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 on a sample basis, subject to review by the Federal Reserve Board and the California Department of Financial Protection and Innovation.
Maturities on CRE loans are generally 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 other real estate loans that can be sold in the secondary market, may be granted for longer maturities.
Maturities for CRE loans are generally 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 other real estate loans that can be sold in the secondary market, may be granted for longer maturities. 59 ​ Table of Contents The CRE owner occupied loan portfolio increased $18.3 million, or 3% to $601.6 million at December 31, 2024, from $583.3 million at December 31, 2023.
Loan Distribution The Loan Distribution table that follows sets forth the Company’s gross loans outstanding, excluding loans held-for-sale, and the percentage distribution in each category at the dates indicated. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2023 ​ December 31, 2022 ​ ​ Balance % to Total Balance % to Total ​ ​ (Dollars in thousands) Commercial ​ $ 463,778 ​ 14 % $ 533,915 ​ 16 % Real estate: ​ ​ ​ ​ ​ ​ ​ ​ ​ CRE - owner occupied ​ ​ 583,253 ​ 17 % ​ 614,663 ​ 19 % CRE - non-owner occupied ​ 1,256,590 ​ 37 % 1,066,368 ​ 32 % Land and construction ​ 140,513 ​ 4 % 163,577 ​ 5 % Home equity ​ 119,125 ​ 4 % 120,724 ​ 4 % Multifamily ​ 269,734 ​ 8 % 244,882 ​ 7 % Residential mortgages ​ ​ 496,961 ​ 15 % ​ 537,905 ​ 16 % Consumer and other ​ 20,919 ​ 1 % 17,033 ​ 1 % Total Loans ​ 3,350,873 100 % 3,299,067 100 % Deferred loan fees, net ​ (495) — ​ (517) — ​ Loans, net of deferred fees ​ 3,350,378 100 % 3,298,550 100 % Allowance for credit losses on loans ​ (47,958) ​ (47,512) Loans, net ​ $ 3,302,420 ​ $ 3,251,038 ​ ​ 75 ​ Table of Contents ​ The Company’s loan portfolio is concentrated in commercial (primarily manufacturing, wholesale, and services-oriented entities) and commercial real estate, with the remaining balance in land development and construction and home equity, purchased residential mortgages, and consumer loans.
Loan Distribution The Loan Distribution table that follows sets forth the Company’s gross loans, excluding loans held-for-sale, outstanding and the percentage distribution in each category at the dates indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2024 ​ December 31, 2023 ​ ​ Balance % to Total Balance % to Total ​ ​ (Dollars in thousands) Commercial ​ $ 531,350 ​ 15 % $ 463,778 ​ 14 % Real estate: ​ ​ ​ ​ ​ ​ ​ ​ ​ CRE - owner occupied ​ ​ 601,636 ​ 17 % ​ 583,253 ​ 17 % CRE - non-owner occupied ​ 1,341,266 ​ 38 % 1,256,590 ​ 37 % Land and construction ​ 127,848 ​ 4 % 140,513 ​ 4 % Home equity ​ 127,963 ​ 4 % 119,125 ​ 4 % Multifamily ​ 275,490 ​ 8 % 269,734 ​ 8 % Residential mortgages ​ ​ 471,730 ​ 14 % ​ 496,961 ​ 15 % Consumer and other ​ 14,837 ​ % 20,919 ​ 1 % Total Loans ​ 3,492,120 100 % 3,350,873 100 % Deferred loan fees, net ​ (183) — ​ (495) — ​ Loans, net of deferred fees ​ 3,491,937 100 % 3,350,378 100 % Allowance for credit losses on loans ​ (48,953) ​ (47,958) Loans, net ​ $ 3,442,984 ​ $ 3,302,420 ​ ​ The Company’s loan portfolio is concentrated in commercial loans (primarily manufacturing, wholesale, and services-oriented entities) and CRE, with the remaining balance in land development and construction, home equity, purchased residential mortgages, and consumer loans.
The effect of such events, although uncertain at this time, could result in an increase in the level of nonperforming loans and increased loan losses, which could adversely affect the Company’s future growth and profitability.
Also, any weakness of a prolonged nature in the technology industry would have a negative impact on the local market. The effect of such events, although uncertain at this time, could result in an increase in the level of nonperforming loans and increased loan losses, which could adversely affect the Company’s future growth and profitability.
The following table shows the balance of factor receivables at period end, average balances during the period, and full time equivalent employees of Bay View Funding at period end: ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, December 31, ​ 2023 2022 ​ ​ (Dollars in thousands) Total factored receivables at period-end ​ $ 57,458 ​ $ 79,263 ​ Average factored receivables: ​ ​ ​ ​ ​ ​ ​ For the year ended ​ ​ 62,642 ​ ​ 64,099 ​ Total full time equivalent employees at period-end ​ 28 ​ 28 ​ ​ The commercial loan portfolio decreased ($70.1) million, or (13%), to $463.8 million at December 31, 2023, from $533.9 million at December 31, 2022.
The following table shows the balance of factored receivables at period-end, average balances during the period, and full time equivalent employees of Bay View Funding at period-end: ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, December 31, ​ 2024 2023 ​ ​ (Dollars in thousands) Total factored receivables at period-end ​ $ 68,897 ​ $ 57,458 ​ Average factored receivables: ​ ​ ​ ​ ​ ​ ​ For the year ended ​ ​ 55,717 ​ ​ 62,642 ​ Total full time equivalent employees at period-end ​ 30 ​ 28 ​ ​ The commercial loan portfolio increased $67.6 million, or 15%, to $531.4 million at December 31, 2024, from $463.8 million at December 31, 2023.
Our most significant accounting policies are described in Note 1 — Summary of Significant Accounting Policies in the consolidated financial statements included in this Form 10-K.
A reconciliation of GAAP to non-GAAP financial measures are presented in the tables under “Reconciliation of Non-GAAP Financial Measures.” Our most significant accounting policies are described in Note 1 — Summary of Significant Accounting Policies in the consolidated financial statements included in this Form 10-K.
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 allowance for credit losses on loans to total nonperforming loans was 638.49% at December 31, 2024, compared to 622.27% at December 31, 2023.
The following table shows the net pre-tax unrealized and unrecognized (loss) on securities available-for-sale and securities held-to-maturity and the allowance for credit losses for the periods indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ​ ​ 2023 2022 ​ ​ (Dollars in thousands) Securities available-for-sale pre-tax unrealized (loss): ​ ​ ​ ​ ​ ​ ​ U.S.
Monthly adjustments are made to reflect changes in the fair value of the Company’s available-for-sale securities. 57 ​ Table of Contents The following table shows the net pre-tax unrealized and unrecognized (loss) on securities available-for-sale and securities held-to-maturity and the allowance for credit losses at the dates indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ​ ​ 2024 2023 ​ ​ (Dollars in thousands) Securities available-for-sale pre-tax unrealized (loss): ​ ​ ​ ​ ​ ​ ​ U.S.
The fair value is expected to recover as the securities approach their maturity date and/or interest rates decline. ​ ● The weighted average life of the securities available-for-sale portfolio was 1.29 years, the weighted average life of the securities held-to-maturity portfolio was 6.57 years, and the average life of the total investment securities portfolio was 4.40 years at December 31, 2023.
The fair value is expected to recover as the securities approach their maturity date and/or interest rates decline. ​ ● The weighted average life of the securities available-for-sale portfolio was 1.57 years, the weighted average life of the securities held-to-maturity portfolio was 6.35 years, and the average life of the total investment securities portfolio was 4.88 years at December 31, 2024. ​ ● During the fourth quarter of 2024, the Company purchased $20.5 million of agency mortgage-backed securities and $9.8 million of U.S.
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’s business is not generally seasonal in nature. Public funds were less than 1% of deposits at December 31, 2024 and December 31, 2023. 69 ​ Table of Contents Total deposits increased $441.6 million, or 10% to $4.8 billion at December 31, 2024, compared to $4.4 billion at December 31, 2023.
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.
It is the risk that changes in the level of market interest rates will result in disproportionate changes in the value of, and the net earnings generated from, the Company’s interest-earning assets and interest-bearing liabilities. Management has established policies and procedures to monitor and limit earnings and balance sheet exposure to changes in interest rates.
Treasury ​ (5,621) ​ (10,323) ​ Agency mortgage-backed securities ​ $ (4,313) ​ $ (5,794) ​ Total ​ $ (9,934) ​ $ (16,117) ​ Securities held-to-maturity pre-tax unrecognized (loss): ​ ​ ​ Agency mortgage-backed securities ​ $ (85,729) ​ $ (99,742) ​ Municipals — exempt from Federal tax ​ ​ (721) ​ ​ (810) ​ Total ​ $ (86,450) ​ $ (100,552) ​ ​ ​ ​ ​ ​ ​ ​ ​ Allowance for credit losses on municipal securities ​ ​ (12) ​ ​ (14) ​ ​ The net pre-tax unrealized loss on the securities available-for-sale portfolio was ($9.9) million, or ($7.1) million net of taxes, which was 1.1% of total shareholders’ equity at December 31, 2023, down from ($16.1) million, or ($11.5) million net of taxes, at December 31, 2022, due to lower interest rates.
Treasury ​ (912) ​ (5,621) ​ Agency mortgage-backed securities ​ $ (4,148) ​ $ (4,313) ​ Total ​ $ (5,060) ​ $ (9,934) ​ Securities held-to-maturity pre-tax unrecognized (loss): ​ ​ ​ Agency mortgage-backed securities ​ $ (91,585) ​ $ (85,729) ​ Municipals — exempt from Federal tax ​ ​ (1,431) ​ ​ (721) ​ Total ​ $ (93,016) ​ $ (86,450) ​ ​ ​ ​ ​ ​ ​ ​ ​ Allowance for credit losses on municipal securities ​ ​ (12) ​ ​ (12) ​ ​ The net pre-tax unrealized loss on the securities available-for-sale portfolio was ($5.1) million, or ($3.7) million net of taxes, which was less than 1% of total shareholders’ equity at December 31, 2024.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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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.
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 89 through 143. ITEM 9.
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.
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. At December 31, 2024, the Company did not use interest rate derivatives to hedge its interest rate risk.

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