EDGAR 10-K Filing

Company CIK: 1053352
Filing Year: 2025
Filename: 1053352_10-K_2025_0001558370-25-002516.json

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ITEM 1. BUSINESS
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. 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. 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.
We made progress in 2024 that we believe is quite substantial, positioning the Company for even more significant progress in 2025 and beyond. Among these critical steps, during 2024 and the first two months of 2025, we:
• Grew deposit balances 10% during 2024, driven by our team’s success at cultivating local community commercial deposit relationships. Additionally, total loans increased 4% during 2024.
• Continued our positive credit trends during 2024, with nonperforming assets and net charge-offs remaining low at December 31, 2024.
• Hired a new Chief Operating Officer, Thomas A. Sa, who has extensive experience in banking operations, finance and personnel. We believe this key initiative will allow us to place greater focus on streamlining our branch operations and back-office functions, and will allow our Chief Executive Officer to concentrate his primary attention to growth and strategy, including business development and organic and potential strategic expansion.
• Hired a new Chief People and Culture Officer, Chris Edmonds-Waters, to replace our departing Chief People and Diversity Officer, who relocated outside our market area.
• Hired a new General Counsel, Janisha Sabnani, who has more than 15 years’ experience with increasing levels of responsibility for corporate, securities and regulatory matters within publicly traded financial institutions. We believe Ms. Sabnani’s accession will allow us to provide more hands-on responses to internal legal demands across all our departments and operations and will afford significant efficiencies in our employment of outside counsel.
• Began a search for a new Chief Financial Officer following the departure of our long-time CFO, Larry McGovern. Our search is centered on executives with proven experience with accounting and finance technology and modernization efforts, and we believe this will provide more efficient, accurate and prompt reporting and will enhance our responsiveness to investors and regulators.
• Began a refreshment process that led to the retirement of one long-time director and plans for bringing in talented, experienced individuals with a breadth of talent and experience to facilitate the anticipated retirements of highly talented, experienced and capable, but longer-tenured, directors.
In addition to these personnel and strategy initiatives, we continued to enhance our information technology and cybersecurity infrastructure and capabilities, adapting to keep pace with a rapidly growing and evolving threat environment. We also were able to resolve [two] litigation matters whose uncertainty and ongoing cost had plagued the Company and the Bank and had created distractions for our management team for several years.
These successes, of course, were accompanied by significant costs, including additional compensation, legal and severance, which together with other one-time operating costs, amounted to $1.5 million. However, we view these costs as an investment in preserving and growing our talent pool in the face of transitions involving several highly experienced
personnel, and in significantly reducing our overall risk profile. We are enthusiastic in our belief that these initiatives have positioned HCC and HBC for years of continuing growth and success both strategically and financially.
As we look forward to the benefits we expect to reap from these investments, we are proud and confident in our more routine accomplishments, as well. 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. We offer a multitude of other products and services to complement those lending and deposit services. Through the Bank’s Bay View Funding subsidiary, we also provide factoring financing to small businesses located throughout the United States.
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.
The Internet address of the Company’s website is “http://www.heritagecommercecorp.com,” and the Bank’s website is “http://www.heritagebankofcommerce.com.” The contents of our websites are not incorporated into and do not form a part of this or any other report or document we file with the SEC. The Company makes available free of charge through the Company’s website, the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports. The Company makes these reports available on its website on the same day they appear on the SEC’s website.
Heritage Bank of Commerce
HBC is a California state-chartered bank headquartered in San Jose, California. It was incorporated in November 1993 and opened for business in June 1994. HBC operates through seventeen full-service branch offices.
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. From time to time the Company has purchased single family residential mortgage loans. 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. 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.
Deposit Products
As a full-service commercial bank, we focus deposit generation on relationship accounts, encompassing non-interest bearing demand, interest bearing demand, and money market accounts. In order to facilitate the generation of non-interest bearing demand deposits, we require, depending on the circumstances and the type of relationship, our borrowers to maintain deposit balances with us as a typical condition of granting loans. We also offer certificates of deposit and savings accounts. 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.
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. 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 clients, to compete with larger banks and to provide a convenient platform for clients to review and transact business. We offer sophisticated electronic or “internet banking” opportunities that permit commercial clients to conduct much of their banking business remotely from their home or business, with the additional assistance of third party products designed to mitigate fraud risk. 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. 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. 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. 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. 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. The investment policy is reviewed annually by the Finance and Investment Committee, and any changes to the policy are subject to approval by the full Board. The overall objectives of the investment policy are to maintain a portfolio of high quality investments to maximize interest income over the long term and to minimize risk, to manage liquidity, to provide collateral for borrowings, and to provide additional earnings when loan production is low. 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.
Correspondent Banks
Correspondent bank deposit accounts are maintained to enable the Company to transact types of activity that it would otherwise be unable to perform or would not be cost effective due to the size of the Company or volume of activity. The Company has utilized several correspondent banks to process a variety of transactions.
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. 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.
With respect to commercial bank competitors, the business is dominated by a relatively small number of major banks that operate a large number of offices within our geographic footprint. 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
a combined 69.45% of deposit market share based on June 30, 2024 FDIC market share data. 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. They can also offer certain services that we do not offer directly, but may offer indirectly through correspondent institutions. By virtue of their greater total capitalization, these banks also have substantially higher lending limits than we do. 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.
In addition to other large regional banks and local community banks, our competitors include savings institutions, securities and brokerage companies, asset management groups, mortgage banking companies, credit unions, finance and insurance companies, internet-based companies, and money market funds. In recent years, we have also witnessed increased competition from specialized companies that offer wholesale finance, credit card, and other consumer finance services, as well as services that circumvent the banking system by facilitating payments via the internet, wireless devices, prepaid cards, or other means. 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. 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. 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.
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. Our “preferred lender” status with the Small Business Administration allows us to approve SBA loans faster than many of our competitors. 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. See Item 1 - “Business - Correspondent Banks.”
HBC is a California state-chartered bank headquartered in San Jose, California. It was incorporated in November 1993 and opened for business in June 1994. HBC operates through seventeen full-service branch offices. The 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
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. 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. California Boulevard
Bldg. 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
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 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. 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. Our ultimate goal is to deepen client and community relationships and to deliver exceptional experience to all whom we serve.
In 2024, we had:
The Culture We Are Building: Engagement
In the fourth quarter of 2024 we shifted our framework from one of diversity to a business-focused team member engagement effort. While diversity efforts will continue - we will be administering a team member engagement survey in 2025 that assesses all of the diversity metrics and concerns we deeply care about. We believe our initiatives will continue to provide a strong foundation that correlates our client-facing net promoter scores to our internal engagement results. We expect that this shift will occur seamlessly, and we are optimistic that this evolution will continue to foster our team members’ interests and capabilities to serve our clients.
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 team members from various departments and locations. Through self-identification, the Culture Ambassadors represent 77% female and 62% ethnic/racial diversity. Culture Ambassadors serve an important role to help shape enterprise initiatives such as creation of corporate values.
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. 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.
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. 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.
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 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.
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. Additionally, we offer a generous tuition reimbursement to support
team members’ desire to pursue higher education degrees. Team members 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.
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.
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. 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. 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. 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. 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. We take all complaints seriously and promptly investigate concerns. We have a zero-tolerance anti-retaliation policy.
Health, Safety and Wellbeing
Our team members 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. 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 2024, we continued offering employee assistance program (EAP) private counseling sessions, monthly fitness stipend for all team members and hosted in-person and virtual meditation sessions to promote the importance of self-care.
Supervision and Regulation
General
Like all depositary institutions, both Heritage Commerce Corp and Heritage Bank of Commerce, as well as their operating subsidiaries and affiliates, are regulated extensively under federal and state law. The effects of these laws and regulations affect our ability to make management decisions and to conduct our operations, and over recent years the volume, scope and complexity of these regulations have expanded substantially. The combined application of these laws and regulations applies to virtually every aspect of our business, and to a substantial degree affects our relationships with clients, vendors, and affiliates as well. Further, the cost of complying with these laws and regulations, and the potential penalties, liabilities or other consequences of failure to comply, has risen dramatically in recent years, and we do not expect that these costs or associated risks will be ameliorated in the foreseeable future.
With respect to the Company, we are regulated and examined by the California Department of Financial Protection and Innovation (“DFPI”), the Federal Reserve Bank of San Francisco. Heritage Bank of Commerce files reports with and is examined by the FDIC, the DFPI, and the Consumer Financial Protection Bureau (“CFPB”). In addition to banking and financial institutions laws and regulations, we are subject to a broad swath of other regulatory frameworks applicable to public companies generally, including federal and state tax laws, accounting rules developed by the Financial Accounting Standards Board (“FASB”), and federal and state securities laws. 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. This section offers a brief summary of the most significant aspects of applicable banking laws and regulations, but the implications and effects of these laws and regulations upon our business is far too extensive to be described completely, and readers should refer to the section of this Report entitled “Item 1A, Risk Factors,” for certain effects of these laws and regulations that may have a particular effect on our assets, results of operations and financial condition. We have not attempted to summarize laws of general applicability, such as corporate, tax, securities and accounting regulations, or other laws, such as employment laws, that may also have a material impact upon our business.
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. 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”). 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. The term “Tier 1 capital” means common equity Tier 1 capital plus additional Tier 1 capital, and the term “total capital” means Tier 1 capital plus Tier 2 capital.
The Capital Rules generally measure an institution’s capital using four capital measures or ratios. The common equity Tier 1 capital ratio is the ratio of the institution’s common equity Tier 1 capital to its total risk-weighted assets. The Tier 1 risk-based capital ratio is the ratio of the institution’s Tier 1 capital to its total risk-weighted assets. The total risk-based capital ratio is the ratio of the institution’s total capital to its total risk-weighted assets. The Tier 1 leverage ratio is the ratio of the institution’s Tier 1 capital to its average total consolidated assets. To determine risk-weighted assets, assets of an institution are generally placed into a risk category as prescribed by the regulations and given a percentage weight based on the relative risk of that category. An asset’s risk-weighted value will generally be its percentage weight multiplied by the asset’s value as determined under generally accepted accounting principles. In addition, certain off-balance-sheet items are converted to balance-sheet credit equivalent amounts, and each amount is then assigned to one of the risk categories.
To be adequately capitalized, both the Company and HBC are required to have a common equity Tier 1 capital ratio of at least 4.5% or more, a Tier 1 leverage ratio of 4.0% or more, a Tier 1 risk-based ratio of 6.0% or more and a total risk-based ratio of 8.0% or more. In addition to the preceding requirements, both the Company and HBC are required to maintain a “conservation buffer” consisting of common equity Tier 1 capital, which is at least 2.5% above each of the required minimum levels. 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. Higher or more sensitive risk weights are assigned to various categories of assets, among which are credit facilities that finance the acquisition, development or construction of real property, certain exposures or credits that are 90 days past due or are nonaccrual, foreign exposures, certain corporate exposures, securitization exposures, equity exposures and in certain cases mortgage servicing rights and deferred tax assets. 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.
Supervision and Regulation of 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”), and by the DFPI in accordance with the California Financial Code. HCC is required to file with the Federal Reserve periodic reports of its operations and such additional information as the Federal Reserve may require. 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 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.
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. HCC is required to act as a source of strength to HBC and to commit capital and financial resources to support HBC, including at times when HCC may not be in a financial position to do so. HCC must stand ready to use its available resources to provide adequate capital to HBC during periods of financial stress or adversity. HCC must also maintain the financial flexibility and capital raising capacity to obtain additional resources for assisting HBC. HCC’s failure to meet its source of strength obligations may constitute an unsafe and unsound practice, a violation of the Federal Reserve’s regulations, or both. The source of strength doctrine most directly affects bank holding companies whose subsidiary bank fails to maintain adequate capital levels. In such situation, the subsidiary bank will be required by the bank’s federal regulator to take “prompt corrective action.” Any capital loans by a bank holding company to its subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of the bank. In the event of a bank holding company’s bankruptcy, its commitment to a federal bank regulatory agency to maintain the capital of its subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment.
Dividend Payments, Stock Redemptions and Repurchases. 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. 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. These regulations include extensive application filing and approval requirements as well as substantive regulation over the projected operations and financial performance of institutions proposing to merge or to be acquired. These laws and regulations afford regulators, including the Federal Reserve, the FDIC and the DFPI with expansive authority and discretion and may affect the availability, timing and cost of initiatives that financial institutions might take as a means to effectuate strategic growth.
Supervision and Regulation of Heritage Bank of Commerce
General. 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. The regulations of these agencies govern most aspects of a bank’s business.
Brokered Deposit Restrictions. Well capitalized institutions are not subject to limitations on brokered deposits, while an adequately capitalized institution is able to accept, renew or roll over brokered deposits only with a waiver from the FDIC and subject to certain restrictions on the yield paid on such deposits. Undercapitalized institutions are generally not permitted to accept, renew, or roll over brokered deposits. As of December 31, 2024, HBC was eligible to accept brokered deposits without limitations.
Loans to One Borrower. 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. 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. 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.
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 order to maintain the DIF, member institutions are assessed insurance premiums based on an insured institution’s average consolidated total assets less its average tangible equity capital.
Each institution is provided an assessment rate, which is generally based on the risk that the institution presents to the DIF. 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. 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. Under the California Financial Code, HBC is permitted to pay a dividend in the following circumstances: (i) without the consent of either the DFPI or HBC’s shareholders, in an amount not exceeding the lesser of (a) the retained earnings of HBC; or (b) the net income of HBC for its last three fiscal years, less the amount of any distributions made during the prior period; (ii) with the prior approval of the DFPI, in an amount not exceeding the greatest of: (a) the retained earnings of HBC; (b) the net income of HBC for its last fiscal year; or (c) the net income for HBC for its current fiscal year; and (iii) with the prior approval of the DFPI and HBC’s shareholders (i.e., HCC) in connection with a reduction of its contributed capital.
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. Properly managing risks has been identified as critical to the conduct of safe and sound banking activities and has become even more important as new technologies, product innovation, and the size and speed of financial transactions have changed the nature of banking markets. The agencies have identified a spectrum of risks facing a banking institution including, but not limited to, credit, market, liquidity, operational, legal, and reputational risk. In particular, recent regulatory pronouncements have focused on operational risk, which arises from the potential that inadequate information systems, operational problems, breaches in internal controls, fraud, or unforeseen catastrophes will result in unexpected losses. 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.
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. These laws and regulations are intended to detect, identify, track and prevent
money-laundering, money transfers to prohibited nations and entities, and certain types of financial crimes. These laws and regulations impose strict reporting and compliance obligations on financial institutions, and violations can carry substantial fines, civil money penalties and other sanctions, as well as restrictions on an institution’s business. Regulatory authorities routinely examine financial institutions for compliance with these obligations, and failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required. 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. Concentration stemming from CRE is one area of regulatory concern. Regulatory guidance provides supervisory criteria, including the following numerical indicators, to assist bank examiners in identifying banks with potentially significant CRE loan concentrations that may warrant greater supervisory scrutiny: (i) CRE loans exceeding 300% of capital and increasing 50% or more in the preceding three years; or (ii) construction and land development loans exceeding 100% of capital. The guidance does not limit banks’ levels of CRE lending activities, but rather guides institutions in developing risk management practices and levels of capital that are commensurate with the level and nature of their CRE concentrations. 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, 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.
Readers also should note that in addition to the formal concentration guidance, substantially all our activities, operations and assets are located in the San Francisco Bay Area of Central California, or in other areas of that State. Accordingly, we are subject to geographic concentration risks that are described in greater detail in “Item 1A, Risk Factors.”
Consumer Protection. We are subject to a number of federal and state consumer protection laws that extensively govern our relationship with our clients. 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”). The consumer protection laws applicable to us, among other things, require disclosures of the cost of credit and terms of deposit accounts, provide substantive consumer rights, prohibit discrimination in credit transactions, regulate the use of credit report information, provide financial privacy protections, prohibit UDAAP practices, restrict our ability to raise interest rates and subject us to substantial regulatory oversight. 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. 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. 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. 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. 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.

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ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS
Our business, financial condition and results of operations are subject to various risks, including those discussed below. 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.
Summary of Risk Factors
Risks Related to Our Operations
● Interruptions, cyberattacks, fraud and other security breaches
● Difficulties from our third-party providers
● Failure to attract and retain well-qualified directors, management and other skilled professionals
● The soundness of other financial institutions
● Failure of our risk management framework
● Team member misconduct
● Inaccurate information provided to us by clients or counterparties
● Environmental, social and governance practices
● Severe weather, natural disasters, pandemics, acts of war or terrorism, social unrest and other external events
Risks Related to Our Business
● Geographic concentration in the Greater San Francisco Bay Area
● Failure to maintain a favorable reputation with our clients and communities
Risks Related to Our Loans
● Negative changes affecting real estate values and liquidity
● Risks involved with land and construction development loans
● Increased scrutiny by regulators of commercial real estate concentrations
● Unreliability of loan appraisals used in real property loan decisions
● Commercial loans are more sensitive to the borrower’s successful operations or property development
● Small and medium business loans are subject to greater risks from adverse business developments
Risks Related to Our SBA Loan Program
● Dependence on U.S. federal government SBA loan program
● Recognition of gains on sale of loans and servicing asset valuations reflect certain assumptions we use
Risks Related to Our Credit Quality
● Managing credit risk
● The allowance for credit losses on loans may be insufficient
● Nonperforming assets can affect our financial results and require management time to resolve
● Exposure to environmental liabilities on foreclosed real estate collateral
Risks Related to our Growth Strategy
● Risks associated with acquisitions, including availability of suitable targets and integration risks
● Impairment of the goodwill recorded from an acquisition
● Managing our branch growth strategy
● Managing risks of adding new lines of business and new products
Risks Related to Our Financial Strength and Liquidity
● Actual or perceived reduction in our financial strength
● Increased challenges in credit markets
● Fluctuations in interest rates may reduce net income and impact our business
● Failure to maintain effective internal controls over financial reporting
● Significant deferred tax assets may not be fully realized
● Unrealized losses on our securities portfolio, particularly from the impact of increased interest rates on our securities available-for-sale portfolio
● Adverse changes in credit ratings
● Liquidity risks, particularly from limited access to lines of credit, deposits, and other traditional forms of funding
Risks Related to Our Capital
● More stringent capital requirements
Risks Related to Our Legal and Regulatory Environment
● Complexity and scope of regulatory oversight and the costs of managing compliance with applicable laws and regulations
● Changes in accounting standards
● Litigation, regulatory actions, investigations or similar matters, could subject us to uninsured liabilities and reputational harm and otherwise materially affect our business, financial condition and results of operations.
● Costs and risks associated with potential data breaches and associated litigation or regulatory actions
Risks from Competition
● Competition for client deposits and other business
● Rapid technological developments in the financial services industry
Risks Related to Our Common Stock
● Investment in our common stock is not an insured deposit
● Dilution affect resulting from the issuance of common stock consideration for acquisitions
● Limited trading volume
● Volatile trading price of our common stock
● Dividends may change without notice and payment thereof is subject to restrictions
● Limitations on director liability for monetary damages for failure to exercise their fiduciary duty
● Issuance of preferred stock which may have rights and preferences over our common stock
● Holders of our debt obligations may have rights and preferences over holders of our common stock
● Our charter documents and California law may have an anti-takeover effect limiting changes of control
Risks Relating to Our Operations
Interruptions, cyberattacks, fraudulent activity or other security breaches may have a material adverse effect on our business.
In the normal course of business, we (directly or through third parties) collect, store, share, process and retain sensitive and confidential information regarding our clients. We also rely heavily upon electronic infrastructure that we own or that we obtain via license or other contractual arrangements with third parties. This infrastructure is essential in the conduct of our business, including for allowing our clients to access and transfer funds, initiate and pay loans and leases, communicating with our client service teams, and a variety of other activities that form the foundation of modern financial services businesses. There have been a number of recent and well-publicized incidents involving various types of cybersecurity lapses, and many of these have had substantial impacts upon targeted businesses and on clients of even some of the world’s most prominent cybersecurity firms. One of the most recent events resulted in a widespread failure of a large cybersecurity platform, some of the consequences of which are ongoing and may not be fully known or estimable. Similarly, extremely sophisticated criminal and nation-state organizations routinely target and exploit information technology networks, data systems, and other critical infrastructure.
We devote significant financial and management resources to ensure the integrity of our systems against cybercriminals and similar actors, as well as against threats from fires and other natural disasters; power or telecommunications failures; acts of terrorism or wars or other catastrophic events; breaches, physical break-ins or errors
resulting in interruptions and unauthorized disclosure of confidential information, through information security and business continuity programs.
Notwithstanding these efforts, cybersecurity measures are, by their nature, largely reactive, and threats are constantly evolving. We expect that the development of AI-based technology will cause a rapid expansion in both the number and the sophistication of these threats. While we believe we maintain state-of-the-art defensive measures, we routinely experience attempts to exploit our networks and systems, and we must continue investing in increasingly sophisticated (and concomitantly expensive) technology to counteract these threats. Further, if our systems cannot timely detect and mitigate vulnerabilities, or cannot promptly respond to threats, we may experience damage to or interruptions in the availability of our computer networks, or we may experience a loss of data, unauthorized use or disclosure of client information, or a loss of client funds as a result of unauthorized access to client accounts.
Additionally, as financial institutions and technology systems become more interconnected and more complex, any operational incident at a third party, such as a vendor or client, may increase our operational risks, including from information breaches or loss, breakdowns, disruptions or failures of their own systems or infrastructure, or any deficiencies in the performance of their responsibilities. These risks are increased to the extent we rely on a single-source vendor or provider.
The access by unauthorized persons to, or the improper disclosure by us or our third-party vendors of, confidential information regarding our clients or our own proprietary information, software, methodologies and business secrets, failures or disruptions in our communications, information and technology systems, or our failure to adequately address them, could negatively affect our client relationship management, online banking, accounting or other systems. 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.
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.
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. Specifically, we utilize third party core banking services and receive credit card and debit card services, branch capture services, Internet banking services and services complementary to our banking products from various third party service providers. 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. If our service providers experience difficulties or terminate their services and we are unable to replace them, our operations could be interrupted. It may be difficult for us to timely replace some of our service providers, which may be at a higher cost due to the unique services they provide. 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. 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.
Commercial banking requires substantial board and management expertise, knowledge, and community and industry relationships. If we cannot retain our existing Board or leadership team or recruit experienced, well-qualified successors, our business may suffer.
Our success depends, in large degree, on the skills of our Board and management team and our ability to retain, recruit and motivate key directors, officers and team members. Our Board and senior management team have significant industry experience, as well as significant experience in our local markets, and their knowledge and relationships would be difficult to replace. We recently announced a search for a Chief Financial Officer to replace Lawrence McGovern, who
had served in that role for more than 25 years, and the recruitment of a well-qualified, long-term successor, is expected to be time-consuming and may result in an increased risk of internal control deficiencies or in financial statement inaccuracies during this process. The substitution of our recently-hired Chief Operating Officer into the Chief Financial Officer role may also result in a distraction from other critical management functions in one or both of those leadership positions. Additional Board and/or leadership changes will occur from time to time, and we cannot always anticipate or control the timing of these changes, Similarly, we cannot offer assurance that we would be able to recruit additional qualified personnel on a timely basis, either to fill vacancies created by departures or to grow our executive team to respond to and prepare for the expansion of our business. Competition for senior executives and skilled personnel in the financial services and banking industry is intense, which means the cost of hiring, paying incentives and retaining skilled personnel may continue to increase. Our ability to compete effectively for senior executives and other qualified leadership personnel may increase our compensation and administrative expenses and may be restricted by applicable banking laws and regulations. The loss of the services of any director, senior executive or other key personnel, or the inability to recruit and retain qualified personnel in the future, could have a material adverse effect on our business, financial condition and results of operations.
Our ability to access markets for funding and acquire and retain clients could be adversely affected by the deterioration of other financial institutions or the financial service industry’s reputation.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services companies are interrelated as a result of trading, clearing, counterparty and other relationships. We have exposure to different industries and counterparties, and through transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks and other institutional clients. 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. These losses or defaults could have a material adverse effect on our business, financial condition and results of operations.
The 2023 high-profile bank failures of Silicon Valley Bank, Signature Bank and First Republic have generated significant market volatility among publicly traded bank holding companies. 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. Partly as a result of these conditions, some community and regional bank depositors have chosen to place their deposits with larger financial institutions or to invest in higher yielding short-term fixed income securities, all of which have unfavorably affected, and may continue to materially adversely impact our liquidity, cost of funding, loan funding capacity, net interest margin, capital, and results of operations. In connection with high-profile bank failures, uncertainty and concern has been, and may be in the future, compounded by advances in technology that increase the speed at which deposits can be moved, as well as the speed and reach of media attention, including social media, and its ability to disseminate concerns or rumors, in each case potentially exacerbating liquidity concerns. Further, any current or future measures announced by the Department of the Treasury, the Federal Reserve, and the Federal Deposit Insurance Corporation (“FDIC”) intended to reassure depositors of the availability of their deposits may not be successful in restoring client confidence in the banking system.
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.
Our risk management framework may not be effective in mitigating risks and/or losses to us.
Our risk management framework is comprised of various processes, systems and strategies, and is designed to manage the types of risk to which we are subject, including, among others, credit, market, liquidity, interest rate and compliance. Our risk management framework may not be effective under all circumstances and may not adequately mitigate any risk or loss. If our risk management framework is not effective, we could suffer unexpected losses and our business, financial condition and results of operations could be materially and adversely affected. We may also be subject to potentially adverse regulatory consequences.
Team member misconduct could expose us to significant legal liability and reputational harm.
We are vulnerable to reputational harm because we operate in an industry in which integrity and the confidence of our clients are of critical importance. Conduct by our team members that reflects fraudulent, illegal, wrongful or suspicious activities, or they act in a manner that results in consumer harm, may adversely affect our clients and/or our business. The precautions we take to detect and prevent such misconduct may not always be effective and could result in regulatory sanctions and/or penalties, criminal or civil penalties and, serious harm to our reputation, financial condition, client relationships, team member relationships and ability to attract new clients. 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. 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.
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.
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. 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. We may also rely on representations of clients and counterparties as to the accuracy and completeness of that information. In deciding whether to extend credit, we may rely upon our clients’ representations that their financial statements conform to stated accounting principles and present fairly, in all material respects, the financial condition, results of operations and cash flows of the client. 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. We may not detect all misrepresented information in our originations or from service providers we engage to assist in the approval process. Any such misrepresented information could have a material adverse effect on our business, financial condition and results of operations.
Increasing scrutiny and evolving expectations from clients, regulators, investors, and other stakeholders with respect to our environmental, social and governance practices may impose additional costs on us or expose us to new or additional risks.
Companies are facing increasing scrutiny from clients, regulators, investors, and other stakeholders related to their environmental, social and governance (“ESG”) practices and disclosure. Investor advocacy groups, investment funds and influential investors are also increasingly focused on these practices, especially as they relate to the environment, health and safety, diversity, labor conditions and human rights. Increased ESG-related compliance costs for us as well as among our suppliers, vendors and various other parties within our supply chain could result in increases to our overall operational costs. New government regulations could also result in new or more stringent forms of ESG oversight and expanding mandatory and voluntary reporting, diligence, and disclosure. 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. Failure to adapt to or comply with evolving regulatory requirements or investor or stakeholder expectations and standards could negatively impact our reputation, ability to do business with certain partners, access to capital, and our stock price.
Severe weather, natural disasters, pandemics, acts of war or terrorism, social unrest and other external events could significantly impact our operations.
Severe weather, natural disasters (including fires, earthquakes, and floods), wide spread disease or pandemics, such as the COVID-19 pandemic, acts of war or terrorism, social unrest and other adverse external events have had in the past and could have in the future a significant impact on our ability to conduct business and create significant volatility and disruption in global and U.S. economies. Such events could affect the financial markets, reduce access to liquidity,
impair our client’s financial condition, affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause us to incur additional expenses. The majority of our branches are located in the San Jose, San Francisco, Oakland areas, which in the past have experienced both severe earthquakes and wildfires. We do not carry earthquake insurance on our properties. Earthquakes, wildfires or other natural disasters could severely disrupt our operations. Operations in our market could be disrupted by both the evacuation of large portions of the population as well as damage to and/or lack of access to our banking and operation facilities. Although management has established disaster recovery policies and procedures, the occurrence of any such events could have a material adverse effect on our business, financial condition and results of operations.
Risks Relating to Our Business
Our profitability is dependent upon the geographic concentration of the markets in which we operate.
We operate primarily in the general San Francisco Bay Area of California in the counties of Alameda, Contra Costa, Marin, San Benito, San Francisco, San Mateo, and Santa Clara and, as a result, our business, financial condition and results of operations are subject to the demand for our products in those areas and is also subject to changes in the economic conditions in those areas. Our success depends upon the business activity, population, income levels, deposits and real estate activity in these markets. Although Bay View Funding, the Bank’s factoring subsidiary, and our clients’ business and financial interests may extend well beyond these market areas, adverse economic conditions that affect these market areas could reduce our growth rate, affect the ability of our clients to repay their loans to us, could impair the value of the collateral securing our loans, or otherwise generally could affect our business, financial condition and results of operations. Because of our geographic concentration, we are less able than regional or national financial institutions to diversify demand for our products or our credit risks across multiple markets.
Similarly, geologic, weather-related, and other hazards such as wildfires, earthquakes, droughts, floods and storms, frequently threaten our markets, and in certain circumstances could be expected to have a disproportionate effect on our business as compared to financial institutions whose client and asset bases are more diversified. Such events may harm our business directly or may harm our clients and prospective clients in a way that increases the risks of defaults on our loans, reduces the value of our collateral, and increases clients’ need for liquidity, thus reducing our deposit base and potentially increasing our costs of funds.
Our ability to maintain our reputation is critical to the success of our business, and the failure to do so may materially adversely affect our business, financial condition and results of operations.
We are a community bank, and our reputation is one of the most valuable components of our business. Threats to our reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical practices, team member misconduct, cybersecurity failures or disruptions, failure to deliver minimum standards of service or quality, compliance deficiencies, and questionable or fraudulent activities of our clients or third parties. 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.
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.
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. 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. 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, access to insurance coverage, and acts of nature, such as wildfires, earthquakes and other natural disasters or adverse events. Adverse changes affecting real estate values and the liquidity of real estate in one or more of our markets could increase the credit risk associated with our loan portfolio, significantly impair the value of property pledged as collateral on loans and affect our ability to sell the collateral upon foreclosure without a loss or additional losses, which would adversely affect profitability. 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.
At December 31, 2024, land and construction loans, (including land acquisition and development loans) totaled $127.8 million or 4% of our portfolio. Of these loans, 18% were comprised of owner occupied and 82% non-owner occupied land and construction loans. These loans involve additional risks because funds are advanced upon the security of the project, which is of uncertain value prior to its completion, and costs may exceed realizable values in declining real estate markets. Because of the uncertainties inherent in estimating construction costs and the realizable market value of the completed project and the effects of governmental regulation of real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the related loan-to-value ratio. 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. If our appraisal of the value of the completed project proves to be overstated or market values or rental rates decline, we may have inadequate security for the repayment of the loan upon completion of project construction. If we are forced to foreclose on a project prior to or at completion due to a default, we may not be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs. In addition, we may be required to fund additional amounts to complete the project and may have to hold the property for an unspecified period of time while we attempt to dispose of it.
Increased scrutiny by regulators of commercial real estate concentrations could restrict our activities and impose financial requirements or limits on the conduct of our business.
Banking regulators are giving commercial real estate lending greater scrutiny, and may require banks with higher levels of commercial real estate loans to implement improved underwriting, internal controls, risk management policies and portfolio stress testing, as well as possibly higher levels of allowances for credit losses on loans and capital levels as a result of commercial real estate lending growth and exposures. Therefore, we could be required to raise additional capital or restrict our future growth as a result of our higher level of commercial real estate loans.
Our use of appraisals in deciding whether to make a loan on or secured by real property does not ensure the value of the real property collateral.
In considering whether to make a loan secured by real property we generally require an appraisal of the property. However, an appraisal is only an estimate of the value of the property at the time the appraisal is conducted, and an error in fact or judgment could adversely affect the reliability of an appraisal. In addition, events occurring after the initial appraisal may cause the value of the real estate to decrease. As a result of any of these factors the value of collateral securing a loan may be less than estimated, and if a default occurs, we may not recover the outstanding balance of the loan.
Many of our loans are to commercial borrowers, which may have a higher degree of risk than other types of borrowers.
At December 31, 2024, commercial loans totaled $531.4 million or 15% of our loan portfolio (including SBA loans, asset-based lending, and factored receivables). Commercial loans are often larger and involve greater risks than other types of lending. Because payments on such loans are often dependent on the successful operation or development of the property or business involved, repayment of such loans is often more sensitive than other types of loans to adverse conditions in the real estate market or the general business climate and economy. Accordingly, a downturn in the real estate market and a challenging business and economic environment may increase our risk related to commercial loans, particularly commercial real estate loans. 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. Our commercial and industrial loans are primarily made based on the identified cash flow of the borrower and secondarily on the collateral underlying the loans. Most often, collateral consists of accounts receivable, inventory and equipment and may incorporate a personal guarantee. Inventory and equipment may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. Accounts receivable may be uncollectable. If the cash flow from business operations is reduced, the borrower’s ability to repay the loan may be impaired. Vacancy rates can also negatively impact cash flows from business operations. Thus, HBC’s borrowers and their guarantors could be adversely impacted by a downturn in these sectors of the economy which could further impact the borrower’s ability to repay their loans. Due to the larger average size of each commercial loan as compared with other loans such as residential loans, as well as collateral that is generally less readily-marketable, losses incurred on a small number of commercial loans could have a material adverse effect on our business, financial condition and results of operations.
The small and medium-sized businesses that we lend to may have fewer resources to weather adverse business developments, which may impair a borrower’s ability to repay a loan, and such impairment could adversely affect our business, financial condition and results of operation.
We target our business development and marketing strategy primarily to serve the banking and financial services needs of small to medium-sized businesses. 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. In addition, the success of a small and medium-sized business often depends on the management talents and efforts of one or two people or a small group of people, and the death, disability or resignation of one or more of these people could have a material adverse impact on the business and its ability to repay its loan. 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.
Risks Related to our SBA Loan Program
Small Business Administration lending is an important part of our business. Our SBA lending program is dependent upon the U.S. federal government, and we face specific risks associated with originating SBA loans.
At December 31, 2024, SBA loans totaled $29.9 million, which are included in the commercial loan portfolio. SBA loans held-for-sale totaled $2.4 million at December 31, 2024. Our SBA lending program is dependent upon the U.S. federal government. As an approved participant in the SBA Preferred Lender’s Program (an “SBA Preferred Lender”), we enable our clients to obtain SBA loans without being subject to the potentially lengthy SBA approval process necessary for lenders that are not SBA Preferred Lenders. The SBA periodically reviews the lending operations of participating lenders to assess, among other things, whether the lender exhibits prudent risk management. When weaknesses are identified, the SBA may request corrective actions or impose enforcement actions, including revocation of the lender’s SBA Preferred Lender status. 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. Any changes to the SBA program, including but not limited to changes to the level of guarantee provided by the federal government on SBA loans, changes to program specific rules impacting volume eligibility under the guaranty program, as well as changes to the program amounts authorized by Congress may also have a material adverse effect on our business. In addition, any default by the U.S. government on its obligations or any prolonged government shutdown could, among other things, impede our ability to originate SBA loans or sell such loans in the secondary market, which could have a material adverse effect on our business, financial condition and results of operations.
The SBA’s 7(a) Loan Program is the SBA’s primary program for helping start-up and existing small businesses, with financing guaranteed for a variety of general business purposes. Generally, we sell the guaranteed portion of our SBA 7(a) loans in the secondary market. These sales result in premium income for us at the time of sale and create a stream of future servicing income, as we retain the servicing rights to these loans. For the reasons described above, we may not be able to continue originating these loans or sell them in the secondary market. Furthermore, even if we are able to continue to originate and sell SBA 7(a) loans in the secondary market, we might not continue to realize premiums upon the sale of the guaranteed portion of these loans or the premiums may decline due to economic and competitive factors. 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
share any loss and recovery related to the loan pro-rata with the SBA. If the SBA establishes that a loss on an SBA guaranteed loan is attributable to significant technical deficiencies in the manner in which the loan was originated, funded or serviced by us, the SBA may seek recovery of the principal loss related to the deficiency from us. 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.
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. Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies and especially our organization, changes in the laws, regulations and procedures applicable to SBA loans could adversely affect our ability to operate profitably.
The recognition of gains on the sale of loans and servicing asset valuations reflect certain assumptions.
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. The determination of these gains is based on assumptions regarding the value of unguaranteed loans retained, servicing rights retained and deferred fees and costs, and net premiums paid by purchasers of the guaranteed portions of U.S. government guaranteed loans. The value of retained unguaranteed loans and servicing rights are determined based on market derived factors such as prepayment rates, current market conditions and recent loan sales. Deferred fees and costs are determined using internal analysis of the cost to originate loans. 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. 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. Consequently, as of December 31, 2024, we held $32.3 million of SBA loans (including loans held-for-sale) on our balance sheet, $18.3 million of which consisted of the non-guaranteed portion of SBA loans, and $14.0 million of which consisted of the guaranteed portion of 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.
When we sell the guaranteed portion of SBA loans in the ordinary course of business, we are required to make certain representations and warranties to the purchaser about the SBA loans and the manner in which they were originated. Under these agreements, we may be required to repurchase the guaranteed portion of the SBA loan if we have breached any of these representations or warranties, in which case we may record a loss. In addition, if repurchase and indemnity demands increase on loans that we sell from our portfolios, our liquidity, results of operations and financial condition could be adversely affected. Further, we generally retain the non-guaranteed portions of the SBA loans that we originate and sell, and to the extent the borrowers of such loans experience financial difficulties, our financial condition and results of operations could be adversely impacted.
Risks Related to our Credit Quality
Our business depends on our ability to successfully manage credit risk.
The operation of our business requires us to manage credit risk. As a lender, we are exposed to the risk that our borrowers will be unable to repay their loans according to their terms, and that the collateral securing repayment of their loans, if any, may not be sufficient to ensure repayment. In addition, there are risks inherent in making any loan, including risks with respect to the period of time over which the loan may be repaid, risks relating to proper loan underwriting, risks resulting from changes in economic and industry conditions and risks inherent in dealing with individual borrowers. In order to successfully manage credit risk, we must, among other things, maintain disciplined and prudent underwriting standards and ensure that our bankers follow those standards. The weakening of these standards for any reason, a lack of
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. 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.
We maintain an allowance for credit losses on loans to provide for loan defaults and non-performance, which reflects our estimate of the current expected credit losses in our loan portfolio at the relevant balance sheet date. Our allowance for credit losses was $49.0 million, or 1.40% expressed as a percentage of loans, at December 31, 2024. Allowance for credit losses on loans is funded from a provision for credit losses on loans, which is a charge to our income statement. The Company had a provision for credit losses on loans of $2.1 million for the year ended December 31, 2024. The processes we use to estimate the allowance for credit losses on loans and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on our financial condition and results of operations, depends upon the use of analytical models which takes into account known risks, composition and growth of the loan portfolio and economic forecasts. These models may not be accurate, particularly in times of market stress, unforeseen circumstances or due to flaws in the model’s design or implementation. If the models we use for interest rate risk and asset-liability management are inadequate, we may incur increased or unexpected losses upon changes in market interest rates or other market measures. If the models we use for determining the allowance for credit losses on loans are inadequate, the allowance for credit losses on loans may not be sufficient to support future charge-offs. If the models we use to measure the fair value of financial instruments are inadequate, the fair value of such financial instruments may fluctuate unexpectedly or may not accurately reflect what we could realize upon sale or settlement of such financial instruments. Any such failure in our analytical models could result in losses that could have a material adverse effect on our business, financial condition and results of operations.
In addition, we evaluate all loans identified as individually evaluated loans and allocate an allowance based upon our estimation of the potential loss associated with those problem loans. While we strive to carefully manage and monitor credit quality and to identify loans that may be deteriorating, at any time there are loans included in the portfolio that may result in losses, but that have not yet been identified as nonperforming or potential problem loans. Through established credit practices, we attempt to identify deteriorating loans and adjust the allowance for credit losses on loans accordingly. However, because future events are uncertain and because we may not successfully identify all deteriorating loans in a timely manner, there may be loans that deteriorate in an accelerated time frame. We cannot be sure that we will be able to identify deteriorating loans before they become nonperforming assets, or that we will be able to limit losses on those loans that have been so identified.
Although management believes that the allowance for credit losses on loans is adequate to absorb losses on any existing loans that may become uncollectible, we may be required to take additional provisions for credit losses on loans in the future to further supplement the allowance for credit losses on loans, either due to management’s decision to do so or because our banking regulators require us to do so. Our bank regulatory agencies will periodically review our allowance for credit losses on loans and the value attributed to nonaccrual loans or to real estate acquired through foreclosure and may require us to adjust our determination of the value for these items. If our allowance for credit losses on loans is inaccurate, for any of the reasons discussed above (or other reasons), and is inadequate to cover the loan losses that we actually experience, the resulting losses could have a material adverse effect on our business, financial condition and results of operations.
Nonperforming assets adversely affect our results of operations and financial condition, and take significant time to resolve.
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.
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. 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. When we take collateral in foreclosure and similar proceedings, we are required to mark the collateral to its then-fair market value, which may result in a loss. These nonperforming loans and other real estate owned also increase our risk profile and the level of capital our regulators believe is appropriate for us to maintain in light of such risks. The resolution of nonperforming assets requires significant time commitments from management and can be detrimental to the performance of their other responsibilities. 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.
We could be exposed to risk of environmental liabilities with respect to properties to which we take title.
In the course of our business, we may foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these properties. 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. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. Significant environmental liabilities could have a material adverse effect on our business, financial condition, and results of operations.
Risks Related to Our Growth Strategy
We face risks related to any future acquisitions we make.
We plan to continue to grow our business organically. However, from time to time, we may consider opportunistic strategic acquisitions that we believe support our long-term business strategy. We face significant competition from numerous other financial services institutions, many of which will have greater financial resources than we do, when considering acquisition opportunities. Additionally, the process for obtaining any required regulatory approvals has become substantially more difficult, which could affect our evaluation or completion of strategic and competitively significant business opportunities. Accordingly, attractive acquisition opportunities may not be available to us. We may not be successful in identifying or completing any future acquisitions, and we may incur expenses as a result of seeking these opportunities regardless of whether they are consummated. 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.
If we complete any future acquisitions, we may not be able to successfully integrate the operations, management, products and services of the entities that we acquire and eliminate redundancies. 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. The integration process may also require significant time and attention from our management that they would otherwise direct at servicing existing business and developing new business. We may not be able to realize any projected cost savings, synergies or other benefits associated with any such acquisition we complete. We cannot determine all potential events, facts and circumstances that could result in loss and our investigation or mitigation efforts may be insufficient to protect against any such loss.
If the goodwill that we recorded in connection with a business acquisition becomes impaired, it could require charges to earnings, which would have a negative impact on our financial condition and results of operations.
Goodwill represents the amount by which the cost of an acquisition exceeded the fair value of net assets we acquired in connection with the purchase. At December 31, 2024, our acquisition-related goodwill as reflected on our balance sheet was $167.6 million. Management assesses whether it is necessary to perform a quantitative impairment test of goodwill on a quarterly basis. In addition, the Company hires a third-party vendor to test goodwill for impairment annually as of November 30, or on an interim basis if an event triggering impairment assessment may have occurred. We
determine impairment by comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. Estimates of fair value are determined based on a complex model using cash flows, the fair value of our Company as determined by our stock price, and company comparisons. If management’s estimates of future cash flows are inaccurate, fair value determined could be inaccurate and impairment may not be recognized in a timely manner. If the carrying amount (book value) of the reporting unit exceeds the fair value of the reporting unit, an impairment loss is recognized in an amount equal to that excess. Any such adjustments are reflected in our results of operations in the periods in which they become known. There can be no assurance that our future evaluations of goodwill will not result in findings of impairment and related write-downs, which may have a material adverse effect on our financial condition and results of operations.
We must effectively manage our branch growth strategy.
We seek to expand our franchise safely and consistently. A successful growth strategy requires us to manage multiple aspects of our business simultaneously, such as following adequate loan underwriting standards, balancing loan and deposit growth without increasing interest rate risk or compressing our net interest margin, maintaining sufficient capital, maintaining proper system and controls, and recruiting, training and retaining qualified professionals. We also may experience a lag in profitability associated with new branch openings. As part of our general growth strategy we may expand into additional communities or attempt to strengthen our position in our current markets by opening new offices, subject to any regulatory constraints on our ability to open new offices. 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.
New lines of business or new products and services may subject us to additional risks.
From time to time, we may implement or may acquire new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and new products and services we may invest significant time and resources. We may not achieve target timetables for the introduction and development of new lines of business and new products or services and price and profitability targets may not prove feasible. External factors, such as regulatory compliance obligations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to Our 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. 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. The risk that we may be perceived as less creditworthy relative to other market participants is increased in the current market environment, where the consolidation of financial institutions, including major global financial institutions, is resulting in a smaller number of much larger counterparties and competitors. 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.
Increasing challenges in credit markets and the effects on our current and future borrowers have adversely affected, and in the future may adversely affect, our loan portfolio and may result in losses or increasing provision expense.
Although the Federal Reserve System (commonly referred to as “the Fed”) has recently made modest incremental
reductions in benchmark interest rates, the current interest rate environment remains significantly elevated from those of the recent past, and recent indications as of the date of this report are that further reductions are unlikely in the near future. Interest rates affect both our ability to reprice variable-rate loans and to originate new fixed-rate loans, and in times of significant uncertainty about interest rates, such as the present, clients and prospective investors often reduce their borrowing levels, which tends to have a deflating effect on our outstanding loan balances and thus on our interest income.
During the third and fourth quarters of 2024, the Federal Reserve Open Markets Committee cut benchmark interest rates three times and for the first time since 2020. While we do not presently expect that the Fed will resume increases to benchmark interest rates, we are unable to predict changes in future interest rates. Further, the conditions that led the Fed to make these reductions remain uncertain and volatile, and thus are highly unpredictable. This is particularly true of the risks of political instability associated with the new presidential administration and subsequent governmental and economic reactions. If rates resume increasing, or if they continue to remain at relatively elevated levels for prolonged periods, our borrowers may experience increasing difficulty in repaying their loans. Further, borrowers may defer additional borrowing decisions pending the resolution of both the political uncertainties and the potential for further market adjustments in response to those matters and to general economic conditions.
To the extent interest rates remain relatively elevated, or if economic conditions affecting our borrowers worsen, our allowance for credit losses and related provision could be negatively impacted, which would result in a reduction in net income for the corresponding period, or in some cases we may experience losses in excess of established reserves, which would have a similar effect. At the same time, even if interest rates stabilize or if reductions are less significant than clients expect, we may confront a loss of demand that adversely affects our interest earning assets. Either of these outcomes, alone or in combination with other factors, may have a material adverse effect on our results of operations.
Fluctuations in interest rates may reduce net interest income and otherwise negatively affect our business, financial condition and results of operations.
Shifts in short-term interest rates may reduce net interest income, which is the principal component of our earnings. Net interest income is the difference between the amounts received by us on our interest-earning assets and the interest paid by us on our interest-bearing liabilities. When interest rates rise, the rate of interest we receive on our assets, such as floating interest rate loans, rises more quickly than the rate of interest that we pay on our interest-bearing liabilities, such as deposits, which may cause our profits to increase. When interest rates decrease, the rate of interest we receive on our assets, such as floating interest rate loans, declines more quickly than the rate of interest that we pay on our interest-bearing liabilities, such as deposits, which may cause our profits to decrease.
Changes in interest rates could influence our ability to originate loans and deposits. Historically, there has been an inverse correlation between the demand for loans and interest rates. Loan origination volume usually declines during periods of rising or high interest rates and increases during periods of declining or low interest rates.
Changes in interest rates can also affect the level of loan refinancing activity, which impacts the amount of prepayment penalty income we receive on loans we hold. Because prepayment penalties are recorded as interest income when received, the extent to which they increase or decrease during any given period could have a significant impact on the level of net interest income and net income we generate during that time. A decrease in our prepayment penalty income resulting from any change in interest rates or as a result of regulatory limitations on our ability to charge prepayment penalties could therefore adversely affect our net interest income, net income or results of operations.
An increase in interest rates that adversely affects the ability of borrowers to pay the principal or interest on loans may lead to an increase in nonperforming assets and a reduction of income recognized, which could have a material adverse effect on our results of operations and cash flows. 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. Thus, an increase in the amount of nonperforming assets would have an adverse impact on net interest income.
Changes in interest rates also can affect the value of loans, securities and other assets. Rising interest rates will result in a decline in value of the fixed-rate debt securities we hold in our investment securities portfolio. 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. If debt securities in an unrealized loss position are sold, such losses become realized and will reduce our regulatory capital ratios.
Failure to maintain effective internal controls over financial reporting could have a material adverse effect on our business and stock price.
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. 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. 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.
We have significant deferred tax assets and cannot assure that they will be fully realized.
Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between the carrying amounts and tax basis of assets and liabilities computed using enacted tax rates. We regularly assess available positive and negative evidence to determine whether it is more likely than not that our net deferred tax assets will be realized. Realization of a deferred tax asset requires us to apply significant judgment and is inherently speculative because it requires estimates that cannot be made with certainty. At December 31, 2024, we had a net deferred tax asset of $27.8 million. If we were to determine at some point in the future that we will not achieve sufficient future taxable income to realize our net deferred tax asset, we would be required, under generally accepted accounting principles, to establish a full or partial valuation allowance which would require us to incur a charge to income for the period in which the determination was made.
Fluctuations in market interest rates may have a material effect on the value of the Company’s securities portfolio.
As of December 31, 2024, the fair value of our securities portfolio was approximately $753.3 million, of which approximately $256.3 million were categorized as available-for-sale. Fixed-rate investment securities, such as bonds, treasuries and mortgage-backed securities, generally decline in value when interest rates rise above the rates applicable to such securities. Correspondingly, declining interest rates tend to increase the value of fixed-rate securities issued in times of relatively higher rates, but those declines also affect our net interest income because they force us to pay above-market rates on certificates of deposit and other longer-term obligations, and clients tend to exit those investments less frequently under those conditions because their earning capacity in other investments is relatively less attractive.
In response to inflationary pressures and other general economic conditions, the Federal Open Market Committee of the Board of Governors of the Fed rapidly and significantly increased interest rates between early 2022 and mid-2024, which resulted in declines in the carrying value of both our held-to-maturity and, particularly, our available-for-sale securities portfolios. Market interest rates have declined modestly in response to the Fed’s recent interest rate reductions. However, the economy remains highly uncertain with respect to various factors, including inflation and employment statistics, and it is thus extremely difficult for management to predict when, to what degree, or in which direction the Fed may attempt to adjust rates further. 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. These trends can be exacerbated if the Company were required to sell such securities to meet liquidity needs, including in the event of deposit outflows or slower deposit growth. Correspondingly, additional rate reductions may affect our net interest income as we seek to price our deposit products in a way that remains competitive and attractive to clients, while also mitigating the risk that future declines may leave us with elevated borrowing costs.
Additional factors beyond our control can further significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. Additional factors include, but are not limited to, rating agency downgrades of the securities or our own analysis of the value of the security, defaults by the issuer or individual mortgagors with respect to the underlying securities, and continued instability in the credit markets. Any of the foregoing factors could cause credit-related impairment in future periods and result in realized losses. The process for determining whether impairment is credit related usually requires difficult, subjective judgments about the future financial performance of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security. Because of changing economic and market conditions affecting interest rates, we may recognize realized and/or unrealized losses in future periods, or we may face periods of compressed net interest margins, either of which could have a material adverse effect on our business, financial condition and results of operations.
Adverse changes to our credit ratings could limit our access to funding and increase our borrowing costs.
Credit ratings are subject to ongoing review by rating agencies, which consider a number of factors, including our financial strength, performance, prospects and operations as well as factors not under our control. Other factors that influence our credit ratings include changes to the rating agencies’ methodologies for our industry or certain security types; the rating agencies’ assessment of the general operating environment for financial services companies; our relative positions in the markets in which we compete; our various risk exposures and risk management policies and activities; pending litigation and other contingencies; our reputation; our liquidity position, diversity of funding sources and funding costs; the current and expected level and volatility of our earnings; our capital position and capital management practices; our corporate governance; current or future regulatory and legislative initiatives; and the agencies’ views on whether the U.S. government would provide meaningful support to us or our subsidiaries in a crisis. Rating agencies could make adjustments to our credit ratings at any time, and there can be no assurance that they will maintain our ratings at current levels or that downgrades will not occur.
Any downgrade in our credit ratings could potentially adversely affect the cost and other terms upon which we are able to borrow or obtain funding, increase our cost of capital and/or limit our access to capital markets. Credit rating downgrades or negative watch warnings could negatively impact our reputation with lenders, investors and other third parties, which could also impair our ability to compete in certain markets or engage in certain transactions. In particular, holders of deposits may perceive such a downgrade or warning negatively and withdraw all or a portion of such deposits. While certain aspects of a credit rating downgrade are quantifiable, the impact that such a downgrade would have on our liquidity, business and results of operations in future periods is inherently uncertain and would depend on a number of interrelated factors, including, among other things, the magnitude of the downgrade, the rating relative to peers, the rating assigned by the relevant agency pre-downgrade, individual client behavior and future mitigating actions we might take.
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 the Company is unable to maintain or grow its deposits, it may be subject to paying higher funding costs. The composition of our deposit base, and particularly the extent to which our deposits are not federally insured, may present a heightened risk of withdrawal. Such deposit balances can decrease during periods of economic uncertainty or when clients perceive alternative investments are providing a better risk/return tradeoff. 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. 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. 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. We could have to raise interest rates to retain deposits, thereby increasing our funding costs and reducing net interest income and net income.
Additional liquidity is provided by our ability to borrow from the Federal Reserve Bank of San Francisco and the Federal Home Loan Bank of San Francisco. We also may borrow from third-party lenders from time to time. Our access to funding sources in amounts adequate to finance or capitalize our activities on terms that are acceptable to us could be
impaired by factors that affect us directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry.
Any decline in available funding could adversely impact our ability to continue to implement our strategic plan, including our ability to originate loans, invest in securities, meet our expenses, or to fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse effect on our liquidity, business, financial condition and results of operations.
Risks Related to Our Capital
We may be subject to more stringent capital requirements in the future.
We are subject to current and changing regulatory requirements specifying minimum amounts and types of capital that we must maintain. 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.
We may need to raise additional capital in the future, and if we fail to maintain sufficient capital, whether due to losses, an inability to raise additional capital or otherwise, our financial condition, liquidity and results of operations, as well as our ability to maintain regulatory compliance, would be adversely affected.
We face significant capital and other regulatory requirements as a financial institution. We may need to raise additional capital in the future to provide us with sufficient capital resources and liquidity to meet our commitments and business needs, which could include the possibility of financing acquisitions. Our ability to raise additional capital depends on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the banking industry, market conditions and governmental activities, and on our financial condition and performance. Any occurrence that may limit our access to the capital markets may adversely affect our capital costs and our ability to raise capital. Moreover, if we need to raise capital in the future, we may have to do so when many other financial institutions are also seeking to raise capital and would have to compete with those institutions for investors. We, therefore, may not be able to raise additional capital if needed or on terms acceptable to us.
Risks Related to Our Legal and Regulatory Environment
We are subject to extensive and complex regulations which are costly to comply with and may subject us to significant penalties for noncompliance.
Our operations are subject to extensive regulation by federal, state and local governmental authorities, including the FDIC, the Federal Reserve and the California Department of Financial Protection and Innovation, and to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of our operations. Many of these laws are complex, especially those governing fair lending, predatory or unfair or deceptive practices, and other consumer-focused practices. Similarly, these laws and regulations have expanded substantially in terms of scope and complexity in recent years, and this expansion can be expected to continue. The complexity of those rules creates additional potential liability for us because noncompliance could result in significant regulatory action, including restrictions on operations and fines, and could lead to class action lawsuits from shareholders, consumers and employees. In addition, various states, particularly California, where substantially all our operations and banking activities take place, have their own laws and regulations. These state-specific regulations include heightened data privacy, employment law and consumer protection regulations, and the cost of complying with state rules that differ from federal rules can significantly increase compliance costs.
The laws, rules and regulations to which we are subject evolve and change frequently, including changes that come from judicial or administrative agency interpretations of laws and regulations outside of the legislative process that may be more difficult to anticipate, and changes to our regulatory environment are often driven by shifts of political power in the federal government. In addition, we are subject to various examinations by our regulators during the course of the year. Regulatory authorities who conduct these examinations have extensive discretion in their interpretation of various
laws and regulations and in their supervisory and enforcement activities, including the authority to restrict our operations and certain corporate actions. Administrative and judicial interpretations of the rules that apply to our business may change the way such rules are applied, which also increases our compliance risk if the interpretation differs from our understanding or prior practice. Moreover, an increasing amount of the regulatory authority that pertains to financial institutions is in the form of informal “guidance” such as handbooks, guidelines, examination manuals, field interpretations by regulators or similar provisions that could affect our business or require changes in our practices in the future even if they are not formally adopted as laws or regulations. Any such changes could adversely affect our cost of doing business and our profitability and may create operational and legal risks that are difficult to anticipate or to mitigate.
In addition, changes in regulation of our industry have the potential to create higher costs of compliance, including short-term costs to meet new compliance standards, limit our ability to pursue business opportunities and increase our exposure to potential fines, penalties and litigation.
Changes in accounting standards could materially impact our financial statements.
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 addition, the bodies that interpret the accounting standards (such as banking regulators or outside auditors) may change their interpretations or positions on how these standards should be applied. These changes may be beyond our control, can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retrospectively, or apply an existing standard differently, also retrospectively, in each case resulting in our needing to revise or restate prior period financial statements. Restating or revising our financial statements may result in reputational harm or may have other adverse effects on us.
Litigation, regulatory actions, investigations or similar matters, could subject us to uninsured liabilities and reputational harm and otherwise materially affect our business, financial condition and results of operations.
We are and will continue to be involved from time to time in a variety of litigation, regulatory actions, investigations or similar matters arising out of our business. These matters may include supervisory or enforcement actions by our regulators, criminal proceedings by prosecutorial authorities, claims by clients or by former and current employees, including class, collective and representative actions, or environmental lawsuits stemming from property that we may hold as OREO following a foreclosure action in the course of our business. It is inherently difficult to assess the outcome of these matters, and we may not prevail in any proceedings or litigation. Any such matters could be time-consuming and expensive to resolve, involve regulatory sanctions, civil money penalties or fines, divert management attention from executing our business plan, and lead to attempts on the part of other parties to pursue similar claims. Any proceedings or claims asserted against us, regardless of merit or eventual outcome may harm our reputation. To mitigate the cost of some of these matters, we maintain insurance coverage in amounts and with deductibles that we believe are appropriate for our operations. 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. In addition, such insurance coverage may not continue to be available to us at a reasonable cost or at all. As a result, we may be exposed to substantial uninsured liabilities, reputational harm, regulatory sanctions or other effects which could adversely affect our business, prospects, financial condition, results of operations and capital position.
The failure to protect our clients' confidential information, data and privacy could adversely affect our business.
We are subject to federal and state privacy regulations and confidentiality obligations, including the California Consumer Privacy Act of 2018 and the California Privacy Rights Act of 2020, that, among other things restrict the use and dissemination of, and access to, certain information that we produce, store or maintain in the course of our business and establishes a new state agency to enforce these rules. We also have contractual obligations to protect certain confidential information we obtain from our existing vendors and clients. These obligations generally include protecting such confidential information in the same manner and to the same extent as we protect our own confidential information, and in some instances may impose indemnity obligations on us relating to unlawful or unauthorized disclosure of any such
information.
The continued development and enhancement of our information security controls, processes and practices designed to protect client information, our systems, computers, software, data and networks from attack, damage or unauthorized access remain a priority for our management as we increase our online and mobile banking offerings. As cyber threats continue to evolve, including supply chain risks, our costs to combat the cybersecurity threat can be expected to increase. Nonetheless, our measures may be insufficient to prevent all physical and electronic break-ins, denial of service and other cyber-attacks or security breaches.
If we do not properly comply with privacy regulations and contractual obligations that require us to protect confidential information, or if we experience a security breach or network compromise, we could face regulatory sanctions, penalties or fines, increased compliance costs, remedial costs such as providing credit monitoring or other services to affected clients, litigation and damage to our reputation, which in turn could result in decreased revenues and loss of clients, any or all of which would have a material adverse effect on our business, financial condition, results of operations and capital position.
Risks from Competition
We face strong competition from financial services companies and other companies that offer commercial banking services, which could harm our business.
We face substantial competition in all phases of our operations from a variety of different competitors. Our competitors, including larger commercial banks, community banks, savings and loan associations, mutual savings banks, credit unions, consumer finance companies, insurance companies, securities dealers, brokers, mortgage bankers, investment advisors, money market mutual funds and other financial institutions, compete with lending and deposit gathering services offered by us. Many of these competing institutions have much greater financial and marketing resources than we have. Due to their size, many competitors can achieve larger economies of scale and may offer a broader range of products and services than we can. If we are unable to offer competitive products and services, our business may be negatively affected. Some of the financial services organizations with which we compete are not subject to the same degree of regulation as is imposed on bank holding companies and federally insured financial institutions or are not subject to increased supervisory oversight arising from regulatory examinations. As a result, these non-bank competitors have certain advantages over us in accessing funding and in providing various services.
We anticipate intense competition will continue for the coming year due to the recent consolidation of many financial institutions and more changes in legislation, regulation and technology. Further, we expect loan demand to continue to be challenging due to the uncertain economic climate and the intensifying competition for creditworthy borrowers, both of which could lead to loan rate concession pressure and could impact our ability to generate profitable loans. 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. 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. 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. For example, consumers can maintain funds in brokerage accounts or mutual funds that would have historically been held as bank deposits. Consumers can also complete transactions such as paying bills and transferring funds directly without the assistance of banks. 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. If we are unable to attract and retain banking clients and expand our loan and deposit growth, then we may be unable to continue to grow our business which could have a material adverse effect on our financial condition and results of operations.
We have a continuing competitive need for technological change, and we may not have the resources to effectively implement new technology or we may experience operational challenges when implementing new technology.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new, technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve clients and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our clients by using technology to provide products and services that will satisfy client demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements than we do. As a result, they may be able to offer additional or superior products to those that we will be able to offer, which would put us at a competitive disadvantage. We may not be able to effectively implement new, technology-driven products and services or be successful in marketing these products and services to our clients. In addition, the implementation of technological changes and upgrades to maintain current systems and integrate new ones may also cause service interruptions, transaction processing errors and system conversion delays and may cause us to fail to comply with applicable laws. Failure to successfully keep pace with technological change affecting the financial services industry and avoid interruptions, errors and delays could have a material adverse effect on our business, financial condition and results of operations.
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. Investment in our common stock is inherently risky for the reasons described herein, and is subject to the same market forces that affect the price of common stock in any company. As a result, if you acquire our common stock, you could lose some or all of your investment.
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.
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. 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. We sometimes must pay an acquisition premium above the fair market value of acquired assets for the acquisition of banks or bank holding companies. Paying this acquisition premium, in addition to the dilutive effect of issuing additional shares, may also adversely affect the prevailing market price of our common stock.
The trading volume in our common stock is less than that of other larger financial services companies.
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. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace at any given time of willing buyers and sellers of our common stock. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. Given the lower trading volume of our common stock, significant sales of our common stock, or the expectation of these sales, could cause our stock price to fall.
The price of our common stock may fluctuate significantly, and this may make it difficult for you to resell shares of common stock owned by you at times or at prices you find attractive.
The stock market and, in particular, the market for financial institution stocks, has experienced significant volatility. In some cases, the markets have produced downward pressure on stock prices for certain issuers without regard to those issuers’ underlying financial strength. As a result, the trading volume in our common stock may fluctuate more than usual and cause significant price variations to occur.
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. These broad market fluctuations have adversely affected and may continue to adversely affect the market price of our common stock, some of which are out of our control. Among the factors that could affect our stock price are:
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changes in business and economic condition;
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actual or anticipated quarterly fluctuations in our operating results and financial condition;
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actual occurrence of one or more of the risk factors outlined above;
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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;
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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;
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strategic actions by us or our competitors, such as acquisitions, restructurings, dispositions or financings;
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actions by institutional investors;
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fluctuations in the stock price and operating results of our competitors;
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future sales of our equity, equity related or debt securities;
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proposed or adopted regulatory changes or developments;
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anticipated or pending investigations, proceedings, or litigation that involve or affect us;
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the level and extent to which we do or are allowed to pay dividends;
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trading activities in our common stock, including short selling;
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deletion from well-known index or indices;
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domestic and international economic factors unrelated to our performance; and
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general market conditions and, in particular, developments related to market conditions for the financial services industry.
Our dividend policy may change without notice, and our future ability to pay dividends is subject to restrictions.
Historically, our Board has declared quarterly dividends on our common stock. However, we have no obligation to continue doing so and may change our dividend policy at any time without notice to holders of our common stock. Holders of our common stock are only entitled to receive such cash dividends as our Board, in its discretion, may declare out of funds legally available for such payments. Furthermore, consistent with our strategic plans, growth initiatives, capital availability, projected liquidity needs, and other factors, we have made, and will continue to make, capital management decisions and policies that could adversely impact the amount of dividends paid to holders of our common stock.
HCC is a separate and distinct legal entity from HBC. 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. The Basel III capital rules also provide for risk-based capital, leverage and liquidity standards, including capital conservation buffers, that result in restrictions on HBC and the Company's ability to make dividend payments, redemptions or other capital distributions. If the HBC does not receive regulatory approval or does not maintain a level of capital sufficient to permit it to make dividend payments to us while maintaining adequate capital levels, our ability to pay our expenses and our business, financial condition and results of operations could be materially adversely impacted.
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. 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. If required payments on our debt obligations are not made or are deferred, or dividends on any preferred stock we may issue are not paid, we will be prohibited from paying dividends on our common stock.
We have limited the circumstances in which our directors will be liable for monetary damages.
We have included in our articles of incorporation a provision to eliminate the liability of directors for monetary damages to the maximum extent permitted by California law. The effect of this provision will be to reduce the situations in which we or our shareholders will be able to seek monetary damages from our directors.
Our bylaws also have a provision providing for indemnification of our directors and executive officers and advancement of litigation expenses to the fullest extent permitted or required by California law, including circumstances in which indemnification is otherwise discretionary. Also, we have entered into agreements with our officers and directors in which we similarly agreed to provide indemnification that is otherwise discretionary. Such indemnification may be available for liabilities arising in connection with future offerings.
We may issue shares of preferred stock in the future, which could make it difficult for another company to acquire us or could otherwise adversely affect holders of our common stock, which could depress the price of our common stock.
Although there are currently no shares of our preferred stock issued and outstanding, our articles of incorporation authorize us to issue up to 10 million shares of one or more series of preferred stock. The board also has the power, without shareholder approval (subject to Nasdaq shareholder approval rules), to set the terms of any series of preferred stock that may be issued, including voting rights, dividend rights, preferences over our common stock with respect to dividends or in the event of a dissolution, liquidation or winding up and other terms. In the event that we issue preferred stock in the future that has preference over our common stock with respect to payment of dividends or upon our liquidation, dissolution or winding up, or if we issue preferred stock with voting rights that dilute the voting power of our common stock, the rights of the holders of our common stock or the market price of our common stock could be adversely affected. In addition, the ability of our Board to issue shares of preferred stock without any action on the part of our shareholders may impede a takeover of us and prevent a transaction perceived to be favorable to our shareholders.
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.
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. In such event, holders of our common stock would not be entitled to receive any payment or other distribution of assets upon the liquidation, dissolution or winding up of the Company until after all of the Company’s obligations to the debt holders were satisfied and holders of the subordinated debt had received any payment or distribution due to them. In addition, we are required to pay interest on the subordinated notes and if we are in default in the payment of interest we would not be able to pay any dividends on our common stock.
Provisions in our charter documents and California law may have an anti-takeover effect, and there are substantial regulatory limitations on changes of control of bank holding companies.
Our articles of incorporation and bylaws contain a number of provisions relating to corporate governance and rights of shareholders that might discourage future takeover attempts. As a result, shareholders who might desire to participate in such transactions may not have an opportunity to do so. In addition, these provisions will also render the removal of our Board or management more difficult. Such provisions include a requirement that shareholder approval for any action proposed by the Company must be obtained at a shareholders meeting and may not be obtained by written consent. Our bylaws provide that shareholders seeking to make nominations of candidates for election as directors, or to bring other business before an annual meeting of the shareholders, must provide timely notice of their intent in writing and follow specific procedural steps in order for nominees or shareholder proposals to be brought before an annual meeting.
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. 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. Under the California Financial Code, no person may, directly or indirectly, acquire control of a California state bank or its holding company unless the DFPI has approved such acquisition of control. Moreover, the combination of these provisions effectively inhibits certain mergers or other business combinations, which, in turn, could adversely affect the market price of our common stock.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
ITEM 2. 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. California Boulevard in Walnut Creek, California 94596, at 1987 First Street in Livermore, California 94550, at 18625 Sutter Boulevard in Morgan Hill, California 95037, at 7598 Monterey Street in Gilroy, California 95020, at 351 Tres Pinos Road in Hollister, California 95023, at 419 S. San Antonio Road in Los Altos, California 94022, at 325 Lytton Avenue in Palo Alto, California 94301, at 400 S. 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.
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 $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.
Branch Offices
In June of 2007, as part of the acquisition of Diablo Valley Bank, the Company took ownership of an 8,285 square foot one story commercial office building, including the land, located at 387 Diablo Road in Danville, California.
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. 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. 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.
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 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. The Company has reserved the right to extend the lease for two additional period of five years.
In January of 2021, the Company amended and extended its lease for approximately 6,233 square feet on the twenty third floor in a multi-tenant office building located at 120 Kearny Street in San Francisco, California. The current monthly rent payment is $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 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 Company has reserved the right to extend the term of the lease for one additional period of five years.
In December of 2021, the Company entered into a new lease agreement for approximately 4,099 square feet on the sixteenth floor in a multi-tenant office building located at 1111 Broadway in Oakland, California. The current monthly rent payment is $25,005, 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.
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. 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. 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. 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.
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 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 $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 $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.
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 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 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. 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 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. The Company has reserved the right to extend the term of the lease for one additional period of five years.
Bay View Funding Office
The Bay View Funding administrative office is located at 224 Airport Parkway in San Jose, California, consisting of approximately 7,849 square feet and is subject to a sublease with Heritage Bank of Commerce dated March 6, 2020. 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.
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.”

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
We evaluate all claims and lawsuits with respect to their potential merits, our potential defenses and counterclaims, settlement or litigation potential and the expected effect on us. The outcome of any claims or litigation, regardless of the merits, is inherently uncertain. Any claims and other lawsuits, and the disposition of such claims and lawsuits, whether through settlement or litigation, could be time-consuming and expensive to resolve, divert our attention from executing our business plan, result in efforts to enjoin our activities, and lead to attempts by third parties to seek similar claims.
For more information regarding legal proceedings, see Note 15 “Commitments and Contingencies” to the consolidated financial statements.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
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.
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. It is Federal Reserve policy that bank holding companies generally pay dividends on common stock only out of income available over the past year, and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. It is also Federal Reserve policy that bank holding companies not maintain dividend levels that undermine the holding company’s ability to be a source of strength to its banking subsidiaries. Additionally, in consideration of the current financial and economic environment, the Federal Reserve has indicated that bank holding companies should carefully review their dividend policy and has discouraged payment ratios that are at maximum allowable levels unless both asset quality and capital are very strong. Under the federal Prompt Corrective Action regulations, the Federal Reserve or the FDIC may prohibit a bank holding company from paying any dividends if the holding company’s bank subsidiary is classified as undercapitalized.
As a holding company, our ability to pay cash dividends is affected by the ability of our bank subsidiary, HBC, to pay cash dividends. The ability of HBC (and our ability) to pay cash dividends in the future and the amount of any such cash dividends is and could be in the future further influenced by bank regulatory requirements and approvals and capital guidelines.
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.
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, 2019 to December 31, 2024, to the performance of several specific industry indices. 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. 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. 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 *
S&P 500 Index *
NASDAQ Composite Index*
KBW NASDAQ Bank Index*
*
Source: S&P Global Market Intelligence - (434) 977-1600

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. [RESERVED]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion provides information about the consolidated results of operations, financial condition, liquidity, and capital resources of Heritage Commerce Corp (the “Company” or “HCC”), its wholly-owned subsidiary, Heritage Bank of Commerce (the “Bank” or “HBC”), and HBC’s wholly-owned subsidiary, CSNK Working Capital Finance Corp, a California Corporation, dba Bay View Funding. This information is intended to facilitate the understanding and assessment of significant changes and trends related to our financial condition and the results of operations. This discussion and analysis should be read in conjunction with our consolidated financial statements and the accompanying notes presented elsewhere in this report. 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.
Critical Accounting Policies and Estimates
Financial results are presented in accordance with the accounting principles generally accepted in the United States of America (“GAAP”) and with reference to certain non-GAAP financial measures. 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. Some of these policies and estimates relate to matters that are highly complex and contain inherent uncertainties. It is possible that, in some instances, different estimates and assumptions could reasonably have been made and used by management, instead of those we applied, which might have produced different results that could have had a material effect on the financial statements.
Management believes that the presentation of certain non-GAAP financial measures provide useful supplemental information to investors as these financial measures are commonly used in the banking industry. 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. Certain of these accounting policies require management to use significant judgment and estimates, which can have a material impact on reported income or loss and on the carrying value of certain assets and liabilities, and we consider these policies to be our critical accounting estimates. These judgments and assumptions are based upon historical experience, future forecasts, or other factors that management believes to be reasonable under the circumstances. Because of the nature of the judgments and assumptions, actual results could differ from management’s estimates, which could have a material effect on our financial condition and results of operations. The following accounting policies materially affect our reported earnings and financial condition and require significant judgments and estimates. 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 ACLL is a valuation amount that is deducted from the amortized cost basis of loans, and is adjusted each period by an expense or credit for credit losses, which is recognized in earnings, and reduced by loan charge-offs, net of recoveries. 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. Expected cash flows are estimated for each loan and discounted using the contractual terms of the loan, calculated probabilities of default, loss given default, prepayment and curtailment estimates as well as qualitative factors. The probability-of-default estimates are generated using a regression model used to estimate the likelihood of a loan being charged-off within the life of the loan. 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. These economic factors included variables such as California state gross product, California unemployment rate, California home price index, and a commercial real estate value index. Qualitative factors are also applied by management to reflect increased portfolio risks from such factors as collateral value risk, portfolio growth, or loan grade and performance trends that management has assessed as not being fully captured in the quantitative estimate.
The ACLL represents management’s best estimate of potential loan losses, but significant changes in prevailing economic conditions could result in material changes in the allowance. Generally, an improving economic forecast generates a lower ACLL estimate than a weakening economic forecast. One of the most significant judgments used in estimating the ACLL is the reasonable and supportable macroeconomic forecast for the economic factors used in the model. Changes in the macroeconomic forecast, especially for California state gross product and the California unemployment rate, could significantly impact the calculated estimated credit loss. The economic forecast utilized for the ACLL model input is inherently uncertain and many external factors could impact these forecasts. Management reviews the forecast inputs to ensure they are reasonable and supportable, however, changes in local and national economic conditions will impact the allowance level and an increase in the California unemployment rate specifically would have the largest impact on the allowance level. While management utilizes its best judgement and current information available, the adequacy of the ACLL is significantly determined by certain factors outside the Company’s control, such as the performance of our loan portfolio, changes in the economic environment including economic uncertainty, changes in interest rates, and any regulatory changes. Additionally, the level of ACLL may fluctuate based on the balance and mix of the loan portfolio.
Qualitative factors are evaluated each period and applied in instances when management assesses that additional risks not captured in the quantitative estimate should be factored into the overall ACLL estimate. These risks include loan performance trends, collateral value risk and portfolio growth characteristics. Changes in the assessment of these qualitative factors could significantly impact the calculated estimated credit loss.
Other key assumptions used to calculate the ACLL include the forecast and reversion to mean time periods for the economic factor inputs, and prepayment and curtailment assumptions. The model calculation is less sensitive to these assumptions than to the macroeconomic forecast and the application of qualitative factors.
Executive Summary
The Company conducts a general commercial banking business through the Bank. Our primary operations are located 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. Our market includes the cities of Oakland, San Francisco, and San Jose, the headquarters of a number of technology based companies in the region known commonly as Silicon Valley. The Bank’s clients are primarily closely held businesses and professionals. We also have limited operations in other regions primarily by virtue of Bay View Funding, the Bank’s factoring subsidiary, which provides factoring and other alternative corporate financing services.
Performance Overview
2024 was a year of solid progress. We saw deposit balances grow by 10% year-over-year as our team deepened relationships with local businesses. Loan growth was steady at 4%, reinforcing our role as a trusted financial partner in the Bay Area. One of the most important things we did in 2024 was invest in the future by hiring top-tier bankers, upgrading our technology, and reinforcing our operational strength. Our capital position remains strong, our loan portfolio is high quality, and we have the liquidity and earnings power to continue strengthening our franchise.
For the year ended December 31, 2024, net income was $40.5 million, or $0.66 per average diluted common share, compared to $64.4 million, or $1.05 per average diluted common share, for the year ended December 31, 2023, and $66.6 million, or $1.09 per average diluted common share for the year ended December 31, 2022. The Company’s annualized return on average tangible assets was 0.78% and annualized return on average tangible common equity was 8.05% for the year ended December 31, 2024, compared to 1.26% and 13.57%, respectively, for the year ended December 31, 2023, and 1.27% and 15.57%, respectively, for the year ended December 31, 2022. The annualized return on average tangible assets and annualized return on average tangible common equity are non-GAAP financial measures.
2024 Highlights
Results of Operations:
● For the year ended December 31, 2024, net interest income decreased (11%) to 163.6 million, compared to $183.2 million for the year ended December 31, 2023. The fully tax equivalent (“FTE”) net interest margin decreased (42) basis points to 3.28% for the year ended December 31, 2024, from 3.70% for the year ended December 31, 2023, primarily due to higher rates paid on client deposits, a decrease in the average balance of noninterest-bearing deposits, and a lower average yield on investment securities, partially offset by an increase in the average balances of loans and overnight funds. The FTE net interest margin is a non-GAAP financial measure.
● The average yield on the total loan portfolio increased to 5.47% for the year ended December 31, 2024, compared to 5.45% for the year ended December 31, 2023.
● In the aggregate, the remaining net purchase discount on total loans acquired was $2.1 million at December 31, 2024.
● The average cost of total deposits increased to 1.70% for the year ended December 31, 2024, compared to 1.06% for the year ended December 31, 2023. The average cost of funds increased to 1.74% for the year ended December 31, 2024, compared to 1.13% for the year ended December 31, 2023.
● There was a provision for credit losses on loans of $2.1 million 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, primarily due to the increase in the balance of total loans, and an increase in specific reserves for individually analyzed loans.
● 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.
● Total noninterest expense for the year ended December 31, 2024 increased to $113.6 million, compared to $101.1 million for the year ended December 31, 2023, primarily due to higher salaries and employee benefits, rent expense, professional fees, marketing related expenses, insurance expense, homeowner association third-party vendor payments, and Insured Cash Sweep (“ICS”)/Certificate of Deposit Account Registry Service (“CDARS”) fee expense.
● The efficiency ratio increased to 65.88% for the year ended December 31, 2024, compared to 52.57% for the year ended December 31, 2023, primarily due to both higher noninterest expense and lower net revenue. The efficiency ratio is a non-GAAP financial measure.
● Income tax expense for the year ended December 31, 2024 was $16.1 million, compared to $26.0 million for the year ended December 31, 2023. The effective tax rate for the year ended December 31, 2024 was 28.5%, compared to 28.7% for the year ended December 31, 2023.
Current Financial Condition and Liquidity Position:
● Our liquidity, including cash on hand, undrawn lines of credit, and other sources of liquidity, totaled $3.3 billion, or 69% of the Company’s total deposits and approximately 155% of the Bank’s estimated uninsured deposits at December 31, 2024. The Bank’s uninsured deposits were approximately $2.2 billion, representing 45% of total deposits, at December 31, 2024. The following table shows our liquidity, available lines of credit and the amounts outstanding at December 31, 2024:
Total
Remaining
Available
Outstanding
Available
(Dollars in thousands)
Excess funds at the Federal Reserve Bank ("FRB")
$
935,400
$
-
$
935,400
FRB discount window collateralized line of credit
1,383,149
-
1,383,149
Federal Home Loan Bank ("FHLB")
collateralized borrowing capacity
815,760
-
815,760
Unpledged investment securities (at fair value)
94,088
-
94,088
Federal funds purchase arrangements
90,000
-
90,000
Holding company line of credit
25,000
-
25,000
Total
$
3,343,397
$
-
$
3,343,397
● Cash, interest bearing deposits in other financial institutions and securities available-for-sale, at fair value, increased 44% to $1.2 billion at December 31, 2024, from $850.8 million at December 31, 2023.
● Securities held-to-maturity, at amortized cost, totaled $590.0 million at December 31, 2024, compared to $650.6 million at December 31, 2023.
● The pre-tax unrealized (loss) on the securities available-for-sale portfolio was ($5.1) million, or ($3.7) million net of taxes, which equaled less than 1% of total shareholders’ equity at December 31, 2024. The pre-tax unrecognized loss on the securities held-to-maturity portfolio was ($93.0) million at December 31, 2024, or ($65.5) million net of taxes, which equaled 9.5% of total shareholders’ equity at December 31, 2024. 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. Treasury securities, for total purchases of $30.3 million in the available-for-sale portfolio. Securities purchased had a book yield of 4.79% and an average life of 4.80 years.
● The following are the projected cash flows from paydowns and maturities in the investment securities portfolio for the periods indicated based on the current interest rate environment:
Agency
Mortgage-
U.S.
backed and
Treasury
Municipal
(Par Value)
Securities
Total
(Dollars in thousands)
First quarter of 2025
$
35,000
$
20,986
$
55,986
Second quarter of 2025
118,000
19,666
137,666
Third quarter of 2025
25,500
20,822
46,322
Fourth quarter of 2025
-
19,228
19,228
Total
$
178,500
$
80,702
$
259,202
● 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. 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. The increase in classified assets at December 31, 2024 was primarily the result of one downgraded owner occupied commercial real estate (“CRE”) credit, and a number of residential related loans. The loans are well-collateralized and we do not anticipate to incur losses as a result of the downgrades of these loans.
● Net charge-offs totaled $1.1 million for the year ended December 31, 2024, compared to $303,000 for the year ended December 31, 2023.
● The ACLL at December 31, 2024, was $49.0 million, or 1.40% of total loans, representing 638.49% of nonperforming loans. 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.
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.
(2) This is a non-GAAP financial measure that represents shareholders’ equity minus goodwill and other intangible assets divided by total assets minus goodwill and other intangible assets.
RESULTS OF OPERATIONS
The Company earns income from two primary sources. The first is net interest income, which is interest income generated by earning assets less interest expense on interest-bearing liabilities. 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.
Net Interest Income and Net Interest Margin
The level of net interest income depends on several factors in combination, including growth in earning assets, yields on earning assets, the cost of interest-bearing liabilities, the relative volumes of earning assets and interest-bearing liabilities, and the mix of products that comprise the Company’s earning assets, deposits, and other interest-bearing liabilities. Net interest income can also be impacted by the reversal of interest on loans placed on nonaccrual status, and recovery of interest on loans that have been on nonaccrual and are either sold or returned to accrual status. To maintain its net interest margin, the Company must manage the relationship between interest earned and interest paid.
The following Distribution, Rate and Yield table presents for each of the past three years, the average amounts outstanding for the major categories of the Company’s balance sheet, the average interest rates earned or paid thereon, and the resulting net interest margin on average interest earning assets for the periods indicated. Average balances are based on daily averages.
Distribution, Rate and Yield
Year Ended December 31,
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
1.66
%
11,809
0.82
%
12,587
0.17
%
Time deposits - $100 and over
228,388
8,968
3.93
%
218,131
6,874
3.15
%
122,018
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
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
-
0.00
%
27,145
1,365
5.03
%
-
-
%
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. Nonaccrual loans are included in average balance.
(2) Yield amounts earned on loans include fees and costs. 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 $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.
(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.
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. Volume variances are equal to the increase or decrease in the average balance multiplied by prior period rates and rate variances are equal to the increase or decrease in the average rate multiplied by the prior period average balance. 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
$
$
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)
(69)
(237)
(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)
(216)
(938)
5,178
4,240
Savings and money market
11,947
12,877
(4,404)
20,541
16,137
Time deposits - under $100
(12)
(6)
Time deposits - $100 and over
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
14,069
Short-term borrowings
-
(1,365)
(1,365)
1,364
1,365
Subordinated debt, net of issuance costs
(8)
-
(127)
(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
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.
Net interest income decreased 11% to $163.6 million for the year ended December 31, 2024, compared to $183.2 million for the year ended December 31, 2023. For the year ended December 31, 2024, the non-GAAP FTE net interest margin decreased (42) basis points to 3.28% for the year ended December 31, 2024, compared to 3.70% for the year ended December 31, 2023, primarily due to higher rates paid on client deposits, a decrease in the average balance of noninterest-bearing deposits, and a lower average yield on investment securities, partially offset by an increase in the average balances of loans and overnight funds.
Net interest income increased 2% to $183.2 million for the year ended December 31, 2023, compared to $179.9 million for the year ended December 31, 2022. For the year ended December 31, 2023, the non-GAAP FTE net interest margin increased 13 basis points to 3.70%, compared to 3.57% for the year ended December 31, 2022, primarily due to increases in the prime rate and the rate on overnight funds, and a shift in the mix of earning assets as the Company invested its excess liquidity into higher yielding loans, partially offset by higher rates paid on client deposits, a decrease in the average balances of noninterest-bearing demand deposits, and an increase in the average balances of short-term borrowings.
The following tables present the average balance of loans outstanding, interest income, and the average yield for the periods indicated:
Year Ended December 31,
Average
Interest
Average
Average
Interest
Average
Average
Interest
Average
Balance
Income
Yield
Balance
Income
Yield
Balance
Income
Yield
(Dollars in thousands)
Loans, core bank
$
2,848,206
$
155,690
5.47
%
$
2,730,789
$
147,028
5.38
%
$
2,643,017
$
123,779
4.68
%
Prepayment fees
-
0.00
%
-
0.02
%
-
1,278
0.05
%
Bay View Funding factored receivables
55,717
10,980
19.71
%
62,642
13,426
21.43
%
64,099
12,819
20.00
%
Purchased residential mortgages
444,476
15,038
3.38
%
472,582
15,309
3.24
%
417,672
12,395
2.97
%
Loan credit mark / accretion
(2,737)
1,158
0.04
%
(3,819)
1,381
0.05
%
(5,782)
2,739
0.11
%
Total loans (includes loans
held-for-sale)
$
3,345,662
$
182,983
5.47
%
$
3,262,194
$
177,628
5.45
%
$
3,119,006
$
153,010
4.91
%
The average yield on the total loan portfolio increased to 5.47% for the year ended December 31, 2024, compared to 5.45% for the year ended December 31, 2023, primarily due to an increase in the yield on the core bank loan portfolio. 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. 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 increase in the average cost of total deposits and the average cost of funds for the year ended December 31, 2024 was primarily due to clients seeking higher yields and moving noninterest-bearing deposits to the Bank’s interest-bearing ICS/CDARS deposits and interest-bearing money market accounts and increases in market rates.
Provision for Credit Losses on Loans
Credit risk is inherent in the business of making loans. The Company establishes an allowance for credit losses on loans through charges to earnings, which are presented in the statements of income as the provision for credit losses on loans. Specifically identifiable and quantifiable known losses are promptly charged off against the allowance. The provision for credit losses on loans is determined by conducting a quarterly evaluation of the adequacy of the Company’s allowance for credit losses on loans and charging the shortfall or excess, if any, to the current quarter’s expense. This has the effect of creating variability in the amount and frequency of charges to the Company’s earnings. The provision for credit losses on loans and level of allowance for each period are dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management’s assessment of the quality of the loan portfolio, the valuation of problem loans and the general economic conditions in the Company’s market area. 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. 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.”
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
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
%
%
Gain on sales of SBA loans
(9)
(2)
%
(9)
(2)
%
Servicing income
(35)
(9)
%
(108)
(21)
%
Gain on proceeds from company-owned life insurance
%
%
Termination fees
%
%
Gain on warrants
-
-
-
N/A
(669)
(100)
%
Other
1,856
1,465
1,790
%
(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. 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. Servicing income generally declines as the respective loans are repaid.
Noninterest Expense
The following table sets forth the various components of the Company’s noninterest expense for the periods indicated:
Increase
Increase
Year Ended
(Decrease)
(Decrease)
December 31,
2024 versus 2023
2023 versus 2022
Amount
Percent
Amount
Percent
(Dollars in thousands)
Salaries and employee benefits
$
63,952
$
56,862
$
55,331
$
7,090
%
$
1,531
%
Occupancy and equipment
10,226
9,490
9,639
%
(149)
(2)
%
Insurance expense
6,724
6,264
4,958
%
1,306
%
Professional fees
5,416
4,350
5,015
1,066
%
(665)
(13)
%
Client services
3,920
2,512
1,851
1,408
%
%
Data processing
3,183
3,429
2,482
(246)
(7)
%
%
Software subscriptions
3,046
2,599
1,958
%
%
Other
17,116
15,548
13,625
1,568
%
1,923
%
Total noninterest expense
$
113,583
$
101,054
$
94,859
$
12,529
%
$
6,195
%
The following table indicates the percentage of noninterest expense in each category for the periods indicated:
Year Ended December 31,
Percent
Percent
Percent
of Total
of Total
of Total
(Dollars in thousands)
Salaries and employee benefits
$
63,952
%
$
56,862
%
$
55,331
%
Occupancy and equipment
10,226
%
9,490
%
9,639
%
Insurance expense
6,724
%
6,264
%
4,958
%
Professional fees
5,416
%
4,350
%
5,015
%
Client services
3,920
%
2,512
%
1,851
%
Data processing
3,183
%
3,429
%
2,482
%
Software subscriptions
3,046
%
2,599
%
1,958
%
Other
17,116
%
15,548
%
13,625
%
Total noninterest expense
$
113,583
%
$
101,054
%
$
94,859
%
Noninterest expense for the year ended December 31, 2024 increased 12% to $113.6 million, compared to $101.1 million for the year ended December 31, 2023, primarily due to higher salaries and employee benefits, rent expense, professional fees, marketing related expenses, insurance expense, homeowner association third-party vendor payments, and ICS/CDARS fee expense.
Noninterest expense for the year ended December 31, 2023 increased 7% to $101.1 million, compared to $94.9 million for the year ended December 31, 2022, primarily due to higher salaries and employee benefits, higher insurance, regulatory assessments, improvements in information technology, and ICS/CDARS fee expenses included in other noninterest expense, partially offset by lower professional fees and occupancy and equipment expense during the year ended December 31, 2023.
Full-time equivalent employees were 355 at December 31, 2024, and 349 at December 31, 2023, and 340 at December 31, 2022.
Income Tax Expense
The Company computes its provision for income taxes on a monthly basis. The effective tax rate is determined by applying the Company’s statutory income tax rates to pre-tax book income as adjusted for permanent differences between pre-tax book income and actual taxable income. These permanent differences include, but are not limited to increases in the cash surrender value of life insurance policies, interest on tax-exempt securities, certain expenses that are not allowed as tax deductions, and tax credits.
The following table shows the effective tax rate at the dates indicated:
Year Ended December 31,
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.
Some items of income and expense are recognized in different years for tax purposes than when applying generally accepted accounting principles leading to timing differences between the Company’s actual tax liability, and the amount accrued for this liability based on book income. These temporary differences comprise the “deferred” portion of the Company’s tax expense or benefit, which is accumulated on the Company’s books as a deferred tax asset or deferred tax liability until such time as they reverse.
Realization of the Company’s deferred tax assets is primarily dependent upon the Company generating sufficient future taxable income to obtain benefit from the reversal of net deductible temporary differences and the utilization of tax credit carryforwards and the net operating loss carryforwards for Federal and state income tax purposes. The amount of deferred tax assets considered realizable is subject to adjustment in future periods based on estimates of future taxable income. Under generally accepted accounting principles a valuation allowance is required to be recognized if it is “more likely than not” that the deferred tax assets will not be realized. The determination of the realizability of the deferred tax assets is highly subjective and dependent upon judgment concerning management’s evaluation of both positive and negative evidence, including forecasts of future income, cumulative losses, applicable tax planning strategies, and assessments of current and future economic and business conditions.
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. 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.
FINANCIAL CONDITION
At December 31, 2024, total assets increased 9% to $5.6 billion, compared to $5.2 billion at December 31, 2023, primarily related to growth in client deposits.
Securities available-for-sale, at fair value, were $256.3 million at December 31, 2024, a decrease of (42%) from $442.6 million at December 31, 2023, due to maturities and paydowns. 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. Loans, excluding residential mortgages, increased $166.8 million, or 6%, to $3.0 billion at December 31, 2024, compared to $2.9 billion at December 31, 2023.
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.
Securities Portfolio
The following table reflects the balances for each category of securities at the dates indicated:
December 31,
(Dollars in thousands)
Securities available-for-sale (at fair value):
U.S. Treasury
$
186,183
$
382,369
Agency mortgage-backed securities
70,091
60,267
Total
$
256,274
$
442,636
Securities held-to-maturity (at amortized cost):
Agency mortgage-backed securities
$
559,548
$
618,374
Municipals - exempt from Federal tax (1)
30,480
32,203
Total (1)
$
590,028
$
650,577
(1) Gross of the allowance for credit losses of $12,000 at both December 31, 2024 and December 31, 2023.
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. Treasury
$
176,405
2.89
%
$
9,778
4.31
%
$
-
-
%
$
-
-
%
$
186,183
2.96
%
Agency mortgage-backed securities
2.78
%
40,769
2.52
%
29,237
4.24
%
-
-
%
70,091
3.24
%
Total
$
176,490
2.89
%
$
50,547
2.86
%
$
29,237
4.24
%
$
-
-
%
$
256,274
3.04
%
Securities held-to-maturity (at amortized cost):
Agency mortgage-backed securities
$
1,083
2.05
%
$
98,445
1.86
%
$
378,920
1.84
%
$
81,100
2.76
%
$
559,548
1.98
%
Municipals - exempt from Federal tax (1) (2)
3,350
4.08
%
6,906
3.28
%
20,224
3.62
%
-
0.00
%
30,480
3.59
%
Total (2)
$
4,433
3.58
%
$
105,351
1.95
%
$
399,144
1.93
%
$
81,100
2.76
%
$
590,028
2.06
%
(1) Reflects the non-GAAP FTE adjustment for Federal tax exempt income based on a 21% tax rate.
(2) Gross of the allowance for credit losses of ($12,000) at December 31, 2024.
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.
The Company’s portfolio may include: (i) U.S. Treasury securities and U.S. Government sponsored entities’ debt securities for liquidity and pledging; (ii) mortgage-backed securities, which in many instances can also be used for pledging, and which generally enhance the yield of the portfolio; (iii) municipal obligations, which provide tax free income and limited pledging potential; (iv) single entity issue trust preferred securities, which generally enhance the yield on the portfolio; (v) corporate bonds, which also enhance the yield on the portfolio; (vi) money market mutual funds; (vii) certificates of deposit; (viii) commercial paper; (ix) bankers acceptances; (x) repurchase agreements; (xi) collateralized mortgage obligations; and (xii) asset-backed securities.
The Company classifies its securities as either available-for-sale or held-to-maturity at the time of purchase. Accounting guidance requires available-for-sale securities to be marked to fair value with an offset to accumulated other comprehensive income (loss), a component of shareholders’ equity. Monthly adjustments are made to reflect changes in the fair value of the Company’s available-for-sale securities.
The 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,
(Dollars in thousands)
Securities available-for-sale pre-tax unrealized (loss):
U.S. 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. The net pre-tax unrecognized loss on the securities held-to-maturity portfolio was ($93.0) million, or ($65.5) million net of taxes, which was 9.5% of total shareholders’ equity at December 31, 2024. The unrealized and unrecognized losses in both the available-for-sale and held-to-maturity portfolios were due to higher interest rates at December 31, 2024 compared to when the securities were purchased. The issuers are of high credit quality and all principal amounts are expected to be repaid when the securities mature. The fair value is expected to recover as the securities approach their maturity date and/or interest rates decline.
Loans
The Company’s loans represent the largest portion of earning assets, substantially greater than the securities portfolio or any other asset category, and the quality and diversification of the loan portfolio is an important consideration when reviewing the Company’s financial condition. Gross loans, excluding loans held-for-sale, represented 62% of total assets at December 31, 2024, compared to 65% at December 31, 2023. The loans to deposit ratio was 72.45% at December 31, 2024, compared to 76.52% at December 31, 2023.
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
%
$
463,778
%
Real estate:
CRE - owner occupied
601,636
%
583,253
%
CRE - non-owner occupied
1,341,266
%
1,256,590
%
Land and construction
127,848
%
140,513
%
Home equity
127,963
%
119,125
%
Multifamily
275,490
%
269,734
%
Residential mortgages
471,730
%
496,961
%
Consumer and other
14,837
<1
%
20,919
%
Total Loans
3,492,120
%
3,350,873
%
Deferred loan fees, net
(183)
-
(495)
-
Loans, net of deferred fees
3,491,937
%
3,350,378
%
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 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,
2024, and December 31, 2023. 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. All loan types are within established limits. The Company uses underwriting guidelines to assess the borrowers’ historical cash flow to determine debt service, and we further stress test the debt service under higher interest rate scenarios. Financial and performance covenants are used in commercial lending to allow the Company to react to a borrower’s deteriorating financial condition, should that occur. Stress testing and debt service on commercial real estate loans are reviewed quarterly.
The Company’s commercial loans are made for working capital, financing the purchase of equipment or for other business purposes. Commercial loans include loans with maturities ranging from thirty days to two years and “term loans” with maturities normally ranging from one to five years. Short-term business loans are generally intended to finance current transactions and typically provide for periodic principal payments, with interest payable monthly. Term loans normally provide for floating interest rates, with monthly payments of both principal and interest.
The Company is an active participant in the SBA and U.S. Department of Agriculture guaranteed lending programs, and has been approved by the SBA as a lender under the Preferred Lender Program. The Company regularly makes such loans conditionally guaranteed by the SBA (collectively referred to as “SBA loans”). The guaranteed portion of these loans is typically sold in the secondary market depending on market conditions. 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 Company’s factoring receivables are from the operations of Bay View Funding, whose primary business is purchasing and collecting factored receivables on a nation-wide basis. Factored receivables are receivables that have been transferred by the originating organization and typically have not been subject to previous collection efforts. These receivables are acquired from a variety of companies, including, but not limited to, service providers, transportation companies, manufacturers, distributors, wholesalers, apparel companies, advertisers, and temporary staffing companies. The portfolio of factored receivables is included in the Company’s commercial loan portfolio. The 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. 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,
(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
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. 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 Company generally restricts real estate term loans to no more than 75% of the property’s appraised value or the purchase price of the property depending on the type of property and its utilization. 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. 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.
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. CRE non-owner occupied loans increased $84.7 million, or 7% to $1.34 billion at December 31, 2024, from $1.26 billion at December 31, 2023. At December 31, 2024, 31% of the CRE loan portfolio was secured by owner occupied real estate, compared to 32% at December 31, 2023.
During the fourth quarter of 2024, there were 39 new owner occupied and non-owner occupied CRE loans originated totaling $72 million with a weighted average loan-to-value (“LTV”) of 42%; the weighted average debt-service coverage ratio (“DSCR”) for the non-owner occupied portfolio was 2.58 times. The average loan size for all CRE loans was $1.6 million, and the average loan size for office CRE loans was $1.7 million. The Company has personal guarantees on 92% of its CRE portfolio. A substantial portion of the unguaranteed CRE loans were made to credit-worthy non-profit organizations.
Total office exposure (excluding medical/dental offices) in the CRE portfolio was $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. Non-owner occupied CRE with office exposure totaled $322 million at December 31, 2024. At December 31, 2024, the weighted average LTV and DSCR for the entire non-owner occupied office portfolio were 41.5% and 2.16 times, respectively. 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
%
37.4
%
2.18
%
46.1
%
%
38.9
%
Industrial
%
38.7
%
2.98
%
42.9
%
%
40.3
%
Mixed-Use, Special
Purpose and Other
%
41.6
%
1.99
%
40.6
%
%
41.2
%
Office
%
41.5
%
2.16
%
44.1
%
%
42.1
%
Multifamily
%
42.9
%
1.91
%
0.0
%
%
42.9
%
Hotel/Motel
< 1
%
16.3
%
1.32
%
0.0
%
< 1
%
16.3
%
Total
%
40.0
%
2.24
%
42.8
%
%
40.8
%
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
%
43.8
%
1.92
%
45.3
%
%
44.1
%
Contra Costa
%
41.6
%
1.77
%
46.9
%
%
43.1
%
Marin
%
45.9
%
2.02
%
51.7
%
%
46.3
%
Monterey
%
42.8
%
1.82
%
40.8
%
%
42.1
%
Napa
< 1
%
29.1
%
2.40
%
51.6
%
< 1
%
36.8
%
Out of Area
%
42.3
%
2.04
%
48.9
%
%
44.0
%
San Benito
%
38.3
%
1.84
%
39.3
%
%
38.7
%
San Francisco
%
37.3
%
2.19
%
39.5
%
%
37.6
%
San Mateo
%
38.1
%
2.33
%
40.0
%
%
38.7
%
Santa Clara
%
36.9
%
2.80
%
40.7
%
%
38.3
%
Santa Cruz
%
32.2
%
1.75
%
49.6
%
%
35.5
%
Solano
%
32.5
%
2.91
%
37.5
%
%
33.9
%
Sonoma
%
38.7
%
2.58
%
42.8
%
%
39.6
%
Total
%
40.0
%
2.24
%
42.8
%
%
40.8
%
The Company’s land and construction loans are primarily to finance the development/construction of commercial and single family residential properties. The Company utilizes underwriting guidelines to assess the likelihood of repayment from sources such as sale of the property or availability of permanent mortgage financing prior to making the construction loan. Construction loans are provided primarily in our market area, and we have extensive controls for the disbursement process. 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. 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. Purchases of residential loans have been an attractive alternative for replacing mortgage-backed security paydowns in the investment securities portfolio. Residential mortgage loans decreased ($25.3) million, or (5%), to $471.7 million at December 31, 2024, compared to $497.0 million at December 31, 2023.
Additionally, the Company makes consumer loans for the purpose of financing automobiles, various types of consumer goods, and other personal purposes. 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. 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. For HBC, these lending limits were $113.7 million and $189.6 million at December 31, 2024, respectively.
Loan Maturities
The following table presents the maturity distribution of the Company’s loans (excluding loans held-for-sale), as of December 31, 2024. The table shows the distribution of such loans between those loans with predetermined (fixed) interest rates and those with variable (floating) interest rates. Floating rates generally fluctuate with changes in the prime
rate and contractual repricing dates. At December 31, 2024, approximately 26% of the Company’s loan portfolio consisted of floating interest rate loans.
Over One
Due in
Year But
One Year
Less than
Over
or Less
Five Years
Five Years
Total
(Dollars in thousands)
Commercial
$
376,538
$
109,423
$
45,389
$
531,350
Real estate:
CRE - owner occupied
41,447
191,688
368,501
601,636
CRE - non-owner occupied
56,605
513,626
771,035
1,341,266
Land and construction
119,167
8,556
127,848
Home equity
5,641
26,777
95,545
127,963
Multifamily
14,682
135,845
124,963
275,490
Residential mortgages
6,764
16,709
448,257
471,730
Consumer and other
12,533
2,128
14,837
Loans
$
633,377
$
1,004,752
$
1,853,991
$
3,492,120
Loans with variable interest rates
$
469,400
$
188,849
$
236,771
$
895,020
Loans with fixed interest rates
163,977
815,903
1,617,220
2,597,100
Loans
$
633,377
$
1,004,752
$
1,853,991
$
3,492,120
Loan Servicing
At December 31, 2024, 2023, and 2022, SBA loans that the Company serviced for others totaled $48.3 million, $55.8 million, and $64.8 million, respectively. Activity for loan servicing rights was as follows for the periods indicated:
Year Ended
December 31,
(Dollars in thousands)
Beginning of period balance
$
$
$
Additions
Amortization
(181)
(260)
(230)
End of period balance
$
$
$
Loan servicing rights are included in accrued interest receivable and other assets on the consolidated balance sheets and reported net of amortization. There was no valuation allowance at December 31, 2024 and 2023, as the fair value of the assets was greater than the carrying value.
Activity for the interest-only (“I/O”) strip receivable was as follows for the periods indicated:
Year Ended
December 31,
(Dollars in thousands)
Beginning of period balance
$
$
$
Unrealized holding loss
(35)
(35)
(69)
End of period balance
$
$
$
Management reviews the key economic assumptions used to estimate the fair value of I/O strip receivables on a quarterly basis. The fair value of the I/O strip can be adversely impacted by a significant increase in either the prepayment speed of the portfolio or the discount rate. At December 31, 2024, 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
$
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. 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. 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. For more information regarding the Company’s off-balance sheet arrangements, see Note 15 to the consolidated financial statements located elsewhere herein.
Credit Quality and Allowance for Credit Losses on Loans
Like all financial institutions, HBC has exposure to credit quality risk, which generally arises because we could potentially receive less than a full return of principal and interest if a debtor becomes unable or unwilling to repay. Since loans are the Company’s most significant assets and generate the largest portion of its revenues, the Company’s management of credit quality risk is focused primarily on loan quality. 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. In addition, certain debt securities that the Company may purchase have the potential of declining in value if the obligor’s financial capacity to repay deteriorates.
The Company’s policies and procedures identify market segments, set goals for portfolio growth or contraction, and establish limits on industry and geographic credit concentrations. In addition, these policies establish the Company’s underwriting standards and the methods of monitoring ongoing credit quality. 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. As an independent community bank serving a specific geographic area, the Company must contend with the unpredictable changes in the general California market and, particularly, primary local markets. The Company’s asset quality has suffered in the past from the impact of national and regional economic recessions, consumer bankruptcies, and depressed real estate values.
Nonperforming assets are comprised of the following: loans for which the Company is no longer accruing interest; restructured loans which have been current under six months; loans 90 days or more past due and still accruing interest (although they are generally placed on nonaccrual when they become 90 days past due, unless they are both well-secured and in the process of collection); and foreclosed assets. The following tables present the aging of past due loans by class at the dates indicated:
December 31, 2024
30 - 59
60 - 89
90 Days or
Days
Days
Greater
Total
Past Due
Past Due
Past Due
Past Due
Current
Total
(Dollars in thousands)
Commercial
$
7,364
$
2,295
$
1,393
$
11,052
$
520,298
$
531,350
Real estate:
CRE - Owner Occupied
1,879
-
-
1,879
599,757
601,636
CRE - Non-Owner Occupied
4,479
-
-
4,479
1,336,787
1,341,266
Land and construction
4,290
2,323
5,874
12,487
115,361
127,848
Home equity
-
127,135
127,963
Multifamily
-
-
-
-
275,490
275,490
Residential mortgages
-
-
470,880
471,730
Consumer and other
-
14,507
14,837
Total
$
18,940
$
5,485
$
7,480
$
31,905
$
3,460,215
$
3,492,120
December 31, 2023
30 - 59
60 - 89
90 Days or
Days
Days
Greater
Total
Past Due
Past Due
Past Due
Past Due
Current
Total
(Dollars in thousands)
Commercial
$
6,688
$
2,030
$
1,264
$
9,982
$
453,796
$
463,778
Real estate:
CRE - Owner Occupied
-
-
-
-
583,253
583,253
CRE - Non-Owner Occupied
1,289
-
-
1,289
1,255,301
1,256,590
Land and construction
-
3,706
4,661
135,852
140,513
Home equity
-
-
118,983
119,125
Multifamily
-
-
-
-
269,734
269,734
Residential mortgages
3,794
5,083
491,878
496,961
Consumer and other
-
-
-
-
20,919
20,919
Total
$
12,726
$
2,540
$
5,891
$
21,157
$
3,329,716
$
3,350,873
The following table presents the past due loans on nonaccrual and current loans on nonaccrual at the dates indicated:
December 31,
December 31,
(Dollars in thousands)
Past due nonaccrual loans
$
7,068
$
6,100
Current nonaccrual loans
Total nonaccrual loans
$
7,178
$
6,818
Management’s classification of a loan as “nonaccrual” is an indication that there is reasonable doubt as to the full recovery of principal or interest on the loan. At that point, the Company stops accruing interest income, and reverses any uncollected interest that had been accrued as income. The Company resumes recognizing interest income only as cash interest payments are received and it has been determined the collection of all outstanding principal is not in doubt. The loans may or may not be collateralized, and collection efforts are pursued. Loans may be restructured by management when a borrower has experienced some change in financial status, causing an inability to meet the original repayment terms and where the Company believes the borrower will eventually overcome those circumstances and make full restitution. Foreclosed assets consist of properties and other assets acquired by foreclosure or similar means that management is offering or will offer for sale.
There were no foreclosed assets on the balance sheet at December 31, 2024 or December 31, 2023. There were no CRE loans in NPAs as of December 31, 2024 or December 31, 2023. There were no Shared National Credits or material purchased participations included in NPAs or total loans at December 31, 2024 or December 31, 2023.
The following table summarizes the Company’s nonperforming assets at the dates indicated:
December 31,
(Dollars in thousands)
Nonaccrual loans - held-for-investment
$
7,178
$
6,818
Loans 90 days past due and still accruing
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
$
$
$
$
1,503
Real estate:
CRE - Owner Occupied
-
-
-
-
CRE - Non-Owner Occupied
-
-
-
-
Land and construction
5,874
-
-
5,874
Home equity
-
-
Consumer and other
-
-
-
-
Total
$
6,264
$
$
$
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
$
$
$
$
2,125
Real estate:
CRE - Owner Occupied
-
-
-
-
CRE - Non-Owner Occupied
-
-
-
-
Land and construction
4,661
-
-
4,661
Home equity
-
-
Residential mortgages
-
-
Total
$
6,528
$
$
$
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). Loans held for sale are carried at the lower of cost or estimated fair value, and are not allocated an allowance for credit losses.
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. 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. The class of loan represents the primary collateral type associated with the loan. Significant quarter over quarter changes are reflective of changes in nonaccrual status and not necessarily associated with credit quality indicators like appraisal value.
Classified loans increased to $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. The increase in classified assets at December 31, 2024 was primarily the result of one downgraded owner occupied CRE credit, and a number of residential related loans. The loans are well-collateralized and we do not anticipate to incur losses as a result of the downgrades of these loans.
In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed in accordance with the Company’s underwriting policy.
The ACLL is calculated by using the CECL methodology. The ACLL estimation process involves procedures to appropriately consider the unique characteristics of loan portfolio segments. These segments are further disaggregated into loan classes, the level at which credit risk is monitored. When computing the level of expected credit losses, credit loss assumptions are estimated using a model that categorizes loan pools based on loss history, delinquency status, and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. In future periods, evaluations of the overall loan portfolio in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and credit loss expense in those future periods.
The allowance level is influenced by loan volumes, loan risk rating migration or delinquency status, changes in historical loss experience, and other conditions influencing loss expectations, such as reasonable and supportable forecasts of economic conditions. 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. Descriptions of the Company’s loan portfolio segments are included in Note 1 “Summary of Significant Accounting Policies - Allowance for Credit Losses on Loans” in this Form 10-K.
Loans are charged-off against the allowance when management believes the uncollectibility of a loan balance is confirmed. 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. Based on information currently available, management believes that the allowance for credit losses on loans is adequate. However, the loan portfolio can be adversely affected if economic conditions in general, and the real estate market in the San Francisco Bay Area market in particular, were to weaken further. 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. No assurance of the ultimate level of credit
losses can be given with any certainty.
Changes in the allowance for credit losses on loans were as follows for the periods indicated:
(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
1,354
Real estate:
CRE - owner occupied
CRE - non-owner occupied
-
-
-
-
-
Land and construction
-
-
-
Home equity
Consumer and other
-
-
3,343
Total recoveries
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
(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
$
$
5,053
$
3,425
$
$
47,958
Charge-offs
(1,305)
-
-
-
-
-
-
(299)
(1,604)
Recoveries
-
-
-
-
-
Net (charge-offs) recoveries
(969)
-
-
-
-
(299)
(1,144)
Provision for (recapture of)
credit losses on loans
1,176
1,456
(952)
(318)
2,139
End of period balance
$
6,060
$
5,225
$
26,779
$
1,400
$
$
4,735
$
3,618
$
$
48,953
Percent of ACLL to Total ACLL
at end of period
12%
11%
55%
3%
1%
10%
7%
1%
100%
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
$
$
3,366
$
5,907
$
$
47,512
Charge-offs
(750)
-
-
-
(246)
-
-
(15)
(1,011)
Recoveries
-
-
-
-
Net (charge-offs) recoveries
(404)
-
-
-
-
(15)
(303)
Provision for (recapture of)
credit losses on loans
(360)
(641)
3,188
(589)
(127)
1,687
(2,482)
End of period balance
$
5,853
$
5,121
$
25,323
$
2,352
$
$
5,053
$
3,425
$
$
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. The increase in specific reserves was the result of reserve additions to nonaccrual loans that were undercollateralized and the increase in the pooled loan reserve was primarily driven by an increase in the loan portfolio.
The following table provides a summary of the allocation of the allowance for credit losses on loans by class at the dates indicated. 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,
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
%
$
5,853
%
$
6,617
%
$
8,414
%
$
11,587
%
Real estate:
CRE - owner occupied
5,225
%
5,121
%
5,751
%
7,954
%
8,560
%
CRE - non-owner occupied
26,779
%
25,323
%
22,135
%
17,125
%
16,416
%
Land and construction
1,400
%
2,352
%
2,941
%
1,831
%
2,509
%
Home equity
%
%
%
%
1,297
%
Multifamily
4,735
%
5,053
%
3,366
%
2,796
%
2,804
%
Residential mortgages
3,618
%
3,425
%
5,907
%
4,132
%
%
Consumer and other
<1
%
%
%
%
%
Total
$
48,953
%
$
47,958
%
$
47,512
%
$
43,290
%
$
44,400
%
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. 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 Company had net charge-offs of $1.1 million, or 0.03% of average loans, for the year ended December 31, 2024, compared to 303,000, or 0.01% of average loans, for the year ended December 31, 2023, and net recoveries of ($3.5) million, or (0.11)% of average loans, for the year ended December 31, 2022.
The following table shows the drivers of change in ACLL for the year ended December 31, 2024:
(Dollars in thousands)
ACLL at December 31, 2023
$
47,958
Portfolio changes during the first quarter of 2024
(234)
Qualitative and quantitative changes during the first
quarter of 2024 including changes in economic forecasts
ACLL at March 31, 2024
47,888
Portfolio changes during the second quarter of 2024
Qualitative and quantitative changes during the second
quarter of 2024 including changes in economic forecasts
(550)
ACLL at June 30, 2024
47,954
Portfolio changes during the third quarter of 2024
Qualitative and quantitative changes during the third
quarter of 2024 including changes in economic forecasts
(734)
ACLL at September 30, 2024
47,819
Portfolio changes during the fourth quarter of 2024
1,912
Qualitative and quantitative changes during the fourth
quarter of 2024 including changes in economic forecasts
(778)
ACLL at December 31, 2024
$
48,953
Leases
The Company recognizes the following for all leases, at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use (“ROU”) asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. 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. 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. 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 Company’s liquidity is impacted by the volatility of deposits from the propensity of that money to leave the institution for rate-related or other reasons. Deposits can be adversely affected if economic conditions weaken in California, and the Company’s market area in particular. 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.
The following table summarizes the distribution of deposits and the percentage of distribution in each category of deposits at the dates indicated:
December 31, 2024
December 31, 2023
Balance
% to Total
Balance
% to Total
(Dollars in thousands)
Demand, noninterest-bearing
$
1,214,192
%
$
1,292,486
%
Demand, interest-bearing
936,587
%
914,066
%
Savings and money market
1,325,923
%
1,087,518
%
Time deposits - under $250
38,988
%
38,055
%
Time deposits - $250 and over
206,755
%
192,228
%
ICS/CDARS - interest-bearing demand,
money market and time deposits
1,097,586
%
854,105
%
Total deposits
$
4,820,031
%
$
4,378,458
%
The Company obtains deposits from a cross-section of the communities it serves. 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.
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 Company had 25,427 deposit accounts at December 31, 2024, with an average balance of $190,000, compared to 24,737 deposit accounts, with an average balance of $177,000 at December 31, 2023.
Deposits from the Bank’s top 100 client relationships, representing 22% of the total number of accounts, totaled $2.2 billion, representing 47% of total deposits, with an average account size of $400,000 at December 31, 2024. At December 31, 2023, deposits from the Bank’s top 100 client relationships, representing 22% of the total number of accounts, totaled $2.0 billion, representing 45% of total deposits, with an average account size of $368,000.
The Bank’s uninsured deposits were approximately $2.2 billion, or 45% of total deposits, at December 31, 2024, compared to $2.0 billion, or 46% of total deposits, at December 31, 2023.
At December 31, 2024, the $1.10 billion ICS/CDARS deposits were comprised of $433.4 million of interest-bearing demand deposits, $345.5 million of money market accounts and $318.7 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.
The following table indicates the contractual maturity schedule of the Company’s uninsured time deposits in excess of $250,000 at December 31, 2024:
Balance
% of Total
(Dollars in thousands)
Three months or less
$
50,918
%
Over three months through six months
38,286
%
Over six months through twelve months
33,761
%
Over twelve months
24,540
%
Total
$
147,505
%
The Company focuses primarily on providing and servicing business deposit accounts that are frequently over $250,000 in average balance per account. As a result, certain types of business clients that the Company serves typically carry average deposits in excess of $250,000. The account activity for some account types and client types necessitates appropriate liquidity management practices by the Company to ensure its ability to fund deposit withdrawals.
The contractual maturity of total deposits at December 31, 2024, are as follows:
Less Than
One to
Three to
After
One Year
Three Years
Five Years
Five Years
Total
(Dollars in thousands)
Deposits (1)
$
4,762,847
$
56,880
$
$
$
4,820,031
(1) Deposits with indeterminate maturities, such as demand, savings and money market accounts, are reflected as obligations due in less than one year.
Return on Equity and Assets
The following table indicates the ratios for return on average assets and average equity, and average equity to average assets for the periods indicated:
Year Ended
December 31,
Return on average assets
0.76
%
1.22
%
1.23
%
Return on average tangible assets (1)
0.78
%
1.26
%
1.27
%
Return on average equity
5.97
%
9.88
%
10.95
%
Return on average tangible common equity (1)
8.05
%
13.57
%
15.57
%
Average equity to average assets ratio
12.71
%
12.62
%
11.25
%
(1) This is a non-GAAP financial measure.
Liquidity, Asset/Liability Management and Available Lines of Credit
The Company’s liquidity position supports its ability to maintain cash flows sufficient to fund operations, meet all of its financial obligations and commitments, and accommodate unexpected sudden changes in balances of loans and demand for deposits in a timely manner. At various times the Company requires funds to meet short term cash requirements brought about by loan growth or deposit outflows, the purchase of assets, or repayment of liabilities. An integral part of the Company’s ability to manage its liquidity position appropriately is derived from its large base of core deposits which are generated by offering traditional banking services in its service area and which have historically been a stable source of funds.
The Company manages liquidity to be able to meet unexpected sudden changes in levels of its assets or deposit liabilities without maintaining excessive amounts of balance sheet liquidity. In order to meet short term liquidity needs the Company utilizes overnight Federal funds purchase arrangements and other borrowing arrangements with correspondent banks, solicits brokered deposits if cost effective deposits are not available from local sources, and maintains collateralized lines of credit with the FHLB and FRB.
The Company monitors its liquidity position and funding strategies on a daily basis, but recognizes that unexpected events, economic or market conditions, earnings issues or situations beyond its control could cause either a short or long term liquidity crisis. 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. 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 liquidity stress scenarios include a dashboard showing key liquidity ratios compared to established target limits and estimated cash flows for the next several quarters.
One of the measures of liquidity is the loan to deposit ratio. The loan to deposit ratio was 72.45% at December 31, 2024, compared to 76.52% 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.
HBC has off-balance sheet liquidity in the form of Federal funds purchase arrangements with correspondent banks, and lines of credit from the FHLB and FRB. HBC maintains a collateralized line of credit with the FHLB of San Francisco. Under this line, HBC can borrow from the FHLB on a short-term (typically overnight) or long-term (over one year) basis. HBC can also borrow from the FRB discount window. In addition, the Company has a line of credit with a correspondent bank. The following table shows the collateral value of loans and securities pledged for the lines of credit
(if collateralized), total available lines of credit, the amounts outstanding, and the remaining available at the dates indicated:
December 31, 2024
Collateral
Total
Remaining
Value
Available
Outstanding
Available
(Dollars in thousands)
FHLB collateralized borrowing capacity
$
1,233,768
$
815,760
$
-
$
815,760
FRB discount window collateralized line of credit
1,755,347
1,383,149
-
1,383,149
Federal funds purchase arrangements
N/A
90,000
-
90,000
Holding company line of credit
N/A
25,000
-
25,000
$
2,989,115
$
2,313,909
$
-
$
2,313,909
December 31, 2023
Collateral
Total
Remaining
Value
Available
Outstanding
Available
(Dollars in thousands)
FHLB collateralized borrowing capacity
$
1,600,371
$
1,100,931
$
-
$
1,100,931
FRB discount window collateralized line of credit
1,658,642
1,235,573
-
1,235,573
Federal funds purchase arrangements
N/A
90,000
-
90,000
Holding company line of credit
N/A
20,000
-
20,000
Total
$
3,259,013
$
2,446,504
$
-
$
2,446,504
HBC may also utilize securities sold under repurchase agreements to manage our liquidity position. 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. The external guidelines, which are issued by the Federal Reserve and the FDIC, establish a risk-adjusted ratio relating capital to different categories of assets and off-balance sheet exposures.
On July 25, 2024, the Company announced that its Board of Directors adopted a share repurchase program (the “Repurchase Program”) under which the Company is authorized to repurchase up to $15.0 million of the Company’s shares of its issued and outstanding common stock. Unless otherwise suspended or terminated, the Repurchase Program expires on July 31, 2025. The Company did not repurchase any of its common stock during the year ended December 31, 2024.
On May 11, 2022, the Company completed a private placement offering of $40.0 million aggregate principal amount of its 5.00% fixed-to-floating rate subordinated notes due May 15, 2032 (“Sub Debt due 2032”). The Company used the net proceeds of the Sub Debt due 2032 for general corporate purposes, including the repayment on June 1, 2022 of the Company’s $40.0 million aggregate principal amount of 5.25% fixed-to-floating rate subordinated notes due June 1, 2027. The Sub Debt due 2032, net of unamortized issuance costs of $347,000, totaled $39.7 million at December 31, 2024, and qualifies as Tier 2 capital for the Company under the guidelines established by the Federal Reserve Bank.
The following table summarizes risk based capital, risk weighted assets, and risk based capital ratios of the consolidated Company under the Basel III requirements at the dates indicated:
December 31,
December 31,
December 31,
(Dollars in thousands)
Capital components:
Common Equity Tier 1 capital
$
524,204
$
511,799
$
475,609
Additional Tier 1 capital
-
-
-
Tier 1 Capital
524,204
511,799
475,609
Tier 2 Capital
86,439
82,572
79,201
Total Capital
$
610,643
$
594,371
$
554,810
Risk-weighted assets
$
3,917,931
$
3,838,667
$
3,747,246
Average assets for capital purposes
$
5,436,274
$
5,100,600
$
5,196,294
Capital ratios:
Total Capital
15.6
%
15.5
%
14.8
%
Tier 1 Capital
13.4
%
13.3
%
12.7
%
Common equity Tier 1 Capital
13.4
%
13.3
%
12.7
%
Tier 1 Leverage (1)
9.6
%
10.0
%
9.2
%
(1)
Tier 1 capital divided by quarterly average assets (excluding intangible assets and disallowed deferred tax assets).
The following table summarizes risk-based capital, risk-weighted assets, and risk-based capital ratios of HBC under the Basel III requirements at the dates indicated:
December 31,
December 31,
December 31,
(Dollars in thousands)
Capital components:
Common Equity Tier 1 capital
$
543,872
$
529,836
$
492,725
Additional Tier 1 capital
-
-
-
Tier 1 Capital
543,872
529,836
492,725
Tier 2 Capital
46,786
43,071
39,851
Total Capital
$
590,658
$
572,907
$
532,576
Risk-weighted assets
$
3,914,648
$
3,835,419
$
3,745,725
Average assets for capital purposes
$
5,432,806
$
5,097,382
$
5,194,802
Capital ratios:
Total Capital
15.1
%
14.9
%
14.2
%
Tier 1 Capital
13.9
%
13.8
%
13.2
%
Common Equity Tier 1 Capital
13.9
%
13.8
%
13.2
%
Tier 1 Leverage (1)
10.0
%
10.4
%
9.5
%
(1)
Tier 1 capital divided by quarterly average assets (excluding intangible assets and disallowed deferred tax assets).
The following table presents the applicable well-capitalized regulatory guidelines and the standards for minimum capital adequacy requirements under Basel III and the regulatory guidelines for a “well-capitalized” financial institution under PCA:
Well-capitalized
Basel III
Financial
Minimum
Institution PCA
Regulatory
Regulatory
Requirements (1)
Guidelines
Capital ratios:
Total Capital
10.5
%
10.0
%
Tier 1 Capital
8.5
%
8.0
%
Common equity Tier 1 Capital
7.0
%
6.5
%
Tier 1 Leverage
4.0
%
5.0
%
(1) Includes 2.5% capital conservation buffer, except the leverage ratio.
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. 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. Quantitative measures established by regulation to help ensure capital adequacy require the Company and HBC to maintain minimum amounts and ratios of total risk-based capital, Tier 1 capital, and common equity Tier 1 (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined). Management believes that, as of December 31, 2024, December 31, 2023, and December 31, 2022, the Company and HBC met all capital adequacy guidelines to which they were subject. There are no conditions or events since December 31, 2024, that management believes have changed the categorization of the Company or HBC as well-capitalized.
At December 31, 2024, the Company had total shareholders’ equity of $689.7 million, compared to $672.9 million at December 31, 2023. At December 31, 2024, total shareholders’ equity included $510.1 million in common stock, $187.7 million in retained earnings, and ($8.1) million of accumulated other comprehensive loss. The book value per share was $11.24 at December 31, 2024, compared to $11.00 at December 31, 2023. Tangible common equity was $515.7 million at December 31, 2024, compared to $496.6 million at December 31, 2023. The tangible book value per share was $8.41 at December 31, 2024, compared to $8.12 at December 31, 2023. Tangible common equity and tangible book value per share are non-GAAP financial measures.
The following table reflects the components of accumulated other comprehensive loss, net of taxes, at the dates indicated:
December 31,
Accumulated Other Comprehensive Loss
(Dollars in thousands)
Unrealized loss on securities available-for-sale
$
(3,656)
$
(7,116)
Split dollar insurance contracts liability
(2,339)
(2,809)
Supplemental executive retirement plan liability
(2,173)
(2,892)
Unrealized gain on interest-only strip from SBA loans
Total accumulated other comprehensive loss
$
(8,105)
$
(12,730)
Market Risk
Market risk is the risk of loss of future earnings, fair values, or future cash flows that may result from changes in the price of a financial instrument. 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. 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.
Interest Rate Management
The Company’s market risk exposure is primarily that of interest rate risk. Interest rate risk arises when the maturity or re-pricing periods and interest rated indices of the interest-earning assets and interest-bearing liabilities are different. 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. The Company does not engage in the trading of financial instruments, nor does the Company have exposure to currency exchange rates.
The principal objective of interest rate risk management (often referred to as “asset/liability management”) is to manage the financial components of the Company in a manner that will optimize the risk/reward equation for earnings and capital in relation to changing interest rates. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income. Management realizes certain risks are inherent, and that the goal is to identify and manage the risks. Management uses two methodologies to manage interest rate risk: (i) a standard GAP analysis; and (ii) an interest rate shock simulation model.
The planning of asset and liability maturities is an integral part of the management of an institution’s net interest margin. To the extent maturities of assets and liabilities do not match in a changing interest rate environment, the net interest margin may change over time. Even with perfectly matched repricing of assets and liabilities, risks remain in the form of prepayment of loans or securities or in the form of delays in the adjustment of rates of interest applying to either earning assets with floating rates or to interest-bearing liabilities.
Interest rate changes do not affect all categories of assets and liabilities equally or at the same time. Varying interest rate environments can create unexpected changes in prepayment levels of assets and liabilities, which may have a significant effect on the net interest margin and are not reflected in the interest sensitivity analysis table. Because of these factors, an interest sensitivity GAP report may not provide a complete assessment of the exposure to changes in interest rates.
The Company uses modeling software for asset/liability management in order to simulate the effects of potential interest rate changes on the Company’s net interest margin, and to calculate the estimated fair values of the Company’s financial instruments under different interest rate scenarios. The program imports current balances, interest rates, maturity dates and repricing information for individual financial instruments, and incorporates assumptions on the characteristics of embedded options along with pricing and duration for new volumes to project the effects of a given interest rate change on the Company’s interest income and interest expense. Rate scenarios consisting of key rate and yield curve projections are run against the Company’s investment, loan, deposit and borrowed funds’ portfolios. These rate projections can be shocked (an immediate and parallel change in all base rates, up or down) and ramped (an incremental increase or decrease in rates over a specified time period), based on current trends and econometric models or stable economic conditions (unchanged from current actual levels). Critical assumptions in the Company’s interest rate risk model, like deposit betas, deposit rate change lags and decay rate assumptions, are reviewed and updated regularly to reflect current market conditions.
The following tables set forth the estimated changes in the Company’s annual net interest income and economic value of equity (a non-GAAP financial measure) that would result from the designated instantaneous parallel shift in interest rates noted, and assuming a flat balance sheet with consistent product mix, as of December 31, 2024:
Increase/(Decrease) in
Estimated Net
Interest Income (1)
Change in Interest Rates
Amount
Percent
(basis points)
(Dollars in thousands)
+400
$
27,272
14.0
%
+300
$
20,340
10.5
%
+200
$
13,451
6.9
%
+100
$
6,590
3.4
%
-
-
−100
$
(8,368)
(4.3)
%
−200
$
(19,659)
(10.1)
%
−300
$
(33,576)
(17.3)
%
−400
$
(54,794)
(28.2)
%
Increase/(Decrease) in
Estimated Economic
Value of Equity (1)
Change in Interest Rates
Amount
Percent
(basis points)
(Dollars in thousands)
+400
$
124,156
9.0
%
+300
$
104,693
7.6
%
+200
$
78,580
5.7
%
+100
$
44,383
3.2
%
-
-
−100
$
(71,172)
(5.2)
%
−200
$
(177,928)
(13.0)
%
−300
$
(314,451)
(22.9)
%
−400
$
(492,841)
(35.9)
%
(1) Computations of prospective effects of hypothetical interest rate changes are for illustrative purposes only, are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results. These projections are forward-looking and should be considered in light of the “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.
As with any method of gauging interest rate risk, there are certain shortcomings inherent to the methodology noted above. The model assumes interest rate changes are instantaneous parallel shifts in the yield curve. In reality, rate changes are rarely instantaneous. The use of the simplifying assumption that short-term and long-term rates change by the same degree may also misstate historic rate patterns, which rarely show parallel yield curve shifts. Further, the model assumes that certain assets and liabilities of similar maturity or period to repricing will react in the same way to changes in rates. In reality, certain types of financial instruments may react in advance of changes in market rates, while the reaction of other types of financial instruments may lag behind the change in general market rates. Additionally, the methodology noted above does not reflect the full impact of annual and lifetime restrictions on changes in rates for certain assets, such as adjustable rate loans. When interest rates change, actual loan prepayments and actual early withdrawals from certificates may deviate significantly from the assumptions used in the model. Finally, this methodology does not measure or reflect the impact that higher rates may have on adjustable-rate loan clients’ ability to service their debt. All of these factors are considered in monitoring the Company’s exposure to interest rate risk.
Selected Financial Data
The following table presents a summary of selected financial information that should be read in conjunction with the Company’s Consolidated Financial Statements and notes thereto following Item 15 - Exhibits and Financial Statement Schedules.
SELECTED FINANCIAL DATA
AT OR FOR THE YEAR ENDED DECEMBER 31,
(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
(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. See “Reconciliation of Non-GAAP Financial Measures” below.
(2) Average balances used in this table are based on daily averages.
(3) Average loans net of the average allowance for credit losses on loans and exclude loans held-for-sale.
(4) Average loans and total loans exclude loans held-for-sale.
Quarterly Financial Data (Unaudited)
The following table discloses the Company’s selected unaudited quarterly financial data for the periods indicated:
Quarter Ended
12/31/2024
9/30/2024
6/30/2024
3/31/2024
(Dollars in thousands, except per share amounts)
Interest income
$
64,633
$
61,438
$
59,077
$
57,551
Interest expense
20,448
21,523
19,622
17,458
Net interest income
44,185
39,915
39,455
40,093
Provision for credit losses on loans
1,331
Net interest income after provision for credit losses on loans
42,854
39,762
38,984
39,909
Noninterest income
2,185
2,240
2,276
2,047
Noninterest expense
30,304
27,555
28,188
27,536
Income before income taxes
14,735
14,447
13,072
14,420
Income tax expense
4,114
3,940
3,838
4,254
Net income
$
10,621
$
10,507
$
9,234
$
10,166
Earnings per common share
Basic
$
0.17
$
0.17
$
0.15
$
0.17
Diluted
$
0.17
$
0.17
$
0.15
$
0.17
Quarter Ended
12/31/2023
9/30/2023
6/30/2023
3/31/2023
(Dollars in thousands, except per share amounts)
Interest income
$
58,892
$
60,791
$
58,341
$
56,274
Interest expense
16,591
15,419
12,048
7,016
Net interest income
42,301
45,372
46,293
49,258
Provision for (recapture of) credit losses on loans
Net interest income after provision for credit losses on loans
42,012
45,204
46,033
49,226
Noninterest income
1,942
2,216
2,074
2,766
Noninterest expense
25,491
25,171
24,991
25,401
Income before income taxes
18,463
22,249
23,116
26,591
Income tax expense
5,135
6,454
6,713
7,674
Net income
$
13,328
$
15,795
$
16,403
$
18,917
Earnings per common share
Basic
$
0.22
$
0.26
$
0.27
$
0.31
Diluted
$
0.22
$
0.26
$
0.27
$
0.31
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
The accounting and reporting policies of the Company conform to GAAP in the United States and prevailing practices in the banking industry. However, certain non-GAAP performance measures and ratios are used by management to evaluate and measure the Company’s performance. The Company believes these non-GAAP financial measures are common in the banking industry, and may enhance comparability for peer comparison purposes. These non-GAAP financial measures should be supplemental to primary GAAP financial measures and should not be read in isolation or relied upon as a substitute for primary GAAP financial measures.
Management reviews yields on certain asset categories and the net interest margin of the Company on a FTE basis. In this non-GAAP presentation, net interest income is adjusted to reflect tax-exempt interest income on an equivalent before-tax basis using tax rates effective as of the end of the period. This measure ensures comparability of net interest income arising from both taxable and tax-exempt sources.
The following table summarizes components of FTE net interest income of the Company for the periods indicated:
December 31,
(Dollars in thousands)
Net interest income before provision for
credit losses on loans (GAAP)
$
163,648
$
183,224
$
179,880
$
146,125
$
141,890
Tax-equivalent adjustment on securities -
exempt from Federal tax
Net interest income, FTE (non-GAAP)
$
163,885
$
183,475
$
180,168
$
146,544
142,397
Average balance of total interest earning assets
$
4,999,363
$
4,955,018
$
5,051,552
$
4,805,630
4,071,805
Net interest margin (annualized net interest
income divided by the average balance
of total interest earnings assets) (GAAP)
3.27
%
3.70
%
3.56
%
3.04
%
3.48
%
Net interest margin, FTE (annualized net interest
income, FTE, divided by the average balance
of total interest earnings assets) (non-GAAP)
3.28
%
3.70
%
3.57
%
3.05
%
3.50
%
The efficiency ratio is a non-GAAP financial measure, which is calculated by dividing noninterest expense by total revenue (net interest income plus noninterest income), and measures how much it costs to produce one dollar of revenue. The following table summarizes components of the efficiency ratio of the Company for the periods indicated:
December 31,
(Dollars in thousands)
Noninterest expense
$
113,583
$
101,054
$
94,859
$
93,077
$
89,511
Net interest income before provision
for credit losses on loans
$
163,648
$
183,224
$
179,880
146,125
141,890
Noninterest income
8,748
8,998
10,111
9,688
9,922
Total revenue
$
172,396
$
192,222
$
189,991
$
155,813
$
151,812
Efficiency ratio (noninterest expense divided
by total revenue) (non-GAAP)
65.88
%
52.57
%
49.93
%
59.74
%
58.96
%
Management considers the tangible common equity ratio and tangible book value per common share as useful measurements of the Company’s equity. The Company references the return on average tangible common equity as a measurement of profitability.
The following table summarizes components of the annualized return on average tangible assets and the annualized return on average tangible common equity for the periods indicated:
December 31,
(Dollars in thousands)
Net income
$
40,528
$
64,443
$
66,555
$
47,700
$
35,299
Average tangible assets components:
Average Assets (GAAP)
$
5,338,705
$
5,289,375
$
5,401,220
$
5,166,294
$
4,434,329
Less: Goodwill
(167,631)
(167,631)
(167,631)
(167,631)
(167,631)
Less: Other Intangible Assets
(7,589)
(9,905)
(12,430)
(15,256)
(18,608)
Total Average Tangible Assets (non-GAAP)
$
5,163,485
$
5,111,839
$
5,221,159
$
4,983,407
$
4,248,090
Annualized return on average tangible assets (non-GAAP)
0.78
%
1.26
%
1.27
%
0.96
%
0.83
%
Average tangible common equity components:
Average Equity (GAAP)
$
678,543
$
652,449
$
607,603
$
585,156
$
576,675
Less: Goodwill
(167,631)
(167,631)
(167,631)
(167,631)
(167,631)
Less: Other Intangible Assets
(7,589)
(9,905)
(12,430)
(15,256)
(18,608)
Total Average Tangible Common Equity (non-GAAP)
$
503,323
$
474,913
$
427,542
$
402,269
$
390,436
Annualized return on average tangible common
equity (non-GAAP)
8.05
%
13.57
%
15.57
%
11.86
%
9.04
%
The following table summarizes components of the tangible common equity to tangible assets ratio of the Company at the dates indicated:
December 31,
(Dollars in thousands)
Capital components:
Total Equity (GAAP)
$
689,727
$
672,901
$
632,456
$
598,028
$
577,889
Less: Preferred Stock
-
-
-
-
-
Total Common Equity
689,727
672,901
632,456
598,028
577,889
Less: Goodwill
(167,631)
(167,631)
(167,631)
(167,631)
(167,631)
Less: Other Intangible Assets
(6,439)
(8,627)
(11,033)
(13,668)
(16,664)
Total Tangible Common Equity (non-GAAP)
$
515,657
$
496,643
$
453,792
$
416,729
$
393,594
Asset components:
Total Assets (GAAP)
$
5,645,006
$
5,194,095
$
5,157,580
$
5,499,409
$
4,634,114
Less: Goodwill
(167,631)
(167,631)
(167,631)
(167,631)
(167,631)
Less: Other Intangible Assets
(6,439)
(8,627)
(11,033)
(13,668)
(16,664)
Total Tangible Assets (non-GAAP)
$
5,470,936
$
5,017,837
$
4,978,916
$
5,318,110
$
4,449,819
Tangible common equity to tangible assets (non-GAAP)
9.43
%
9.90
%
9.11
%
7.84
%
8.85
%
The following table summarizes components of the tangible common equity to tangible assets ratio of HBC at the dates indicated:
December 31,
(Dollars in thousands)
Capital components:
Total Equity (GAAP)
$
709,379
$
690,918
$
649,545
$
616,108
$
595,681
Less: Preferred Stock
-
-
-
-
-
Total Common Equity
709,379
690,918
649,545
616,108
595,681
Less: Goodwill
(167,631)
(167,631)
(167,631)
(167,631)
(167,631)
Less: Other Intangible Assets
(6,439)
(8,627)
(11,033)
(13,668)
(16,664)
Total Tangible Common Equity (non-GAAP)
$
535,309
$
514,660
$
470,881
$
434,809
$
411,386
Asset components:
Total Assets (GAAP)
$
5,641,646
$
5,190,829
$
5,157,093
$
5,496,724
$
4,632,230
Less: Goodwill
(167,631)
(167,631)
(167,631)
(167,631)
(167,631)
Less: Other Intangible Assets
(6,439)
(8,627)
(11,033)
(13,668)
(16,664)
Total Tangible Assets (non-GAAP)
$
5,467,576
$
5,014,571
$
4,978,429
$
5,315,425
$
4,447,935
Tangible common equity to tangible assets (non-GAAP)
9.79
%
10.26
%
9.46
%
8.18
%
9.25
%
The following table summarizes components of the tangible book value per share at the dates indicated:
December 31,
(Dollars in thousands, except per share amounts)
Capital components:
Total Equity (GAAP)
$
689,727
$
672,901
$
632,456
$
598,028
$
577,889
Less: Preferred Stock
-
-
-
-
-
Total Common Equity
689,727
672,901
632,456
598,028
577,889
Less: Goodwill
(167,631)
(167,631)
(167,631)
(167,631)
(167,631)
Less: Other Intangible Assets
(6,439)
(8,627)
(11,033)
(13,668)
(16,664)
Total Tangible Common Equity (non-GAAP)
$
515,657
$
496,643
$
453,792
$
416,729
$
393,594
Common shares outstanding at period-end
61,348,095
61,146,835
60,852,723
60,339,837
59,917,457
Tangible book value per share (non-GAAP)
$
8.41
$
8.12
$
7.46
$
6.91
$
6.57

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a financial institution, the Company’s primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of the Company’s assets and liabilities and the market value of all interest-earning assets, other than those which have a short term to maturity. Based upon the nature of the Company’s operations, the Company is not subject to foreign exchange or commodity price risk. The Company has no market risk sensitive instruments held for trading purposes. At December 31, 2024, the Company did not use interest rate derivatives to hedge its interest rate risk.
The information concerning quantitative and qualitative disclosure or market risk called for by Item 305 of Regulation S-K is included as part of Item 7 of this report.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Control and Procedures
The Company has carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures at December 31, 2024. As defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), disclosure controls and procedures are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported on a timely basis. Disclosure controls are also designed to reasonably assure that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls were effective as of December 31, 2024, the period covered by this report.
Management’s Annual Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Rule 13a-15(f) under the Exchange Act, internal control over financial reporting is a process designed by, or under the supervision of, a company’s principal executive and principal financial officers and effected by a company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. It includes those policies and procedures that:
● Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of a company;
● Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of a company are being made only in accordance with authorizations of management and the board of directors of the company; and
● Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of a company’s assets that could have a material effect on its financial statements.
Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management has used the criteria established in the 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) to evaluate the effectiveness of the Company’s internal control over financial reporting. Management has selected the COSO framework for its evaluation as it is a control framework recognized by the SEC and the Public Company Accounting Oversight Board, that is free from bias, permits reasonably consistent qualitative and quantitative measurement of the Company’s internal controls, is sufficiently complete so that relevant controls are not omitted and is relevant to an evaluation of internal controls over financial reporting.
Based on our assessment, management has concluded that our internal control over financial reporting, based on criteria established in the 2013 Internal Control - Integrated Framework issued by COSO was effective at December 31, 2024.
The independent registered public accounting firm of Crowe LLP, as auditors of our consolidated financial statements, has issued an audit report on the effectiveness of the Company’s internal control over financial reporting based on criteria established in the 2013 “Internal Control - Integrated Framework,” issued by COSO.
Inherent Limitations on Effectiveness of Controls
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all errors and fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the year ended December 31, 2024 that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

---

ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
None.

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information required by this item will be contained in our Definitive Proxy Statement for our 2025 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A with the Securities and Exchange Commission within 120 days of December 31, 2024. Such information is incorporated herein by reference.
We have adopted a code of ethics that applies to our Chief Executive Officer, Chief Financial Officer, and to our other principal financial officers, and other senior management personnel, as designated. The code of ethics is available at the Governance Documents section of our website at www.heritagecommercecorp.com. We intend to disclose future amendments to, or waivers from, certain provisions of our code of ethics on the above website.
We have adopted an Insider Trading Policy governing the purchase, sale, and/or other dispositions of our securities, as well as the securities of publicly traded companies with whom we have a business relationship, by directors, officers and employees, and consultants. Our Insider Trading Policy is designed to promote compliance with all applicable insider trading laws, listing standards, rules and regulations. A copy of our insider trading policy is incorporated by reference as Exhibit 19.1 to this Annual Report on Form 10-K.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item will be contained in our Definitive Proxy Statement for our 2025 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A with the Securities and Exchange Commission within 120 days of December 31, 2024. Such information is incorporated herein by reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
(a) Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of December 31, 2024 regarding equity compensation plans under which equity securities of the Company were authorized for issuance:
Number of securities
remaining available for
Number of securities to
Weighted average
future issuance under
be issued upon exercise of
exercise price of
equity compensation plans
outstanding options,
outstanding options,
(excluding securities
warrants and rights
warrants and rights
reflected in column (a))
(a)
(b)
(c)
Equity compensation plans approved by
security holders
2,222,496
(1)
$
10.73
900,292
(2)
Equity compensation plans not approved by
security holders
N/A
N/A
N/A
(1) Consists of 1,976,873 options to acquire shares under the Company’s 2013 Equity Incentive Plan 20,000 options to acquire shares under the Company’s 2023 Equity Incentive Plan, and the aggregate amount of 225,623 stock options assumed from the Presidio stock option and equity incentive plans.
(2) Available under the Company’s 2023 Equity Incentive Plan.
(b) Information required by this item will be contained in our Definitive Proxy Statement for our 2025 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A with the Securities and Exchange Commission within 120 days of December 31, 2024. Such information is incorporated herein by reference.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Information required by this item will be contained in our Definitive Proxy Statement for our 2025 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A with the Securities and Exchange Commission within 120 days of December 31, 2024. Such information is incorporated herein by reference.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by this item will be contained in our Definitive Proxy Statement for our 2025 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A with the Securities and Exchange Commission within 120 days of December 31, 2024. Such information is incorporated herein by reference.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(1) FINANCIAL STATEMENTS
The Financial Statements of the Company and the Report of Independent Registered Public Accounting Firm are set forth on pages 89 through 143.
(2) FINANCIAL STATEMENT SCHEDULES
All schedules to the Financial Statements are omitted because of the absence of the conditions under which they are required or because the required information is included in the Financial Statements or accompanying notes.
(3) EXHIBITS
The exhibits listed below are filed or incorporated by reference as part of this Annual Report on Form 10-K.
Exhibit
Number
Description
3.1
Heritage Commerce Corp Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K filed on March 16, 2009).
3.2
Certificate of Amendment of Articles of Incorporation of Heritage Commerce Corp, as filed with the California Secretary of State on June 1, 2010 (incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-1 filed July 23, 2010).
3.3
Certificate of Amendment of Articles of Incorporation of Heritage Commerce Corp, as filed with the California Secretary of State on August 29, 2019 (incorporated by reference to Exhibit 3.3 to the Registrant’s Quarterly Report on Form 10-Q filed November 11, 2019).
3.4
Heritage Commerce Corp Bylaws, as amended (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on June 28, 2013).
4.1
Description of Securities Registered under Section 12 of the Securities Exchange Act of 1934 (incorporated herein by reference to the Registrant’s Annual Report on Form 10-K filed on March 11, 2020).
*10.1
Heritage Commerce Corp Management Cash Incentive Bonus Plan (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed January 28, 2022).
*10.2
Non-qualified Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.11 to the Registrant’s Annual Report on Form 10-K filed March 31, 2005).
*10.3
Amended and Restated Employment Agreement with Lawrence McGovern, dated July 21, 2011 (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed July 21, 2011).
*10.4
Employment Agreement with Robertson Clay Jones, dated September 15, 2022 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed September 19, 2022).
*10.5
Employment Agreement with Chris Edmonds-Waters, dated April 30, 2024 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 6, 2024).
Exhibit
Number
Description
*10.6
Employment Agreement with Deborah K. Reuter, dated March 23, 2023 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed March 27, 2023).
*10.7†
Amended and Restated Employment Agreement with Glen Shu, dated February 1, 2024 (incorporated by reference to Exhibit 10.8 to the Registrant's Annual Report on Form 10-K filed March 11, 2024).
*10.8†
Employment Agreement with Thomas A. Sa, dated September 26, 2024 (incorporated by reference to Exhibit 10.01 to the Registrant’s Current Report on Form 8-K filed on October 2, 2024).
*10.9
†
Amended and Restated Employment Agreement with Susan Just, dated February 1, 2024 (incorporated by reference to Exhibit 10.10 to the Registrant's Annual Report on Form 10-K filed March 11, 2024).
*10.10
†
Employment Agreement with Dustin Warford, dated February 1, 2024 (incorporated by reference to Exhibit 10.11 to the Registrant's Annual Report on Form 10-K filed March 11, 2024).
*10.11
Employment Agreement with Janisha Sabnani, dated February 3, 2025 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed February 3, 2025).
*10.12
Heritage Commerce Corp 2013 Equity Incentive Plan (incorporated by reference to Exhibit 4.4 to the Registrant’s Registration Statement on Form S-8 filed July 15, 2013).
*10.13
Amendment No. 1 to Heritage Commerce Corp 2013 Equity Incentive Plan, dated May 25, 2017 (incorporated by reference to Exhibit A to the Registrant’s Proxy Statement, filed April 19, 2017).
*10.14
Amendment No. 2 to Heritage Commerce Corp 2013 Equity Incentive Plan, dated May 21, 2020 (incorporated by reference to Appendix A to the Registrant’s Proxy Statement, filed April 15, 2020).
*10.15
Form of Restricted Stock Agreement for 2013 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Registration Statement on Form S-8 filed July 15, 2013).
*10.16
Form of Stock Option Agreement for 2013 Equity Incentive Plan (incorporated by reference to Exhibit 4.4 to the Registrant’s Registration Statement on Form S-8 filed July 15, 2013).
*10.17
Form of Restricted Stock Unit Agreement (serviced-based) for 2013 Equity Incentive Plan (incorporated by reference to Exhibit 10.17 to the Registrant’s Annual Report on Form 10-K filed March 9, 2023).
*10.18
Form of Restricted Stock Unit Agreement (performance-based) for 2013 Equity Incentive Plan (incorporated by reference to Exhibit 10.18 to the Registrant’s Annual Report on Form 10-K filed March 9, 2023).
*10.19
Heritage Commerce Corp 2023 Equity Incentive Plan (incorporated by reference to Appendix A to the Registrant's Proxy Statement filed April 13, 2023).
*10.20
2005 Amended and Restated Heritage Commerce Corp Supplemental Retirement Plan (incorporated herein by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed September 30, 2008).
*10.21
Form of Endorsement Method Split Dollar Plan Agreement for Executive Officers (incorporated herein by reference to Exhibit 10.20 to the Registrant’s Annual Report on Form 10-K filed March 17, 2008).
*10.22
Form of Endorsement Method Split Dollar Plan Agreement for Directors (incorporated herein by reference to Exhibit 10.21 to the Registrant’s Annual Report on Form 10-K filed March 17, 2008).
*10.23
First Amended and Restated Director Compensation Benefits Agreement dated December 29, 2008 between Jack Conner and the Company (incorporated herein by reference to Exhibit 10.8 to the Registrant’s Current Report on Form 8-K filed January 2, 2009).
*10.24
Form of Indemnification Agreement between the Registrant and its directors and executive officers (incorporated herein by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed December 23, 2009).
*10.25
Presidio Bank Amended and Restated 2006 Stock Options Plan (incorporated by reference to Exhibit 99.1 to the Registrant’s Statement on Form S-8 filed October 15, 2019).
*10.26
Presidio Bank 2016 Equity Incentive Plan (incorporated by reference to Exhibit 99.2 to the Registrant’s Statement on Form S-8 filed October 15, 2019).
19.1
Heritage Commerce Corp Insider Trading Policy, filed herewith.
21.1
Subsidiaries of the Registrant (incorporated by reference to Exhibit 21.1 to the Registrant’s Annual Report on Form 10-K, as filed March 3, 2017).
23.1
Consent of Crowe LLP, filed herewith.
31.1
Certification of Registrant’s Chief Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002, filed herewith.
Exhibit
Number
Description
31.2
Certification of Registrant’s Interim Chief Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002, filed herewith.
**32.1
Certification of Registrant’s Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.
**32.2
Certification of Registrant’s Interim Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.
97.1
Heritage Commerce Corp Incentive Compensation Recovery Policy (incorporated by reference to Exhibit 97.1 to the Registrant's Annual Report on Form 10-K filed March 11, 2024).
101.INS
Inline XBRL Instance Document, filed herewith.
101.SCH
Inline XBRL Taxonomy Extension Schema Document, filed herewith.
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document, filed herewith.
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document, filed herewith.
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document, filed herewith.
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document, filed herewith.
Cover Page Interactive Data (formatted as inline XBRL and contained in Exhibits 101).
* Management contract or compensatory plan or arrangement.
** Furnished and not filed.
† Certain identified information has been excluded from the exhibit pursuant to Regulation S-K Item 601(b)(10)(iv) because it is both (i) not material and (ii) is the type that the Company customarily treats as private or confidential.