Annual Report
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2020 Annual Report | On Form 10-K
2021 Notice of Annual Meeting of Shareholders
2021 Annual Meeting Proxy Statement
2020
Shareholders
April 15, 2021
Dear Fellow Shareholders:
The year of 2020 was an extraordinary year, creating both challenges and opportunities for Heritage Commerce Corp (the
“Company”). As we faced unprecedented challenges caused by the economic impact of COVID-19, including a significant decline
in interest rates, we generated net income of $35.3 million for the year; just $5.2 million shy of 2019, which was the most
profitable year in the history of our Company. At the same time, opportunities presented themselves through the Small Business
Administration Paycheck Protection Program (“PPP”) allowing us to significantly help meet the financial needs of our customers
who were impacted by the coronavirus pandemic.
As the premier business bank in the Greater San Francisco Bay Area, Heritage Bank of Commerce (the “Bank”) funded 1,105 PPP
loans, totaling $333.4 million during the first half of 2020. Our employees were resilient and flexible throughout this process, as
they came together to support our customers and communities facing many obstacles brought on by the pandemic.
During 2020, we successfully completed the integration of Presidio Bank after acquiring the bank in the fourth quarter of 2019.
This was the largest bank acquisition in the history of our Company; and, although merger-related costs reduced pre-tax earnings
by $2.6 million during 2020, we gained traction in the new markets introduced to us through the Presidio Bank merger.
Additionally, by year-end, we had fully relocated our San Jose headquarters offices and Bay View Funding to new facilities at 224
Airport Parkway, San Jose, CA. This consolidated different operating areas of the Bank into a single location, which has allowed
us to better serve our customers, community partners and the entire Heritage organization across the region.
2020 Highlights:
• Net income for the full year of 2020 was $35.3 million, or $0.59 per average diluted common share, compared to record
earnings of $40.5 million, or $0.84 per average diluted common share for 2019. Total assets increased 13% over 2019 to
$4.6 billion.
• Credit quality improved with nonperforming assets declining (20%) from 2019 to 0.17% of total assets, while the allowance
for credit losses on loans to total loans (“ACLL”) was 1.70%, and the ACLL to total loans, excluding PPP loans, was 1.91% at
December 31, 2020.
• Capital levels remained strong with a total risk-based capital ratio and leverage for Heritage Commerce Corp at 16.5% and
9.1% respectively, and 15.8% and 9.5% respectively, for Heritage Bank of Commerce at December 31, 2020. All capital levels
exceeded regulatory requirements for a “well-capitalized” financial institution under the Basel III regulatory requirements.
•
In May of 2020, Heritage Commerce Corp was awarded the coveted Raymond James Community Bankers Cup, an award
based on profitability, operational efficiencies, and balance sheet metrics.
• At the beginning of 2020, the Board of Directors raised our quarterly cash dividend for the seventh consecutive year by 8%
to $0.13 per share to holders of common stock.
• The Company continued to provide significant grants and sponsorships to support local community groups.
We would like to thank our employees across the Company for their ongoing hard work and dedication to our customers and
communities. We also want to thank you, our shareholders, for the trust you have placed in Heritage Commerce Corp.
Please join us for our annual meeting on Thursday, May 27, 2021, at 1:00 p.m. You may access the meeting virtually by going
to: https://register.proxypush.com/HTBK. As a shareholder, you will then be required to enter your control number in the upper
right-hand corner of your proxy card. After registering, you will receive a confirmation email. You will receive another email
approximately one hour prior to the start of the meeting to the email address you provided during registration with a unique link
to the virtual meeting.
Sincerely,
Jack W. Conner
Chairman of the Board
Walter T. Kaczmarek
President and CEO
To Our P
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HERITAGE COMMERCE CORP
April 15, 2021
Dear Shareholder:
You are cordially invited to attend the 2021 Annual Meeting of Shareholders, which will be held at
1:00 p.m., Pacific Daylight Time (PDT) on Thursday, May 27, 2021. The accompanying Notice of Annual
Meeting and proxy statement describe the business that will be conducted at the meeting and provide
information about Heritage Commerce Corp. We have also enclosed our 2020 Annual Report on Form 10-K.
Due to the public health impact of the coronavirus (COVID-19) outbreak and to support the health and
well being of our shareholders, this year’s Annual Meeting will be a completely virtual meeting of shareholders,
which will be conducted online via live webcast. You will be able to attend the Annual Meeting by registering
at register.proxypush.com/HTBK. Upon completing your registration, you will receive further instructions via
email, including a unique link that will allow you access to the Annual Meeting and to vote and submit
questions during the Annual Meeting.
Whether or not you participate in our virtual Annual Meeting, it is very important that your shares be
represented at the meeting. Accordingly, please sign, date, and promptly mail the enclosed proxy card. You
may also vote over the Internet or by telephone by following the instructions on the proxy card. If you attend
the virtual Annual Meeting and prefer to vote at the meeting, you may do so.
Sincerely,
Jack W. Conner
Chairman of the Board
Walter T. Kaczmarek
President and Chief Executive Officer
224 Airport Parkway, San Jose, California 95110 ● Telephone (408) 947-6900 ● Fax (408) 947-6910
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HERITAGE COMMERCE CORP
224 Airport Parkway
San Jose, California 95110
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Date and Time:
Thursday, May 27, 2021, at 1:00 p.m., Pacific Daylight Time (PDT).
Items of Business:
Record Date:
Mailing Date:
Important Notice
Regarding the
Internet
Availability of
Proxy Materials:
1.
2.
3.
4.
To elect 11 members of the Board of Directors, each for a term of one year;
To approve an advisory proposal on the Company’s 2020 executive compensation;
To ratify the selection of Crowe LLP as the Company’s independent registered
public accounting firm for the year ending December 31, 2021; and
To transact such other business as may properly come before the meeting, and any
adjournment or postponement.
You can vote if you are a shareholder of record on March 26, 2021.
The proxy materials are being distributed to our shareholders on or about April 15,
2021, and include our Annual Report on Form 10-K, Notice of Annual Meeting, this
proxy statement, and proxy or voting instruction card.
The proxy statement and Annual Report on Form 10-K are available at
www.heritagecommercecorp.com. Your Vote is Important. Please vote as promptly as
possible by using the Internet or telephone or by signing, dating and returning the
enclosed proxy card.
VIRTUAL ANNUAL MEETING
The Annual Meeting will be held in a virtual-only meeting format, via live video webcast that will provide
shareholders with the ability to participate in the Annual Meeting, vote their shares and ask questions. We are
implementing a virtual-only meeting format in order to leverage technology to enhance shareholder access to
the Annual Meeting by enabling attendance and participation from any location around the world. We believe
that the virtual-only meeting format will give shareholders the opportunity to exercise the same rights as if
they had attended an in-person meeting and believe that these measures will enhance shareholder access and
encourage participation and communication with our Board of Directors and management.
BENEFITS OF A VIRTUAL ANNUAL MEETING
We believe a virtual-only meeting format facilitates shareholder attendance and participation by enabling
all shareholders to participate fully and equally, and without cost, using an Internet-connected device from
any location around the world. In addition, the virtual-only meeting format increases our ability to engage
with all shareholders, regardless of size, resources or physical location, and enables us to protect the health and
safety of all attendees, particularly in light of the COVID-19 pandemic.
Shareholders of record and beneficial owners as of the close of the business day on March 26, 2021, the
record date, will have the ability to submit questions and vote electronically at the Annual Meeting via the
virtual-only meeting platform.
ATTENDANCE AT THE VIRTUAL ANNUAL MEETING
Only shareholders of record and beneficial owners of shares of our common stock as of the close of
business on March 26, 2021, the record date, may attend and participate in the Annual Meeting, including
voting and asking questions during the virtual Annual Meeting. You will not be able to attend the Annual
Meeting physically in person.
In order to attend the Annual Meeting, you must register at register.proxypush.com/HTBK. Upon
completing your registration, you will receive further instructions via email, including a unique link that will
allow you access to the Annual Meeting and to vote and submit questions during the Annual Meeting.
As part of the registration process, you must enter the control number located on your proxy card or
voting instruction form. If you are a beneficial owner of shares registered in the name of a broker, bank or
other nominee, you will also need to provide the registered name on your account and the name of your
broker, bank or other nominee as part of the registration process.
On the day of the Annual Meeting, May 27, 2021, shareholders may begin to log in to the virtual-only
Annual Meeting 15 minutes prior to the Annual Meeting. The Annual Meeting will begin promptly at 1:00 p.m.
Pacific Daylight Time.
We will have technicians ready to assist you with any technical difficulties you may have accessing the
Annual Meeting. If you encounter any difficulties accessing the virtual-only Annual Meeting platform,
including any difficulties voting or submitting questions, you may call the technical support number that will
be posted in your instructional email.
QUESTIONS AT THE VIRTUAL ANNUAL MEETING
Our virtual Annual Meeting will allow shareholders to submit questions before and during the Annual
Meeting. During a designated question and answer period at the Annual Meeting, we will respond to
appropriate questions submitted by shareholders.
We will answer as many shareholder-submitted questions as time permits, and any questions that we are
unable to address during the Annual Meeting will be answered following the meeting, with the exception of
any questions that are irrelevant to the purpose of the Annual Meeting or our business or that contain
inappropriate or derogatory references which are not in good taste. If we receive substantially similar questions,
we will group such questions together and provide a single response to avoid repetition.
By Order of the Board of Directors,
Deborah Reuter
Executive Vice President
and Corporate Secretary
April 15, 2021
San Jose, California
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TABLE OF CONTENTS
QUESTIONS & ANSWERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Why did you send me this proxy statement? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How will our Annual Meeting be held? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Who is entitled to vote? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What constitutes a quorum? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How many votes do I have? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Is voting confidential? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How do I vote by proxy? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What do I have to do to vote my shares if they are held in the name of my broker? . . . . . . . . . . . .
How do I vote at the virtual meeting? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
May I vote over the Internet or by telephone? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What is cumulative voting and how do I cumulate my shares? . . . . . . . . . . . . . . . . . . . . . . . . . .
May I change my vote after I return my proxy? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What if I receive multiple proxy cards? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What vote is required to approve each proposal? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How will voting on any other business be conducted? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
What are the costs of soliciting these proxies? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
How do I obtain an Annual Report on Form 10-K? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BENEFICIAL OWNERSHIP OF COMMON STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CORPORATE GOVERNANCE AND BOARD MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . .
Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Code of Ethics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reporting of Complaints/Concerns Regarding Accounting or Auditing Matters . . . . . . . . . . . . .
INFORMATION ABOUT DIRECTORS AND EXECUTIVE OFFICERS . . . . . . . . . . . . . . . . .
The Board of Directors
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Board Leadership Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Board Authority for Risk Oversight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Committees of the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Role of Compensation Consultant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Officers of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transactions with Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policies and Procedures for Approving Related Party Transactions . . . . . . . . . . . . . . . . . . . . . . .
Delinquent Section 16(a) Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation Committee Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CEO Pay Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plan Based Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity Compensation Plan Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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Outstanding Equity Awards
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Option Exercises and Vested Stock Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
401(k) Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee Stock Ownership Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplemental Retirement Plan for Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred Compensation Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change of Control Arrangements and Termination of Employment
. . . . . . . . . . . . . . . . . . . . .
Director Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Director Outstanding Stock Options and Stock Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Director Compensation Benefits Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROPOSAL 1—ELECTION OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROPOSAL 2—ADVISORY PROPOSAL ON EXECUTIVE COMPENSATION . . . . . . . . . . . .
PROPOSAL 3—RATIFICATION OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OTHER BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SHAREHOLDER PROPOSALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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PROXY STATEMENT FOR HERITAGE COMMERCE CORP
2021 ANNUAL MEETING OF SHAREHOLDERS
INFORMATION ABOUT THE ANNUAL MEETING AND VOTING
QUESTIONS & ANSWERS
Why did you send me this proxy statement?
We sent you this proxy statement and the enclosed proxy card because our Board of Directors (the “Board
of Directors” or the “Board”) is soliciting your proxy to vote at the 2021 Annual Meeting (“Annual Meeting”)
of Shareholders. This proxy statement summarizes the information you need to know to cast an informed vote
at the Annual Meeting. Heritage Commerce Corp is referred to in this proxy statement as the “Company.”
Along with this proxy statement, we are also sending you the Heritage Commerce Corp 2020 Annual Report
on Form 10-K, which includes our consolidated financial statements.
How will our Annual Meeting be held?
The Annual Meeting will be held in a virtual-only meeting format, via live video webcast that will provide
shareholders with the ability to participate in the Annual Meeting, vote their shares and ask questions. We are
implementing a virtual-only meeting format in order to leverage technology to enhance shareholder access to
the Annual Meeting by enabling attendance and participation from any location around the world. We believe
that the virtual-only meeting format will give shareholders the opportunity to exercise the same rights as if
they had attended an in-person meeting and believe that these measures will enhance shareholder access and
encourage participation and communication with our Board of Directors and management.
We believe a virtual-only meeting format facilitates shareholder attendance and participation by enabling
all shareholders to participate fully and equally, and without cost, using an Internet-connected device from
any location around the world. In addition, the virtual-only meeting format increases our ability to engage
with all shareholders, regardless of size, resources or physical location, and enables us to protect the health and
safety of all attendees, particularly in light of the COVID-19 pandemic.
Shareholders of record and beneficial owners as of the close of business on March 26, 2021, the record
date, will have the ability to submit questions and vote electronically at the Annual Meeting via the virtual-
only meeting platform.
Only shareholders of record and beneficial owners of shares of our common stock as of the close of
business on March 26, 2021, the record date, may attend and participate in the Annual Meeting, including
voting and asking questions during the virtual Annual Meeting. You will not be able to attend the Annual
Meeting physically in person.
In order to attend the Annual Meeting, you must register at register.proxypush.com/HTBK. Upon
completing your registration, you will receive further instructions via email, including a unique link that will
allow you access to the Annual Meeting and to vote and submit questions during the Annual Meeting.
As part of the registration process, you must enter the control number located on your proxy card or
voting instruction form. If you are a beneficial owner of shares registered in the name of a broker, bank or
other nominee, you will also need to provide the registered name on your account and the name of your
broker, bank or other nominee as part of the registration process.
On the day of the Annual Meeting, May 27, 2021, shareholders may begin to log in to the virtual-only
Annual Meeting 15 minutes prior to the Annual Meeting. The Annual Meeting will begin promptly at 1:00 p.m.
Pacific Daylight Time.
We will have technicians ready to assist you with any technical difficulties you may have accessing the
Annual Meeting. If you encounter any difficulties accessing the virtual-only Annual Meeting platform,
including any difficulties voting or submitting questions, you may call the technical support number that will
be posted in your instructional email.
Our virtual Annual Meeting will allow shareholders to submit questions before and during the Annual
Meeting. During a designated question and answer period at the Annual Meeting, we will respond to
appropriate questions submitted by shareholders.
1
We will answer as many shareholder-submitted questions as time permits, and any questions that we are
unable to address during the Annual Meeting will be answered following the meeting, with the exception of
any questions that are irrelevant to the purpose of the Annual Meeting or our business or that contain
inappropriate or derogatory references which are not in good taste. If we receive substantially similar questions,
we will group such questions together and provide a single response to avoid repetition.
Who is entitled to vote?
We will begin sending this proxy statement, the attached Notice of Annual Meeting and the enclosed
proxy card on or about April 15, 2021, to all shareholders entitled to vote. Shareholders who were the record
owners of the Company’s common stock at the close of the business day on March 26, 2021, are entitled to
vote. On this record date, there were 59,932,334 shares of common stock outstanding.
What constitutes a quorum?
A majority of the outstanding shares of the common stock entitled to vote at the Annual Meeting must
be present, in person or by proxy, in order to constitute a quorum. We can only conduct the business of the
Annual Meeting if a quorum has been established. We will include proxies marked as abstentions and broker
non-votes in determining the number of shares present at the Annual Meeting.
How many votes do I have?
Each share of common stock entitles you to one vote in person or by proxy, for each share of common
stock outstanding in your name on the books of the Company as of March 26, 2021, the record date for the
Annual Meeting on any matter submitted to a vote of the shareholders, except that in connection with the
election of directors (Proposal 1), you may cumulate your shares (see “What is cumulative voting and how do I
cumulate my shares?” on page 3). The proxy card indicates the number of votes that you have as of the record
date.
Is voting confidential?
We have a confidential voting policy to protect the privacy of our shareholders’ votes. Under this policy,
ballots, proxy cards and voting instructions returned to banks, brokers and other nominees are kept
confidential. Only the proxy tabulator and the Inspector of Election have access to the ballots, proxy cards
and voting instructions.
How do I vote by proxy?
You may vote by granting a proxy or, for shares held in street name, by submitting voting instructions to
your broker or other nominee. If your shares are held by a broker or other nominee, you will receive
instructions that you must follow to have your shares voted. If you hold your shares as a shareholder of
record, you may vote by completing, signing and dating the enclosed proxy card and returning it promptly in
the envelope provided. You may also vote by telephone or over the Internet (see page 3). Returning the proxy
card will not affect your right to participate on line at the virtual the Annual Meeting and vote.
If you properly fill in your proxy card and send it to us in time to vote, your “proxy” (one of the individuals
named on your proxy card) will vote your shares as you have directed. If you sign the proxy card but do not
make specific choices, your proxy will vote your shares as recommended by the Board of Directors as follows:
• “FOR” the election of all 11 nominees for director;
• “FOR” the approval of the advisory proposal on the Company’s 2020 executive compensation; and
• “FOR” the ratification of the selection of Crowe LLP as our independent registered public accounting
firm for 2021.
For the election of directors (Proposal 1), a shareholder may withhold authority for the proxy holders to
vote for any one or more of the nominees by marking the enclosed proxy card in the manner instructed on the
proxy card. Unless authority to vote for the nominees is withheld, the proxy holders will vote the proxies
received by them for the election of the nominees listed on the proxy card as directors of the Company. Your
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proxy does not have an obligation to vote for nominees not identified on the preprinted proxy card (that is,
write in candidates). Should any shareholder attempt to “write in” a vote for a nominee not identified on the
preprinted card (and described in these proxy materials), your proxy will NOT vote the shares represented by
your proxy card for any such write in candidate, but will instead vote the shares for any and all other indicated
candidates. If any of the nominees should be unable or decline to serve, which is not now anticipated, your
proxy will have discretionary authority to vote for a substitute who shall be designated by the present Board of
Directors to fill the vacancy. In the event that additional persons are nominated for election as directors, your
proxy intends to vote all of the proxies in such a manner, in accordance with the cumulative voting, as will
assure the election of as many of the nominees identified on the proxy card as possible. In such event, the
specific nominees to be voted for will be determined by the proxy holders, in their sole discretion.
What do I have to do to vote my shares if they are held in the name of my broker?
If your shares are held by your broker, sometimes called “street name” shares, you must vote your shares
through your broker. You should receive a form from your broker asking how you want to vote your shares.
Follow the instructions on that form to give voting instructions to your broker. Under the rules that govern
brokers who are voting with respect to shares held in street name, brokers have the discretion to vote such
shares on routine, but not on non-routine matters. A “broker non vote” occurs when your broker does not
vote on a particular proposal because the broker does not receive instructions from the beneficial owner and
does not have discretionary authority. Proposal 1 (election of directors) and Proposal 2 (advisory proposal on
the 2020 executive compensation), are non-routine items on which a broker may vote only if the beneficial
owner has provided voting instructions. Proposal 3 (ratification of independent registered public accounting
firm) is a routine item.
How do I vote at the virtual meeting?
If you plan to attend the virtual Annual Meeting and desire to vote at the meeting you will have the
opportunity to do so, but we recommend you send in a proxy card to vote. However, if your shares are held in
the name of your broker, bank or other nominee, you must provide the proper codes as set forth in the proxy
card.
May I vote over the Internet or by telephone?
Shareholders whose shares are registered in their own names may vote either over the Internet or by
telephone. Special instructions for voting over the Internet or by telephone are set forth on the enclosed proxy
card. The Internet and telephone voting procedures are designed to authenticate the shareholder’s identity
and to allow shareholders to vote their shares and confirm that their voting instructions have been properly
recorded.
If your shares are registered in the name of a bank or brokerage firm, you may be eligible to vote your
shares by telephone or over the Internet. Most U.S. banks and brokerage firms are clients of Broadridge
Financial Solutions (“Broadridge”). As such, shareholders who receive either a paper copy of their proxy
statement or electronic delivery notification have the opportunity to vote by telephone or over the Internet. If
your bank or brokerage firm is a Broadridge client, your proxy card or Voting Instruction Form (“VIF”) will
provide the instructions. If your proxy card or VIF does not provide instructions for Internet and telephone
voting, please complete and return the proxy card in the self-addressed, postage paid envelope provided.
What is cumulative voting and how do I cumulate my shares?
For the election of directors (Proposal 1), California law provides that a shareholder of a California
corporation, or his/her proxy, may cumulate votes in the election of directors. That is, each shareholder may
cast that number of votes equal to the number of shares owned by him/her, multiplied by the number of
directors to be elected, and he/she may cumulate such votes for a single candidate or distribute such votes
among as many candidates as he/she deems appropriate.
Certain affirmative steps must be taken by you in order to be entitled to vote your shares cumulatively for
the election of directors. At the shareholders’ meeting at which directors are to be elected, no shareholder is
entitled to cumulate votes (i.e., cast for any one or more candidates a number of votes greater than the number
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of the shareholder’s shares) unless the candidates’ names have been placed in nomination at the meeting and
prior to the commencement of the voting and at least one shareholder has given notice at the meeting and
prior to commencement of the voting of the shareholder’s intention to cumulate votes. If any shareholder has
given such notice, then every shareholder entitled to vote may cumulate votes for candidates in nomination
and give one candidate a number of votes equal to the number of directors to be elected multiplied by the
number of votes to which that shareholder’s shares are entitled, or distribute the shareholder’s votes on the
same principle among any or all of the candidates, as the shareholder thinks appropriate. The candidates
receiving the highest number of votes, up to the number of directors to be elected, will be elected.
The proxies designated on your proxy card do not, at this time, intend to cumulate votes, to the extent
they have the shareholder’s discretionary authority to do so, pursuant to the proxies solicited in this proxy
statement unless another shareholder gives notice to cumulate, in which case your proxy may cumulate votes
in accordance with the recommendations of the Board of Directors. Therefore, discretionary authority to
cumulate votes in such an event is solicited in this proxy statement.
May I change my vote after I return my proxy?
If you fill out and return the enclosed proxy card, or vote by telephone or over the Internet, you may
change your vote at any time before the vote is conducted at the Annual Meeting. You may change your vote
in any one of four ways:
• You may send to the Company’s Corporate Secretary another completed proxy card with a later date.
• You may notify the Company’s Corporate Secretary in writing before the Annual Meeting that you
have revoked your proxy.
• You may virtually attend the Annual Meeting and vote on line.
• If you have voted your shares by telephone or over the Internet, you can revoke your prior telephone or
Internet vote by recording a different vote, or by signing and returning a proxy card dated as of a date
that is later than your last telephone or Internet vote.
What if I receive multiple proxy cards?
If you receive multiple proxy cards, your shares are probably registered differently or are in more than
one account. Vote all proxy cards received to ensure that all your shares are voted. Unless you need multiple
accounts for specific purposes, we recommend that you consolidate as many of your accounts as possible
under the same name and address. If the shares are registered in your name, contact our transfer agent, EQ
Shareowner Services, 1-866-883-3382; otherwise, contact your bank, broker or other nominee.
What vote is required to approve each proposal?
Approval of Proposal 1 (election of directors) requires a plurality of votes cast for each nominee. This
means that the 11 nominees who receive the most votes will be elected. So, if you do not vote for a particular
nominee, or you indicate “WITHHOLD AUTHORITY” to vote for a particular nominee on your proxy card,
your vote will not count either “for” or “against” the nominee. Abstentions will not have any effect on the
outcome of the vote. You may cumulate your votes in the election of directors as described under “What is
cumulative voting and how do I cumulate my shares?” on page 3. Broker non-votes will not count as a vote on
the proposal and will not affect the outcome of the vote.
Proposal 2 (advisory proposal on the executive compensation) and Proposal 3 (ratification of independent
registered public accounting firm) each requires a vote that satisfies two criteria: (i) the affirmative vote for the
proposal must constitute a majority of the common shares present or represented or by proxy and voting on
the proposal at the Annual Meeting; and (ii) the affirmative vote for the proposal must constitute a majority of
the common shares required to constitute the quorum. For purposes of Proposal 2 and 3, abstentions and
broker non-votes will not affect the outcome under clause (i), which recognizes only actual votes cast. However,
abstentions and broker non-votes will affect the outcome under clause (ii) if the number of affirmative votes,
though a majority of the votes represented, does not constitute a majority of the voting power required to
constitute a quorum. The ratification of the appointment of the independent registered public accounting
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firm for 2021 is a matter on which a broker or other nominee is generally empowered to vote and, therefore, no
broker non-votes are expected to exist with respect to Proposal 3.
How will voting on any other business be conducted?
Your proxy card confers discretionary authority to your proxy to vote your shares on the matters which
may properly be presented for action at the Annual Meeting, and may include action with respect to procedural
matters pertaining to the conduct of the Annual Meeting.
What are the costs of soliciting these proxies?
We will pay all the costs of soliciting these proxies. In addition to mailing proxy soliciting material, our
directors, officers and employees also may solicit proxies in person, by telephone or by other electronic means
of communication for which they will receive no compensation. We will ask banks, brokers and other
institutions, nominees and fiduciaries to forward the proxy materials to their principals and to obtain authority
to execute proxies. We will then reimburse them for their reasonable expenses. We have hired Advantage Proxy
to seek the proxies of custodians, such as brokers, which hold shares which belong to other people. This
service will cost the Company approximately $5,000 plus expenses.
How do I obtain an Annual Report on Form 10-K?
A copy of our 2020 Annual Report on Form 10-K accompanies this proxy statement. If you would like
another copy of this report, we will send you one without charge. The Annual Report on Form 10-K includes
a list of exhibits filed with the Securities and Exchange Commission (“SEC”), but does not include the exhibits.
If you wish to receive copies of the exhibits, we will send them to you. Please write to:
Heritage Commerce Corp
224 Airport Parkway
San Jose, California 95110
Attention: Executive Vice President and Corporate Secretary
You can also find out more information about us at our website www.heritagecommercecorp.com. Our
website is available for information purposes only and should not be relied upon for investment purposes, nor
is it incorporated by reference into this proxy statement. On our website you can access electronically filed
copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,
Section 16 filings, and amendments to those reports and filings, free of charge. The SEC also maintains a
website at www.sec.gov that contains reports, proxy statements and other information regarding SEC
registrants, including the Company.
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BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth information as of February 28, 2021, pertaining to beneficial ownership of
the Company’s common stock by persons known to the Company to own 5% or more of the Company’s
common stock, nominees to be elected to the Board of Directors, the executive officers named in the Summary
Compensation Table presented in this proxy statement, and all directors and executive officers of the
Company, as a group. This information has been obtained from the Company’s records, or from information
furnished directly by the individual or entity to the Company.
For purposes of the following table, shares issuable pursuant to stock options which may be exercised
within 60 days of February 28, 2021, are deemed to be issued and outstanding and have been treated as
outstanding in determining the amount and nature of beneficial ownership and in calculating the percentage
of ownership of those individuals possessing such interest, but not for any other individuals.
Name of Beneficial Owner(1)
Michael E. Benito . . . . . . . . . . . Executive Vice President/
Position
Business Banking Manager of
Heritage Bank of Commerce
Julianne Biagini-Komas . . . . . . . Director
Frank G. Bisceglia . . . . . . . . . . Director
Margo G. Butsch . . . . . . . . . . . Executive Vice President and
Chief Credit Officer of Heritage
Bank of Commerce
Bruce H. Cabral . . . . . . . . . . . . Director
Jack W. Conner . . . . . . . . . . . . Director and Chairman of the
Jason DiNapoli
. . . . . . . . . . . . Director
Stephen G. Heitel . . . . . . . . . . . Director
Robertson Clay Jones . . . . . . . . Executive Vice President and
Board
Shares
Beneficially
Owner(2)(3)
Exercisable
Options
Percent of
Class(3)
90,406(4)(24)
32,233(5)
140,857(6)
22,500
0.15%
— 0.05%
0.23%
18,000
43,258(7)(24)
110,285(8)
10,849
17,290
0.07%
0.18%
141,533(9)
326,162(10)
293,089(11)
— 0.24%
— 0.54%
0.49%
123,499
President of Community
Business Bank Group of
Heritage Bank of Commerce
260,123(12)(24) 160,549
0.43%
Walter T. Kaczmarek . . . . . . . . Chief Executive Officer,
President and Director(13)
107,605(14)
— 0.18%
Lawrence D. McGovern . . . . . . Executive Vice President and
Chief Financial Officer
Robert T. Moles . . . . . . . . . . . . Director
Laura Roden . . . . . . . . . . . . . . Director
Marina Park Sutton . . . . . . . . . Director
Ranson W. Webster . . . . . . . . . . Director
Keith A. Wilton . . . . . . . . . . . . Former Chief Executive Officer,
138,080(15)(24)
77,024(16)
33,620(17)
104,152(18)
639,198(19)
30,000
18,000
10,700
32,110
18,000
0.23%
0.13%
0.06%
0.17%
1.07%
President and Director(20)
139,077(21)(24)
— 0.23%
All directors, and executive
officers (16 individuals)
. . . . .
BlackRock Inc. . . . . . . . . . . . . .
. .
T. Rowe Price Associates, Inc.
2,676,702
4,829,721(22)
6,945,413(23)
461,497
4.43%
— 8.06%
— 11.59%
(1) Except as otherwise noted, the address for all persons is c/o Heritage Commerce Corp, 224 Airport
Parkway, San Jose, California, 95110.
(2) Subject to applicable community property laws and shared voting and investment power with a spouse,
the persons listed have sole voting and investment power with respect to such shares unless otherwise
noted. Listed amounts reflect all previous stock splits and stock dividends.
(3)
Includes shares beneficially owned (including options exercisable within 60 days of February 28, 2021, as
shown in the “Exercisable Options” column).
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(4)
(5)
(6)
(7)
(8)
(9)
Includes 26,187 shares of restricted stock that have not vested and of which Mr. Benito has the right to
vote.
Includes 3,086 shares of restricted stock that have not vested and of which Ms. Biagini-Komas has the
right to vote.
Includes 93,237 shares as one of two trustees of the Bisceglia Family Trust, and 11,000 shares held by
Mr. Bisceglia in a personal Individual Retirement Account. Also includes 3,086 shares of restricted stock
that have not vested and of which Mr. Bisceglia has the right to vote.
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Includes 24,909 shares of restricted stock that have not vested and of which Ms. Butsch has the right to
vote.
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Includes 46,312 shares held indirectly by trust. Also includes 3,086 shares of restricted stock that have not
vested and of which Mr. Cabral has the right to vote.
Includes 29,344 shares held by Mr. Conner’s spouse. Also includes 3,858 shares of restricted stock that
have not vested and of which Mr. Conner has the right to vote.
(10) Includes 300,815 shares held by a partnership. Also includes 3,086 shares of restricted stock that have not
vested and of which Mr. DiNapoli has the right to vote.
(11) Includes 75,658 shares held by Individual Retirement Account. Also includes 3,086 shares of restricted
stock that have not vested and of which Mr. Heitel has the right to vote.
(12) Includes 92,296 shares held directly. Also includes 7,278 shares of restricted stock that have not vested
and of which Mr. Jones has the right to vote.
(13) Mr. Kaczmarek became the Company’s President and Chief Executive Officer on March 12, 2021.
(14) Includes 42,906 shares held in a personal Individual Retirement Account. Includes 28,696 shares held
indirectly by trust. Also includes 36,003 shares of restricted stock that have not vested and of which
Mr. Kaczmarek has the right to vote.
(15) Includes 4,980 shares held by Mr. McGovern in a personal Individual Retirement Account. Includes
62,970 shares held indirectly by trust. Also includes 34,436 shares of restricted stock that have not vested
and of which Mr. McGovern has the right to vote.
(16) Includes 18,295 shares held by Mr. Moles’ spouse. Also includes 3,086 shares of restricted stock that have
not vested and of which Mr. Moles has the right to vote.
(17) Includes 3,086 shares of restricted stock that have not vested and of which Ms. Roden has the right to
vote.
(18) Includes 33,345 shares held indirectly by trust. Also includes 3,086 shares of restricted stock that have not
vested and of which Ms. Sutton has the right to vote.
(19) Includes 8,493 shares held indirectly. Also includes 3,086 shares of restricted stock that have not vested
and of which Mr. Webster has the right to vote.
(20) Mr. Wilton retired from the Company on March 12, 2021.
(21) Includes 59,370 shares of restricted stock that had not vested on February 28, 2021. On March 12, 2021,
25,012 shares vested and 34,358 shares were forfeited when Mr. Wilton retired.
(22) BlackRock, Inc. is an investment management firm and may be deemed to beneficially own 4,829,721
shares of the Company, which are held of record by clients of BlackRock, Inc. The address for
BlackRock, Inc. is 55 East 52nd Street, New York, NY 10055. All of the foregoing information has been
obtained by Schedule 13G filed with the SEC on January 29, 2021.
(23) T. Rowe Price Associates, Inc. is an investment management firm and may be deemed to beneficially own
6,945,413 shares of the Company, which are held of record by clients of T. Rowe Price Associates, Inc.
the address for T. Rowe Price Associates, Inc. is 100 East Pratt Street, Baltimore, MD 21202. All of the
foregoing information has been obtained by Schedule 13G filed with the SEC on February 16, 2021.
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(24) The Company’s Employee Stock Ownership Plan owns 101,231 shares of our common stock, all of which
have been allocated. These include shares held for the account of the following named executive officers
and includes in the table for Mr. McGovern 5,694 shares, Mr. Benito 2,369 shares, and zero shares for
Ms. Butsch, Mr. Jones, and Mr. Wilton. Mr. McGovern is one of the two trustees of the Employee Stock
Ownership Plan. As trustees, they have the power to vote any unallocated shares of the Employee Stock
Ownership Plan (currently no shares are unallocated) and allocated shares for which voting instructions
are not otherwise provided.
CORPORATE GOVERNANCE AND BOARD MATTERS
The Board of Directors is committed to good business practices, transparency in financial reporting and
the highest level of corporate governance. To that end, the Board continually reviews its governance policies
and practices, as well as the requirements of the Sarbanes Oxley Act of 2002 and the listing standards of the
Nasdaq Stock Market, to help ensure that such policies and practices are compliant and up to date.
Board of Directors
Board Independence
In 2020, 10 out of 12 members of the Board of Directors were independent directors, as defined by the
applicable rules and regulations of the Nasdaq Stock Market, as follows:
Julianne M. Biagini-Komas
Frank G. Bisceglia
Bruce H. Cabral
Jack W. Conner, Chairman of the Board
Jason DiNapoli
Stephen G. Heitel
Robert T. Moles
Laura Roden
Marina Park Sutton
Ranson W. Webster
Board and Committee Meeting Attendance
During the fiscal year ended December 31, 2020, our Board of Directors held a total of 10 meetings. For
the meetings directors were qualified to attend in 2020, each incumbent director who was a director during
2020 attended at least 75% of the aggregate of (a) the total number of such meetings and (b) the total number
of meetings held by the standing committees of the Board on which such director served.
Director Attendance at Annual Meetings of Shareholders
The Board believes it is important for all directors to attend the Annual Meeting of Shareholders in order
to show their support for the Company and to provide an opportunity for shareholders to communicate any
concerns to them. The Company’s policy is to encourage, but not require, attendance by each director at the
Company’s Annual Meeting of Shareholders. All of the directors of the Company are encouraged to attend
the Annual Meeting of Shareholders and at the 2020 Annual Meeting of Shareholders all of our directors
were in attendance.
Communications with the Board
Shareholders may communicate with the Board of Directors, including a committee of the Board or
individual directors, by writing to the Corporate Secretary, Heritage Commerce Corp, 224 Airport Parkway,
San Jose, California 95110. Each communication from a shareholder should include the following information
in order to permit shareholder status to be confirmed and to provide an address to forward a response if
deemed appropriate:
• The name, mailing address and telephone number of the shareholder sending the communication; and
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• If the shareholder is not a record holder of our common stock, the name of the record holder of our
common stock beneficially owned must be identified along with the shareholder.
Our Corporate Secretary will forward all appropriate communications to the Board or individual
members of the Board specified in the communication. Our Corporate Secretary may (but is not required to)
review all correspondence addressed to the Board or any individual member of the Board, for any
inappropriate correspondence more suitably directed to management. Communications may be deemed
inappropriate for this purpose if it is reasonably apparent from the face of the correspondence that it relates
principally to a customer dispute. Our policies regarding the handling of security holder communications
were approved by a majority of our independent directors.
Nomination of Directors
The Company has a Corporate Governance and Nominating Committee. The duties of the Corporate
Governance and Nominating Committee include the recommendation of candidates for election to the
Company’s Board of Directors.
The Corporate Governance and Nominating Committee’s minimum qualifications for a director are
persons of high ethical character who have both personal and professional integrity, which is consistent with
the image and values of the Company. The Corporate Governance and Nominating Committee considers
some or all of the following criteria in considering candidates to serve as directors:
• commitment to ethical conduct and personal and professional integrity as evidenced through the
person’s business associations, diversity, service as a director or executive officer or other commitment
to ethical conduct and personal and professional integrity as evidenced in organizations and/or
education;
• objective perspective and mature judgment developed through business experiences and/or educational
endeavors;
• the candidate’s ability to work with other members of the Board of Directors and management to
further our goals and increase shareholder value;
• the ability and commitment to devote sufficient time to carry out the duties and responsibilities as a
director;
• demonstrated experience at policy making levels in various organizations and in areas that are relevant
to our activities;
• the skills and experience of the potential nominee in relation to the capabilities already present on the
Board of Directors; and
• such other attributes, including independence, relevant in constituting a board that also satisfies the
requirements imposed by the SEC and the Nasdaq Stock Market.
The Corporate Governance and Nominating Committee does not have a separate policy for consideration
of any director candidates recommended by shareholders. Instead, the Corporate Governance and
Nominating Committee considers any candidate meeting the requirements for nomination by a shareholder
set forth in the Company’s Bylaws (as well as applicable laws and regulations) in the same manner as any other
director candidate. The Corporate Governance and Nominating Committee believes that requiring
shareholder recommendations for director candidates to comply with the requirements for nominations in
accordance with the Company’s Bylaws ensures that the Corporate Governance and Nominating Committee
receives at least the minimum information necessary for it to begin an appropriate evaluation of any such
director nominee.
Section 5.14 of the Company’s Bylaws provide that any shareholder must give advance written notice to
the Company of an intention to nominate a director at a shareholder meeting. Notice of intention to make
any nominations must be delivered to the Secretary of the Company at the principal executive offices of the
Company not later than the close of business 90 days nor earlier than the close of business 120 days prior to
the first anniversary of the preceding year’s annual meeting. If the date of the annual meeting is more than
30 days before or more than 60 days after such anniversary date of the annual meeting, notice by the
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shareholder must be delivered not earlier than the close of business 120 days prior to such annual meeting and
not later than the close of business 90 days prior to such annual meeting or 10 days following the day on which
public announcement of the date of such meeting is first made by the Company.
To be in proper written form, a shareholder’s notice to the Corporate Secretary must provide as to each
person, whom the shareholder proposes to nominate for election as a director (each referred to as the
“Nominee”): (i) all information relating to the Nominee that is required to be disclosed in solicitations of
proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to and in
accordance with Regulation 14A under the Securities Exchange Act of 1934 (the “Exchange Act”); (ii) the
Nominee’s written consent to being named in the proxy statement as a nominee and to serving as a director if
elected; (iii) the number of shares of capital stock of any bank, bank holding company, savings and loan
association or other depository institution owned beneficially by the Nominee and the identities and locations
of any such institutions; (iv) whether the Nominee has ever been convicted of or pleaded nolo contender to
any criminal offensive involving dishonestly or breach of trust, filed a petition in bankruptcy or been adjudged
bankrupt; (v) a written statement executed by the Nominee acknowledging that as a director of the Company,
the Nominee will owe a fiduciary duty exclusively to the Company and its shareholders; (vi) a representation
whether the Nominee satisfies the requirements of Section 2.2(b) of the Company’s Bylaws (see below);
(vii) whether and the extent to which any hedging or other transaction or series of transactions has been
entered into by or on behalf of the Nominee respect to any securities of the Company, and a description of
any other agreement, arrangement or understanding (including any short position or any borrowing or lending
of shares), the effect or intent of which is to mitigate loss to, or to manage the risk or benefit of share price
changes for, or to increase or decrease the voting power of the Nominee, and (viii) a description of all
arrangements or understandings between the shareholder and the Nominee and any other person or persons
(naming such person or persons) pursuant to which the nomination is to be made by the shareholder.
The notice must also set forth with respect to the shareholder submitting the nomination: (i) the name
and address of the shareholder (and beneficial owner, if applicable), as it appears on the Company’s books,
(and of such beneficial owner, if applicable) and any other shareholders and beneficial owners known by such
shareholder to be supporting the Nominee(s) for election; (ii) the class or series and number of shares of
capital stock of the Company that are, directly or indirectly, owned beneficially and of record by such
shareholder (and by such beneficial owner, if applicable); (iii) any derivative positions with respect to shares of
capital stock of the Company held or beneficially held by or on behalf of such shareholder (and by or on
behalf of such beneficial owner), the extent to which any hedging or other transaction or series of transactions
has been entered into with respect to the shares of capital stock of the Company by or on behalf of such
shareholder (and by or on behalf of such beneficial owner), and the extent to which any other agreement,
arrangement or understanding has been made, the effect or intent of which is to increase or decrease the
voting power of such shareholder (and such beneficial owner) with respect to shares of capital stock of the
Company; (iv) a representation that the shareholder is a holder of record of stock of the Company entitled to
vote at the meeting and intends to appear in person or by proxy at the meeting to propose the Nominee, and
(v) a representation whether the shareholder (or the beneficial owner, if any), intends or is part of a group that
intends to deliver a proxy statement and/or form of proxy to holders of at least the percentage of the
Company’s outstanding capital stock required to elect the nominee or otherwise to solicit proxies from
shareholders in support of such nomination (and a copy of such documents must be provided with the notice).
The information required of clauses (iii) and (iv) must be supplemented not later than ten days following the
record date to disclose the information contained in clauses (iii) and (iv) above as of the record date.
The Company may require any proposed nominee to furnish such other information as it may reasonably
require to determine: (i) the eligibility of the Nominee to serve as a director of the Company (including the
information required to be set forth in the shareholder’s notice of nomination of such person as a director as
of a date subsequent to the date on which the notice of such person’s nomination was given), and (ii) whether
the Nominee qualifies as an “independent director” or “audit committee financial expert” under applicable
law, securities exchange rule or regulation, or any publicly disclosed corporate governance guideline or
committee charter of the Company.
Nominees for the Board must also meet certain qualifications set forth in Section 2.2(b) of our Bylaws,
which prohibit the election as a director of any person who is a director, executive officer, branch manager or
trustee for any unaffiliated commercial bank, savings bank, trust company, savings and loan association,
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building and loan association, industrial bank or credit union that is engaged in business in: (i) any city, town
or village in which the Company or any affiliate or subsidiary thereof has offices; or (ii) any city, town or
village adjacent to a city, town or village in which the Company or any affiliate or subsidiary thereof has
offices.
Diversity of the Board of Directors
In considering diversity of the Board (in all aspects of that term) as a criteria for selecting nominees in
accordance with its charter, the Corporate Governance and Nominating Committee takes into account various
factors and perspectives, including differences of viewpoint, high quality business and professional experience,
education, skills and other individual qualities and attributes that contribute to Board heterogeneity, as well as
race, gender and national origin. The Committee does not assign specific weights to particular criteria and no
particular criterion is necessarily applicable to all prospective nominees. The Committee seeks persons with
leadership experience in a variety of contexts and industries. The Committee believes that this expansive
conceptualization of diversity is the most effective means to implement Board diversity. The Corporate
Governance and Nominating Committee will assess the effectiveness of this approach as part of its annual
review of its charter.
Term of Office
Directors serve for a one-year term or until their successors are elected. The Board does not have term
limits, instead preferring to rely upon the evaluation procedures described herein as the primary methods of
ensuring that each director continues to act in a manner consistent with the best interests of the shareholders
and the Company.
Board Committees
The Board may delegate portions of its responsibilities to committees of its members. These standing
committees of the Board meet at regular intervals to attend to their particular areas of responsibility. Our
Board has four standing committees: Audit Committee, Compensation Committee, Corporate Governance
and Nominating Committee, and the Strategic Initiatives and Finance and Investment Committee. In addition,
Heritage Bank of Commerce (the "Bank") maintains a Loan Committee. An independent director, as defined
by the applicable rules and regulations of the Nasdaq Stock Market, chairs the Board and its other standing
committees (including the Bank’s Loan Committee). The Chair determines the agenda, the frequency and the
length of the meetings and receives input from Board members.
Executive Sessions
Independent directors meet in executive sessions throughout the year including meeting annually to
consider and act upon the recommendation of the Compensation Committee regarding the compensation
and performance of the Chief Executive Officer.
Evaluation of Board Performance
A Board assessment and director self-evaluations are conducted annually in accordance with an
established evaluation process and includes performance of committees. The Corporate Governance and
Nominating Committee oversees this process and reviews the assessment and self-evaluation with the full
Board.
Management Performance and Compensation
The Compensation Committee reviews and approves the Chief Executive Officer’s evaluation of the
management team on an annual basis. The Board (largely through the Compensation Committee) evaluates
the compensation plans for senior management and other employees to ensure they are appropriate,
competitive and properly reflect the Company’s objectives and performance.
Director Stock Ownership Guidelines
The Board has adopted a policy that each member of the Board who is not an employee of the Company
is expected to hold a minimum number of shares of the Company’s common stock. In 2020, each such director
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was required to hold, at a minimum, 17,500 shares of the Company’s common stock. Any director not meeting
the minimum level as of the effective date of their initial election to the Board or on the effective date of any
change in policy has three years to bring his or her holdings up to this minimum level. The Corporate
Governance and Nominating Committee will review this policy on an annual basis.
Code of Ethics
The Board expects all directors, as well as officers and employees, to display the highest standard of
ethics, consistent with the principles that have guided the Company over the years.
The Board has adopted an Executive and Principal Financial Officer’s Code of Ethics that applies to the
Chief Executive Officer, Chief Financial Officer and the senior financial officers of the Company to help
ensure that the financial affairs of the Company are conducted honestly, ethically, accurately, objectively,
consistent with generally accepted accounting principles and in compliance with all applicable governmental
law, rules and regulations. We will disclose any amendment to, or a waiver from a provision of our Code of
Ethics on our website. The Executive and Principal Financial Officer’s Code of Ethics is available on our
website at www.heritagecommercecorp.com.
Reporting of Complaints/Concerns Regarding Accounting or Auditing Matters
The Company’s Board has adopted procedures for receiving and responding to complaints or concerns
regarding accounting and auditing matters. These procedures were designed to provide a channel of
communication for employees and others who have complaints or concerns regarding accounting or auditing
matters involving the Company.
Employee concerns may be communicated in a confidential or anonymous manner to the Audit
Committee of the Board. The Audit Committee Chair will make a determination on the level of inquiry,
investigation or disposal of the complaint. All complaints are discussed with the Company’s senior
management and monitored by the Audit Committee for handling, investigation and final disposition. The
Chair of the Audit Committee will report the status and disposition of all complaints to the Board.
INFORMATION ABOUT DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors
The Board of Directors oversees our business and monitors the performance of management. In
accordance with corporate governance principles, the Board does not involve itself in day-to-day operations.
The directors keep themselves informed through, among other things, discussions with the Chief Executive
Officer, other key executives and our principal outside advisors (legal counsel, outside auditors, and other
consultants), by reading reports and other materials that we send them and by participating in Board and
committee meetings.
The Company’s Bylaws currently permit the number of Board members to range from 9 to 15, leaving the
Board authority to fix the exact number of directors within that range. On March 12, 2021, the Board fixed
the number of directors at 11.
Board Leadership Structure
The Board is committed to maintaining an independent Board, and a majority of the Board has been
comprised of independent directors. It has further been the practice for many years of the Company to
separate the roles of Chief Executive Officer and Chairman of the Board in recognition of the differences
between the two roles. The Chief Executive Officer is responsible for setting the strategic direction for the
Company and the day-to-day leadership and performance of the Company. The Chairman of the Board
provides guidance to the Chief Executive Officer, sets the agenda for Board meetings, presides over meetings
of the full Board (including executive sessions), and facilitates communication among the independent
directors and between the independent directors and the Chief Executive Officer. The Board further believes
that the separation of the duties of the Chief Executive Officer and the Chairman of the Board eliminates any
inherent conflict of interest that may arise when the roles are combined, and that an independent director who
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has not served as an executive of the Company can best provide the necessary leadership and objectivity
required as Chairman of the Board.
Board Authority for Risk Oversight
The Board has active involvement and the responsibility for overseeing risk management of the Company
arising out of its operations and business strategy. The Board monitors, reviews and reacts to material
enterprise risks identified by management. The Board receives specific oral and written reports from officers
with oversight responsibility for particular risks within the Company. Reports cover executive management
on financial, credit, liquidity, interest rate, capital, operational, legal and regulatory compliance and reputation
risks and the Company’s degree of exposure to those risks. The Board helps ensure that management is
properly focused on risk by, among other things, reviewing and discussing the performance of senior
management and business line leaders.
Board committees also have responsibility for risk oversight in specific areas. The Audit Committee
oversees financial, accounting and internal control risk management policies. The Company’s internal Risk
Management Steering Committee reports directly to the Audit Committee. The Audit Committee is
responsible for monitoring the Company’s overall risk program. The Audit Committee receives quarterly
reports from the Risk Management Steering Committee and the Company’s internal audit department. The
Audit Committee reports periodically to the Board on the effectiveness of risk management processes in place,
risk trends, and the overall risk assessment of the Company’s activities. The Compensation Committee assesses
and monitors risks in the Company’s compensation program. The Corporate Governance and Nominating
Committee recommends director candidates with appropriate experience and skills who will set the proper
tone for the Company’s risk profile and provide competent oversight over our material risks.
The Committees of the Board
The Board may delegate portions of its responsibilities to committees of its members. These standing
committees of the Board meet at regular intervals to attend to their particular areas of responsibility. Our
Board has four standing committees: the Audit Committee, Compensation Committee, Corporate Governance
and Nominating Committee, and Strategic Initiatives and Finance and Investment Committee. In addition,
the Bank also maintains a Loan Committee.
Audit Committee. The Company has a separately designated standing Audit Committee established in
accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended. The Audit
Committee charter adopted by the Board sets out the responsibilities, authority and specific duties of the
Audit Committee. The Audit Committee
is available on the Company’s website at
charter
www.heritagecommercecorp.com.
The responsibilities of the Audit Committee include the following:
• oversee our financial, accounting and reporting process, our system of internal accounting and
financial controls, and our compliance with related legal and regulatory requirements;
• oversee the appointment, compensation, retention and oversight of our independent auditors,
including conducting a review of their independence, reviewing and approving the planned scope of
our annual audit, overseeing the independent auditors’ work, and reviewing and pre-approving any
audit and non-audit services that may be performed by them;
• review with management and our independent auditors the effectiveness of our internal controls over
financial reporting;
• approve the scope and engagement of external audit services and review significant accounting policies
and adjustments recommended by the independent auditors and address any significant, unresolved
disagreements between the independent auditors and management;
• review and discuss the annual audited financial statements with management and the independent
auditors prior to publishing the annual report and filing the Annual Report on Form 10-K with the
SEC;
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• review and discuss with management and the independent auditors any significant changes, significant
deficiencies and material weaknesses regarding internal controls over financial reporting required by
the Sarbanes Oxley Act of 2002, and oversee the corrective action taken to mitigate any significant
deficiencies and material weaknesses identified;
• review with management and the independent auditors the effect of significant regulatory and
accounting initiatives, changes, and pronouncements as well as significant and unique transactions
and financial relationships;
• review with the independent auditors the matters required to be discussed by Auditing Standards
No. 1301, and receive and discuss with the independent auditors disclosures regarding the auditors’
independence;
• oversee the internal audit function and the audits directed under its auspices;
• establish policies to ensure all non-audit services provided by the independent auditors are approved
prior to work being performed; and
• oversee and report to the full Board on the effectiveness of the Company’s risk management processes
and overall risk assessment of the Company’s activities.
Each member of the Audit Committee meets the independence criteria as defined by applicable rules and
regulations of the SEC for audit committee membership and is independent and is “financially sophisticated”
as defined by the applicable rules and regulations of the Nasdaq Stock Market. The members of the Audit
Committee are Julianne M. Biagini-Komas (Committee Chair), Bruce H. Cabral, Laura Roden, and Marina
Park Sutton. The Audit Committee met 10 times during 2020.
The Board has determined that Julie Biagini-Komas meets the definition of “audit committee financial
expert” under the applicable rules and regulations of the SEC and is “financially sophisticated” as defined by
the applicable rules and regulations of the Nasdaq Stock Market. The designation of a person as an audit
committee financial expert does not result in the person being deemed an expert for any purpose, including
under Section 11 of the Securities Act of 1933. The designation does not impose on the person any duties,
obligations or liability greater than those imposed on any other audit committee member or any other director
and does not affect the duties, obligations or liability of any other member of the Audit Committee or Board.
The Audit Committee Report for 2020 appears on page 53 of this Proxy Statement.
Personnel and Compensation Committee. The Company has a separately designated Personnel and
Compensation Committee (“Compensation Committee”), which consists entirely of independent directors as
defined by the applicable rules and regulations of the Nasdaq Stock Market. The Compensation Committee
has adopted a charter, which is available on the Company’s website at www.heritagecommercecorp.com. The
Compensation Committee has the following responsibilities:
• review and approve our compensation philosophy;
• review industry compensation practices and our relative compensation positioning;
• review the incentive compensation programs by the Company to evaluate and ensure that none of
them encourage excessive risk;
• retain compensation consultants to provide independent professional advice;
• approve compensation paid to our Chief Executive Officer and other executive officers;
• review the Company’s human capital and diversity policies;
• review and approve the Compensation Discussion and Analysis appearing in our proxy statement;
• review director compensation programs, plans and awards;
• administer our short term and long term executive incentive plans and stock or stock based plans; and
• review and approve general employee welfare benefit plans and other plans on an as needed basis.
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The members of the Compensation Committee are Julianne M. Biagini-Komas, Frank G. Bisceglia,
Robert T. Moles, Marina Park Sutton (Committee Chair), and Ranson W. Webster. The Committee met six
times during 2020.
Corporate Governance and Nominating Committee. The Company has a separately designated
Corporate Governance and Nominating Committee, which consists of entirely independent directors as
defined by the applicable rules and regulations of the Nasdaq Stock Market. The Corporate Governance and
Nominating Committee have adopted a charter, which is available on the Company’s website at
www.heritagecommercecorp.com.
The purposes of the Corporate Governance and Nominating Committee include the following
responsibilities:
• identifying individuals qualified to become Board members and making recommendations to the full
Board of candidates for election to the Board;
• recommending to the Board corporate governance guidelines;
• leading the Board in an annual review of its performance; and
• recommending director appointments to Board committees.
The members of
the Corporate Governance and Nominating Committee are Jason DiNapoli,
Robert T. Moles, Marina Park Sutton, and Ranson W. Webster (Committee Chair). The Committee met nine
times during 2020.
Strategic Initiatives and Finance and Investment Committee. The Strategic Initiatives and Finance and
Investment Committee provides oversight and guidance to senior management regarding the strategic
direction of the Company. The Committee is also responsible for the development of policies and procedures
related to liquidity, asset liability management, and supervision of the Company’s investments. The Committee
also oversees and reviews internal financial reports including annual forecasts and budgets, and stress test
analysis prepared by management. The members of the Committee are Frank G. Bisceglia, Jack W. Conner,
Jason DiNapoli, Stephen G. Heitel, Walter T. Kaczmarek, Laura Roden (Committee Chair), and Ranson
Webster. The Committee met eight times during 2020.
Heritage Bank of Commerce Loan Committee. The Heritage Bank of Commerce Loan Committee is
responsible for the approval and supervision of loans and the development of the Company’s loan policies
and procedures. The members of the Loan Committee are Bruce H. Cabral (Committee Chair), Jason
DiNapoli, Stephen G. Heitel, and Walter T. Kaczmarek. The Loan Committee met 41 times during 2020.
Role of Compensation Consultant
The Compensation Committee of the Board retained McLagan, an Aon Hewitt Company (“McLagan”)
as its independent compensation consultant in 2019 and its report delivered in the first quarter of 2019 was
used to make compensation decisions for 2019 and 2020. McLagan was also retained in the fourth quarter of
2020 and its report delivered in the first quarter of 2021 was used for compensation decisions in 2021.
The Compensation Committee has the authority to obtain assistance and advice from advisors to assist
it with the evaluation of compensation matters without the approval or permission of management or the
Board. The Compensation Committee uses advisors to obtain candid and direct advice independent of
management, and takes steps to satisfy this objective. First, in evaluating firms to potentially provided advisory
services to the Compensation Committee, the Compensation Committee considers if the firm provides any
other services to the Company. In addition, while members of management may assist the Compensation
Committee in the search for advisors, the Compensation Committee ultimately and in its sole discretion makes
the decision to hire or engage a consultant and provides direction as to the scope of work to be conducted.
The Chair of the Compensation Committee has evaluated the relationship of the compensation consultant
with both the Company and the Compensation Committee, including the nature and amount of work
performed for the Compensation Committee during the year. The Compensation Committee retained
McLagan, to:
• review existing compensation programs for executive officers;
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• provide information based on third party data and analysis of compensation programs at comparable
financial institutions for the design and implementation of our executive compensation programs;
• assist the Compensation Committee in forming a peer group; and
• provide independent information as to the reasonableness and appropriateness of the compensation
levels and compensation programs of the Company as compared to comparable financial services
companies.
Executive Officers of the Company
Set forth below is certain information with respect to the executive officers of the Company:
Name
Walter T. Kaczmarek ............................................... President and Chief Executive Officer of Heritage
Commerce Corp and Heritage Bank of Commerce
Position
Michael E. Benito .................................................... Executive Vice President/Business Banking
Manager of Heritage Bank of Commerce
Margo G. Butsch ..................................................... Executive Vice President and Chief Credit Officer of
Heritage Bank of Commerce
Robertson Clay Jones ............................................... Executive Vice President/President of Community
Business Banking Group for Heritage Bank of
Commerce
Lawrence D. McGovern ........................................... Executive Vice President and Chief Financial
Officer of Heritage Commerce Corp and Heritage
Bank of Commerce
Biographical information for Walter T. Kaczmarek is found under “Proposal 1—Election of Directors.”
Mr. Kaczmarek assumed the position of President and Chief Executive Officer of the Company and the Bank
on March 12, 2021.
Michael E. Benito, age 60, has served as Executive Vice President/Business Banking Manager of Heritage
Bank of Commerce since January 2012. Mr. Benito joined Heritage Bank of Commerce in 2003 as Senior Vice
President/Director of Sales & Business Development. From 1998 through 2003, Mr. Benito served as a
Managing Director for Greater Bay Bank and from December 1986 through 1998, he served as Regional Vice
President with Imperial Bancorp. Mr. Benito began his banking career more than 32 years ago at Union Bank
of California (formerly Union Bank).
Margo G. Butsch, age 57, has served as Executive Vice President and Chief Credit Officer of Heritage
Bank of Commerce since July 2017. Ms. Butsch joined Heritage Bank of Commerce through Focus Business
Bank which was acquired by Heritage Bank of Commerce in August 2015. After the acquisition, Ms. Butsch
joined Heritage Bank of Commerce as Vice President/Credit Administration and was promoted to Senior
Vice President/Credit Administration in November 2015. Since 1995 and prior to joining Heritage Bank of
Commerce, Ms. Butsch held various Vice President and Senior Vice President relationship management and
loan administration positions with Focus Business Bank, The Independent Bankers Bank, Greater Bay Bank,
and Imperial Bank.
Robertson Clay Jones, age 50, has served as Executive Vice President/President Community Business
Banking Group for Heritage Bank of Commerce since October 12, 2019. Mr. Jones was formally the President
of Presidio Bank assuming the positon in July 2018. Mr. Jones joined Presidio Bank in 2010 as Executive Vice
President and Mid Peninsula Market President. Prior to joining Presidio Bank, Mr. Jones was the organizing
and initial President and Chief Executive Officer of New Resource Bank. From October 1993 to May 2005
Mr. Jones served in ever increasing corporate capacities for subsidiaries of Greater Bay Bancorp and Comerica
Bank, including his position as Executive Vice President & Chief Operating Officer at Cupertino National
Bank and Executive Vice President and Manager of the Venture Banking Group.
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Lawrence D. McGovern, age 66, has served as Executive Vice President and Chief Financial Officer of
Heritage Commerce Corp and Heritage Bank of Commerce since July 1998.
Transactions with Management
Some of the Company’s directors and executive officers, as well as other related persons (as defined under
“Policies and Procedures for Approving Related Party Transactions” below), are customers of, and have
banking transactions with, the Company’s subsidiary, Heritage Bank of Commerce, in the ordinary course of
business, and Heritage Bank of Commerce expects to have such ordinary banking transactions with these
persons in the future. In the opinion of the management of the Company and Heritage Bank of Commerce,
all loans and commitments to lend included in such transactions were made in the ordinary course of business,
on substantially the same terms, including interest rates and collateral, as those prevailing for comparable
transactions with other persons of similar creditworthiness, and do not involve more than the normal risk of
collectability or present other unfavorable features. Loans to individual directors, officers and related persons
must comply with Heritage Bank of Commerce’s lending policies and statutory lending limits. In addition,
prior approval of the Board is required for all loans advanced to directors and executive officers. These loans
are exempt from the loan prohibitions of the Sarbanes Oxley Act.
Policies and Procedures for Approving Related Party Transactions
The Board has adopted a written Statement of Policy with Respect to Related Party Transactions. Under
this policy, any “related party transaction” may be consummated or may continue only if the Audit Committee
approves or ratifies the transaction in accordance with the guidelines in the policy and if the transaction is on
terms comparable to those that could be obtained in arm’s length dealings with an unrelated third party. For
purposes of this policy, a “related person” means: (i) any person who is, or at any time since the beginning of
the Company’s last fiscal year was, a director or executive officer of the Company or a nominee to become a
director of the Company; (ii) any person who is known to be the beneficial owner of more than 5% of any
class of the Company’s voting securities; (iii) any immediate family member of any of the foregoing persons,
which means any child, stepchild, parent, stepparent, spouse, sibling, mother in law, father in law, son in law,
daughter in law, brother in law, or sister in law of the director, executive officer, nominee or more than 5%
beneficial owner, and any person (other than a tenant or employee) sharing the household of such director,
executive officer, nominee or more than 5% beneficial owner, and (iv) any firm, corporation or other entity in
which any of the foregoing persons is employed or is a partner, principal or in a similar position, or in which
such person has a 10% or greater beneficial ownership interest.
A “related party transaction” is a transaction in which the Company or any of its subsidiaries is a
participant and in which a related person had or will have a direct or indirect interest, other than transactions
involving: (i) less than $5,000 when aggregated with all similar transactions; (ii) customary bank deposits and
accounts (including certificates of deposit), and (iii) loans and commitments to lend included in such
transactions that are made in the ordinary course of business on substantially the same terms, including
interest rates and collateral, as those prevailing for comparable transactions with other persons of similar
creditworthiness, and do not involve more than the normal risk of collectability or present other unfavorable
features to the Company.
A related party who has a position or relationship with a firm, corporation, or other entity that engaged
in a transaction with the Company shall not be deemed to have an indirect material interest within the meaning
of this policy where the interest in the transaction arises only: (1) from such related party’s position as a
director of another corporation or organization that is party to the transaction; (2) from the direct or indirect
ownership by the related party of less than a 10% equity interest in another person (other than a partnership)
which is a party to the transaction; or (3) from the related party’s position as a limited partner in a partnership
in which the related party has an interest of less than 10%, and the related party is not a general partner of and
does not hold another position in the partnership.
The Board has determined that the Audit Committee is best suited to review and approve related party
transactions. The Committee considers all of the relevant facts and circumstances available to the Committee,
including (if applicable) but not limited to: (i) the benefits to the Company; (ii) the impact on a director’s
independence in the event the related person is a director, an immediate family member of a director or an
entity in which a director is a partner, shareholder or executive officer; (iii) the availability of other sources for
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comparable products or services; (iv) the terms of the transaction; and (v) the terms available to unrelated
third parties or to employees generally. No member of the Audit Committee may participate in any review,
consideration or approval of any related person transaction with respect to which such member or any of his
or her immediate family members is the related person. The Committee will approve only those related person
transactions that are in, or are not inconsistent with, the best interests of the Company and its shareholders, as
the Committee determines in good faith. The Audit Committee conveys its decision to the Chief Executive
Officer, who conveys the decision to the appropriate persons within the Company.
Delinquent Section 16(a) Reports
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s directors,
executive officers and persons who own more than ten percent of a registered class of the Company’s equity
securities, to file with the SEC initial reports of ownership and reports of changes in ownership of common
stock and other equity securities. They are required by SEC rules and regulations to furnish the Company
with copies of all Section 16(a) forms they file.
To the Company’s knowledge, except as disclosed below, based solely on review of the copies of such
reports furnished to the Company and written representations that no other reports were required, all
Section 16(a) filing requirements applicable to our executive officers and directors were complied with during
the year ended December 31, 2020. The Company inadvertently failed to file a timely Form 4 on behalf of
Michael Benito following notice that he exercised stock options. A Form 4 was filed a few weeks later to report
the transaction.
Compensation Discussion and Analysis
EXECUTIVE COMPENSATION
This Compensation Discussion and Analysis identifies the Company’s current compensation philosophy
and objectives and describes the various methodologies, policies and practices for establishing and
administering the compensation programs for our executives including the named executive officers. The
strategies and policies of the Compensation Committee have been developed so that there is a direct correlation
between executive compensation and the Company’s overall performance and individual performance. The
individuals who served as the Company’s Chief Executive Officer and Chief Financial Officer during 2020, as
well as, the other individuals included in the Summary Compensation Table, are referred to as the “named
executive officers.”
Overview of Compensation Philosophy
Our compensation philosophy is driven by our objective to attract and retain the premier talent needed to
lead our Company in an extremely competitive environment and to strongly align the interests of our
executives with those of our shareholders for the long term. Our executive compensation is aligned with our
overall business strategy, with a focus on driving growth, profitability and long-term value for our shareholders.
We structure our executive compensation program with a mix of base salary, annual performance-based
cash incentive awards and long-term equity awards to incentivize and reward those individuals who make the
greatest contributions to our performance and creation of shareholder value over time.
The first goal of our compensation program is to link a reasonable percentage of executive compensation
to the financial performance of the Company. We achieve this goal by providing our named executive officers
the opportunity to significantly increase their annual cash compensation through our variable performance
based cash award incentive plan. The plan awards improvement in the Company’s performance in key financial
metrics on an annual basis. We also expect that as those improvements are maintained and built upon, they
will be reflected in the Company’s stock price.
The second goal of our compensation program is to align the interests of our executive officers with the
interests of our shareholders. We use equity awards to reward the long-term efforts of management and to
retain management. These equity awards serve to increase the ownership stake of our management in the
Company, further aligning the interests of the executives with those of our shareholders.
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The third goal of our compensation program is to attract and retain highly competent executives. Our
executives, and particularly our named executive officers, are talented managers and they are often presented
with opportunities at other institutions, including opportunities at potentially higher compensation levels. We
seek to attract and retain our executives by setting base compensation and incentives at competitive levels and
awarding equity based awards. We also consider other forms of executive pay,
including severance
arrangements (including change of control provisions) as a means to attract and retain our executive officers
including the named executive officers.
The use of these compensation programs and benefits enables us to reinforce our pay-for-performance
philosophy, align our executives’ interests with shareholders, and strengthen our ability to attract, retain and
motivate highly qualified executives. We believe that this combination of programs provides an appropriate
mix of fixed and variable pay, balances short-term operational performance with long-term shareholder value,
and encourages executive recruitment and retention.
Compensation Program Objectives and Rewards
The components of Company’s compensation and benefits programs are driven by our business
environment and are designed to enable us to achieve the goals of our compensation program within a
framework that adheres to the Company’s mission and values. The programs’ objectives are to:
• Reflect our position as a leading community bank in our service areas;
• Attract, engage and retain a diverse workforce that helps ensure our current and future success;
• Motivate and inspire employee behavior that fosters a high performance culture;
• Support a one company culture;
• Support the integration of employees hired from acquired banks;
• Support overall business objectives;
• Provide shareholders with a superior rate of return over the long term; and
• Create shareholder value through the continuous provision of quality service to our customers.
Consequently, the guiding principles of our programs are to:
• Promote and maintain a high performance banking organization;
• Remain competitive in our marketplace for talent;
• Balance our compensation costs with our desire to provide value to a diverse workforce and
shareholders; and
• Avoid encouraging excessive risk taking.
To this end, we will measure success of our programs by:
• Overall business performance and employee engagement;
• Ability to attract and retain key talent;
• Costs and business risks that are limited to levels that optimize risk and return;
• Employee understanding and perceptions that ensure program value equals or exceeds program cost;
and
• Employee turnover metrics.
All of our compensation and benefits for our named executive officers described below have as a primary
purpose our need to attract, retain and motivate the highly talented individuals whose performance will enable
us to succeed in creating shareholder value in a highly competitive marketplace. Beyond that, different elements
have specific purposes designed to reward different performance and retention goals.
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• Base salary and benefits are designed to:
• Reward core competence in the executive role relative to position, performance, experience and
responsibility;
• Provide fixed cash compensation with merit increases competitive with the market place; and
• Control fixed expenses.
• Annual incentive variable cash awards are designed to:
• Focus employees on annual financial objectives derived from the business plan that lead to
long-term success;
• Provide annual variable performance based cash awards to reward and motivate achievement
of critical annual performance metrics selected by the Compensation Committee; and
• Foster an equal pay for performance culture that aligns our compensation programs with our
overall business strategy.
• Equity based compensation awards are designed to:
• Align the interests of executives with those of our shareholders;
• Promote teamwork by tying compensation significantly to the value of our common stock;
• Attract the next generation of management by providing significant capital accumulation
opportunities; and
• Retain executives by providing a long-term-oriented program whose value could only be achieved
by remaining with and performing for the Company.
• Change of control and separation benefits:
• Individual employment contracts with certain executives provide for double-trigger change of
control and separation benefits;
• Separation benefits provide benefits to ease an employee’s transition due to an unexpected
employment termination by the Company due to ongoing changes in the Company’s employment
needs; and
• Change in control benefits encourage key executives to remain focused on the Company’s business
in the event of rumored or actual fundamental corporate changes which will enhance shareholder
value.
• Manage excessive risk-taking through plan design and oversight of incentive plans:
• Incentive awards are capped;
• Performance objectives are aligned with annual financial plan approval by the Board of Directors;
• Multiple financial metrics are used taking into account performance and risk;
• A “claw-back policy” is applied to performance based cash payments;
• Payouts are modified through the use of risk-based capital ratio metrics;
• Long-term incentive equity awards are deferred through vesting requirements; and
• The Compensation Committee has discretion to reduce cash bonus payments.
Role of Shareholder Input
The Compensation Committee has been mindful of the strong support our shareholders expressed for
our compensation program when making executive compensation decisions, including base salary adjustments
and long-term incentive awards. In making these executive compensation decisions, which are discussed more
fully below, the Compensation Committee’s main considerations included our shareholders’ support for our
executive compensation program, and the peer and market information provided by the Compensation
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Committee’s compensation consultant. The Compensation Committee will continue to consider our
shareholders’ views when making executive compensation decisions in the future.
Commencing in 2019 we included a say-on-pay non-binding advisory proposal every year with our annual
meeting proxy statement. Last year our non-binding shareholder advisory vote on executive compensation
was approved, with approximately 96% of voting shareholders casting their votes in favor of the say-on-pay
resolution.
Role of Compensation Committee in Determining Compensation
The Compensation Committee of the Board has strategic and oversight responsibility for the overall
compensation and benefits programs for executives of
the Company. These responsibilities include
establishing, implementing, and continually monitoring the compensation structure, policies, and programs
of the Company. The Compensation Committee also periodically reviews, assesses and monitors the
performance, and regularly reviews the design and function, of the Company’s incentive compensation
arrangements to ensure that any risk-taking incentives are consistent with regulatory guidance and the safety
and soundness of the organization. The Compensation Committee is responsible for assessing and approving
the total compensation paid to the Chief Executive Officer and all executive officers. The Compensation
Committee is responsible for determining whether the compensation paid to each of these executives is fair,
reasonable and competitive, and whether the compensation program serves the interests of the Company’s
shareholders.
The Compensation Committee regularly monitors performance against established goals and approves
funding accruals, as well as focus on other aspects of the compensation program, including, among other
things, peer group review and determination, compensation risk review, and monitoring of market and
governance trends impacting compensation.
In carrying out its oversight responsibilities, the Compensation Committee regularly reports to the Board
on the actions it has taken, as well as confers with the Board on compensation matters, as necessary. The
Compensation Committee also makes recommendations for all other compensation-related matters that
require full Board approval.
At least annually, the Compensation Committee reviews the executive compensation program overall,
and establishes base salaries, target annual cash bonus opportunities and equity grants (if any) for the fiscal
year. In setting these elements of compensation, the Compensation Committee reviews the total target
compensation for our executives and also considers developments in compensation practices outside of the
Company. Specifically, the Compensation Committee is provided with competitive positioning data for
similarly situated executives at companies in our peer group, as well as summary consolidated information
about our executives’ total compensation and pay history to use in setting individual compensation elements
and making decisions on total executive compensation levels. Peer data is a helpful reference for the
Compensation Committee to assess the competitiveness and appropriateness of our executive compensation
program within the banking industry and the broader business community. Ultimately, the Compensation
Committee applies its own business judgment and experience to determine the individual compensation
elements, the amount of each compensation element and total target compensation
The Compensation Committee generally targets compensation in relation to the Company’s
Compensation Peer Group (discussed under “Market Positioning and Pay Benchmarking”). We strive to
compete with the prevailing market taking into account the competition in our market for talented executives
and our desire to attract and, more importantly, retain and motivate talented individuals we believe are
necessary to achieve the goals and objectives of our Board of Directors. Depending upon Company and
individual performance, as well as the various other factors discussed in this Compensation Discussion and
Analysis, target and actual total direct compensation of our executives, as well as individual compensation
elements, may be within, below or above the market range for their positions.
The Compensation Committee periodically reviews the compensation levels of the Board. In its review,
the Compensation Committee looks to ensure that the compensation is fair, reasonably competitive and
commensurate to the responsibilities of both the individual directors as well as the Board in the aggregate.
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Additionally, the Committee specifically takes into consideration the directors’ adherence to the Company’s
director Stock Ownership Guidelines when reviewing compensation.
The Compensation Committee is comprised of five independent directors who satisfy The Nasdaq Stock
Market listing requirements and relevant SEC regulations on independence. The Compensation Committee’s
Chair regularly reports to the Board on the Compensation Committee actions and recommendations. To
evaluate and administer the compensation practices of the Chief Executive Officer and other executive officers,
the Compensation Committee meets a minimum of four times a year. The Compensation Committee also
holds special meetings and meets telephonically to discuss extraordinary items, such as the hiring or dismissal
of executive officers. The Compensation Committee meets on a regular basis, and routinely meets in executive
session without management present. During 2020, the committee held six meetings.
Role of the Chief Executive Officer
The Chief Executive Officer is not a member of the Compensation Committee but is invited to attend
meetings as necessary to provide input and recommendations on compensation for the other named executive
officers. The Chief Executive Officer provides the Compensation Committee with his assessment of the
performance of each named executive officer and his perspective on the factors described above in developing
his recommendations for the executive’s compensation, including salary adjustments, incentive bonuses, annual
equity grants and equity grants awarded in conjunction with promotions. Because the Chief Executive Officer
works closely with and supervises our executive team, the Compensation Committee believes that the Chief
Executive Officer provides valuable insight in evaluating their performance. The Chief Executive Officer also
provides the Compensation Committee with additional information regarding the effect, if any, of market
competition and changes in business strategy or priorities. The Compensation Committee takes the Chief
Executive Officer’s general input into consideration when determining and approving executive officer
compensation, including for the named executive officers other than the Chief Executive Officer.
Role of Compensation Consultants
Generally, at least every two years the Compensation Committee retains the services of an independent
executive compensation consultant to assess the competitiveness of our compensation programs, conduct
other research as directed by the Compensation Committee, and support the Compensation Committee in the
design and implementation of executive and Board of Director compensation. In 2019, the Compensation
Committee retained McLagan, an Aon Hemitt Company (“McLagan”) to: (i) review existing compensation
programs; (ii) provide market benchmark information pertaining to both cash and noncash compensation for
executives; (iii) provide recommendations and guidance to the Compensation Committee to support its
oversight over such compensation programs; and (iv) provide other advice and consultation, including
guidance relative to evolving compensation-related regulatory requirements and industry best practices.
McLagan delivered its report in the first quarter of 2019 (“2019 Report”). The information from the 2019
Report was used in making compensation decisions for 2020.
Representatives of the compensation consultant attend meetings of the Compensation Committee as
requested and also communicate with the Compensation Committee outside of meetings. The compensation
consultant reports to the Compensation Committee rather than to management, although representatives of
the firm may meet with members of management, including our Chief Executive Officer for purposes of
gathering information on proposals that management may make to the Compensation Committee. The
compensation consultant met with various executives to collect data and obtain management’s perspective on
the fiscal year 2020 compensation for our executives. The Compensation Committee may replace its
compensation consultant or hire additional advisors at any time. After the Committee’s review of applicable
rules for independence, the Committee determined that there are no known conflicts of interest between
McLagan and its affiliates and the Company and its affiliates. McLagan reports directly to the Committee
and does not provide services to, or on behalf of, any other part of the Company’s business.
Market Positioning and Pay Benchmarking
Many factors are taken into account in determining the actual positioning of each executive officer’s
compensation,
including the executive’s experience, responsibilities, management abilities and job
performance, overall performance of the Company, current market conditions and competitive pay for similar
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positions at comparable companies. In addition, the Compensation Committee reviews the relationship of
various positions between departments, the affordability of desired pay levels and the importance of each
position within the Company. These factors are considered by the Compensation Committee in a subjective
manner without any specific formula or weighting.
McLagan, in consultation with the Compensation Committee, selected a custom peer group of financial
institutions to establish a “Compensation Peer Group” for the 2019 Report. The companies included in the
Compensation Peer Group were selected from publicly traded banks in California, Colorado, Nevada, Oregon,
Utah and Washington based on: (i) compatibility of the bank based on size as measured through total assets
with a median of $3.8 billion as of December 31, 2018; (ii) similarity of their product lines and business focus;
and (iii) comparable performance criteria including, asset growth, profitability, credit quality, capitalization
and total shareholder return. In addition to the Compensation Peer Group, McLagan’s primary data sources
also included its proprietary 2018 Regional & Community Banking Survey database. McLagan aged salary
data to 2019 at annual rate of 3%. National survey data was adjusted to account for the cost of salaries and
wages in San Jose, California relative to the national average.
The Compensation Peer Group component companies used in the evaluation of the Company’s executive
compensation programs in the 2019 Report for executive officers were as follows:
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Bank of Commerce Holdings
Bank of Marin Bancorp
BayCom Corp
National Bank Holdings
Opus Bank*
Pacific Mercantile Bancorp
Central Valley Community Bancorp
Peoples Utah Bancorp
Farmers & Merchants Bancorp
First Foundation Inc.
Hanmi Financial Corp.
Heritage Financial Corp.
Luther Burbank Corp.
* Acquired.
Preferred Bank
RBB Bancorp
Sierra Bancorp
TriCo Bancshares
Westamerica Bancorp
The Compensation Committee does not solely rely on comparative data from the Compensation Peer
Group. Such comparative data provides helpful market information about our peer companies as a reference,
but the Compensation Committee does not target any specific positioning or percentile, nor does it use a
formulaic approach, in determining executive pay levels. All applicable information is reviewed and considered
in aggregate, and the Compensation Committee does not place any particular weighting on any one factor.
Chief Executive Officer Compensation
The Compensation Committee meets with the other independent directors each year in an executive
session, including the Corporate Governance committee, without management present to evaluate the
performance of the Chief Executive Officer. The Chief Executive Officer does not participate in any
deliberations regarding his own compensation. The Compensation Committee annually reviews and approves
goals and objectives relevant to the Chief Executive Officer and evaluates the Chief Executive Officer’s
performance against those objectives. The Compensation Committee typically considers corporate financial
performance, the Company’s achievement of its short and long-term goals versus its strategic objectives and
financial targets. With the assistance of the compensation consultant, the Compensation Committee also
considers the compensation data related to the Compensation Peer Group for base pay, total cash
compensation, and total direct compensation. When Keith A. Wilton assumed the position of Chief Executive
Officer in August 2019, his salary was increased to $500,000. In March 2020, his salary was increased to
$550,000. Mr. Wilton retired from the Company on March 12, 2021.
Base Salary Decisions for the Other Named Executive Officers
We pay base salaries in order to provide executives with a reasonable level of fixed short-term
compensation. Executive base salary levels are typically reviewed at least annually by the Compensation
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Committee. Base salaries are determined on an individual basis. Generally the Compensation Committee
believes that executive base salaries should be competitive with its peer group and prevailing market conditions
for executives in similar positions with similar responsibilities. Base salaries are reviewed annually and adjusted
as necessary to realign them with market levels after taking into account the value of the position in the
marketplace, merit career experience, the contribution and performance of the individual and retention
concerns. Although each of the named executive officers has an employment agreement with the Company,
the initial base salary in each of the agreements may be increased (and has been in the past) in accordance with
the Chief Executive Officer’s evaluation of the executive’s performance and the Compensation Committee’s
evaluation of the Company’s overall compensation programs and policies.
At its March 2020 meeting, the Compensation Committee approved the following salaries for 2020:
Named Executive
2020 Salary
Keith A. Wilton* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$550,000
Michael E. Benito . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$304,880
Margo G. Butsch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$298,700
Robertson Clay Jones . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$324,250
Lawrence D. McGovern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$350,200
* Mr. Wilton retired from the Company on March 12, 2021.
Base salary drives the formula used in the Management Incentive Plan as discussed below under
“Management Incentive Plan.”
Management Incentive Plan
We provide annual performance-based cash incentive awards linked to achievement against certain
corporate performance goals under our Management Incentive Plan (“Incentive Plan”). The Compensation
Committee believes that the annual performance metrics used in the bonus plan contribute to driving
long-term stockholder value, play an important role in influencing executive performance and are an important
component of our compensation program to help attract, motivate and retain our executives.
To establish our executive officers’ individual target cash bonus opportunities, which are expressed as
a percentage of base salary, the Compensation Committee considers competitive pay data, input from its
compensation consultant, and the level, position, objectives and scope of responsibilities of each executive, as
well as considerations of internal parity among similarly situated Company executives.
Payouts generally are not calculated by mathematical interpolation (on a continuous scale), therefore an
incentive level must be reached or exceeded for a cash award.
Named Executive
Keith A. Wilton* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Michael E. Benito . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Margo G. Butsch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Robertson Clay Jones . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lawrence D. McGovern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As a percent of base salary
Threshold
Target Max
10%
10%
10%
10%
10%
60% 100%
40% 60%
40% 60%
40% 60%
45% 65%
* Mr. Wilton retired from the Company on March 12, 2021.
The Compensation Committee reviews and approves the financial metrics for each plan year. The
Compensation Committee identifies from three to six financial metrics which may be revised from year to year
to align them with the Company’s annual strategic plan. The Compensation Committee determines the
weighting of financial metrics each year based upon recommendations from the Chief Executive Officer. For
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2020, the following financial metrics along with the relative weights of each financial metric were established
by the Compensation Committee were approved in March 2020:
Financial Metrics
Pre-Tax Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonperforming Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposit Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weight
20%
15%
20%
15%
15%
15%
The Compensation Committee believes pre-tax income is a valid measurement in assessing how the
Company is performing from a financial standpoint. Pre-tax income is an accepted accounting measures that
drives earnings per share and shareholder returns over the long term. Noninterest income and noninterest
expense are important components of net income that senior management and the Board of Directors sought
to improve upon in 2020. In addition, the Compensation Committee, in consultation with the Chief Executive
Officer, concluded that management should continue its focus on credit quality and loan and deposit growth.
Financial metrics for noninterest income and noninterest expense are financial metrics that drive overall net
income. The Compensation Committee believes that nonperforming assets are an effective measure to monitor
the Company’s progress in improving its credit quality.
The Compensation Committee did not realign the weighting of the mix of the financial metrics in 2020
from 2019. Because the Compensation Committee believed that the Incentive Plan should also balance risk-
taking with performance, the Compensation Committee maintained a risk-based capital element to the
Incentive Plan. If the total risk-based capital ratio was below 10% at year-end 2020, bonus payments would be
reduced to zero. The Incentive Plan is also subject to a claw back policy if financial statements or other
financial metric criteria are found to be materially inaccurate as determined by the Audit Committee.
Performance objectives were generally identified through our annual financial planning and budgeting
process. Senior management developed a financial plan for 2020, and the financial plan was reviewed and
approved by the Board. The Compensation Committee received recommendations from senior management
for financial performance objective ranges. In setting the Threshold, Target and Maximum levels, the
Compensation Committee considered specific circumstances anticipated to be encountered by the Company
during the coming year and the level of improvement from year-to-year required to achieve the performance
level. The Compensation Committee believed that the Threshold, Target and Maximum levels established for
the Incentive Plan in 2020 were sufficiently challenging given the economic climate and the level of growth and
improvement in the various financial metrics that would have to occur to meet the various performance
objectives.
For 2020, performance was assessed relative to performances for the year ended December 31, 2020, as
shown below and compared to actual results:
Financial Metrics (dollars in thousands)
Pre-Tax Income . . . . . . . . . . . . . . . . . . . . . . . . .
Nonperforming Assets . . . . . . . . . . . . . . . . . . . .
Loans Outstanding(1) . . . . . . . . . . . . . . . . . . . . .
Noninterest Income(2) . . . . . . . . . . . . . . . . . . . .
Threshold
(90% of Plan)
$
$
74,490
3,300
$2,720,993
10,623
$
Target
(Plan)
Maximum
(110% of Plan)
$
$
82,767
3,000
$2,864,203
11,804
$
$
$
91,044
2,700
$3,007,413
12,984
$
2020 Actual
$
$
49,068
7,869
$2,619,261
9,645
$
Noninterest Expense(3)
. . . . . . . . . . . . . . . . . . .
$
96,191
$
94,191
$
92,191
$
89,511
Deposits Outstanding(4) . . . . . . . . . . . . . . . . . . .
$3,619,533
$3,810,035
$4,000,537
$3,890,575
(1) Threshold and Maximum at 95% and 105% of plan (includes factored receivables).
(2) Securities gains or losses excluded from calculations.
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(3) 90% and 100% of plan not used. A $2.0 million differential below and over Target was used for Threshold
and Maximum.
(4) Threshold and Maximum at 95% and 105% of plan (excludes brokered deposits, CDARS and State
CDs).
During the first quarter of the following fiscal year-end, the Compensation Committee assesses the
performance of the Company for each financial metric comparing the actual fiscal year-end results to the
pre-determined performance objectives for each financial metric calculated with reference to the pre-
determined weight accorded the financial metric, and an overall percentage amount for the award is calculated.
In addition, the Compensation Committee has discretionary authority to include qualitative subjective
measures which may increase or decrease an award. The Compensation Committee may also use its discretion
in adjusting financial metrics and performance objectives for unexpected economic conditions or changes in
the business of the Company.
Impact of Covid-19. The Covid-19 pandemic has had an ongoing global impact on nearly every aspect
of daily life in the U.S. since early 2020. As infection and death rates continued to accelerate throughout 2020,
many businesses and schools were forced to close or alter their way of business to ensure public safety.
Businesses shifted to work-from-home arrangements for their employees, and some had to juggle new childcare
and home-schooling responsibilities due to shutdowns. Despite government intervention to facilitate financial
assistance and small business loans, as well as the roll-out of a vaccine in mid-December 2020 to prevent
Covid-19, many businesses suffered losses or closures. The pandemic has led to a weakening in gross domestic
product and employment in the United States.
California where the Company primarily operates, implemented significant restrictions on the movement
of its citizens and the operations of business beyond those enacted in many other states, with a resultant
significant impact on economic activity in the state. The pandemic resulted in temporary closures of many
businesses and the institution of social distancing and sheltering in place requirements in California, including
our primary market area. As a result, the Company’s business was significantly impacted in 2020. In addition,
certain other government actions such as loan deferrals, a reduction in the prime rate and the effect on yields
from a decline in Fed funds impacted the securities portfolio and net interest income.
The Covid-19 pandemic adversely affected the Company’s performance and impacted its forecast and
budget for 2020. During 2020, the only Incentive Plan metrics achieved were Noninterest Expense (at
maximum level) and Deposits Outstanding (target level). These results would provide a 15% of salary award
for the named executive officers, other than the Chief Executive Officer and Chief Financial Officer, 16.5% for
the Chief Financial Officer, and 24% for the Chief Executive Officer. Had the Company achieved target for
each metric measure the awards would have been 40% of base salary for the named executive officers other
than the Chief Executive Officer and Chief Financial Officer, 45% for the Chief Financial Officer and 60% for
the Chief Executive Officer.
Committee Review of Incentive Plan Results. Mid-year the Compensation Committee reviewed the
performance target metrics used for the Incentive Plan, and concluded that because the circumstances around
the pandemic were expected to continue to evolve during 2020 the Compensation Committee did not have
confidence that it would be possible to establish appropriate revised metrics for 2020. In its year-end review,
the Compensation Committee analyzed the actual results for 2020 and then considered the use of its discretion
to modify the pro forma award results. The Compensation Committee recognized that 2020 was unlike any
year, and neither management nor the Board could have anticipated or forecasted the impact of Covid-19
when the Incentive Plan metrics were adopted. The Covid-19 pandemic and the uncertainty it created, along
with various governmental shutdowns, rendered most of the metrics used for the Incentive Plan outside the
control of management.
The Compensation Committee discussed qualitative factors in reviewing management’s performance in
2020. The Compensation Committee focused on the number of major tactics that were accomplished by the
management team including developing an operational strategy to deal with the effects of the pandemic, as
follows:
• Completing the integration of Presidio Bank, including conversions systems and employees.
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• Establishing a Covid-19 operating plan and for remote operations, converting branch servers to remote
servers, adopting protocols at all branches, developing “pandemic team” meetings and Chief Executive
Officer updates for all personnel.
• Completing the successful adoption and conversion in the first quarter of 2020 of Accounting
Standards Update (“ASU”) No. 2016-13, “Measurement of Credit Losses on Financial Instruments”,
commonly referred to as “CECL”.
• Remotely assimilating a new executive team from Presidio Bank, new head of IT and a new marketing
director.
• Pivoting the Bank line organization for a greater focus on customer relationships and credit
management.
• Instituting policies and procedures to implement the SBA Paycheck Protection Program (“PPP”) and
completion of the first phase successfully for Bank clients, including processing the loan forgiveness
feature of the PPP program.
• Processing $189 million of loan deferments as encouraged by government authorities and regulators
and then working and reducing the deferments to $2.6 million by year-end.
• Completing the build out of the new Company principal executive offices under pandemic construction
restrictions, and then completing the move of the entire corporate headquarters offices to the new
facilities as well as relocating and moving Bay View Funding (a subsidiary of the Bank) into a new
building.
• Consolidating the Bank’s San Mateo branch and administrative offices to new build out premises.
• Maintaining noninterest expense cost controls.
• Reducing the costs of deposits.
The Compensation Committee used its discretionary authority to modify target metrics for extra ordinary
events that affect the Company that were not incorporated into the development of the 2020 Incentive Plan
and to use discretion for awards for qualitative achievements during 2020. The Committee concluded that in
view of the historic pandemic and its material impact on the economy, the Bank’s customers, employees and
the response by management and its performance in 2020, and comparison of performance statistics with peer
banks that cash awards for 2020 should be paid out at the “target” level based on the base salary paid in 2020
for each participant in the Plan. Therefore, the Committee approved the following incentive cash awards.
Named Executive
Bonus Award
Keith A. Wilton* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$322,500
Michael E. Benito . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$121,064
Margo G. Butsch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Robertson Clay Jones . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$118,610
$128,835
Lawrence D. McGovern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$156,443
* Mr. Wilton retired from the Company on March 12, 2021.
Equity Based Compensation
The Compensation Committee periodically reviews our equity compensation program from a market
perspective as well as in the context of our overall compensation philosophy. The Compensation Committee
also considers the appropriateness of various equity vehicles, such as stock options, and restricted stock as
well as overall program costs (which include both stockholder dilution and compensation expense), when
evaluating the long-term incentive mix.
The Compensation Committee believes that equity based compensation should be a significant
component of total executive compensation to align executive compensation with the long-term performance
of the Company and to encourage executives to make value enhancing decisions for the benefit of our
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shareholders. Each of the named executive officers is eligible to receive equity compensation. The
Compensation Committee is responsible for determining equity grants to all staff members, including named
executive officers. The Compensation Committee may also grant equity-based awards to award performance,
coincide with promotions and hirings, and for recruiting and retention purposes.
In considering whether to grant an equity award and the size of the grants to be awarded, the
Compensation Committee considers, among other things, with respect to each executive officer, (i) the salary
level, (ii) the contributions expected toward the growth and profitability of the Company, (iii) extraordinary
contribution to the Company’s financial performance, (iv) prior award levels, and (v) peer survey data
indicating grants made to similarly situated officers at comparable financial institutions.
The Company’s Amended and Restated 2004 Equity Plan (the “2004 Plan”) provided for the grant of
non-qualified and incentive stock options, and restricted stock. In 2013, the Board of Directors and
shareholders approved the 2013 Equity Incentive Plan (the “2013 Plan”) and the 2004 Plan was terminated.
Stock options and restricted stock awards issued under the 2004 Plan remain outstanding. The Compensation
Committee approved all awards under the 2004 Plan and continues to do so under the 2013 Plan. The
Compensation Committee is the administrator of the 2013 Plan.
We may grant stock options to our executives to align their interests with those of our shareholders and
as an incentive to remain with us. The Compensation Committee believes that options to purchase shares of
our common stock, with an exercise price equal to the market price of our common stock on the date of grant,
are inherently performance-based and are a very effective tool to motivate our executives to build shareholder
value and reinforce our position as a growth company. With stock options, our executives can realize value
only to the extent that the market price of our common stock increases during the period that the option is
outstanding, which provides a strong incentive to our executives to increase shareholder value. Further, because
these options typically vest over a four-year period, they incentivize our executives to build value that can be
sustained over time.
The Compensation Committee approves primarily nonstatutory stock options instead of incentive stock
options because of the tax advantages available to the Company for nonstatutory options and because
employees generally do not take full advantage of the tax benefits available to them from incentive stock
options.
We also may grant restricted stock to our executives. Restricted stock aligns the interests of our executives
with those of our shareholders and helps manage the dilutive effect of our equity compensation program. Our
awards of restricted stock are subject to time-based vesting. Because restricted stock has value to the recipient
even in the absence of stock price appreciation, awards of restricted stock help us retain and incentivize
executives during periods of market volatility, and also result in our granting fewer shares of common stock
than through stock options of equivalent grant date fair value. Our awards of restricted stock typically vest
over a three to four-year period for executives, and we believe that, like stock options, they help incentivize our
executives to build value that can be sustained over time.
The Compensation Committee has established a stock option and restricted stock policy which recognizes
that stock options and restricted stock have an impact on the profits of the Company under current accounting
rules and also have a dilutive effect on the Company’s shareholders. Accordingly, they are recognized as a
scarce resource and option grants and awards of restricted stock are given the same consideration as any other
form of compensation. The Compensation Committee has established ranges for the amount of options that
may be granted that depend on the individual’s position with the Company and whether the option is awarded
as an incentive to attract an individual, to retain an individual or to reward performance.
We do not backdate options or grant options or award restricted stock retroactively. In addition, we do
not coordinate grants of options or awards of restricted stock so that they are made before announcement of
favorable information, or after announcement of unfavorable information. The Company’s options and
restricted stock are granted at fair market value on a fixed date or event (the first day of service for new hires
and the date of Compensation Committee approval for existing employees), with all required approvals
obtained in advance of or on the actual grant date. All grants to executive officers require the approval of the
Compensation Committee and the Board of Directors. Fair market value has been consistently determined as
the closing price on The Nasdaq Global Select Market on the grant date. In order to ensure that an option
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exercise price or restricted stock date of grant valuation fairly reflects all material information, without regard
to whether the information seems positive or negative, every grant of options and restricted stock is contingent
upon an assurance by management and legal counsel that the Company is not in possession of material
undisclosed information. If the Company is in a “black-out” period for trading under its trading policy or
otherwise in possession of inside information, the date of grant is suspended until the second business day
after public dissemination of the information. We do not grant stock options with a so-called “reload” feature,
nor do we loan funds to employees to enable them to exercise stock options. We have never re-priced stock
options.
The Company’s general practice has been to grant options and restricted stock at the Compensation
Committee and Board of Directors’ regular meeting held during the first quarter for the named executive
officers as well as current staff, and at any other Compensation Committee meeting (whether a regular meeting
or otherwise) held on the same date as a regularly scheduled Board of Directors meeting (which are held
monthly) as required to attract new staff, retain staff or recognize key specific achievements. Commencing in
2021, restricted stock grants to directors will be made on the date of the annual meeting.
For 2020, the Compensation Committee determined to grant restricted stock awards to executives based
on a percentage of the executive’s salary. The percentage applied was the same percentage used as “target” in
the Incentive Plan.
For 2020, the Compensation Committee approved the following restricted stock awards:
Named Executive
Restricted
Shares
Dollar Value on
Date of Grant
Percent of
Salary
Keith A. Wilton* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Michael E. Benito . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Margo G. Butsch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Robertson Clay Jones** . . . . . . . . . . . . . . . . . . . . . . . . . .
37,037
13,687
13,409
7,278
Lawrence D. McGovern . . . . . . . . . . . . . . . . . . . . . . . . . .
17,686
$330,000
$121,951
$119,474
$ 64,847
$157,582
60%
40%
40%
20%
45%
* Mr. Wilton retired from the Company on March 12, 2021.
** Mr. Jones joined the Company after the acquisition of Presidio Bank and was therefore allocated a
pro rata portion of his “target” percentage.
Retirement Plans
Our Amended and Restated Supplemental Retirement Plan (“SERP”) is an element of our compensation
program that was offered to certain executive officers. These types of plans had been commonly offered in the
community bank industry for some time. The SERP is a nonqualified defined benefit plan and is unsecured
and unfunded and there are no plan assets. When the Company offered key employees participation in the
SERP, including some but not all of the named executive officers, the supplemental retirement benefit awarded
was based on the individual’s position within the Company and a vesting schedule determined by the
desirability of incenting the retention element of the program. The participant receives his or her vested benefit
at retirement. A participant whose employment terminates after the normal retirement date will receive 100%
of his or her supplemental retirement benefit, payable monthly, commencing on the first of the month
following retirement (unless selected otherwise by the participant and except executive officers who will receive
their benefit six months following retirement) and continuing until the death of the participant (unless the
joint survivor option is selected). For information on the plan, see the “Summary Compensation” table and
the “Supplemental Retirement Plan for Executive Officers.” The Company has reduced its use of the SERP as
a program to attract and retain executives and key employees. It has been more than eight years since the
Company has offered SERP benefits to executives and key employees.
Termination of Employment and Change in Control Provisions
We recognize that it is possible that we may be involved in a transaction involving a change of control of
the Company, and that this possibility could result in the departure or distraction of our executives to the
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detriment of our business. The Compensation Committee and the Board believe that the prospect of such a
change of control transaction would likely result in our executives facing uncertainties about their future
employment and distractions resulting from concern over how the potential transaction might affect them.
To allow our executives to focus solely on making decisions that are in the best interests of our
shareholders in the event of a possible, threatened, or pending change of control transaction, and to encourage
them to remain with us despite the possibility that a change of control might affect them adversely, each of
our named executives and chief executive officer have change of control provisions in their respective
employment agreements that provide them with certain payments and benefits in the event of the termination
of their employment within 120 days prior to, or the 24 month period following, a change of control of the
Company (referred to as the “change of control period”). The Compensation Committee and the Board
believe that these “double-trigger” agreements serve as an important retention tool to ensure that personal
uncertainties do not dilute our executives’ complete focus on building shareholder value.
The Compensation Committee considers the use of change of control provisions and severance provisions
on a case by case basis depending on the individual’s position with the Company and the need to attract
and/or retain the individuals. The employment agreements for Mr. Benito and Mr. McGovern contain excise
tax gross-up provisions for purposes of Section 280G of the Internal Revenue Code of 1986, as amended. It
has been the policy of the Company since those agreements were entered into to exclude such provisions from
its executive contracts.
The severance benefits provided for our named executive officers were determined by the Compensation
Committee based on its judgment of prevailing market practices at the time each agreement was entered into.
At present, we have employment agreements with the Chief Executive Officer and the other named executive
officers, which detail their eligibility for payments under various termination scenarios. In addition, certain
equity grants made to the named executive officers provide for vesting of stock options and restricted stock
upon a change of control. We have disclosed the severance and/or change in control payouts that would be
payable to each named executive officer if the triggering event occurred on December 31, 2020, in the “Change
in Control Arrangements and Termination of Employment” section in this proxy statement.
Prohibition on Hedging
Our stock trading guidelines prohibit executives and directors from speculating in our stock, which
includes, but is not limited to, short selling (profiting if the market price of the securities decreases), buying or
selling publicly traded options, including writing covered calls, and hedging or any other type of derivative
arrangement that has a similar economic effect.
Prohibition on Pledging
Directors and executive officers are prohibited from purchasing Company securities on margin,
borrowing against Company securities held in a margin account, or pledging Company securities as collateral
for a loan.
Tax Considerations
Section 162(m) of the Code generally limits the allowable deduction of publicly held corporations for
compensation paid or accrued with respect to a “covered employee” to no more than $1 million per taxable
year. A “covered employee” includes (i) an employee who is the corporation’s principal executive officer or
principal financial officer at any time during the taxable year (or who acts in such a capacity at any time during
the year), (ii) any other employee whose total compensation must be reported under the Securities Act of 1933
by reason of such employee being among the three highest compensated officers for the year (other than those
listed in clause (1) above), and (iii) an employee was who a “covered employee” for any taxable year beginning
after December 31, 2016.
In light of Section 162(m) of the Code, it is the policy of the Compensation Committee to examine our
executive compensation program to maximize the tax deductibility of compensation paid to our executive
officers when and if the $1 million threshold becomes an issue. At the same time, the Compensation Committee
also believes that the overall performance of our executives cannot in all cases be reduced to a fixed formula
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and that the prudent use of discretion in determining pay levels is in our best interests and those of our
shareholders. Under some circumstances, the Compensation Committee’s use of discretion in determining
appropriate amounts of compensation may be essential. In those situations where discretion is or can be used
by the Compensation Committee, compensation may not be fully deductible.
Federal tax legislation enacted in December 2017 eliminated the performance-based compensation
exemption to the $1 million limitation in Section 162(m) of the Code prospectively and made other changes to
Section 162(m), but with a transition rule that preserves the performance-based compensation exemption for
certain arrangements and awards provided pursuant to a written binding contract that was in effect on
November 2, 2017 and not materially modified on or after such date. We intend to continue to administer
arrangements and awards subject to this transition rule with a view toward preserving their eligibility for the
performance-based compensation exemption to the extent practicable and consistent with the non-tax
compensation program objectives noted above.
Section 409A of the Code (“Section 409A”), among other things, limits flexibility with respect to the time
and form of payment of deferred compensation. If a payment or award is subject to Section 409A, but does
not meet the requirements that exempt such amounts from taxation under such section, the recipient is subject
to: (i) income tax at the time the payment or award is not subject to a substantial risk of forfeiture; (ii) an
additional 20% tax at that time; and (iii) an additional tax equal to the amount of interest (at the underpayment
rate under the Code plus one percentage point) on the underpayment that would have occurred had the award
been includable in the recipient’s income when first deferred or, if later, when not subject to a substantial risk
of forfeiture. We have made modifications to our plans and arrangements such that payments and awards
under those arrangements either are intended to not constitute “deferred compensation” for Section 409A
purposes (and will thereby be exempt from Section 409A’s requirements) or, if they constitute “deferred
compensation,” are intended to comply with the Section 409A statutory provisions and final regulations.
Accounting Considerations
Accounting considerations play an important role in the design of our executive compensation program.
Accounting rules require us to expense the fair value of restricted stock awards and the estimated fair value of
our stock option grants which reduces the amount of our reported profits. The Compensation Committee
considers the amount of this expense in determining the amount of equity compensation awards.
Compensation Committee Interlocks and Insider Participation
No member of the Compensation Committee serves or has served as an employee of the Company or its
subsidiaries, and there are no common participants between the compensation committee of any other entity
and the Company.
Compensation Committee Report
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis
required by Item 401(b) of Regulation S-K with management and, based on such review and discussions, the
Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be
included in this proxy statement.
Compensation Committee of the Board
Marin Park Sutton, Chair
Julianne M. Biagini-Komas
Frank G. Bisceglia
Robert T. Moles
Ranson W. Webster
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Executive Compensation Tables
The following table provides for the periods shown, information as to compensation for services of the
Company’s principal executive officer, principal financial officer, and the three other executive officers of the
Company who had the highest total compensation (as defined in accordance with applicable regulations) with
respect to the year ended 2020 (collectively referred to as the “named executive officers”):
Summary Compensation Table
Name and
Principal Position
(a)
Year
(b)
Salary
($)
(c)(1)
Keith A. Wilton* . . . . . . . . . . . . . . . . . . . . . . . . . . 2020 $537,500 $
2019 $429,839 $
2018 $358,440 $
President and Chief Executive
Officer of Heritage Commerce Corp and
President of Heritage Bank of Commerce
Bonus
($)
(d)
Stock
Awards
($)
(e)(2)
Option
Awards
($)
(f)(2)
— $330,000 $ —
— $243,200 $ —
— $201,600 $ —
Michael E. Benito . . . . . . . . . . . . . . . . . . . . . . . . . 2020 $302,660 $
2019 $292,517 $
2018 $280,013 $
Executive Vice President/Business Banking
Manager of Heritage Bank of Commerce
Margo G. Butsch . . . . . . . . . . . . . . . . . . . . . . . . . . 2020 $296,525 $
2019 $281,250 $
2018 $250,000 $
Executive Vice President & Chief Credit Officer
of Heritage Bank of Commerce
— $121,951 $ —
— $145,920 $ —
— $100,800 $ —
— $119,474 $ —
— $145,920 $ —
— $117,600 $ —
Robertson Clay Jones (6)
. . . . . . . . . . . . . . . . . . . . 2020 $322,088
Executive Vice President and President of
Community Business Bank Group of
Heritage Bank of Commerce
2019 $ 68,015 $142,500
$ 64,847 $ —
— $ —
Non-Equity
Incentive
Plan
Compensation
($)
(g)(3)
$322,500
$151,733
$ 89,610
$121,064
$ 90,172
$ 70,003
$118,610
$ 86,961
$ 62,500
$128,835
—
$
Lawrence D. McGovern . . . . . . . . . . . . . . . . . . . . . 2020 $347,650 $
2019 $332,109 $
2018 $305,471 $
Executive Vice President & Chief Financial Officer
of Heritage Commerce Corp and Heritage Bank
of Commerce
— $157,582 $ —
— $182,400 $ —
— $151,200 $ —
$156,443
$101,456
$ 76,368
Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
($)
(h)(4)
$
$
$
—
—
—
$343,000
$374,600
$ 24,000
$
$
$
—
—
—
$ 44,900
$ 38,315
$375,900
$352,100
—
$
All Other
Compensation
($)
(i)(5)
$47,428
$30,834
$32,229
$31,130
$30,220
$28,053
$26,199
$19,332
$14,431
$13,534
$ 4,585
Total
($)
(j)
$1,237,428
$ 855,606
$ 681,879
$ 919,805
$ 933,429
$ 502,869
$ 560,808
$ 533,463
$ 444,531
$ 574,204
$ 253,415
$50,068
$32,820
$30,030
$1,087,643
$1,000,885
$ 563,069
* Mr. Wilton retired from the Company on March 12, 2021.
(1) The amounts in column (c) include amounts voluntarily deferred by each of the named executive officers
into their 401(k) plan accounts. For 2020, each executive officer deferred $26,000.
(2) The amounts shown in columns (e) and (f) reflect the applicable full grant date fair values for stock
options and stock awards in accordance with ASC 718 (excluding the effect of forfeitures), and are
reported for the fiscal year during which the stock options and stock awards were issued. The assumptions
used in calculating the valuation for stock options and stock awards may be found in Note 13 to the
Company’s consolidated financial statements for the year ended December 31, 2020, included in the
Company’s Annual Report on Form 10-K, filed with the SEC on March 5, 2021.
(3) The amounts shown in column (g) for 2020 reflect payments made under the terms of the Management
Incentive Plan for 2020 performance and paid in the first quarter of 2021.
(4) The amounts shown in column (h) for 2020 represent only the aggregate change in the actuarial present
value of the accumulated benefit under the Company’s Supplemental Executive Retirement Plan from
December 31, 2019 to December 31, 2020. The amounts in column (h) were determined using interest
rate and mortality rate assumptions consistent with those used in the Company’s consolidated financial
statements and include amounts which the named executive officer may not currently be entitled to receive
because such amounts are not vested. Assumptions used in the calculation of these amounts are included
in Note 14 to the Company’s consolidated financial statements for the year ended December 31, 2020,
included in the Company’s Annual Report on Form 10-K, filed with the SEC on March 5, 2021.
Mr. Jones has a Supplemental Executive Retirement Agreement, dated November 28, 2017 (amended
November 9, 2018) that was entered into with Presidio Bank. The agreement was assumed by the
Company when the Company acquired Presidio Bank. Under the agreement Mr. Jones is entitled to a
present value accumulated benefit of $106,100 as of December 31, 2020. The amount shown in column
(h) for 2019 and 2020 represent only the aggregate change in the actuarial present value of the
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accumulated benefit from December 31, 2018 to December 31, 2019 and from December 31, 2019 to
December 31, 2020. He is fully vested.
(5) The amounts shown in column (i) for 2020 include the following for each named executive:
(6) Mr. Jones joined the Company on October 12, 2019. His bonus in 2019 in column (d) represents an
amount accrued by Presidio Bank prior to the acquisition of Presidio Bank or the Company, pursuant to
a Presidio Bank bonus plan.
Named Executive
Economic
Value of Death
Benefit of Life
Insurance for
Beneficiaries(1)
401(k) Plan
Company
Matching
Contributions
Other
Insurance
Benefit Vacation
Auto
Compensation
Cash
Dividend on
Unvested
Restricted
Stock Award
Total
Keith A. Wilton* . . . . . . . . . . . . .
Michael E. Benito . . . . . . . . . . . . .
Margo G. Butsch . . . . . . . . . . . . .
Robertson Clay Jones . . . . . . . . . . .
Lawrence D. McGovern . . . . . . . . . .
$ —
$2,654
$ —
$ 454
$2,410
$3,000
$3,000
$3,000
$3,000
$3,000
$3,564
$ —
$12,000
$28,864
$47,428
$3,564
$ —
$ 8,400
$13,512
$31,130
$2,322
$ —
$ 8,400
$12,477
$26,199
$1,242
$ —
$ 6,000
$ 2,838
$13,534
$7,430
$13,469
$ 6,000
$17,759
$50,068
* Mr. Wilton retired from the Company on March 12, 2021.
(1) The economic value of the death benefit amounts shown above reflects the annual income imputed
to each executive in connection with Company owned split dollar life insurance policies for which
the Company has fully paid the applicable premiums. These policies are discussed under
“Supplemental Retirement Plan for Executive Officers.”
CEO Pay Ratio
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and SEC
rules require us to disclose the pay ratio of our CEO to our median employee. The pay ratio disclosure below
is a reasonable estimate calculated in a manner consistent with SEC rules and guidance.
We identified the median employee for 2020 by examining the 2020 total W-2 compensation from our
payroll and employment records, including 401(k) deferrals and 401(k) matching of up to $3,000 per employee,
for all individuals, excluding our CEO, who were employed by us on December 31, 2020. We included all
employees, whether employed on a full time, part time, temporary or seasonal basis as of that payroll date. We
did not make any assumptions, adjustments or estimates with respect to such total W-2 reported compensation
except for the 401(k) matching as described above. We did not annualize the compensation for any full or part
time employees that were not employed by us for all of 2020. We believe the use of total W-2 compensation,
including 401(k) deferrals and 401(k) matching of up to $3,000 per employee, for all employees is a consistently
applied compensation measure.
After identifying the median employee based upon the methodology described above, we calculated
annual total compensation for such employee using the same methodology we used for our CEO and other
named executive officers as set forth in the 2020 Summary Compensation Table in this proxy statement. The
annual total compensation in 2020 for our median employee using this methodology was $101,217. The annual
total compensation in 2020 for our CEO using this methodology is shown in the Summary Compensation
Table and was $1,237,428. The ratio of the annual total compensation of our CEO to the annual total
compensation of our median employee in 2020 was 12.23 to 1.
This pay ratio is a reasonable estimate calculated in a manner consistent with SEC rules based on our
payroll and employment records and the methodology described above. Because the SEC rules identifying the
median compensated employee and calculating the pay ratio based on the employee’s annual total
compensation allow companies to adopt a variety of methodologies, to apply certain exclusions, and to make
reasonable estimates and assumptions that reflect their compensation practices, the pay ratio reported by
other companies may not be comparable to the pay ratio reported above, as other companies may have
different employment and compensation practices and may utilize different methodologies, exclusions,
estimates and assumptions in calculating their own pay ratios.
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Executive Contracts
Walter T. Kaczmarek—On April 5, 2021, the Company and Heritage Bank of Commerce entered into a
new employment agreement with Walter T. Kaczmarek who was appointed by the board of Directors as
President and Chief Executive Officer of Heritage Commerce Corp and Heritage Bank of Commerce. The
employment agreement is for one year and is automatically renewed for one year terms. Under the agreement,
Mr. Kaczmarek receives an annual salary of $721,000 with annual increases, if any, as determined by the
Board of Directors’ annual review of executive salaries. He received a grant of $540,000 of restricted common
stock. He is eligible to participate in the Heritage Commerce Corp Management Incentive Plan.
Mr. Kaczmarek may participate in the Company’s 401(k) plan, under which he may receive matching
contributions up to $3,000. The Company provides Mr. Kaczmarek, at no cost to him, group life, health,
accident and disability insurance coverage for himself and his dependents. Mr. Kaczmarek is provided with
life insurance coverage in the amount of $700,000. The Company will reimbursed Mr. Kaczmarek for up to
$1,200 for tax consultation and tax return preparation. He is also reimbursed for expenses that exceed
insurance coverage for an annual physical examination, certain long-term care policy expenses, monthly dues
for one country club membership and one business club membership. He receives an automobile allowance in
the amount of $1,000 per month, together with reimbursements for gasoline and maintenance expenditures.
Under his employment agreement, Mr. Kaczmarek is entitled to certain severance benefits on termination
of his employment, including a change in control. See “Change of Control Arrangements and Termination of
Employment.”
Keith A. Wilton—On August 8, 2019, the Company and Heritage Bank of Commerce entered into an
employment agreement with Keith A. Wilton. The employment agreement was for one year and was
automatically renewed each year. Under the agreement, Mr. Wilton received an annual salary of $550,000
(last increased in March 2020) with annual increases, if any, as determined by the Board of Directors’ annual
review of executive salaries. In addition to his salary, he was eligible to participate in the Heritage Commerce
Corp Management Incentive Plan. Mr. Wilton participated in the Company’s 401(k) plan, under which he
received matching contributions up to $3,000. The Company provided Mr. Wilton, at no cost to him, group
life, health, accident and disability insurance coverage for himself and his dependents. Mr. Wilton was provided
with life insurance coverage in the amount of $700,000. He was provided with long term care insurance, with
a lifetime benefit of up to $72,000. The Company reimbursed Mr. Wilton for up to $1,200 for tax consultation
and tax return preparation. He was also reimbursed for expenses that exceed insurance coverage for an annual
physical examination, monthly dues for one country club membership and one business club membership. He
received an automobile allowance in the amount of $1,000 per month, together with reimbursements for
gasoline and maintenance expenditures.
Under his employment agreement, Mr. Wilton was entitled to certain severance benefits on termination
of his employment, including a change of control. See “Change of Control Arrangements and Termination of
Employment.”
Mr. Wilton retired from the Company on March 12, 2021. The Company and Mr. Wilton entered into a
separation agreement dated March 12, 2021. Pursuant to the agreement, Mr. Wilton received a severance
payment of $1,475,895, acceleration of vesting on 25,012 shares of restricted common stock and three years
of monthly COBRA payments. 34,358 shares of restricted common stock were forfeited.
Michael E. Benito—On February 1, 2012, the Company entered into an employment agreement with
Michael E. Benito when he was promoted to Executive Vice President/Business Banking Manager. The
employment contract is for one year and is automatically renewed for one year terms. Under the Agreement,
Mr. Benito receives an annual salary of $320,124 with annual increases, if any (last increased in March 2021),
as determined by the Company’s Chief Executive Officer and Board of Directors’ Compensation Committee
annual review of executive salaries. In addition to his salary, he is eligible to participate in the Management
Incentive Plan. Mr. Benito participates in the Company’s 401(k) plan, under which he may receive matching
contributions up to $3,000. Mr. Benito also participates in the Company’s Employee Stock Ownership Plan.
The Company provides to Mr. Benito, at no cost to him, group life, health, accident and disability insurance
coverage for himself and his dependents. Mr. Benito receives an automobile allowance in the amount of
$700 per month, together with reimbursements for gasoline expenditures. Mr. Benito is provided with life
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insurance coverage in the amount of two times his salary not to exceed $700,000. He is also provided with long
term care insurance, with a lifetime benefit of up to $72,000.
Under his employment agreement, Mr. Benito is entitled to certain severance benefits on termination of
his employment, including a change of control. See “Change of Control Arrangements and Termination of
Employment.”
Margo G. Butsch—On July 8, 2017, the Company entered into an employment agreement with
Margo G. Butsch when she was promoted by the Company to Executive Vice President and Chief Credit
Officer of Heritage Bank of Commerce. The employment contract is for one year and is automatically renewed
for one year terms. Under the agreement, Ms. Butsch receives an annual salary of $313,635 with annual
increases, if any (last increased in March 2021), as determined by the Company’s Chief Executive Officer and
Board of Directors’ Compensation Committee annual review of executive salaries. In addition to her salary,
she is eligible to participate in the Management Incentive Plan. Ms. Butsch participates in the Company’s
401(k) plan, under which she could receive matching contributions up to $3,000. Ms. Butsch also participates
in the Company’s Employee Stock Ownership Plan. The Company provides to Ms. Butsch, at no cost to her,
group life, health, accident and disability insurance coverage for herself and her dependents. Ms. Butsch also
receives an automobile allowance in the amount of $700 per month. Ms. Butsch is provided with life insurance
coverage in the amount of two times her salary not to exceed $700,000. She is also provided with long term
care insurance, with a lifetime benefit of up to $72,000.
Under her employment agreement, Ms. Butsch is entitled to certain severance benefits on termination of
her employment, including a change of control. See “Change of Control Arrangements and Termination of
Employment.”
Robertson Clay Jones—On October 11, 2019, the Company entered into an employment agreement with
Robertson Clay Jones. The employment agreement is for one year and is automatically renewed for one year
terms. Under the Agreement, Mr. Jones receives an annual salary of $360,140 (last increased in March 2021)
with annual increases, if any, as determined by the Company’s Chief Executive Officer and Board of Directors’
Compensation Committee annual review of executive salaries. In addition to his salary, he is eligible to
participate in the Management Incentive Plan. Mr. Jones participates in the Company’s 401(k) plan, under
which he may receive matching contributions up to $3,000. The Company provides to Mr. Jones, at no cost to
him, group life, health, accident and disability insurance coverage for himself and his dependents. Mr. Jones
receives an automobile allowance in the amount of $500 per month. Mr. Jones is provided with life insurance
coverage in the amount of two times his salary not to exceed $700,000. He is also provided with long term care
insurance, with a lifetime benefit of up to $72,000.
Under his employment agreement, Mr. Jones is entitled to certain severance benefits on termination of
his employment, including a change of control. See “Change of Control Arrangements and Termination of
Employment.”
Lawrence D. McGovern—On July 21, 2011, the Company entered into an Employment Agreement with
Lawrence D. McGovern. The employment contract is for one year and is automatically renewed for one year
terms. Under the agreement, Mr. McGovern receives an annual salary of $367,710 with annual increases, if
any (last increased in March 2021), as determined by the Company’s Chief Executive Officer and Board of
Directors’ Compensation Committee annual review of executive salaries. In addition to his salary, he is eligible
to participate in the Management Incentive Plan. Mr. McGovern participates in the Company’s 401(k) plan,
under which he may receive matching contributions up to $3,000. He also participates in the Company’s
Employee Stock Ownership Plan. The Company provides to Mr. McGovern, at no cost to him, group life,
health, accident and disability insurance coverage for himself and his dependents. Mr. McGovern receives an
automobile allowance in the amount of $500 per month, together with reimbursements for gasoline
expenditures. Mr. McGovern is provided with life insurance coverage in the amount of two times his salary
but not to exceed $700,000. He is also provided with long term care insurance, with a lifetime benefit of up to
$72,000.
Under his employment agreement, Mr. McGovern is entitled to certain severance benefits on termination
of his employment, including a change of control. See “Change of Control Arrangements and Termination of
Employment.”
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Plan Based Awards
Equity Based Plans.
In 2004, the Board of Directors adopted the Heritage Commerce Corp 2004 Stock
Option Plan (the “2004 Plan”), which was approved by the Company’s shareholders at the 2004 Annual
Meeting. The 2004 Plan authorized the Company to grant stock options to officers, employees and directors
of the Company and its affiliates. In 2009, the 2004 Plan was amended and restated as the 2004 Equity Plan to
authorize the issuance of restricted stock in addition to stock options. The 2004 Equity Plan was approved by
the Company’s shareholders at the 2009 Annual Meeting.
In 2013, the Board of Directors approved the 2013 Equity Incentive Plan (“2013 Equity Plan”) to replace
the 2004 Equity Plan. The 2013 Equity Plan was approved by the Company’s shareholders at the 2013 Annual
Meeting. The purpose of the Equity Plan is to promote the long term success of the Company and the creation
of shareholder value. The Board of Directors believes that the availability of stock awards is a key factor in the
ability of the Company to attract and retain qualified individuals to serve as directors, officers and employees.
Under the 2013 Equity Plan incentives are provided through the grant of stock options and restricted stock
awards. At the 2020 Annual Meeting, the shareholders approved an amendment to the 2013 Equity Plan to
increase the number of share authorized under the 2013 Equity Plan from 3,000,000 to 5,000,000.
In connection with its acquisition of Presidio Bank in October 2019, the Company assumed the Presidio
Bank Amended and Restated 2006 Stock Option Plan and the Presidio Bank 2016 Equity Incentive Plan
(collectively the “Presidio Equity Plans”) and the options issued and outstanding at the time of the acquisition.
The issued and outstanding options were exchange for options to acquire an aggregate of 1,176,757 shares of
the Company’s common stock at an adjusted weighted average exercise price of $5.05.
Management Incentive Plan. The Company maintains a Management Incentive Plan adopted by the
Board of Directors in 2005. Executive officers are eligible for target bonuses which are expressed as
a percentage of their respective base salaries which increase as the level of performance of established goals
increases. The bonuses are tied directly to the satisfaction of overall Company performance for the year. See
“Compensation Discussion and Analysis” for information about the Management Incentive Plan.
The following table provides information on the potential performance based awards available if defined
performance objectives were achieved in 2020 for each of the Company’s named executive officers under the
Company’s Management Incentive Plan, and stock options or other stock awards granted to the named
executive officers for the year ended December 31, 2020:
Grants of Plan-Based Awards
Name
(a)
Keith A. Wilton* . . . . . . 4/28/20
Lawrence D. McGovern . . 4/28/20
Michael E. Benito . . . . . . 4/28/20
Margo G. Butsch . . . . . . 4/28/20
Robertson Clay Jones
. . . 4/28/20
Estimated Future Payouts
Under Non-Equity
Incentive Plan Awards(1)
Target
($)
(d)
—
—
—
Grant
Date
(b)
Threshold
($)
(c)
Maximum
($)
(e)
Threshold
(#)
(f)
— —
1/23/20 $55,000 $330,000 $550,000 —
— —
1/23/20 $35,020 $157,590 $227,630 —
— —
1/23/20 $30,488 $121,952 $182,928 —
— —
1/23/20 $29,870 $119,480 $179,220 —
— —
1/23/20 $32,425 $129,700 $194,550 —
—
—
—
—
—
—
—
Estimated Future Payouts
Under Equity
Incentive Plan Awards
Target
(#)
(g)
—
—
—
—
—
—
—
—
—
—
Maximum
(#)
(h)
—
—
—
—
—
—
—
—
—
—
All Other
Stock
Awards:
Number of
Shares of
Stock
or Units
(#)
(i)(2)
37,037
—
17,686
—
13,687
—
13,409
—
7,278
—
All Other
Option
Awards:
Number of
Securities
Underlying
Options
(#)
(j)
—
—
—
—
—
—
—
—
—
—
Grant Date
Fair
Value
of Stock
And
Options
Awards
(l)(3)
Exercise
or Base
Price of
Option
Awards
($/Sh)
(k)
— $330,000
— $
—
— $157,582
— $
—
— $121,951
— $
—
— $119,474
— $
—
— $ 64,847
—
— $
* Mr. Wilton retired from the Company on March 12, 2021.
(1) These potential performance based awards were established under the Management Incentive Plan if the
indicated level of performance was achieved in 2020 as described further in the “Compensation and
Discussion Analysis” and in the discussion under “Plan Based Awards—Management Incentive Plan.”
36
They do not represent the actual payments made to the named executive officers. The payments made for
actual performance in 2020 are reflected in column (g) in the Summary Compensation Table.
(2) This column reflects restricted stock award granted in 2020 pursuant to the 2013 Equity Incentive Plan.
(3) The amounts shown in column (l) reflect the applicable full grant date fair values for restricted stock
award in accordance with ASC 718 (excluding the effect of forfeitures), and are reported for the fiscal
year during which the restricted stock awards were issued. The assumptions used in calculating the
valuation for stock and options awards may be found in Note 13 to the Company’s consolidated financial
statements for the year ended December 31, 2020, included in the Company’s Annual Report on
Form 10-K, filed with the SEC on March 5, 2021.
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Equity Compensation Plan Information
The following table shows the number and weighted average exercise price of securities to be issued upon
exercise of outstanding options, warrants and rights, and the number of securities remaining available for
future issuance under equity compensation plans at December 31, 2020:
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(a)
Weighted average
exercise price of
outstanding options,
warrants and rights
(b)
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column
(a))(c)
Equity compensation plans approved by security
holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,546,821(1)
$ 9.30
2,409,062(2)
Equity compensation plans not approved by
security holders . . . . . . . . . . . . . . . . . . . . . . .
N/A
N/A
N/A
(1) Consists of 266,818 options to acquire shares under the Company’s 2004 Equity Incentive Plan, 1,602,919
options to acquired shares under the Company’s 2013 Equity Incentive Plan, and the aggregate amount
of 677,084 stock options assumed under the Presidio Plans.
(2) Available under the Company’s 2013 Equity Incentive Plan.
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Outstanding Equity Awards
The following table shows the number of Company shares of common stock covered by exercisable and
unexercisable stock options and the number of Company unvested shares of restricted common stock held by
the Company’s named executive officers as of December 31, 2020:
Outstanding Equity Awards at Year End
Option Awards
Stock Awards
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
(b)
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
(c)
Equity
Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
(d)
Number of
Shares
or Units
of
Stock That
Have Not
Vested (#)
(g)(1)
Market
Value of
Shares
or Units
of
Stock That
Have Not
Vested ($)
(h)(2)
Options
Exercise
Price
($)
(e)
Options
Expiration
Date
(f)
Equity
Incentive
Plan Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights That
Have Not
Vested ($)
(j)
Equity
Incentive
Plan Awards:
Number of
Unearned
Shares,
Units or
Other
Rights That
Have Not
Vested (#)
(i)
Name
(a)
Keith A. Wilton* .
Lawrence D.
McGovern .
.
.
.
.
.
.
—
15,000
15,000
Michael E. Benito .
.
.
12,500
Margo G. Butsch .
.
.
10,000
7,181
3,000
Robertson Clay
.
Jones .
.
.
.
.
.
.
49,399(4)
37,050(4)
37,050(4)
37,050(4)
—
—
—
—
—
819(3)
—
—
—
—
—
—
$ —
—
59,370
$526,612
$ 8.07
02/27/2024
34,436
$305,447
$ 6.57
04/30/2023
—
—
$ 8.07
02/27/2024
26,187
$232,279
$ 6.57
04/30/2023
—
—
$14.48
05/02/2027
24,909
$220,943
$10.34
05/03/2026
—
—
$10.74
07/01/2028
7,278
$ 64,556
$ 4.92
01/29/2025
$ 3.98
01/30/2024
$ 2.79
01/10/2022
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
* Mr. Wilton retired from the Company on March 12, 2021. When Mr. Wilton retired, he vested in 25,012
shares of restricted common stock and forfeited 34,358 shares of restricted common stock.
(1) This column represents the unvested shares for restricted stock awards granted. Restricted stock awards
vest 25% per year from the date of grants for the 2017 and 2018 grants. Restricted stock awards vest 33%
per year from the date of grant for the 2019 and 2020 grants.
(2) The market value of the shares of restricted stock that have not vested is calculated by multiplying the
number of shares of stock that have not vested by the closing price of our common stock at December 31,
2020, as reported on The Nasdaq Global Select Market, which was $8.87.
(3) The options vest daily over 4 years beginning May 2, 2017, and have a term of 10 years.
(4) Stock options granted by Presidio Bank under the Presidio Plans which the Company assumed at the
effective time of the acquisition of Presidio Bank. The options were adjusted to reflect the acquisition
exchange ratio. The options are fully vested.
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Option Exercises and Vested Stock Awards
The following table sets forth information with regard to the exercise and vesting of stock options and
vesting of shares of restricted stock for the year ended December 31, 2020, for each of the named executive
officers:
Option Exercises and Stock Vested
Option Awards
Stock Awards
Name
(a)
Number of
Shares Acquired
on Exercise
(#)
(b)
Value
Realized upon
Exercise
($)
(c)
Number of
Shares Acquired
on Vesting
(#)
(d)
Keith A. Wilton* . . . . . . . . . . . . . . . . . . . . . . .
Lawrence D. McGovern . . . . . . . . . . . . . . . . . . .
Michael E. Benito . . . . . . . . . . . . . . . . . . . . . . .
Margo G. Butsch . . . . . . . . . . . . . . . . . . . . . . .
—
—
4,500
—
—
—
$ 12,915
—
Robertson Clay Jones . . . . . . . . . . . . . . . . . . . .
61,750
$413,108
14,917
11,550
8,875
5,750
—
Value
Realized
on Vesting
($)
(e)(1)
$120,775
$ 93,672
$ 71,824
$ 45,168
—
* Mr. Wilton retired from the Company on March 12, 2021. When Mr. Wilton retired, he vested in 25,012
shares of restricted common stock and forfeited 34,358 shares of restricted common stock.
(1) The number of vested shares reflects the gross amount of shares, without netting any shares surrendered
to pay taxes. The aggregate dollar amount realized upon vesting was calculated by multiplying the number
of shares by the fair market value on the vesting date.
401(k) Plan
The Company has established a broad based employee benefit plan under Section 401(k) of the Internal
Revenue Code of 1986 (“401(k) Plan”). The purpose of the 401(k) Plan is to encourage employees to save for
retirement. Eligible employees may make contributions to the plan subject to the limitations of Section 401(k).
The 401(k) Plan trustees administer the Plan. The Company matched up to $3,000 of each employee’s
contributions in 2020. The 401(k) Plan allows highly compensated employees to contribute up to a
maximum percentage of their base salary, up to the limits imposed by the Internal Revenue Code, on a pre-tax
basis. Participants choose to invest their account balances from an array of investment options as selected by
plan fiduciaries. The 401(k) Plan is designed to provide for distributions in a lump sum after termination of
service. However, loans and in service distributions under certain circumstances such as hardship, attainment
of age 591∕2, or a disability are permitted. For named executive officers, these amounts are included in the
Summary Compensation Table under “All Other Compensation.”
Employee Stock Ownership Plan
In 1997, Heritage Bank of Commerce initiated a broad based employee stock ownership plan (“Stock
Ownership Plan”). The Stock Ownership Plan was subsequently adopted by the Company as the successor
corporation to Heritage Bank of Commerce. The Stock Ownership Plan allows the Company, at its option, to
purchase shares of the Company common stock on the open market. To be eligible to receive an award of
shares under the Stock Ownership Plan, an employee must have worked at least 1,000 hours during the year
and must be employed by the Company on December 31. The executive officers have the same eligibility to
receive awards as other employees of the Company. Awards under the Stock Ownership Plan generally vest
over four years. In addition, the value of a participant’s account becomes fully vested upon reaching the age of
65 or termination of employment by death or disability. Since 2010, the Company has suspended contributions
to the Stock Ownership Plan. The Plan was “frozen” as of January 1, 2019. The amounts of contributions to
the Stock Ownership Plan for named executive officers are included in the Summary Compensation Table in
the column entitled “All Other Compensation.”
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Supplemental Retirement Plan for Executive Officers
The Company has established the 2005 Amended and Restated Supplemental Executive Retirement Plan
(the “SERP” or the “Plan”) covering key employees, including several of the named executive officers. The
SERP is a nonqualified defined benefit plan and is unsecured and unfunded and there are no plan assets.
When the Company offers key executives participation in the SERP, the supplemental retirement benefit
awarded is based on the individual’s position within the Company and a vesting schedule determined by the
desirability of incentivizing the retention element of the program. Normally the participant is 100% vested in
his or her benefit at retirement, upon termination within two years from a change in control, or upon disability.
However, the participant’s vested benefit is reduced for payment prior to retirement age in accordance with
the Plan terms, should that be selected by the participant.
The Company has reduced its use of the SERP as a program to attract and retain executives and key
employees. It has been more than eight years since the Company has offered SERP benefits to new executives
and key employees.
Normal Retirement. A participant whose employment terminates after normal retirement (as defined in
the Plan) will receive 100% of his or her supplemental retirement benefit, payable monthly, commencing on
the first of the month following retirement (unless selected otherwise by the participant and except executive
officers who receive their benefit six months after retirement) and continuing until the death of the participant
(unless the joint survivor option is selected).
Early Retirement.
In order to be eligible for early retirement benefits, the plan requires the participant
to terminate employment (for reasons other than for cause or within two years from a change of control) after
the date that the participant is at least 55 years old but prior to normal retirement as defined in the participant’s
participation agreement. The participant will then receive the portion of the supplemental retirement benefit
that has vested as of the actual early retirement date. However, for each year (or partial year) before normal
retirement age the participant receives an early retirement benefit, the vested benefit is reduced by five percent.
Unless otherwise selected by the participant, the early retirement benefit will be paid monthly, with payments
to commence on the first day of the month following the participant’s separation from service (except executive
officers who receive their benefit six months from retirement) and continuing until the death of the participant
(unless the joint survivor option is selected).
Termination before Early Retirement.
If a participant’s employment is terminated without cause or the
participant resigns, the participant shall be eligible to receive the portion of the supplemental retirement benefit
that has vested as of the effective date of termination reduced by 5% for each year (or partial year) that the
participant’s benefits are paid prior to the participant’s normal retirement age. Benefits are payable monthly
commencing on the first of the month elected by the participant but not before the participant’s early
retirement age (except executive officers who receive their benefit six months from retirement), and continuing
until the death of the participant (unless the joint survivor option is selected).
Disability.
In the event a participant becomes disabled, the participant will receive the actuarial
equivalent of his or her supplemental retirement benefit, payable monthly, commencing on the first of the
month following determination that the participant is disabled and continuing until the death of the
participant.
Cause.
If a participant’s employment is terminated for cause, the participant forfeits any rights the
participant may have under the SERP.
Change of Control.
If a participant’s employment is terminated for any reason (except cause or after
qualifying for normal retirement) within two years following a change of control, the participant will receive
100% of his or her supplemental retirement benefit commencing at the later of the first month following the
age selected by the participant or the first month following the participant’s separation from service (except
executive officers who receive their benefit six months from separation of service), and continuing until the
death of the participant (unless the joint survivor option is selected). In the event payments commence prior
to the participant’s normal retirement age, then the benefit due to the participant will be reduced by 5% for
each year (or partial year) that the participant’s benefit is paid prior to the participant’s normal retirement age.
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The Company has purchased life insurance contracts on the participants in order to finance the cost of
these benefits and it is anticipated that, because of the tax advantaged effect of this life insurance investment,
the return on the life insurance contracts will be approximately equal to the accrued benefits to the participants
under the SERP, other than in the event of accelerated vesting because of the change of control.
The following table shows the present value of the accumulated benefit payable to each of the named
executive officers that participate in the SERP, including the number of service years credited to each named
executive officer at December 31, 2020:
Name
(a)
Plan Name
(b)
Present Value of
Accumulated
Benefit(1)(2)
($)
(c)
Payments
During Last
Fiscal Year
($)
(d)
Lawrence D. McGovern . . . . . . . . . . . . . . Heritage Commerce Corp SERP
$1,872,300
Michael E. Benito(3) . . . . . . . . . . . . . . . . Heritage Commerce Corp SERP
$1,446,300
Robertson Clay Jones
. . . . . . . . . . . . . . . Heritage Commerce Corp SERP
$ 106,100
—
—
—
(1) The amounts in column (c) were determined using interest rate and mortality rate assumptions consistent
with those used in the Company’s consolidated financial statements and include amounts which the
named executive officer may not currently be entitled to receive because such amounts are not vested.
Assumptions used in the calculation of these amounts are included in Note 14 to the Company’s
consolidated financial statements for the fiscal year ended December 31, 2020, included in the Company’s
Annual Report on Form 10-K, filed with the SEC on March 5, 2021.
(2) The following vesting percentages apply to the named executive officers who participate in the SERP:
End of the year prior
to termination
Lawrence D.
McGovern
Michael E.
Benito(3)
Robertson
Clay Jones
12/31/2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12/31/2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12/31/2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12/31/2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12/31/2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100%
100%
100%
100%
100%
100%
90%
100% 100%
100% 100%
100% 100%
100% 100%
100%
100%
100%
100%
100%
(3) Mr. Benito has two separate SERP agreements.
Deferred Compensation Plan
In January 2004, the Company adopted the Heritage Commerce Corp Nonqualified Deferred
Compensation Plan for certain executive officers. The purpose of the plan is to offer those employees an
opportunity to elect to defer the receipt of compensation in order to provide termination of employment and
related benefits taxable pursuant to Section 451 of the Internal Revenue Code of 1986, as amended. The plan
is intended to be a “top hat” plan (i.e., an unfunded deferred compensation plan maintained for a select group
of management or highly compensated employees) under Sections 201(2), 301(a)(3) and 401(a)(1) of the
Employee Retirement Income Security Act of 1974. The executive may elect to defer up to 100% of any bonus
and 50% of any regular salary into the Deferred Compensation Plan. Amounts deferred are invested in a
portfolio of approved investment choices as directed by the executive. Under the Deferred Compensation
Plan, the Company may make discretionary contributions for the executive, but has not done so. Amounts
deferred by executives to the plan will be distributed at a future date they have selected or upon termination of
employment. The executive can select a distribution schedule of up to fifteen years.
Change of Control Arrangements and Termination of Employment
Equity Plans. Each of the named executive officers holds options granted under the 2004 Equity Plan
and the 2013 Equity Plan. Under these plans, option holders will be given 30 days advance notice of the
consummation of a change of control transaction during which time the option holders will have the right to
41
exercise their options, and all outstanding options become immediately vested. The options terminate on the
consummation of the change of control. In the event the option holder dies or becomes disabled, the option
holder or his or her estate will have 12 months to exercise those options that have vested as of the date of
termination of employment from a disability or death.
Restricted Stock. The named executive officers hold shares of restricted stock subject to vesting
requirement. Under the terms of the restricted stock awards the vesting of the shares will accelerated upon a
change of control of the Company, or the holder’s death or disability.
Supplemental Executive Retirement Plan. Several of the named executives are participants in the 2005
Amended and Restated Supplemental Executive Plan. If a participant’s employment is terminated without
cause or the participant resigns, the participant shall be eligible to receive the portion of the supplemental
retirement benefit that has vested as of the effective date of termination reduced by 5% for each year (or
partial year) that the participant’s benefits are paid prior to the participant’s normal retirement age. Benefits
are payable monthly commencing on the first of the month elected by the participant (except executive officers
who receive their benefits six months from separation from service), but not before the participant’s early
retirement age, and continuing until the death of the participant (unless the joint survivor option is selected).
In the event a participant becomes disabled, the participant will receive the actuarial equivalent of his or her
supplemental retirement benefit, payable monthly, commencing on the first of the month following
determination that the participant is disabled and continuing until the death of the participant. If a
participant’s employment is terminated for cause, the participant forfeits any rights the participant may have
under the plan. If a participant’s employment is terminated for any reason (except cause or after qualifying for
normal retirement) within two years following a change of control, the participant will receive 100% of his or
her supplemental retirement benefits commencing at the later of the first month following the age selected by
the participant, or the first month following the participant’s separation from service (except executive officers
who receive their benefits six months from separation from service), and continuing until the death of the
participant (unless the joint survivor option is selected). In the event payments commence prior to the
participant’s normal retirement age, then the benefit due to the participant will be reduced by 5% for each year
(or partial year) that the participant’s benefit is paid prior to the participant’s normal retirement age.
Mr. Kaczmarek’s Employment Agreement.
If Mr. Kaczmarek’s employment is terminated without cause
or he resigns for good reason (as defined in the agreement), he is entitled to a lump sum payment equal to two
times his base salary and his average annual bonus in the last three years. The appointment of a new President
and Chief Executive Officer within 24 months of the date of his employment agreement will not result in a
severance payment under the termination without cause or good reason resignation provisions. If
Mr. Kaczmarek’s employment is terminated or he resigns for good reason 120 days before, or within two years
after, a change of control (as defined in the agreement), he will be paid a lump sum of 2.75 times his base
salary and average annual bonus in the last three years (or shorter period). His shares of restricted common
stock granted to him under his contract vest over three years, but vesting will accelerate if a new President and
Chief Executive Officer is appointed, a change of control, a termination without cause or a termination for
good reason. Additionally, following the termination of his employment, Mr. Kaczmarek has agreed to refrain
from using trade secrets or proprietary information in certain activities that would be competitive with the
Company.
Mr. Wilton’s Employment Agreement. Mr. Wilton retired from the Company on March 12, 2021. Under
his employment contract, if Mr. Wilton’s employment was terminated without cause or he resigned for good
reason (as defined in the agreement), he was entitled to a lump sum payment equal to two times his base salary
and his average annual bonus in the last three years. If Mr. Wilton’s employment was terminated or he resigned
for good reason 120 days before, or within two years after, a change of control (as defined in the agreement),
he would have been paid a lump sum of 2.75 times his base salary and average annual bonus in the last
three years. If his employment was terminated by the Company without cause, or he resigned for good reason,
or as a result of a change of control the Company terminated his employment or he resigned for good reason,
his participation in group insurance coverages would continue on at least the same level as at the time of
termination for a period of 36 months from the date of termination. Additionally, following the termination
of his employment, Mr. Wilton agreed to refrain from using trade secrets or proprietary information in certain
activities that would be competitive with the Company.
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Mr. Benito’s Employment Agreement.
If Mr. Benito’s employment agreement is terminated without
cause, he will be entitled to a lump sum payment equal to one times his base salary and his average annual
bonus during the last three years. If Mr. Benito’s employment is terminated by the Company or he resigns for
good reason 120 days before or within two years after a change in control, he will be entitled to a lump sum
payment of two times his base salary and his average annual bonus during the last three years. If Mr. Benito’s
employment is terminated by the Company without cause, his participation in group insurance coverage will
continue on at least the same level as at the time of termination for a period of 12 months from the date of
termination. If Mr. Benito’s employment is terminated by the Company as a result of a change in control, or
he resigns for a good reason as a result of a change in control, these benefits will continue for an additional
24 months from the date of termination. In the event that the amounts payable to Mr. Benito under the
agreement constituted “excess parachute payments” under the Internal Revenue Code of 1986, as amended,
that are subject to an excise or similar tax, the amounts payable to Mr. Benito will be increased so that he
receives substantially the same economic benefit under the agreement had there been no such tax imposed.
Additionally, following the termination of his employment, Mr. Benito has agreed to refrain from certain
activities that would be competitive with the Company within the counties in California in which the Company
has located its headquarters or branch offices, including refraining for 12 months from the date of termination
from soliciting Company employees or customers.
Ms. Butsch’s Employment Agreement.
If Ms. Butsch’s employment agreement is terminated without
cause, she will be entitled to a lump sum payment equal to one times her base salary and her average annual
bonus during the last three years. If Ms. Butsch’s employment is terminated by the Company or she resigns for
good reason 120 days before or within two years after a change in control, she will be entitled to a lump sum
payment of two times her base salary and her average annual bonus during the last three years. If Ms. Butsch’s
employment is terminated by the Company without cause, her participation in group insurance coverage will
continue on at least the same level as at the time of termination for a period of 12 months from the date of
termination. If Ms. Butsch’s employment is terminated by the Company as a result of a change in control, or
she resigns for a good reason as a result of a change in control, these benefits will continue for an additional
24 months from the date of termination. Additionally, following the termination of her employment,
Ms. Butsch has agreed to refrain from certain activities that would be competitive with the Company within
the counties in California in which the Company has located its headquarters or branch offices, including
refraining for 12 months from the date of termination from soliciting Company employees or customers.
Mr. Jones Employment Agreement.
If Mr. Jones employment agreement is terminated without cause, he
will be entitled to a lump sum payment equal to one times his base salary and his average annual bonus during
the last three years. If Mr. Jones’ employment is terminated by the Company or he resigns for good reason
120 days before or within two years after a change in control, he will be entitled to a lump sum payment of two
times his base salary and his average annual bonus during the last three years. If Mr. Jones’ employment is
terminated by the Company without cause, his participation in group insurance coverage will continue on at
least the same level as at the time of termination for a period of 12 months from the date of termination. If
Mr. Jones’ employment is terminated by the Company as a result of a change in control, or he resigns for a
good reason as a result of a change in control, these benefits will continue for an additional 24 months from
the date of termination. Additionally, following the termination of his employment, Mr. Jones has agreed to
refrain from using trade secrets or proprietary information in certain activities that would be competitive with
the Company.
Mr. McGovern’s Employment Agreement.
If Mr. McGovern’s employment is terminated without cause,
he will be entitled to a lump sum payment equal to one times his base salary, his highest annual bonus in the
last three years and his annual automobile allowance. If Mr. McGovern’s employment is terminated by the
Company or he resigns for good reason 120 days before, or within two years after, a change in control, he will
be entitled to a lump sum payment of two times his base salary, his highest annual bonus in the last three years
and his annual automobile allowance. If the employment agreement is terminated by the Company without
cause, his participation in group insurance coverage will continue on at least the same level as at the time of
termination for a period of 12 months from the date of termination. If Mr. McGovern’s employment is
terminated as a result of a change in control during the change of control period, or he resigns for a good
reason as a result of a change in control, these benefits will continue for an additional 24 months from the date
of termination. In the event that the amounts payable to Mr. McGovern under the agreement constitute
“excess parachute payments” under the Internal Revenue Code of 1986, as amended, that are subject to an
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excise or similar tax, the amounts payable to Mr. McGovern will be increased so that he receives substantially
the same economic benefit under the agreement had there been no such tax imposed. Additionally, following
the termination of his employment, Mr. McGovern has agreed to refrain from certain activities that would be
competitive with the Company within the counties in California in which the Company has located its
headquarters or branch offices, including refraining for 12 months from the date of termination from soliciting
Company employees or customers.
The following tables summarize the payments which would be payable to our named executive officers in
the event of various termination scenarios as of December 31, 2020. This information is for illustrative
purposes only. Regardless of the manner in which a named executive’s employment terminates, the officer
would be entitled to: (i) the vested portion of any stock option or restricted stock, and (ii) the vested portion
of the officer’s benefit under the Supplemental Executive Retirement Plan.
Involuntary
Termination
Without
Cause
Termination
for
Good Reason
Change in
Control
Death
Disability
Keith A. Wilton*
Cash severance under employment
agreement . . . . . . . . . . . . . . . . . . . .
$1,838,677
$1,337,219
$1,337,219
$
— $
Health insurance premiums . . . . . . . . . .
113,502
113,502
113,502
—
—
—
Life insurance benefits . . . . . . . . . . . . .
Long-term care insurance benefits . . . . .
—
—
Unvested restricted stock awards
(accelerated)
. . . . . . . . . . . . . . . . . .
526,612
—
—
—
—
—
—
700,000
180,000(3)
—
72,000
526,612
526,612
Total: . . . . . . . . . . . . . . . . . . . . . . . . .
$2,478,791
$1,450,721
$1,450,721
$1,226,612
$778,612
Michael E. Benito
Cash severance under employment
agreement . . . . . . . . . . . . . . . . . . . .
$ 777,257
$ 388,628
$
— $
— $
Health insurance premiums . . . . . . . . . .
91,865
45,933
Life insurance benefits . . . . . . . . . . . . .
Long-term care insurance benefits . . . . .
—
—
—
—
Supplemental executive retirement
plan(1)(2)
. . . . . . . . . . . . . . . . . . . .
18,707
18,918
Unvested restricted stock awards
(accelerated)
. . . . . . . . . . . . . . . . . .
232,279
Split-dollar death benefits (upon
death) . . . . . . . . . . . . . . . . . . . . . . .
—
—
—
—
—
—
—
—
—
—
—
—
609,760
180,000(3)
—
—
72,000
15,936
232,279
232,279
730,711
—
Total: . . . . . . . . . . . . . . . . . . . . . . . . .
$1,120,108
$ 453,479
$
— $1,572,750
$500,215
Margo G. Butsch
Cash severance under employment
agreement . . . . . . . . . . . . . . . . . . . .
Health insurance premiums . . . . . . . . . .
$ 739,508
130,682
$ 369,754
65,341
$
— $
—
— $
—
—
—
Life insurance benefits . . . . . . . . . . . . .
Long-term care insurance benefits . . . . .
Unvested restricted stock awards
—
—
(accelerated)
. . . . . . . . . . . . . . . . . .
220,943
—
—
—
—
—
—
597,400
180,000(3)
—
72,000
220,943
220,943
Total: . . . . . . . . . . . . . . . . . . . . . . . . .
$1,091,133
$ 435,095
$
— $ 818,343
$472,943
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Involuntary
Termination
Without
Cause
Termination
for
Good Reason
Change in
Control
Death
Disability
Robertson Clay Jones
Cash severance under employment
agreement . . . . . . . . . . . . . . . . . . . .
$ 946,833
$473,417
$
— $
— $
Health insurance premiums . . . . . . . . . .
130,682
65,341
—
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Life insurance benefits . . . . . . . . . . . . .
Long-term care insurance benefits . . . . .
Split-dollar death benefits (upon
death) . . . . . . . . . . . . . . . . . . . . . . .
Unvested restricted stock awards
—
—
—
(accelerated)
. . . . . . . . . . . . . . . . . .
64,556
—
—
—
—
—
—
—
—
648,500
180,000(3)
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—
72,000
648,900
—
64,556
64,556
Total: . . . . . . . . . . . . . . . . . . . . . . . . .
$1,142,071
$538,758
$ — $1,361,956
$316,556
Lawrence D. McGovern
Cash severance under employment
agreement . . . . . . . . . . . . . . . . . . . .
$ 915,312
$457,656
$
— $
— $
Health insurance premiums . . . . . . . . . .
91,865
45,933
Life insurance benefits . . . . . . . . . . . . .
Long-term care insurance benefits . . . . .
—
—
Unvested restricted stock awards
(accelerated)
. . . . . . . . . . . . . . . . . .
305,447
Split-dollar death benefits (upon
death) . . . . . . . . . . . . . . . . . . . . . . .
—
—
—
—
—
—
—
—
—
—
—
—
—
700,000
180,000(3)
—
72,000
305,447
305,447
876,754
—
Total: . . . . . . . . . . . . . . . . . . . . . . . . .
$1,312,624
$503,589
$ — $1,882,201
$557,447
* Mr. Wilton retired from the Company on March 12, 2021. The Company and Mr. Wilton entered into a
separation agreement dated March 12, 2021. Pursuant to the agreement, Mr. Wilton received a severance
payment of $1,475,895, acceleration of vesting on 25,012 shares of restricted common stock and
three years of monthly COBRA payments. 34,358 shares of restricted common stock were forfeited.
(1) Assumes executive selected age 62 for commencement of the payment of this benefit.
(2) The amount reflected in the table is the incremental increase in the benefit payable to the named executive
officer in addition to the benefit payable under the terms of the Supplemental Executive Retirement Plan.
See “Supplemental Retirement Plan for Executive Officers” and the tables included therein for
information about the value of the accumulated benefit payable to each named executive officer.
(3) This balance represents the annual payment of long-term disability for the named executive officers. This
long-term payment would begin after an elimination period and a twenty-five week short term disability
period. This long-term disability payment will increase by 3% (cost of living adjustment) over the first
ten years of payments and cease at age 65.
Director Compensation
This section provides information regarding the compensation policies for non-employee directors and
amounts paid to these directors in 2020.
The Company has a policy of compensating non-employee directors for their service on the Board and
Board committees of the Company. On an annual basis, the Compensation Committee reviews director
compensation, including the individual fees and retainers, the components of compensation, as well as the
total amount of director compensation appropriate for the Company.
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In 2020, each director received an annual retainer fee of $50,000. The chair of each standing committee
of the Board received an additional $6,000 per year, and the Chairman of the Board receives an additional
$17,500 per year. Board Members are not paid separate fees for attending Board or committee meetings.
The Compensation Committee has adopted a policy to grant directors restricted stock on an annual basis
in lieu of stock options. Under this policy directors are entitled to awards of restricted stock with an economic
value on the date of grant (or the expiration of any trading black out previous to these in effect) not to exceed
the following:
Board Chairman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$34,375
Board members (non-chairman) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$27,500
In 2020, each of the directors received restricted stock in accordance with the above schedule.
The following table summarizes the compensation of non-employee directors for the year ended
December 31, 2020:
Director Compensation Table
Name
(a)
Fees
Earned or
Paid in
Cash
($)
(b)
Stock
Awards
($)
(c)(1)
Options
Awards
($)
(d)
Non-Equity
Incentive
Plan
Compensation
($)
(e)
Julianne Biagini-Komas
. . . .
$59,500
$27,496
$ —
Frank G. Bisceglia . . . . . . .
$50,000
$27,496
$ —
Bruce H. Cabral
. . . . . . . .
$56,000
$27,496
$ —
Jack W. Conner . . . . . . . . .
$72,000
$34,375
$ —
Jason DiNapoli . . . . . . . . .
$50,000
$27,496
$ —
Stephen G. Heitel
. . . . . . .
$50,000
$27,496
$ —
Walter T. Kaczmarek(4)
. . . .
$51,500
$27,496
$ —
Robert T. Moles
. . . . . . . .
$50,000
$27,496
$ —
Laura Roden . . . . . . . . . .
$56,000
$27,496
$ —
Marina Park Sutton . . . . . .
$54,333
$27,496
$ —
Ranson W. Webster . . . . . . .
$56,000
$27,496
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
$ —
Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
($)
(f)(2)
Cash
Dividend
on Unvested
Restricted
Stock Award
($)
(g)
—
$19,300
—
$13,400
—
—
—
$36,800
—
—
$14,000
$1,791
$1,791
$1,204
$2,239
$1,791
$1,204
$1,791
$1,791
$1,791
$1,204
$1,791
All Other
Compensation
($)
(h)(3)
Total
($)
(i)
$ —
$ 88,787
$ 871(3)
$ 99,458
$ —
$ 84,700
$1,376(3)
$123,390
$ —
$ —
$ —
$ —
$ —
$ —
$ 79,287
$ 78,700
$ 80,787
$116,087
$ 85,287
$ 83,033
$ 902(3)
$100,189
(1) The amounts shown in column (c) reflect the applicable full grant date value for stock awards in
accordance with ASC 718 (excluding the effect of forfeitures). See Note 13 to the Company’s consolidated
financial statements for the year ended December 31, 2020 included in the Company’s Annual Report on
Form 10-K, filed with the SEC on March 5, 2021.
(2) The amounts shown in column (f) represent only the aggregate change in the actuarial present value of
the accumulated benefit measured from December 31, 2019 to December 31, 2020, under the respective
director compensation benefits agreements. The amounts in column (f) were determined using interest
rate and mortality rate assumptions, consistent with those used in the Company’s consolidated financial
statements, and include amounts which the named director may not currently be entitled to receive
because such amounts are not vested. Assumptions used in the calculation of these amounts are included
in Note 14 to the Company’s consolidated financial statements for the year ended December 31, 2020,
included in the Company’s Annual Report on Form 10-K filed with the SEC on March 5, 2021.
(3) The amounts shown reflect the annual income imputed to each director in connection with Company
owned split dollar life insurance policies for which the Company has fully paid the applicable premiums.
(4) Mr. Kaczmarek became the Company’s President and Chief Executive Officer on March 12, 2021.
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Director Outstanding Stock Options and Stock Awards
Each of the non-employee directors owned the following stock options and stock awards as of
December 31, 2020:
Director
Stock Options
Stock Awards
Julianne M. Biagini-Komas . . . . . . . . . . . . . . . . . . . . . . .
Frank G. Bisceglia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bruce H. Cabral(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Jack W. Conner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Jason DiNapoli . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
18,000
17,290
—
—
Stephen G. Heitel(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
123,499
3,086
3,086
3,086
3,086
3,086
3,086
Walter T. Kaczmarek(2) . . . . . . . . . . . . . . . . . . . . . . . . . .
—
36,003
Robert T. Moles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Laura Roden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marina Park Sutton(1)
. . . . . . . . . . . . . . . . . . . . . . . . . .
Ranson W. Webster . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,000
10,700
32,110
18,000
3,086
3,086
3,086
3,086
(1) The stock options were granted by Presidio Bank prior to the acquisition by the Company and
were assumed by the Company in connection with the acquisition.
(2) Mr. Kaczmarek became the Company’s President and Chief Executive Officer on March 12,
2021. Of the stock awards listed in the table, 32,917 stock awards were issued while
Mr. Kaczmarek was President and Chief Executive Officer of the Company prior to his initial
retirement in August 2019.
Director Compensation Benefits Agreement
Prior to 2007, the Company entered into individual director compensation benefits agreements with each
of its then directors. These agreements were amended and restated in December, 2008 (“Benefit Agreements”).
The Benefit Agreements provide an annual benefit equal to a designated applicable percentage of $1,000 times
each year served as a director, subject to a 2% increase each year from the date of the commencement of
payments. The applicable percentage increases over time and equals 100% after nine years of service. In the
event of a disability, or a resignation or termination pursuant to a change of control, the director’s
applicable percentage will be accelerated to 100%. Payments of benefits will be made in equal monthly
payments on the first day of each month, commencing on the later of the director’s attaining the age of 62 or
the month following the month in which the director separates from service on the Board and continuing until
the director’s death. If a director is removed from the Board for cause he or she will forfeit any benefits under
the Benefit Agreement.
Company owned split dollar life insurance policies support the Company’s obligations under the Benefit
Agreements. The premiums on the policies are paid by the Company. The cash value accrued on the policies
supports the payment of the supplemental benefits for each participant. In the case of death of the participant,
the participant’s designated beneficiaries will receive 80% of the net at risk insurance (which means the amount
of the death benefit in excess of the cash value of the policy).
47
The following table shows the present value of the accumulated benefit payable to each director who has
a director compensation benefit agreement, including the number of service years credited to each director
under the Benefit Agreements:
Name
(a)
Plan Name
(b)
Present Value of
Accumulated
Benefit(1)(2)
($)
(c)
Payments
During Last
Fiscal Year
($)
(d)
Frank G. Bisceglia . . . . . . . . . . . . . . . . . . Heritage Commerce Corp SERP
Jack W. Conner . . . . . . . . . . . . . . . . . . . . Heritage Commerce Corp SERP
Robert T. Moles . . . . . . . . . . . . . . . . . . . Heritage Commerce Corp SERP
Ranson W. Webster . . . . . . . . . . . . . . . . . Heritage Commerce Corp SERP
$338,300
$153,100
$330,500
$199,200
—
—
—
—
(1) The amounts in column (c) were determined using interest rate and mortality rate assumptions consistent
with those used in the Company’s consolidated financial statements and include amounts which the
director may not currently be entitled to receive because such amounts are not vested. Assumptions used
in the calculation of these amounts are included in Note 14 to the Company’s consolidated financial
statements for the year ended December 31, 2020, included in the Company’s Annual Report on
Form 10-K, filed with the SEC on March 5, 2021.
(2) Each participant is fully vested.
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PROPOSAL 1—ELECTION OF DIRECTORS
The Bylaws of the Company provide that the number of directors shall not be less than 9 nor more than
15. By resolution, the Board has fixed the number of directors at 11 effective on the date of and prior to the
Annual Meeting. All of our directors serve one year terms that expire at the next following annual meeting.
The Bylaws of the Company provide the procedure for nominations and election of the Board of Directors.
For information on these procedures see “Corporate Governance and Board Matters—Nomination of
Directors.” Nominations not made in accordance with the procedures may be disregarded by the Chairman of
the Annual Meeting and upon his instructions, the inspector of election will disregard all votes cast for such
nominees.
The Board, upon the recommendation of the Corporate Governance and Nominating Committee, has
recommended the nomination of 11 of the current members of the Board of Directors for one year terms that
will expire at the Annual Meeting to be held in 2022. If any nominee should become unable or unwilling to
serve as a director, the proxies will be voted at the Annual Meeting for substitute nominees designated by the
Board. The Board presently has no knowledge that any of the nominees will be unable or unwilling to serve.
The following provides information with respect to each individual nominated and recommended to be
elected to the Board. Each individual below is also a director on the Board of Heritage Bank of Commerce:
JULIANNE M. BIAGINI-KOMAS, age 58, was formerly a member on the Focus Business Bank board
of directors and joined the Board of Directors of the Company in August 2015. Ms. Biagini-Komas is
currently the Vice President, Finance and Human Resources of CNEX Labs, Inc., San Jose, California. She
was the Chief Financial Officer of Quantumscape Corporation, San Jose, California, from 2011 to 2014.
Previously, she was the Chief Financial Officer of Endwave Corporation, a Nasdaq listed company, from 1994
to 2007. Ms. Biagini-Komas has a Bachelor of Science degree in Accounting from San Jose State University
and a Masters in Business Administration degree from Santa Clara University. She is a Certified Public
Accountant. With her experience as a chief financial officer and her accounting background, Ms. Biagini
Komas provides valuable insight and perspective regarding accounting and tax issues and is particularly suited
to serve as the Chair of the Board’s Audit Committee. With over 20 years of human resource administration
experience, Ms. Biagini-Komas is a valuable member of the Compensation Committee.
FRANK G. BISCEGLIA, age 75, became a director of the Company in 1994. Mr. Bisceglia is a Senior
Vice President—Investments, Advisory and Brokerage Services, Senior Portfolio Manager, Portfolio
Management Program at UBS Financial Services, Inc., a full service securities firm. Mr. Bisceglia has a
Bachelor of Science degree in Industrial Management from San Jose State University. Mr. Bisceglia contributes
to the Board a substantial understanding of finance and investments from over 41 years of experience as a
financial advisor to corporate and high wealth individuals. As a long term member of the Board, he has a
broad based understanding of the Company’s business, and, as the former Chair of the Loan Committee, he
has a general knowledge of the Company’s credit administration and loan underwriting process.
BRUCE H. CABRAL, age 66, became a director of the Company in October, 2019 when the Company
acquired Presidio Bank. Mr. Cabral was a director of Presidio Bank. Mr. Cabral is the former Senior Executive
Vice President and Chief Credit Officer of Union Bank, in San Francisco, California. Mr. Cabral retired from
Union Bank in January, 2010 after a 32 year tenure which lasted from 1977 until his retirement. Mr. Cabral
brings to the Board his previous experience and knowledge of the business of Presidio Bank and his vast
experience in the banking industry. He serves as Chair of the Bank’s Loan Committee.
JACK W. CONNER, age 81, became a director of the Company in 2004. Mr. Conner was elected
Chairman of the Board in July, 2006. Mr. Conner was Chairman and Chief Executive Officer of Comerica
California from 1991 until his retirement in 1998, and remained a director until 2002. He was President and a
director of Plaza Bank of Commerce from 1979 to 1991. Prior to joining Plaza Bank of Commerce, he held
various positions with Union Bank of California (formerly Union Bank) where he began his banking career in
1964. Mr. Conner has a Bachelor of Arts degree from San Jose State University. Mr. Conner contributes to
the Board over 20 years of executive leadership and substantial experience in the community banking industry.
Having served as a Chief Executive Officer and President at several successful community banks in the
Company’s primary market, he brings a wide ranging understanding of bank management, finance, operations
and strategic planning. His demonstrated leadership ability, judgment and executive experience led the Board
to elect him as Chairman of the Board.
49
JASON DINAPOLI, age 52, was one of the founders of 1st Century Bank, N.A., a wholly owned
subsidiary of 1st Century Bancshares, Inc., headquartered in Los Angeles, California. In 2008, Mr. DiNapoli
assumed the role of the President and Chief Executive Officer of 1st Century Bank and President of 1st
Century Bancshares, Inc. He served in this role until July 1, 2016, when 1st Century Bancshares, Inc. was
acquired by Midland Financial Co., a privately held bank holding company based in Oklahoma City,
Oklahoma, as a division of MidFirst Bank, a subsidiary of Midland. Mr. DiNapoli presently serves as an
Executive Vice President of MidFirst Bank and President and Chief Executive Officer of the 1st Century
Bank division. Before joining 1st Century Bank, Mr. DiNapoli was vice president of finance for JP DiNapoli
Companies Inc., a real estate investment, development and property management organization. Prior thereto,
he served as a Vice President at Union Bank of California (formerly Union Bank). Mr. DiNapoli earned a
bachelor’s degree from the University of California, Berkeley. He is active in numerous community
organizations. Mr. DiNapoli is the son of Philip DiNapoli, a former director of the Company who retired in
2018. Mr. DiNapoli brings to the Board his extensive experience and knowledge in banking and finance and
management experience in the financial industry as well as experience as a board member of a publicly traded
bank holding company.
STEPHEN G. HEITEL, age 62, became a director of the Company in October, 2019 when the Company
acquired Presidio Bank. Mr. Heitel is the former Chief Executive Officer and director of Presidio Bank. Prior
to joining Presidio Bank in October 2008, he served as President and Chief Executive Officer of Mid-Peninsula
Bank based in Palo Alto, California. Mr. Heitel served in other senior positions at Greater Bay Bancorp,
including President and Chief Executive Officer of San Jose National Bank from December 2003 to
November 2005, and as Executive Vice President and Chief Operating Officer of Cupertino National Bank
from August 2001 to December 2003. Mr. Heitel’s additional experience also includes executive roles with
Bank of America including serving as head of Commercial Banking activities for the Bay Area, focused on
middle market businesses. Mr. Heitel brings to the Board his understanding and knowledge of the business
and personnel of Presidio Bank as well as his previous executive experience and knowledge of the community
banking industry.
WALTER T. KACZMAREK, age 69, has been a director since 2005. He was appointed as President and
Chief Executive Officer of Heritage Commerce Corp and Heritage Bank of Commerce on March 12, 2021.
He had previously served in those positions from 2005 until his initial retirement effective August 8, 2019.
Prior to joining the Company in 2005, Mr. Kaczmarek was Executive Vice President of Comerica Bank and of
Plaza Bank of Commerce from 1990. Prior to joining Plaza Bank of Commerce he served in various positions
with Union Bank of California (formerly Union Bank) and also The Martin Group, a real estate investment
development company. Mr. Kaczmarek has a Bachelor of Science in Commerce degree from Santa Clara
University, and a Masters in Business Administration degree from San Jose State University. Mr. Kaczmarek’s
familiarity of the Company and its business as the former President and Chief Executive Officer and broad
experience in the community banking industry brings a valuable perspective to the Board. He provides the
Board with an overall perspective of all facets of the Company’s business, financial condition and its strategic
direction.
ROBERT T. MOLES, age 66, became a director of the Company in 2004. Mr. Moles has been the
Chairman of the Board of Intero Real Estate Services, Inc., a full service real estate firm since 2002. Prior to
joining Intero, he served as President and Chief Executive Officer of the Real Estate Franchise Group of
Cendant Corporation, the largest franchiser of residential and commercial real estate brokerage offices in the
world. Prior to joining Cendant, he served as President and Chief Executive Officer of Contempo Realty, Inc.
in Santa Clara, California. Mr. Moles contributes to the Board a substantial expertise in the real estate industry
in the Company’s primary market. With over 33 years of experience in executive and managerial positions, he
brings to the Board his skills in dealing with business and financial planning and personnel management.
With his background, Mr. Moles is particularly suited to serve as a member of the Compensation Committee.
LAURA RODEN, age 62, is the founder and managing director of Capital Formation Consultants LLC,
an advisor to alternative asset funds including venture capital, private equity, hedge and debt funds. Prior to
founding Capital Formation Consultants LLC, Ms. Roden was the managing director for The Angels’ Forum
(Palo Alto, CA), an early stage angel and venture capital investing group for high net worth individuals. For
most of Ms. Roden’s prior career she was engaged as chief financial officer at both established and emerging
corporations, including most notably Chronicle Broadcasting Company (San Francisco, CA) and PowerTV,
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Inc. (acquired by Cisco Corporation, San Jose, CA). Ms. Roden has expertise in general management, finance,
fundraising and marketing. Ms. Roden has taught courses on finance at San Jose State University, and is a
frequent speaker for angel investment and venture capital groups and associations. Ms. Roden has a Bachelor
of Arts degree from Harvard College and Masters in Business Administration degree from Harvard Business
School. Ms. Roden has extensive management experience in a full range of business operations, strategic
planning, marketing strategies and capital formation for entrepreneurial companies in the technology industry.
In addition, with her prior experience as a chief financial officer, she is particularly suited to serve as Chair of
the Board’s Strategic Initiatives and Finance and Investment Committee, and serve as a member of the Audit
Committee.
MARINA PARK SUTTON, age 64, became a director of the Company in October, 2019 when the
Company acquired Presidio Bank. Ms. Park Sutton was a director of Presidio Bank. Ms. Park Sutton is Chief
Executive Officer of Girl Scouts of Northern California, which serves 19 counties in Northern California with
almost 40,000 girls and 28,000 adults taking part in programs each year. Prior to joining Girl Scouts of
Northern California in 2007, Ms. Park Sutton held a variety of progressively more senior positions at Pillsbury
Winthrop Shaw Pittman LLP, an international law firm. The Board benefits from Ms. Park Sutton’s experience
as a director and member of the audit, corporate governance and compensation committees at Presidio Bank,
as well as her valuable general business insight and legal experience. With her background she is suited to serve
as the Chair of the Compensation Committee, and as a member of the Audit Committee and Nominating and
Corporate Governance Committee.
RANSON W. WEBSTER, age 76, became a director of the Company in 2004. Mr. Webster founded
Computing Resources, Inc. (“CRI”) in 1978, a privately held general purpose data processing service bureau
specializing in payroll processing for small business nationwide. He served as CRI’s Chief Executive Officer
and Chief Financial Officer. In 1999, CRI merged with Intuit, Inc., the maker of QuickBooks and Quicken
financial software. In 1998, Mr. Webster founded Evergreen Capital, LLC, an early stage investment company
focused on Internet and biotech companies. In 2012, Mr. Webster became the Chief Executive Officer for
Chargerback, Inc. a cloud based startup company dedicated to automating the lost and found process at
hotels, airlines, rental car companies and other public spaces. Mr. Webster contributes to the Board substantial
business acumen, executive strategic planning and financial experience developed through years of proven
entrepreneurial success. Mr. Webster has a unique perspective of the Company from his long standing service
on the Board. He has a general understanding of corporate governance principles as Chairman of the Board’s
Nominating and Corporate Governance Committee.
Recommendation of the Board of Directors
The Board of Directors recommends the election of each nominee. The proxy holders intend to vote all
proxies they hold in favor of the election of each of the nominees. If no instruction is given, the proxy holders
intend to vote FOR each nominee listed.
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PROPOSAL 2—ADVISORY PROPOSAL ON EXECUTIVE COMPENSATION
The Dodd-Frank Act requires, among other things, that we permit a non-binding, advisory vote on the
2020 compensation of our named executive officers, as described in the Compensation Discussion and
Analysis, compensation tables and accompanying narrative discussion contained in this proxy statement.
As described in greater detail under the heading “Compensation Discussion and Analysis,” we seek to
closely align the interests of our named executive officers with the interests of our shareholders. Our
compensation practices are designed to encourage and motivate our named executive officers to achieve
superior performance on both a short term and long-term basis while at the same time avoiding the
encouragement of unnecessary or excessive risk taking.
Accordingly, the Company is presenting this proposal, which gives you as a shareholder the opportunity
to endorse or not endorse our executive pay program by voting for or against the following resolution:
“RESOLVED, that the shareholders approve the 2020 compensation of our named executive officers, as
disclosed in the Compensation Discussion and Analysis, the compensation tables, and the related disclosures
required by Item 402 of Regulation S-K contained in the proxy statement.”
As discussed in the Compensation Discussion and Analysis contained in this proxy statement, the
Compensation Committee of the Board of Directors believes that the executive compensation for 2020 was
reasonable and appropriate, and was the result of a carefully considered approach.
The vote on this resolution is not intended to address any specific item of compensation, but rather that
overall compensation of our named executive officers and the policies and practices described in this proxy
statement. In the event this non-binding proposal is not approved by our shareholders, such a vote shall not be
construed as overruling a decision by the Board of Directors or Compensation Committee, nor create or
imply any additional fiduciary duty of the Board of Directors or Compensation Committee, nor shall such a
vote be construed to restrict or omit the ability of our shareholders to make proposals for inclusion in proxy
materials related to executive compensation. Notwithstanding the foregoing, the Board of Directors and the
Compensation Committee will consider the non-binding vote of our shareholders to this proposal when
reviewing compensation policies and practices in the future.
Recommendation of the Board of Directors
The Board of Directors recommends a vote FOR the Advisory Proposal on Executive Compensation. The
proxy holders intend to vote all proxies they hold in favor of this proposal. If no instruction is given, the proxy
holders intend to vote FOR the proposal.
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PROPOSAL 3—RATIFICATION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
The Board of Directors, upon the recommendation of its Audit Committee, has ratified the selection of
Crowe LLP to serve as our independent registered public accounting firm for 2021, subject to ratification by
our shareholders. A representative of Crowe LLP will be present at the Annual Meeting to answer questions
and will have the opportunity to make a statement if so desired.
We are asking our shareholders to ratify the selection of Crowe LLP as our independent registered public
accounting firm. Although ratification is not required by our Bylaws, the SEC or the Nasdaq Stock Market,
the Board is submitting the selection of Crowe LLP to our shareholders for ratification because we value our
shareholders’ views on the Company’s independent registered public accounting firm and as a matter of good
corporate practice. In the event that our shareholders fail to ratify the selection of Crowe LLP, however, we
reserve the discretion to retain Crowe LLP as our independent registered public accounting firm for 2021.
Even if the selection is ratified, the Audit Committee, in its discretion, may select a different independent
registered public accounting firm at any time during the year if it determines that such a change would be in
the best interests of the Company and our shareholders.
Audit Committee Report
In accordance with its written charter adopted by the Company’s Board of Directors, the Audit
Committee assists the Board in fulfilling its responsibility for oversight of the quality and integrity of the
accounting, auditing, and financial reporting practices of the Company. During 2020, the Committee met 10
times. The Committee discussed the interim financial information contained in each quarterly earnings
announcement with the Chief Financial Officer prior to public release. The Committee also discussed the
interim financial statements with the Chief Financial Officer and the independent auditors prior, with and
without management present, to the filing of each quarterly Form 10-Q and the annual report on Form 10-K.
In discharging its oversight responsibility as to the audit process, the Audit Committee obtained from the
independent auditors a formal written statement describing all relationships between the auditors and the
Company that might bear on the auditors’ independence, discussed with the auditors any relationships that
may impact their objectivity and independence and satisfied itself as to the auditors’ independence. The
Committee reviewed with both the independent auditors and the internal auditor’s audit plans, scope, and
results.
The Committee discussed and reviewed with the independent auditor all communications required by the
standards of the Public Company Accounting Oversights Board (“PCAOB”), including those described in
Auditing Standard No. 1301, Communication with Audit Committees, and discussed and reviewed the results
of the independent auditor’s audit of the consolidated financial statements. The Committee also reviewed and
discussed the results of the internal audit examinations.
The Committee reviewed the audited financial statements of the Company as of and for the year ended
December 31, 2020, with management and the independent auditors. The Committee has also reviewed
“Management’s Assessment over Financial Reporting” and the independent registered public accounting
firm’s opinion on the effectiveness of the Company’s internal control over financial reporting, and discussed
these reports and opinions with management and the independent registered public accounting firm prior to
the Company’s filing of its Annual Report on Form 10-K for the year ended December 31, 2020.
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Based on the above mentioned review and discussion with management and the independent auditors,
the Committee recommended to the Board of Directors that the Company’s audited financial statements be
included in its Annual Report on Form 10-K for the year ended December 31, 2020, for filing with the SEC.
Heritage Commerce Corp
Audit Committee
Julianne M. Biagini-Komas, Chair
Bruce H. Cabral
Laura Roden
Marina Park Sutton
March 4, 2021
The Audit Committee report shall not be deemed incorporated by reference by any general statement
incorporating by reference this proxy statement into any filing under the Securities Act of 1933 or the Securities
Act of 1934, and shall not otherwise be deemed filed under these Acts.
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Independent Registered Public Accounting Firm Fees
The following table summarizes the aggregate fees billed to the Company by its independent auditor:
Category of Services
Fiscal Year
2020
Fiscal Year
2019
Audit fees(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$655,100
$ 625,000
Audit related fees(2)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
48,000
Tax fees(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
205,450
All other fees(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,000
162,500
128,250
97,500
Total accounting fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$918,550
$1,013,250
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(1) Fees for audit services for 2020 and 2019 consisted of the audit of the Company’s annual
financial statements, review of the consolidated financial statements included in the Company’s
Quarterly Reports on Form 10-Q, and the audit of the Company’s internal control over financial
reporting as required by Section 404 of the Sarbanes Oxley Act of 2002.
(2) Fees for audit related services for 2020 and 2019 consisted of financial accounting and reporting
consultations, consents and other services related to SEC matters, and audits of the consolidated
financial statements of the Company’s employee benefit plans.
(3) Fees for tax services for 2020 and 2019 consisted of tax compliance and tax planning and advice.
• Fees for tax compliance services totaled $145,450 and $58,000 in 2020 and 2019, respectively.
Tax compliance services are those rendered based upon facts already in existence or
transactions that have already occurred to document, compute, and obtain government
approval for amounts to be included in tax filings. Such services consisted primarily of
preparation of the Company’s consolidated federal and state income tax returns, trust
preferred returns and a limited liability company tax return for a subsidiary entity.
• Tax planning and advice services are those rendered with respect to proposed transactions,
assistance regarding the Internal Revenue Code Section 280(G) “excise tax gross up”
disclosures in the proxy statement for hypothetical events, and consultation with management
regarding various internal control and accounting matters. Tax planning and advice services
totaled $60,000 and $70,250 in 2020 and 2019, respectively.
(4) All other fees consisted primarily of consulting services for the Company’s strategic objectives
merger and acquisitions, and other discussions.
The ratio of tax planning and advice fees and all other fees to audit fees, audit related fees and tax
compliance fees was 8.25% for 2020 and 19.84% for 2019.
In considering the nature of the services provided by the independent registered public accounting firm,
the Audit Committee determined that such services are compatible with the provision of independent audit
services. The Audit Committee discussed these services with the independent registered public accounting
firm and Company management to determine that they are permitted under the rules and regulations
concerning auditor independence promulgated by the SEC and the Public Company Accounting Oversight
Board.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent
Registered Public Accounting Firm
Under applicable SEC rules, the Audit Committee is required to pre-approve the audit and non-audit
services performed by the independent registered public accountants in order to ensure that they do not impair
the auditors’ independence. The SEC’s rules specify the types of non-audit services that the independent
registered public accountants may not provide to its audit client and establish the Audit Committee’s
responsibility for administration of the engagement of the independent registered public accountants.
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Consistent with the SEC’s rules, the Audit Committee Charter requires that the Audit Committee review
and pre-approve all audit services and permitted non-audit services provided by the independent registered
public accountants to the Company or any of its subsidiaries. The Audit Committee may delegate pre-approval
authority to the Chair of the Audit Committee and if it does, the decisions of that member must be presented
to the full Audit Committee at its next scheduled meeting.
Recommendation of the Audit Committee and the Board of Directors
The Audit Committee of the Board of Directors and the Board of Directors recommends approval of the
ratification of the appointment of Crowe LLP as the Company’s independent registered public accounting firm
for the year ending December 31, 2021. The proxy holders intend to vote all proxies they hold in favor of the
proposal. If no instruction is given, the proxy holders intend to vote FOR approval of the proposal.
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OTHER BUSINESS
If any matters not referred to in this proxy statement come before the meeting, including matters incident
to conducting the meeting, the proxy holders will vote the shares represented by proxies in accordance with
their best judgment. Management is not aware of any other business to come before the meeting and, as of the
date of the preparation of this proxy statement, no shareholder has submitted to management any proposal to
be acted upon at the meeting.
SHAREHOLDER PROPOSALS
Any shareholder that intends to propose business to be considered at the 2022 Annual Meeting must
comply with the Company’s Bylaws including providing the required notice to the Company’s Corporate
Secretary not later than the close of business on February 27, 2022 nor earlier than January 28, 2022. If a
shareholder gives notice of such a proposal before or after these deadlines, proxy holders will be allowed to use
their discretionary voting authority to vote against the shareholder proposal without discussion when and if
the proposal is raised at the 2022 Annual Meeting of Shareholders.
Proposals of shareholders intended to be presented for consideration at the 2022 Annual Meeting of
Shareholders, and to be included in the Company’s proxy statement for that meeting under SEC Rule 14a-8,
must be received by the Company for inclusion in the proxy statement and form of proxy for that meeting no
later than December 15, 2021, in a form that complies with applicable regulations.
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HERITAGE COMMERCE CORP
Deborah Reuter
Executive Vice President
and Corporate Secretary
April 15, 2021
San Jose, California
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HERITAGE COMMERCE CORP
2020 Annual Report on Form 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
☒
☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
or the fiscal year ended December 31, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission file number 000 - 23877
Heritage Commerce Corp
(Exact name of Registrant as Specified in its Charter)
California
(State or Other Jurisdiction of
Incorporation or Organization)
77 - 0469558
(I.R.S. Employer
Identification Number)
224 Airport Parkway
San Jose, California 95110
(Address of Principal Executive Offices including Zip Code)
(408) 947 - 6900
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, No Par Value
Trading Symbol
HTBK
Name of each exchange on which Registered
The NASDAQ Stock Market LLC
(NASDAQ Global Select Market)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes No
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes No
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the
Exchange Act.
Large accelerated filer
Accelerated filer
Non - accelerated filer
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over
financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No
The aggregate market value of the common stock held by non-affiliates of the Registrant as of June 30, 2020, based upon the closing price on that date of $7.51
per share as reported on the NASDAQ Global Select Market, and 47,177,689 shares held, was approximately $354.3 million.
As of February 10, 2021, there were 59,919,957 shares of the Registrant’s common stock (no par value) outstanding.
Portions of the Registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A in connection with
the 2021 Annual Meeting of Shareholders to be held on May 20, 2021 are incorporated by reference into Part III of this Report. The proxy statement will be filed with the
Securities and Exchange Commission not later than 120 days after the Registrant’s fiscal year ended December 31, 2020.
DOCUMENTS INCORPORATED BY REFERENCE
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HERITAGE COMMERCE CORP
INDEX TO ANNUAL REPORT ON FORM 10 - K
FOR YEAR ENDED DECEMBER 31, 2020
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART I.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II.
Item 5.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . .
Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures . . . . . . . .
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III.
Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Item 13.
Item 14.
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Relationships and Related Transactions and Director Independence . . . . . . . . . . . . . . . . . . . . .
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART IV.
Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 15.
Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 16.
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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2
Cautionary Note Regarding Forward - Looking Statements
This Report on Form 10 - K contains various statements that may constitute forward - looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, Rule 175 promulgated thereunder, and Section 21E
of the Securities Exchange Act of 1934, as amended, Rule 3b - 6 promulgated thereunder and are intended to be covered
by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements about our
expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be
forward - looking. These forward - looking statements often can be, but are not always, identified by the use of words such
as “assume,” “expect,” “intend,” “plan,” “project,” “believe,” “estimate,” “predict,” “anticipate,” “may,” “might,”
“should,” “could,” “goal,” “potential” and similar expressions. We base these forward - looking statements on our current
expectations and projections about future events, our assumptions regarding these events and our knowledge of facts at
the time the statements are made. These statements include statements relating to our projected growth, anticipated future
financial performance, and management’s long - term performance goals, as well as statements relating to the anticipated
effects on results of operations and financial condition.
These forward looking statements are subject to various risks and uncertainties that may be outside our control
and our actual results could differ materially from our projected results. Risks and uncertainties that could cause our
financial performance to differ materially from our goals, plans, expectations and projections expressed in forward-looking
statements include those set forth in our filings with the Securities and Exchange Commission (“SEC”), Item 1A of this
Annual Report on Form 10-K, and the following listed below:
•
the effect of the COVID-19 pandemic, and other infectious illness outbreaks that may arise in the future, on
our customers, employees, businesses, liquidity, financial results and overall condition and which has created
significant uncertainties in U.S. and global markets, including our customers' ability to make timely payments
on obligations, and operating expense due to alternative approaches to doing business;
• current and future economic and market conditions in the United States generally or in the communities we
serve, including the effects of declines in property values and overall slowdowns in economic growth should
these events occur;
• effects of and changes in trade, monetary and fiscal policies and laws, including the interest rate policies of
the Federal Open Market Committee of the Federal Reserve Board;
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• our ability to anticipate interest rate changes and manage interest rate risk;
• changes in inflation, interest rates, and market liquidity which may impact interest margins and impact funding
sources;
• volatility in credit and equity markets and its effect on the global economy;
• our ability to effectively compete with other banks and financial services companies and the effects of
competition in the financial services industry on our business;
• our ability to achieve loan growth and attract deposits;
• risks associated with concentrations in real estate related loans;
•
the relative strength or weakness of the commercial and real estate markets where our borrowers are located,
including related asset and market prices;
• credit related impairment charges to our securities portfolio;
• changes in the level of nonperforming assets and charge offs and other credit quality measures, and their
impact on the adequacy of our allowance for credit losses and our provision for credit losses;
•
increased capital requirements for our continual growth or as imposed by banking regulators, which may
require us to raise capital at a time when capital is not available on favorable terms or at all;
3
• regulatory limits on Heritage Bank of Commerce’s ability to pay dividends to the Company;
• changes in our capital management policies, including those regarding business combinations, dividends, and
share repurchases;
• operational issues stemming from, and/or capital spending necessitated by, the potential need to adapt to
industry changes in information technology systems, on which we are highly dependent;
• our inability to attract, recruit, and retain qualified officers and other personnel could harm our ability to
implement our strategic plan, impair our relationships with customers and adversely affect our business,
results of operations and growth prospects;
• possible adjustment of the valuation of our deferred tax assets;
• our ability to keep pace with technological changes, including our ability to identify and address cyber-security
risks such as data security breaches, “denial of service” attacks, “hacking” and identity theft;
•
inability of our framework to manage risks associated with our business, including operational risk and credit
risk;
• risks of loss of funding of Small Business Administration (“SBA”) or SBA loan programs, or changes in those
programs;
• compliance with governmental and regulatory requirements, including the Dodd-Frank Act and others relating
to banking, consumer protection, securities, accounting and tax matters;
• significant changes in applicable laws and regulations, including those concerning taxes, banking and
securities;
• effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well
as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other
accounting standard setters;
• costs and effects of legal and regulatory developments, including resolution of regulatory or other
governmental inquiries, and the results of regulatory examinations or reviews;
•
the expense and uncertain resolution of litigation matters whether occurring in the ordinary course of business
or otherwise;
• availability of and competition for acquisition opportunities;
• risks resulting from domestic terrorism;
• risks resulting from social unrest and protests;
• risks of natural disasters (including earthquakes) and other events beyond our control;
• changes in governmental policy and regulation, including measures taken in response to economic, business,
political and social conditions, such as the SBA Paycheck Protection Program (“PPP”), the Federal Reserve
Board's efforts to provide liquidity to the financial system and provide credit to private commercial and
municipal borrowers, and other programs designed to address the effects of the COVID-19 pandemic;
• our participation as a lender in the PPP and similar programs and its effect on our liquidity, financial results,
businesses and customers, including the availability of program funds and the ability of customers to comply
with requirements and otherwise perform with respect to loans obtained under such programs;
• our success in managing the risks involved in the foregoing factors.
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Forward-looking statements speak only as of the date they are made. The Company does not undertake to update
forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are
made or to reflect the occurrence of unanticipated events. You should consider any forward looking statements in light of
this explanation, and we caution you about relying on forward-looking statements.
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PART I
ITEM 1 — BUSINESS
General
Heritage Commerce Corp, a California corporation organized in 1997, is a bank holding company registered
under the Bank Holding Company Act of 1956, as amended. We provide a wide range of banking services through Heritage
Bank of Commerce, our wholly - owned subsidiary. Heritage Bank of Commerce is a California state - chartered bank
headquartered in San Jose, California and has been conducting business since 1994.
Heritage Bank of Commerce is a multi - community independent bank that offers a full range of commercial
banking services to small and medium - sized businesses and their owners, managers and employees. We operate through
17 full service branch offices located entirely in the general San Francisco Bay Area of California in the counties of
Alameda, Contra Costa, Marin, San Benito, San Francisco, San Mateo, and Santa Clara. Our market includes the
headquarters of a number of technology based companies in the region commonly known as “Silicon Valley.”
Our lending activities are diversified and include commercial, real estate, construction and land development,
consumer and Small Business Administration (“SBA”) guaranteed loans. We generally lend in markets where we have a
physical presence through our branch offices. We attract deposits throughout our market area with a customer - oriented
product mix, competitive pricing, and convenient locations. We offer a wide range of deposit products for business banking
and retail markets. We offer a multitude of other products and services to complement our lending and deposit services.
In addition, Bay View Funding provides factoring financing throughout the United States.
As a bank holding company, Heritage Commerce Corp is subject to the supervision of the Board of Governors of
the Federal Reserve System (the “Federal Reserve”). We are required to file with the Federal Reserve reports and other
information regarding our business operations and the business operations of our subsidiaries. As a California chartered
bank, Heritage Bank of Commerce is subject to primary supervision, periodic examination, and regulation by the California
Department of Financial Protection and Innovation, and by the Federal Reserve, as its primary federal regulator.
Our principal executive office is located at 224 Airport Parkway, San Jose, California 95110, telephone number:
(408) 947-6900.
At December 31, 2020, we had consolidated assets of $4.63 billion, deposits of $3.91 billion and shareholders’
equity of $577.9 million.
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 “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 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 website.
Presidio Bank Merger
The Company completed its merger of its wholly-owned bank subsidiary HBC with Presidio Bank (“Presidio”)
effective October 11, 2019. The merger, which was first announced on May 16, 2019, was concluded following receipt of
approval from both the Company’s and Presidio shareholders and all required regulatory approvals. Presidio’s results of
operations have been included in the Company’s results of operations beginning October 12, 2019.
Presidio was a full-service California state-chartered commercial bank headquartered in San Francisco with
branches in Palo Alto, San Francisco, San Mateo, San Rafael, and Walnut Creek, California.
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Tri-Valley Bank and United American Bank Mergers
The Company completed the merger of Tri-Valley Bank (“Tri-Valley”) into HBC, the Company’s wholly-owned
subsidiary, on April 6, 2018. Tri-Valley’s results of operations have been included in the Company’s results of operations
beginning April 7, 2018. Tri-Valley was a full-service California state-chartered commercial bank with branches in San
Ramon and Livermore, California and served businesses and individuals primarily in Contra Costa and Alameda counties
in Northern California. The Company closed the San Ramon office on July 13, 2018 and incurred $110,000 of lease
termination expense.
The Company completed the merger of United American Bank (“United American”) with HBC on May 4, 2018.
United American’s results of operations have been included in the Company’s results of operations beginning May 5,
2018. United American was a full-service commercial bank located in San Mateo County with full-service branches
located in San Mateo, Redwood City and Half Moon Bay, California and serviced businesses, professionals and
individuals. The Company closed the Half Moon Bay office on August 10, 2018 and incurred $34,000 of lease termination
expense.
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 nineteen 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
Main Branch
224 Airport Parkway
Suite 100
San Jose, CA 95110
Danville: . . . . . . .
Branch Office
387 Diablo Road
Danville, CA 94526
Los Altos: . . . . .
Branch Office
419 South San Antonio Road
Los Altos, CA 94022
Los Gatos: . . . . .
Branch Office
15575 Los Gatos Boulevard
Building B
Los Gatos, CA 95032
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Fremont: . . . . . . .
Branch Office
3137 Stevenson Boulevard
Fremont, CA 94538
Morgan Hill: . . .
Gilroy: . . . . . . . .
Hollister: . . . . . .
Livermore . . . . . .
Branch Office
7598 Monterey Street
Suite 110
Gilroy, CA 95020
Branch Office
351 Tres Pinos Road
Suite 102A
Hollister, CA 95023
Branch Office
1987 First Street
Livermore, CA 94550
Branch Office
18625 Sutter Boulevard
Suite 100
Morgan Hill, CA 95037
Branch Office
325 Lytton Avenue
Suite 100
Palo Alto, CA 94301
Branch Office
300 Main Street
Pleasanton, CA 94566
Palo Alto: . . . . . .
Pleasanton: . . . . .
Redwood City: . .
Branch Office
2400 Broadway
Suite 100
Redwood City, CA 94063
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Walnut Creek: . . . .
Walnut Creek: . . . .
Branch Office
1990 N. California Boulevard
Suite 100
Walnut Creek, CA 94596
Loan Production Office
101 Ygnacio Valley Road
Suite 108
Walnut Creek, CA 94596
Bay View
Funding: . . . . . . .
Administrative Office
224 Airport Parkway
Suite 200
San Jose, CA 95110
San Francisco: . .
San Mateo: . . . . .
San Rafael: . . . . .
Sunnyvale: . . . . .
Branch Office
120 Kearny Street
Suite 2300
San Francisco, CA 94108
Branch Office
400 S. El Camino Real
Suite 150
San Mateo, CA 94402
Branch Office
999 5th Avenue
Suite 100
San Rafael, CA 94901
Branch Office
333 W. El Camino Real
Suite 150
Sunnyvale, CA 94087
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. We also offer home equity
lines of credit (“HELOCS”), to accommodate the needs of business owners and individual clients, as well as consumer
loans (both secured and unsecured). In the event creditworthy loan customers’ borrowing needs exceed our legal lending
limit, we have the ability to sell participations in those loans to other banks. We encourage relationship banking, obtaining
a substantial portion of each borrower’s banking business, including deposit accounts.
As of December 31, 2020, the percentage of our total loans for each of the principal areas in which we directed
our lending activities were as follows: (i) commercial and industrial loans 32% (including SBA loans, PPP loans, asset-
based lending, and factored receivables); (ii) commercial real estate loans 48%; (iii) land and construction loans 6%; (iv)
residential mortgage loans 3%; and (v) consumer and other loans (including home equity and multifamily loans) 11%.
While no specific industry concentration is considered significant, our lending operations are located in market areas
dependent on technology and real estate industries and their supporting companies.
Commercial and Industrial Loans. Our commercial loan portfolio is comprised of operating secured and
unsecured loans advanced for working capital, equipment purchases and other business purposes. Generally short - term
loans have maturities ranging from thirty days to one year, and “term loans” have maturities 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 generally provide for floating or fixed interest rates, with
monthly payments of both principal and interest. Repayment of secured and unsecured commercial loans depends
substantially on the borrower’s underlying business, financial condition and cash flows, as well as the sufficiency of the
collateral. Compared to real estate, the collateral may be more difficult to monitor, evaluate and sell. It may also depreciate
more rapidly than real estate. Such risks can be significantly affected by economic conditions. In addition, the Company
had $290.7 million of PPP loans at December 31, 2020.
Our factored receivables portfolio is originated by Bay View Funding. Factored receivables are receivables that
have been acquired from the originating company 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 average life of the factored receivables is 37 days.
HBC’s commercial loans, except for the asset-based lending and the factored receivables at Bay View Funding,
are primarily originated from locally - oriented commercial activities in communities where HBC has a physical presence
through its branch offices.
8
Commercial Real Estate Loans. The commercial real estate (“CRE”) loan portfolio is comprised of loans secured
by commercial real estate. Commercial real estate loans comprise two segments differentiated by owner occupied
commercial real estate and non-owner commercial real estate. Owner occupied commercial real estate loans are secured
by commercial properties that are at least 50% occupied by the borrower or borrower affiliate. Non-owner occupied
commercial real estate loans are secured by commercial properties that are less than 50% occupied by the borrower or
borrower affiliate. Commercial real estate loans may be adversely affected by conditions in the real estate markets or in
the general economy. These loans are generally advanced based on the borrower’s cash flow, and the underlying collateral
provides a secondary source of payment. HBC generally restricts real estate term loans to no more than 75% of the
property’s appraised value or the purchase price of the property, depending on the type of property and its utilization. HBC
offers both fixed and floating rate loans. Maturities on such loans are generally restricted to between five and ten years
(with amortization ranging from fifteen to twenty - five years and a balloon payment due at maturity); however, SBA and
certain real estate loans that can be sold in the secondary market may be advanced for longer maturities. CRE loans
typically involve large balances to single borrowers or groups of related borrowers. Since payments on these loans are
often dependent on the successful operation or management of the properties, as well as the business and financial
condition of the borrower, repayment of such loans may be subject to adverse conditions in the real estate market, adverse
economic conditions or changes in applicable government regulations. If the cash flow from the project decreases, or if
leases are not obtained or renewed, the borrower’s ability to repay the loan may be impaired.
Construction Loans. We make commercial construction loans for rental properties, commercial buildings and
homes built by developers on speculative, undeveloped property. We also make construction loans for homes and
commercial buildings built by owner occupants. The terms of commercial construction loans are made in accordance with
our loan policy. Advances on construction loans are made in accordance with a schedule reflecting the cost of construction,
but are generally limited to a 70% loan - to - value ratio, as completed. Repayment of construction loans on non - residential
properties is normally expected from the property’s eventual rental income, income from the borrower’s operating entity
or the sale of the subject property. In the case of income - producing property, repayment is usually expected from
permanent financing upon completion of construction. At times we provide the permanent mortgage financing on our
construction loans on income - producing property. Construction loans are interest - only loans during the construction
period, which typically do not exceed 18 months. If HBC provides permanent financing the short - term loan converts to
permanent, amortizing financing following the completion of construction. Generally, before making a commitment to
fund a construction loan, we require an appraisal of the property by a state - certified or state - licensed appraiser. We review
and inspect properties before disbursement of funds during the term of the construction loan. The repayment of
construction loans is dependent upon the successful and timely completion of the construction of the subject property, as
well as the sale of the property to third parties or the availability of permanent financing upon completion of all
improvements. Construction loans expose us to the risk that improvements will not be completed on time, and in
accordance with specifications and projected costs. Construction delays, the financial impairment of the builder, interest
rate increases or economic downturn may further impair the borrower’s ability to repay the loan. In addition, the borrower
may not be able to obtain permanent financing or ultimate sale or rental of the property may not occur as anticipated. HBC
utilizes underwriting guidelines to assess the likelihood of repayment from sources such as sale of the property or
permanent mortgage financing prior to making the construction loan.
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SBA Loans. SBA loans are made through programs designed by the federal government to assist the small
business community in obtaining financing from financial institutions that are given government guarantees as an incentive
to make the loans. HBC has been designated as an SBA Preferred Lender. Our SBA loans fall into three categories: loans
originated under the SBA’s 7a Program (“7a Loans”); loans originated under the SBA’s 504 Program (“504 Loans”); and
SBA “Express” Loans. SBA 7a Loans are commercial business loans generally made for the purpose of purchasing real
estate to be occupied by the business owner, providing working capital, and/or purchasing equipment or inventory. SBA
504 Loans are collateralized by commercial real estate and are generally made to business owners for the purpose of
purchasing or improving real estate for their use and for equipment used in their business. The SBA “Express” Loans or
lines of credit are for businesses that want to improve cash flow, refinance debt, or fund improvements, equipment, or real
estate. It features an abbreviated SBA application process and accelerated approval times, plus it can offer longer terms
and lower down payment requirements than conventional loans.
SBA lending is subject to federal legislation that can affect the availability and funding of the program. From
time to time, this dependence on legislative funding causes limitations and uncertainties with regard to the continued
funding of such programs, which could potentially have an adverse financial impact on our business.
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Home Equity Loans. Our home equity line portfolio is comprised of home equity lines of credit to customers in
our markets. Home equity lines of credit are underwritten in a manner such that they result in credit risk that is substantially
similar to that of residential mortgage loans. Nevertheless, home equity lines of credit have greater credit risk than
residential mortgage loans because they are often secured by mortgages that are subordinated to the existing first mortgage
on the property, which we do not hold, and they are not covered by private mortgage insurance coverage.
Multifamily Loans. Multifamily loans are loans on residential properties with five or more units. These loans rely
primarily on the cash flows of the properties securing the loan for repayment and secondarily on the value of the properties
securing the loan. The cash flows of these borrowers can fluctuate along with the values of the underlying property
depending on general economic conditions.
Residential Mortgage Loans. From time to time the Company has purchased single family residential mortgage
loans. There were no purchases of residential mortgage loans during the years ended December 31, 2020, 2019 and 2018.
Residential mortgage loans outstanding at December 31, 2020 totaled $85.1 million, which included $33.4 million of
purchased residential mortgage loans, and $12.9 million of residential mortgage loans from United American. HBC does
not originate first trust deed home mortgage loans or home improvement loans, other than HELOCS.
Consumer and Other Loans. The consumer loan portfolio is composed of miscellaneous consumer loans
including loans for financing automobiles, various consumer goods and other personal purposes. Consumer loans are
generally secured. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment
for the outstanding loan, and the remaining deficiency may not warrant further substantial collection efforts against the
borrower. In addition, consumer loan collections are dependent on the borrower’s continued financial stability, which can
be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal
and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered
on such loans.
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. In order to facilitate 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 a “remote deposit capture” product that allows deposits to be made via computer at the customer’s
business location. We also offer customers “e-statements” that allows customers to receive statements electronically,
which is more convenient and secure than receiving paper statements.
For customers requiring full Federal Deposit Insurance Corporation (“FDIC”) insurance on certificates of deposit
in excess of $250,000, we offer the Certificate of Deposit Account Registry Service (“CDARS”) program, which allows
HBC to place the certificates of deposit with other participating banks to maximize the customers’ FDIC insurance. HBC
also receives reciprocal deposits from other participating financial institutions.
Electronic Banking
While personalized, service-oriented banking is the cornerstone of our business plan, we use technology and the
Internet as a secondary means for servicing customers, to compete with larger banks and to provide a convenient platform
for customers to review and transact business. We offer sophisticated electronic or “internet banking” opportunities that
permit commercial customers to conduct much of their banking business remotely from their home or business. However,
our customers will 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.
HBC offers multiple electronic banking options to its customers. It does not allow the origination of deposit
accounts through online banking. All of HBC’s electronic banking services allow customers to review transactions and
statements, review images of paid items, transfer funds between accounts at HBC, place stop orders, pay bills and export
to various business and personal software applications. HBC online commercial banking also allows customers to initiate
domestic wire transfers and ACH transactions, with the added security and functionality of assigning discrete access and
levels of security to different employees of the client and division of functions to allow separation of duties, such as input
and release.
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We also offer our internet banking customers an additional third party product designed to assist in mitigating
fraud risk to both the customer and the Bank in internet banking and other internet activities conducted by the customer,
at no cost to the customer.
Other Banking Services
We offer a multitude of other products and services to complement our lending and deposit services. These
include cashier’s checks, bank by mail, night depositories, safe deposit boxes, direct deposit, automated payroll services,
electronic funds transfers, online bill pay, homeowner association services, and other customary banking services. HBC
currently operates ATMs at six different locations. In addition, we have established a convenient customer service group
accessible by toll free telephone to answer questions and promote a high level of customer service. HBC does not have a
trust department. In addition to the traditional financial services offered, HBC offers remote deposit capture, automated
clearing house origination, electronic data interchange and check imaging. HBC continues to investigate products and
services that it believes addresses the growing needs of its customers and to analyze other markets for potential expansion
opportunities.
Investments
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Our investment policy is established by the Board of Directors. The general investment strategies are developed
and authorized by our Finance and Investment Committee of the Board of Directors. The investment policy is reviewed
annually by the Finance and Investment Committee, and any changes to the policy are subject to approval by the full Board
of Directors. 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 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 of Directors’ Finance and Investment Committee on a monthly basis.
Sources of Funds
Deposits traditionally have been our primary source of funds for our investment and lending activities. We also
are able to borrow from the Federal Home Loan Bank (“FHLB”) of San Francisco and the Federal Reserve Bank (“FRB”)
of San Francisco to supplement cash flow needs. Our additional sources of funds are scheduled loan payments, maturing
investments, loan repayments, income on other earning assets, and the proceeds of loan sales and securities sales.
Interest rates, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit
rates and terms are based primarily on current operating strategies and market interest rates, liquidity requirements and
our deposit growth goals.
On May 26, 2017, the Company completed an underwritten public offering of $40,000,000 aggregate principal
amount of its fixed-to-floating rate subordinated notes (“Subordinated Debt”) due June 1, 2027. The Subordinated Debt
initially bears a fixed interest rate of 5.25% per year. Commencing on June 1, 2022, the interest rate on the Subordinated
Debt resets quarterly to the three-month London Inter-Bank Offered Rate (“LIBOR”) plus a spread of 336.5 basis points,
payable quarterly in arrears. Interest on the Subordinated Debt is payable semi-annually on June 1st and December 1st of
each year through June 1, 2022 and quarterly thereafter on March 1st, June 1st, September 1st and December 1st of each
year through the maturity date or early redemption date. The Company, at its option, may redeem the Subordinated Debt,
in whole or in part, on any interest payment date on or after June 1, 2022 without a premium. It is anticipated that the
LIBOR index for new contracts will cease by December 31, 2021. However the LIBOR index will continue to be published
through June 30, 2023, and it is anticipated that the Subordinated Debt will remain under this LIBOR index until this time.
The Federal Reserve Bank of New York has established the Secured Overnight Financing Rate (“SOFR”) as its
recommended alternative to LIBOR, but until the alternative rate is instituted, the SOFR fallback rate is not definitive. We
have created a sub-committee of our Asset Liability Management Committee to address LIBOR transition and phase-out
issues. We are currently reviewing loan documentation, technology systems and procedures we will need to implement
for the transition.
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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 customer segments. Many larger unregulated competitors are
able to compete across geographic boundaries, and provide customers with meaningful alternatives to most significant
banking services and products. These consolidation trends are likely to continue. The increasingly competitive
environment is a result primarily of changes in regulation, changes in technology and product delivery systems, and the
consolidation among financial service providers.
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 424 offices that control
a combined 59.93% of deposit market share based on June 30, 2020 FDIC market share data. HBC ranks sixteenth with
0.57% share of total deposits based on June 30, 2020 market share data. Larger institutions have, among other advantages,
the ability to finance wide - ranging advertising campaigns and to allocate their resources to regions of highest yield and
demand. Larger banks are seeking to expand lending to small businesses, which are traditionally community bank
customers. 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 customers whose needs exceed our legal lending limit, we arrange for the sale, or “participation,” of some of the
balances to financial institutions that are not within our geographic footprint.
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 customers automated transfer payment services that previously were considered
traditional banking products. In addition, many customers now expect a choice of delivery channels, including telephone
and smart phones, mail, personal computer, ATMs, self - service branches, and/or in - store branches.
Strong competition for deposits and loans among financial institutions and non - banks alike affects interest rates
and other terms on which financial products are offered to customers. Mergers between financial institutions have placed
additional pressure on other banks within the industry to remain competitive by streamlining operations, reducing
expenses, and increasing revenues. Competition has also intensified due to Federal and state interstate banking laws
enacted in the mid - 1990’s, which permit banking organizations to expand into other states. The relatively large and
expanding California market has been particularly attractive to out of state institutions. The Gramm - Leach - Bliley Act of
1999 has made it possible for full affiliations to occur between banks and securities firms, insurance companies, and other
financial companies, and has also intensified competitive conditions.
In order to compete with the other financial service providers, the Company principally relies upon
community - oriented, personalized service, local promotional activities, personal relationships established by officers,
directors, and employees with its customers, and specialized services tailored to meet its customers’ needs. 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 customer’s needs, the Company seeks to arrange for
such loans on a participation basis with other financial institutions or to have those services provided in whole or in part
by its correspondent banks. See Item 1 — “Business — Correspondent Banks.”
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Human Capital
We strive to hire, develop and promote a workforce that shares our mission and values and cultivates a culture of
team work, diversity and inclusion that will meet the expectations of our customers, markets and communities. To foster
these goals and to attract and retain quality employees we aim to ensure an inclusive, safe and healthy workplace, and to
provide our employees with competitive and comprehensive compensation, professional development opportunities and
robust health and welfare programs.
Employee Profile
We seek employees from a wide range of backgrounds and experiences for positions through-out our Company
with the skills and experience necessary for the success of our business banking model We are committed to a diverse and
inclusive workplace and we have developed a formalized Affirmative Action Plan to meet these objectives. We employed
318 full time and 17 part time employees as of December 31, 2020. We had 331 full time equivalent employees at
December 31, 2020, and 357 at December 31, 2019, and 302 at December 31, 2018. The average tenure of all employees,
including employees that joined through acquisitions, is eight years.
Compensation
Our compensation philosophy is driven by our objective to attract and retain the premier talent needed to lead our
Company in an extremely competitive environment and to strongly align the interests of our employees with those of our
shareholders for the long term. Our employee compensation is aligned with our overall business strategy, with a focus on
driving growth, profitability and long-term value for our shareholders. Our compensation philosophy encompasses a broad
program and includes competitive base salaries, annual bonus opportunities, and Company matched 401(k) Plan
contributions. We also provide equity awards throughout our workforce.
Health and Safety
The health and safety of our employees is paramount and the Company’s success is fundamentally connected
with the well-being of our team members. All full time employees are offered partially subsidized health and medical
insurance coverage, paid vacation time, paid sick leave, paid bereavement leave, standard maternity and medical leave
policies and Company subsidized health club membership.
We are and have been taking proactive steps to protect employees during the current COVID-19 outbreak. We
believe we have been able to operate effectively to service our customers and at the same time maintain the safety of all
employees within the workplace. We have identified high risk groups, limited travel, implemented enhanced sanitary
procedures at Bank locations, required masks, enforced social distancing, expanded remote working capabilities and
access, and have implemented specific procedures for handling any instances of COVID-19 exposure in the workplace in
accordance with local health department directives.
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Employee Development and Opportunity
Employee development is a critical focus for the Bank to ensure team members have long term success within
the organization. We have established standard review processes for all team members that include employee feedback,
performance assessment and development goals for all positions. Additionally, we provide an education reimbursement
program and we may assist employees on a case by case basis with associated education costs, additional education and
development programs relevant to their contribution and success at the Bank. We have a hire from within first policy and
the Company looks first to internal candidates to fill open positions.
Supervision and Regulation
General
Financial institutions, their holding companies and their affiliates are extensively regulated under U.S. federal
and state law. As a result, the growth and earnings performance of the Company and its subsidiaries may be affected not
only by management decisions and general economic conditions, but also by the requirements of federal and state statutes
and by the regulations and policies of various bank regulatory agencies, including the California Department of Financial
Protection and Innovation (“DFPI”), the Federal Reserve, the FDIC, and the Consumer Financial Protection Bureau
(“CFPB”). Furthermore, tax laws administered by the Internal Revenue Service and state taxing authorities, accounting
rules developed by the FASB, securities laws administered by the SEC and state securities authorities, anti-money
laundering laws enforced by the Treasury have an impact on our business. The effect of 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, and the nature and extent of future legislative, regulatory or other changes affecting financial
institutions are impossible to predict with any certainty.
Federal and state banking laws impose a comprehensive system of supervision, regulation and enforcement on
the operations of financial institutions, their holding companies and affiliates intended primarily for the protection of the
FDIC-insured deposits and depositors of banks, rather than their shareholders. These federal and state laws, and the related
regulations of the bank regulatory agencies, affect, among other things, the scope of business, the kinds and amounts of
investments banks and bank holding companies may make, their reserve requirements, capital levels relative to operations,
the nature and amount of collateral for loans, the establishment of branches, the ability to merge, consolidate and acquire,
dealings with insiders and affiliates and the payment of dividends.
This supervisory and regulatory framework subjects banks and bank holding companies to regular examination
by their respective regulatory agencies, which results in examination reports and ratings that, while not publicly available,
can affect the conduct and growth of their businesses. These examinations consider not only compliance with applicable
laws and regulations, but also capital levels, asset quality and risk, management ability and performance, earnings,
liquidity, and various other factors. The regulatory agencies generally have broad discretion to impose restrictions and
limitations on the operations of a regulated entity where the agencies determine, among other things, that such operations
are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations or with
the supervisory policies of these agencies.
The following is a summary of the material elements of the supervisory and regulatory framework applicable to
the Company and its subsidiaries, including HBC. It does not describe all of the statutes, regulations and regulatory policies
that apply, nor does it restate all of the requirements of those that are described. The descriptions are qualified in their
entirety by reference to the particular statutory and regulatory provision.
Financial Regulatory Reform
Legislation and regulations enacted and implemented since 2008 in response to the U.S. economic downturn and
financial industry instability continue to impact most institutions in the banking sector. Most of the provisions of the Dodd-
Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), which was enacted in 2010, are now effective
and have been fully implemented, but a few are still subject to rulemaking. Many provisions of Dodd-Frank have affected
our operations and expenses, including but not limited to changes in FDIC assessments, the permitted payment of interest
on demand deposits, and enhanced compliance requirements. Some of the rules and regulations promulgated or yet to be
promulgated under Dodd-Frank will apply directly only to institutions much larger than ours, but could indirectly impact
smaller banks, either due to competitive influences or because certain required practices for
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larger institutions may subsequently become expected “best practices” for smaller institutions. We could see continued
attention and resources devoted by the Company to ensure compliance with the statutory and regulatory requirements
engendered by Dodd-Frank.
Regulatory Capital Requirements
The Company and HBC are subject to the comprehensive capital framework adopted by the federal banking
agencies for U.S. banking organizations known as the Basel III Capital Rules. The Basel III Capital Rules are risk-based,
meaning that they provide a measure of capital adequacy that reflects the degree of risk associated with a banking
organization’s operations, both for transactions reported on the balance sheet as assets and for transactions, such as letters
of credit and recourse arrangements, that are recorded as off-balance sheet items.
The Basel III Capital Rules became effective for the Company and HBC on January 1, 2015 (subject to phase-in
periods for some of their components). The Basel III Capital Rules: (i) introduce a new capital measure called Common
Equity Tier 1 (“CET1”), and a related regulatory capital ratio of CET1 to risk-weighted assets; (ii) specify that Tier 1
capital consists of CET1 and “Additional Tier 1 capital” instruments, which are instruments treated as Tier 1 instruments
under the prior capital rules that meet certain revised requirements; (iii) mandate that most deductions or adjustments to
regulatory capital measures be made to CET1 and not to the other components of capital; and (iv) expand the scope of the
deductions from and adjustments to capital, as compared to existing regulations. Under the Basel III Capital Rules, for
most banking organizations, the most common form of additional Tier 1 capital is noncumulative perpetual preferred stock
and the most common form of Tier 2 capital is subordinated notes and a portion of the allowance for credit losses on loans,
in each case, subject to the Basel III Capital Rules’ specific requirements.
The Basel III Capital Rules also introduced a “capital conservation buffer,” composed entirely of CET1, on top
of 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 CET1 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. The implementation of the capital conservation buffer was phased in over a three-year period until it
reached 2.5% on January 1, 2019. As of January 1, 2019, the Company and HBC must maintain the following fully phased-
in minimum capital ratios:
•
•
•
•
4.0% Tier 1 leverage ratio;
4.5% CET1 to risk-weighted assets, plus the capital conservation buffer, effectively resulting in a minimum
ratio of CET1 to risk-weighted assets of at least 7%;
6.0% Tier 1 capital to risk-weighted assets, plus the capital conservation buffer, effectively resulting in a
minimum Tier 1 capital ratio of at least 8.5%; and
8.0% total capital to risk-weighted assets, plus the capital conservation buffer, effectively resulting in a
minimum total capital ratio of at least 10.5%.
The Basel III Capital Rules provide for a number of deductions from and adjustments to CET1. These include,
for example, the requirement that: (i) mortgage servicing rights; (ii) deferred tax assets arising from temporary differences
that could not be realized through net operating loss carrybacks; and (iii) significant investments in non-consolidated
financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such items,
in the aggregate, exceed 15% of CET1. Implementation of the deductions and other adjustments to CET1 began on
January 1, 2015 and were phased-in over a four-year period (beginning at 40% on January 1, 2015 and an additional 20%
per year thereafter). Under the Basel III Capital Rules, the effects of certain accumulated other comprehensive income or
loss items are not excluded for the purposes of determining regulatory capital ratios; however, non-advanced approaches
banking organizations (i.e., banking organizations with less than $250 billion in total consolidated assets or with less than
$10 billion of on-balance sheet foreign exposures), including the Company and HBC, may make a one-time permanent
election to exclude these items. The Company and HBC made this election in the first quarter of 2015’s call reports in
order to avoid significant variations in the level of capital depending upon the impact of interest rate fluctuations on the
fair value of its available-for-sale investment securities portfolio.
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The Basel III Capital Rules prescribe a new standardized approach for risk weightings that expands the risk
weighting categories from the previous four Basel I-derived categories (0%, 20%, 50% and 100%) to a larger and more
risk-sensitive number of categories, generally ranging from 0% for U.S. Government and agency securities, to 600% for
certain equity exposures, depending on the nature of the assets. The new capital rules generally result in higher risk weights
for a variety of asset classes, including certain CRE mortgages. Additional aspects of the Basel III Capital Rules that are
relevant to the Company and HBC include:
•
•
•
•
•
consistent with the Basel I risk-based capital rules, assigning exposures secured by single-family residential
properties to either a 50% risk weight for first-lien mortgages that meet prudent underwriting standards or a
100% risk weight category for all other mortgages;
providing for a 20% credit conversion factor for the unused portion of a commitment with an original
maturity of one year or less that is not unconditionally cancellable (set at 0% under the Basel I risk-based
capital rules);
assigning a 150% risk weight to all exposures that are nonaccrual or 90 days or more past due (set at 100%
under the Basel I risk-based capital rules), except for those secured by single-family residential properties,
which will be assigned a 100% risk weight, consistent with the Basel I risk-based capital rules;
applying a 150% risk weight instead of a 100% risk weight for certain high volatility CRE acquisition,
development and construction loans; and
applying a 250% risk weight to the portion of mortgage servicing rights and deferred tax assets arising from
temporary differences that could not be realized through net operating loss carrybacks that are not deducted
from CET1 capital (set at 100% under the Basel I risk-based capital rules).
As of December 31, 2020, the Company’s and HBC’s capital ratios exceeded the minimum capital adequacy
guideline percentage requirements of the federal banking agencies for “well capitalized” institutions under the Basel III
Capital Rules on a fully phased-in basis.
With respect to HBC, the Basel III Capital Rules also revise the prompt corrective action (“PCA”), regulations
pursuant to Section 38 of the Federal Deposit Insurance Act, as discussed below under “Prompt Corrective Action.”
On September 17, 2019, the federal bank regulatory agencies adopted a final rule that provides certain community
banking organizations the ability to opt into a new community bank leverage ratio (“CBLR”) intended to simplify
regulatory capital requirements. Starting on January 1, 2020, community banking organizations with less than $10 billion
in total consolidated assets may elect the new community banking leverage framework if they have a CBLR of greater
than 8% in 2020, 8.5% in 2021, and 9% beginning on January 1, 2022, and hold 25 percent or less of assets in off-balance
sheet exposures and 5 percent or less of assets in trading assets and liabilities. The CBLR is determined by dividing a
banking organization’s tangible equity capital by its average total consolidated assets. Upon the opt-in to the community
banking leverage framework, a qualifying community banking organization would not be subject to other risk-based and
capital leverage requirements (including the Basel III and Basel IV requirements) and would be considered to have met
the well capitalized ratio requirements. The Company determined not to opt in to the community banking leverage
framework as of January 1, 2020.
Prompt Corrective Action
The Federal Deposit Insurance Act, as amended (“FDIA”), requires federal banking agencies to take PCA in
respect of depository institutions that do not meet minimum capital requirements. The FDIA includes the following five
capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and
“critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare with
various relevant capital measures and certain other factors, as established by regulation. The Basel III Capital Rules,
revised the PCA requirements effective January 1, 2015. Under the revised PCA provisions of the FDIA, an insured
depository institution generally will be classified in the following categories based on the capital measures indicated:
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PCA Category
Well capitalized . . . . . . . . . . . . . . . .
Adequately capitalized . . . . . . . . . .
Undercapitalized . . . . . . . . . . . . . . .
Significantly undercapitalized . . . .
Total Risk-
Based Capital
Ratio
10 %
8 %
< 8 %
< 6 %
Tier 1 Risk-
Based Capital
Ratio
8.0 %
6.0 %
< 6 %
< 4 %
CET1 Risk-
Based Ratio
6.5 %
4.5 %
< 4.5 %
< 3.0 %
Tier 1 Leverage
Ratio
5.0 %
4.0 %
< 4 %
< 3 %
The institution is considered “critically undercapitalized” if the institution’s tangible equity (defined as Tier 1
equity plus non-Tier 1 perpetual preferred stock) is equal to or less than 2.0% of average quarterly tangible assets.
An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its
capital ratios, if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination
rating with respect to certain matters. A bank’s capital category is determined solely for the purpose of applying PCA
regulations and the capital category may not constitute an accurate representation of the bank’s overall financial condition
or prospects for other purposes.
The FDIA generally prohibits a depository institution from making any capital distributions (including payment
of a dividend) or paying any management fee to its parent holding company, if the depository institution would thereafter
be “undercapitalized.” “Undercapitalized” institutions are subject to growth limitations and are required to submit capital
restoration plans. If a depository institution fails to submit an acceptable plan, it is treated as if it is “significantly
undercapitalized.” “Significantly undercapitalized” depository institutions may be subject to a number of requirements
and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce
total assets, and cessation of receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are
subject to the appointment of a receiver or conservator.
The capital classification of a bank holding company and a bank affects the frequency of regulatory examinations,
the bank holding company’s and the bank’s ability to engage in certain activities and the deposit insurance premium paid
by the bank. As of December 31, 2020, we met the requirements to be “well-capitalized” based upon the aforementioned
ratios for purposes of the PCA regulations, as currently in effect.
The appropriate federal banking agency may determine (after notice and opportunity for a hearing) that the
institution is in an unsafe or unsound condition or deems the institution to be engaging in an unsafe or unsound practice.
The appropriate agency is also permitted to require an adequately capitalized or undercapitalized institution to comply
with the supervisory provisions as if the institution were in the next lower category (but not treat a significantly
undercapitalized institution as critically undercapitalized) based on supervisory information other than the capital levels
of the institution.
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Heritage Commerce Corp
General. As a bank holding company, HCC is subject to regulation and supervision by the Federal Reserve under
the Bank Holding Company Act of 1956, as amended, or the BHCA. Under the BHCA, HCC is subject to periodic
examination by the Federal Reserve. 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 policy, and as
now codified by the Dodd-Frank Act, HCC is legally obligated to act as a source of financial strength to HBC and to
commit resources to support HBC in circumstances where HCC might not otherwise do so.
HCC is also a bank holding company within the meaning of Section 1280 of the California Financial Code.
Consequently, HCC is subject to examination by, and may be required to file reports with, the DFPI.
SEC and NASDAQ. HCC’s stock is traded on the NASDAQ Global Select Market (under the trading symbol
“HTBK”), and HCC is subject to rules and regulations of The NASDAQ Stock Market, including those related to corporate
governance. HCC is also subject to the periodic reporting requirements of Section 13 of the Securities Exchange Act of
1934, as amended (the “Exchange Act”), which requires HCC to file annual, quarterly and other current reports with the
SEC. HCC is subject to additional regulations including, but not limited to, the proxy and tender offer rules promulgated
by the SEC under Sections 13 and 14 of the Exchange Act, the reporting requirements of directors, executive officers and
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principal shareholders regarding transactions in HCC’s common stock and short swing profits rules promulgated by the
SEC under Section 16 of the Exchange Act, and certain additional reporting requirements by principal shareholders of
HCC promulgated by the SEC under Section 13 of the Exchange Act.
The Sarbanes Oxley Act of 2002. HCC is subject to the accounting oversight and corporate governance
requirements of the Sarbanes Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”). These include, for example:
(i) required executive certification of financial presentations; (ii) increased requirements for board audit committees and
their members; (iii) enhanced disclosure of controls and procedures and internal control over financial reporting;
(iv) enhanced controls over and reporting of insider trading; and (v) increased penalties for financial crimes and forfeiture
of executive bonuses in certain circumstances.
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 and from engaging in any business other than that
of banking, managing and controlling banks or furnishing services to banks and their subsidiaries. This general prohibition
is subject to a number of exceptions. The principal exception allows bank holding companies to engage in, and to own
shares of companies engaged in, certain businesses found by the Federal Reserve prior to November 11, 1999 to be “so
closely related to banking as to be a proper incident thereto.” This authority would permit HCC to engage in a variety of
banking-related businesses, including the ownership and operation of a savings association, or any entity engaged in
consumer finance, equipment leasing, the operation of a computer service bureau (including software development) and
mortgage banking and brokerage. The BHCA generally does not place territorial restrictions on the domestic activities of
nonbank subsidiaries of bank holding companies. The Federal Reserve has the power to order any bank holding company
or its subsidiaries to terminate any activity or to terminate its ownership or control of any subsidiary when the Federal
Reserve has reasonable grounds to believe that continuing such activity, ownership or control constitutes a serious risk to
the financial soundness, safety or stability of any bank subsidiary of the bank holding company.
Bank holding companies that meet certain eligibility requirements prescribed by the BHCA and elect to operate
as financial holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking
activities, including securities and insurance underwriting and sales, merchant banking and any other activity that the
Federal Reserve, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature
or incidental to any such financial activity or that the Federal Reserve determines by order to be complementary to any
such financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the
financial system generally. HCC has not elected to be a financial holding company, and we have not engaged in any
activities determined by the Federal Reserve to be financial in nature or incidental or complementary to activities that are
financial in nature.
Capital Requirements. Bank holding companies are required to maintain capital in accordance with Federal
Reserve capital adequacy requirements, as affected by the Dodd-Frank Act and Basel III. For a discussion of capital
requirements, see “Regulatory Capital Requirements” above.
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. The Dodd-Frank Act codified this policy as a
statutory requirement. Under this requirement HCC is expected to commit 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 the subsidiary bank 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 or a violation of the Federal Reserve’s regulations
or both. The source of strength doctrine most directly affects bank holding companies where a bank holding company’s
subsidiary bank fails to maintain adequate capital levels. In such a 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 HBC are
subordinate in right of payment to deposits and to certain other indebtedness of HBC. The BHCA provides that in the
event of HCC’s bankruptcy any commitment by a bank holding company 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. HCC’s ability to pay dividends to its shareholders is
affected by both general corporate law considerations and the policies of the Federal Reserve applicable to bank holding
companies. As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company
should eliminate, defer or significantly reduce dividends to shareholders if: (i) the bank holding company’s net income
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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. If HCC’s fails to adhere to these policies, the
Federal Reserve could find that HCC is operating in an unsafe and unsound manner. In addition, under the Basel III Rule,
institutions that seek to pay dividends must maintain 2.5% in CET1 attributable to the capital conservation buffer. See
“Supervision and Regulation—Regulatory Capital Requirements” above.
Subject to exceptions for well-capitalized and well-managed bank holding companies, Federal Reserve
regulations also require approval of bank holding company purchases and redemptions of its securities if the gross
consideration paid exceeds 10 percent of consolidated net worth for any 12-month period. In addition, under Federal
Reserve policies, bank holding companies must consult with and inform the Federal Reserve in advance of (i) redeeming
or repurchasing capital instruments when experiencing financial weakness and (ii) redeeming or repurchasing common
stock and perpetual preferred stock if the result will be a net reduction in the amount of such capital instruments outstanding
for the quarter in which the reduction occurs.
As a California corporation, HCC is subject to the limitations of California law, which allows a corporation to
distribute cash or property to shareholders, including a dividend or repurchase or redemption of shares, if the corporation
meets either a retained earnings test or a “balance sheet” test. Under the retained earnings test, HCC may make a
distribution from retained earnings to the extent that its retained earnings exceed the sum of (i) the amount of the
distribution plus (ii) the amount, if any, of dividends in arrears on shares with preferential dividend rights. HCC may also
make a distribution if, immediately after the distribution, the value of its assets equals or exceeds the sum of (a) its total
liabilities plus (b) the liquidation preference of any shares which have a preference upon dissolution over the rights of
shareholders receiving the distribution. Indebtedness is not considered a liability if the terms of such indebtedness provide
that payment of principal and interest thereon are to be made only if, and to the extent that, a distribution to shareholders
could be made under the balance sheet test. In addition, HCC may not make distributions if it is, or as a result of the
distribution would be, likely to be unable to meet its liabilities (except those whose payment is otherwise adequately
provided for) as they mature. A California corporation may specify in its articles of incorporation that distributions under
the retained earnings test or balance sheet test can be made without regard to the preferential rights amount. HCC’s articles
of incorporation do not address distributions under either the retained earnings test or the balance sheet test.
Acquisitions, Activities and Change in Control. The BHCA generally requires the prior approval by the Federal
Reserve for any merger involving a bank holding company or any of bank holding company’s acquisition of more than
5% of a class of voting securities of any additional bank or bank holding company or to acquire all or substantially all, the
assets of any additional bank or bank holding company. In reviewing applications seeking approval of merger and
acquisition transactions, Federal Reserve considers, among other things, the competitive effect and public benefits of the
transactions, the capital position and managerial resources of the combined organization, the risks to the stability of the
U.S. banking or financial system, the applicant’s performance record under the Community Reinvestment Act of 1977, as
amended (“CRA”), the applicant’s compliance with fair housing and other consumer protection laws and the effectiveness
of all organizations involved in combating money laundering activities. In addition, failure to implement or maintain
adequate compliance programs could cause bank regulators not to approve an acquisition where regulatory approval is
required or to prohibit an acquisition even if approval is not required.
Subject to certain conditions (including deposit concentration limits established by the BHCA and the Dodd-
Frank Act), the Federal Reserve may allow a bank holding company to acquire banks located in any state of the United
States. In approving interstate acquisitions, the Federal Reserve is required to give effect to applicable state law limitations
on the aggregate amount of deposits that may be held by the acquiring bank holding company and its insured depository
institution affiliates in the state in which the target bank is located (provided that those limits do not discriminate against
out-of-state depository institutions or their holding companies) and state laws that require that the target bank have been
in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding
company. Furthermore, in accordance with the Dodd-Frank Act, bank holding companies must be well-capitalized and
well-managed in order to complete interstate mergers or acquisitions. For a discussion of the capital requirements, see “—
Regulatory Capital Requirements” above.
Federal law also prohibits any person or company from acquiring “control” of an FDIC-insured depository
institution or its holding company without prior notice to the appropriate federal bank regulator. On January 30, 2020, the
Federal Reserve finalized regulations revising the rules for determining control of a banking organization under the BHCA
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and adopted a tiered framework pf presumptions where the level of voting share ownership is assessed in combination
with relationship-based factors to determine whether “control” exists. “Control” is conclusively presumed to exist upon
the acquisition of 25% or more of the outstanding voting securities of a bank or bank holding company, but may arise
under certain circumstances between 5% and 24.99% ownership.
Under the California Financial Code, any proposed acquisition of “control” of HBC by any person (including a
company) must be approved by the Commissioner of the DFPI. The California Financial Code defines “control” as the
power, directly or indirectly, to direct HBC’s management or policies or to vote 25% or more of any class of HBC’s
outstanding voting securities. Additionally, a rebuttable presumption of control arises when any person (including a
company) seeks to acquire, directly or indirectly, 10% or more of any class of HBC’s outstanding voting securities.
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 subject to regulation, supervision, and regular examination by the
DFPI and the Federal Reserve Bank as HBC’s primary federal regulator. The regulations of these agencies govern most
aspects of a bank’s business.
Pursuant to the FDIA, and the California Financial Code, California state chartered commercial banks may
generally engage in any activity permissible for national banks. Therefore, HBC may form subsidiaries to engage in the
many so called “closely related to banking” or “nonbanking” activities commonly conducted by national banks in operating
subsidiaries or subsidiaries of bank holding companies. Further, California banks may conduct certain “financial” activities
in a subsidiary to the same extent as a national bank may, provided the bank is and remains “well capitalized,” “well
managed” and in satisfactory compliance with the CRA.
HBC is a member of the FHLB of San Francisco. Among other benefits, each FHLB serves as a reserve or central
bank for its members within its assigned region and makes available loans or advances to its members. Each FHLB is
financed primarily from the sale of consolidated obligations of the FHLB system. As an FHLB member HBC is required
to own a certain amount of capital stock in the FHLB. As of December 31, 2020, HBC was in compliance with the FHLB’s
stock ownership requirement. FHLB stock is carried at cost and classified as a restricted security. Both cash and stock
dividends are reported as income.
HBC is a member of the FRB of San Francisco. As a member of the FRB, the Bank is required to own stock in
the FRB of San Francisco based on a specified ratio relative to our capital. FRB stock is carried at cost and may be sold
back to the FRB at its carrying value. Cash dividends received are reported as income.
Depositor Preference. In the event of the “liquidation or other resolution” of an insured depository institution,
the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain
claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against
the institution. If an insured depository institution fails, insured and uninsured depositors along with the FDIC, will have
priority in payment ahead of unsecured, non deposit creditors including the parent bank holding company with respect to
any extensions of credit they have made to such insured depository institution.
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, 2020, 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 of the borrower) may not
exceed 25% (and unsecured loans may not exceed 15%) of the bank’s shareholders’ equity, allowance for loan loss, and
any capital notes and debentures of the bank.
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
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customer must obtain or provide some additional credit, property or services from or to HBC other than a loan, discount,
deposit or trust services; (ii) the customer must obtain or provide some additional credit, property or service from or to
HCC or HBC; or (iii) the customer must not obtain some other credit, property or services from competitors, except
reasonable requirements to assure soundness of credit extended.
Deposit Insurance. As an FDIC-insured institution, HBC is required to pay deposit insurance premium
assessments to the FDIC. The premiums fund the Deposit Insurance Fund (“DIF”). The FDIC assesses a quarterly deposit
insurance premium on each insured institution based on risk characteristics of the institution and may also impose special
assessments in emergency situations. Effective July 1, 2016, the FDIC changed the deposit insurance assessment system
for banks, such as HBC, with less than $10 billion in assets that have been federally insured for at least five years. Among
other changes, the FDIC eliminated risk categories for such banks and now uses the “financial ratios method” to determine
assessment rates for all such banks. Under the financial ratios method, the FDIC determines assessment rates based on a
combination of financial data and supervisory ratings that estimate a bank’s probability of failure within three years. The
assessment rate determined by considering such information is then applied to the amount of the institution’s average
assets minus average tangible equity to determine the institution’s insurance premium.
The Dodd-Frank Act required the FDIC to increase the minimum DIF reserve ratio to 1.35%. The DIF reserve
ratio is the amount in the DIF as a percentage of DIF-insured deposits. The Dodd-Frank Act also eliminated the requirement
that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds. At least semi-
annually, the FDIC updates its loss and income projections for the DIF and, if needed, may increase or decrease the
assessment rates, following notice and comment on proposed rulemaking if required. As a result, HBC’s FDIC deposit
insurance premiums could increase.
The FDIC may terminate deposit insurance of any insured institution if the FDIC finds that the insured institution
has engaged in unsafe and unsound practices, is in an unsafe or unsound condition, or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or any other regulatory agency.
Supervisory Assessments. California-chartered banks are required to pay supervisory assessments to the DFPI to
fund its operations. The amount of the assessment paid by a California bank to the DFPI is calculated on the basis of the
institution’s total assets, including consolidated subsidiaries, as reported to the DFPI. During the year ended December 31,
2020, HBC paid supervisory assessments to the DFPI totaling $261,000.
Capital Requirements. Banks are generally required to maintain capital levels in excess of other businesses. For
a discussion of capital requirements, see “—Regulatory Capital Requirements” above.
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Dividend Payments. 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.
The payment of dividends by any financial institution is affected by the requirement to maintain adequate capital
pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from
paying any dividends if, following payment thereof, the institution would be undercapitalized. In addition, in order to pay
a dividend, the Basel III Capitals generally require that a financial institution must maintain over a 2.5% in CET1
attributable to the Capital Conservation Buffer. See “—Regulatory Capital Requirements” above. As described above,
HBC exceeded its minimum capital requirements under applicable regulatory guidelines as of December 31, 2020.
Transactions with Affiliates. Transactions between depository institutions and their affiliates, including
transactions between HBC and HCC, are governed by Sections 23A and 23B of the Federal Reserve Act and the Federal
Reserve’s Regulation W promulgated thereunder. Generally, Section 23A limits the extent to which a depository institution
and its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of the
depository institution’s capital stock and surplus, and contains an aggregate limit on all such transactions with all affiliates
of an amount equal to 20% of the depository institution’s capital stock and surplus. Section 23A also establishes specific
collateral requirements for loans or extensions of credit to, or guarantees, acceptances or letters of credit issued on behalf
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of, an affiliate. Section 23B requires that covered transactions and a broad list of other specified transactions be on terms
substantially the same, or at least as favorable to the depository institution and its subsidiaries, as those for similar
transactions with non-affiliates.
Loans to Directors, Executive Officers and Principal Shareholders. The authority of HBC to extend credit to
its directors, executive officers and principal shareholders, including their immediate family members and corporations
and other entities that they control, is subject to substantial restrictions and requirements under the Federal Reserve’s
Regulation O, as well as the Sarbanes-Oxley Act. These laws and regulations impose limits on the amount of loans HBC
may make to directors and other insiders and require, among other things, that: (i) the loans must be made on substantially
the same terms, including interest rates and collateral, as prevailing at the time for comparable transactions with persons
not affiliated with HCC or HBC; (ii) HBC follow credit underwriting procedures at least as stringent as those applicable
to comparable transactions with persons who are not affiliated with HCC or HBC; and (iii) the loans not involve a greater-
than-normal risk of non-payment or include other features not favorable to HBC. A violation of these restrictions may
result in the assessment of substantial civil monetary penalties on the affected bank or any officer, director, employee,
agent or other person participating in the conduct of the affairs of that bank, the imposition of a cease and desist order, and
other regulatory sanctions.
Safety and Soundness Standards/Risk Management. The federal banking agencies have adopted guidelines
establishing operational and managerial standards to promote the safety and soundness of federally insured depository
institutions. The guidelines set forth standards for internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality
and earnings.
In general, the safety and soundness guidelines prescribe the goals to be achieved in each area, and each institution
is responsible for establishing its own procedures to achieve those goals. If a financial institution fails to comply with any
of the standards set forth in the guidelines, its primary federal regulator may require the institution to submit a plan for
achieving and maintaining compliance. If a financial institution fails to submit an acceptable compliance plan, or fails in
any material respect to implement a compliance plan that has been accepted by its primary federal regulator, the regulator
is required to issue an order directing the institution to cure the deficiency. Until the deficiency cited in the regulator’s
order is cured, the regulator may restrict the financial institution’s rate of growth, require the financial institution to increase
its capital, restrict the rates the institution pays on deposits or require the institution to take any action the regulator deems
appropriate under the circumstances. Noncompliance with the standards established by the safety and soundness guidelines
may also constitute grounds for other enforcement action by the federal bank regulatory agencies, including cease and
desist orders and civil money penalty assessments.
During the past decade, the 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.
Branching Authority. California banks, such as HBC, may, under California law, establish a banking office so
long as the bank’s board of directors approves the banking office and the DFPI is notified of the establishment of the
banking office. Deposit-taking banking offices must be approved by the FDIC, which considers a number of factors,
including financial history, capital adequacy, earnings prospects, character of management, needs of the community and
consistency with corporate power. The Dodd-Frank Act permits insured state banks to engage in de novo interstate
branching if the laws of the state where the new banking office is to be established would permit the establishment of the
banking office if it were chartered by such state. Finally, we may also establish banking offices in other states by merging
with banks or by purchasing banking offices of other banks in other states, subject to certain regulatory restrictions.
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Community Reinvestment Act. The CRA is intended to encourage insured depository institutions, while
operating safely and soundly, to help meet the credit needs of their communities. The CRA specifically directs the federal
bank regulatory agencies, in examining insured depository institutions, to assess their record of helping to meet the credit
needs of their entire community, including low and moderate income neighborhoods, consistent with safe and sound
banking practices. The CRA further requires the agencies to take a financial institution’s record of meeting its community
credit needs into account when evaluating applications for, among other things, domestic branches, consummating mergers
or acquisitions or holding company formations.
The federal banking agencies have adopted regulations which measure a bank’s compliance with its CRA
obligations on a performance based evaluation system. The current system bases CRA ratings on an institution’s actual
lending service and investment performance rather than the extent to which the institution conducts needs assessments,
documents community outreach or complies with other procedural requirements. The ratings range from “outstanding” to
a low of “substantial noncompliance.” HBC had a CRA rating of “satisfactory” as of its most recent regulatory
examination.
The federal banking agencies have expressed support for modernizing the CRA regulatory framework. In
December 2019, the FDIC and the OCC issued a joint proposed rule clarifying what qualifies for credit under the CRA,
updating the definition of a small business loan and creating an additional definition of “assessment area” tied to where
deposits are located, partly to address changes that have occurred due to the rise in digital banking. While the OCC has
finalized its amended regulations in May 2020, the FDIC has not yet done so, and it remains unclear whether and to what
extent any changes will be made to the applicable CRA requirements.
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 include the PATRIOT Act, the Bank Secrecy Act, and the Money
Laundering Act, among others. The PATRIOT Act is designed to deny terrorists and criminals the ability to obtain access
to the U.S. financial system and has significant implications for depository institutions, brokers, dealers and other
businesses involved in the transfer of money. The PATRIOT Act mandates financial services companies to have policies
and procedures with respect to measures designed to address any or all of the following matters: (i) customer identification
programs; (ii) money laundering; (iii) terrorist financing; (iv) identifying and reporting suspicious activities and currency
transactions; (v) currency crimes; and (vi) cooperation between financial institutions and law enforcement authorities.
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.
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Treasury’s Office of Foreign Assets Control (“OFAC”), administers and enforces economic and trade sanctions
against targeted foreign countries and regimes under authority of various laws, including designated foreign countries,
nationals and others. OFAC publishes lists of specially designated targets and countries. Financial institutions are
responsible for, among other things, blocking accounts of and transactions with such targets and countries, prohibiting
unlicensed trade and financial transactions with them and reporting blocked transactions after their occurrence. Banking
regulators examine banks for compliance with the economic sanctions regulations administered by OFAC and failure of a
financial institution to maintain and implement adequate OFAC programs, or to comply with all of the relevant laws or
regulations, could have serious legal and reputational consequences for the institution.
Concentrations in Commercial Real Estate. Concentration risk exists when financial institutions deploy too
many assets to any one industry or segment. Concentration stemming from commercial real estate is one area of regulatory
concern. The Commercial Real Estate Concentration Guidance provides supervisory criteria, including the following
numerical indicators, to assist bank examiners in identifying banks with potentially significant commercial real estate loan
concentrations that may warrant greater supervisory scrutiny: (i) commercial real estate 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 CRE Concentration Guidance does not limit banks’ levels of commercial real estate 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 commercial real estate concentrations. As of December 31, 2020, using regulatory definitions in
the CRE Concentration Guidance, our CRE loans represented 245% of HBC total risk-based capital, as compared to 282%
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as of December 31, 2019. If the regulatory agencies become concerned about our CRE loan concentrations, it could limit
our ability to grow by restricting its approvals for the establishment or acquisition of branches, or approvals of mergers or
other acquisition opportunities.
Consumer Financial Services. We are subject to a number of federal and state consumer protection laws that
extensively govern our relationship with our customers. These laws include, among others, the Equal Credit Opportunity
Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act,
the Expedited Funds Availability Act, the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate
Settlement Procedures Act, the Fair Debt Collection Practices Act, the Service Members Civil Relief Act, the Military
Lending Act, and these laws’ respective state law counterparts, as well as state usury laws and laws regarding unfair,
deceptive or abusive acts and practices (“UDAAP”). These and other federal laws, 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 customers, including actual 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, customer rescission rights, and civil money penalties.
Failure to comply 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 our prohibition from engaging in such
transactions even if approval is not required.
The consumer protection provisions of the Dodd-Frank Act and the examination, supervision and enforcement of
those laws and implementing regulations by the CFPB have created a more intense and complex environment for consumer
finance regulation. The CFPB has significant authority to implement and enforce federal consumer protection laws and
new requirements for financial services products provided for in the Dodd-Frank Act, as well as the authority to identify
and prohibit unfair, deceptive or abusive acts and practices. It could also result in increased costs related to regulatory
oversight, supervision and examination, additional remediation efforts and possible penalties. The CFPB has examination
and enforcement authority over providers with more than $10 billion in assets. Banks and savings institutions with $10
billion or less in assets, like HBC, will continue to be examined by their applicable bank regulators.
Under the newly adopted California Consumer Financial Protection Law (the “CCFPL”) that went into effect on
January 1, 2021, the DFPI is given broad jurisdiction and sweeping new authorities that closely resemble those of the
CFPB. The DFPI stated that it intends to exercise its powers to protect consumers from unlawful, unfair, deceptive, and
abusive practices in connection with consumer financial products or services. The DFPI also as a matter of state law can
now enforce the Dodd-Frank Act’s UDAAP provisions against any person offering or providing consumer financial
products in the state of California. While financial institutions licensed under federal or another state law, such as banks,
are excluded from the scope of the CCFPL, financial institutions in California are likely to be faced with a powerful state
financial services regulatory regime with expansive enforcement authority and it is unclear how the DFPI and its broad
enforcement activities will affect us going forward.
Mortgage and Mortgage-Related Products. Because abuses in connection with home mortgages were a
significant factor contributing to the financial crisis of 2008, many new rules issued by the CFPB and required by the
Dodd-Frank Act address mortgage and mortgage-related products, their underwriting, origination, servicing and sales. The
Dodd-Frank Act significantly expanded underwriting requirements applicable to loans secured by 1-4 family residential
real property and augmented federal law combating predatory lending practices. In addition to numerous disclosure
requirements, the Dodd-Frank Act imposed new standards for mortgage loan originations on all lenders, including banks
and savings associations, in an effort to strongly encourage lenders to verify a borrower’s ability to repay, while also
establishing a presumption of compliance for certain “qualified mortgages.”
Ability-to-Repay Requirement and Qualified Mortgage Rules. The CFPB administers regulations implementing
the Dodd-Frank Act’s ability-to-repay/qualified mortgage requirements (“ATR/QM Rule”), which require lenders to make
a reasonable good faith determination of a consumer’s ability to repay a mortgage loan based on verified borrower financial
information and provide certain protections from liability for residential mortgage loans that meet the ATR/QM Rule’s
requirements for “qualified mortgages.” On December 10, 2020, the CFPB issued two final rules amending the ATR/QM
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Rule that are scheduled to have a mandatory compliance date of July 1, 2021. The principal purpose of these final rules
is to avoid anticipated problems concerning mortgage credit availability following the scheduled expiration on July 1,
2021 of the temporary category of qualified mortgages (known as government sponsored enterprises qualified mortgages
or “GSE QM”) that are eligible for purchase by Fannie Mae or Freddie Mac while they operate under federal
conservatorship or receivership.
The first final rule is set to eliminate the GSE QM category and to replace the existing 43% debt-to-income ratio
limit with price-based thresholds and remove the Appendix Q national underwriting standards as well as any requirement
to use them. The price-based threshold provides that the loan’s annual percentage rate not exceed the average prime offer
rate for a comparable transaction by 2.25 percentage points or more as of the date the interest rate is set (with higher
thresholds provided for smaller loans and subordinate-lien loans). Under this final rule, instead of the debt-to-income ratio
limit, the creditor must instead meet “consider and verify” loan underwriting requirements, by considering the consumer’s
current or reasonably expected income or assets other than the value of the subject dwelling, debt obligations, alimony,
child support, and monthly debt-to-income ratio or residual income in order to assess the consumer’s ability to repay the
mortgage loan, and verify this information using third-party records that provide reasonably reliable evidence to support
accuracy.
The second final rule creates a new category of qualified mortgages – “seasoned qualified mortgage.” It allows
non-qualified mortgages and higher-priced qualified mortgages to acquire safe harbor protection from liability under the
ATR/QM Rule following their origination based on specified performance and portfolio requirements.
Pandemic Protections. To alleviate economic hardships brought on by the COVID-19 pandemic, the CARES
Act included certain components that impact consumer rights and obligations, such as a foreclosure moratorium, right to
forbearance, and consumer credit protection. Specifically, the CARES Act prohibits foreclosures on all federally-backed
mortgage loans for a period of time, provides forbearance of up to 180 days (which may be extended by up to another 180
days) for borrowers who suffer a financial hardship due to COVID-19, and requires that any accounts in forbearance be
reported to the credit bureau reporting agencies as current or as the status reported prior to receiving forbearance. In
addition, state governments have instituted additional protections for consumers and businesses affected by the pandemic,
including by halting residential and commercial evictions and instituting a moratorium on residential and commercial
foreclosures and related evictions.
Incentive Compensation Guidance and Proposed Restrictions. The federal bank regulatory agencies have issued
comprehensive guidance intended to ensure that the incentive compensation policies do not undermine the safety and
soundness of banking organizations by encouraging excessive risk-taking. The incentive compensation guidance sets
expectations for banking organizations concerning their incentive compensation arrangements and related risk-
management, control and governance processes. The incentive compensation guidance, which covers all employees that
have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based
upon three primary principles: (i) balanced risk-taking incentives; (ii) compatibility with effective controls and risk
management; and (iii) strong corporate governance. Any deficiencies in compensation practices that are identified may be
incorporated into the organization’s supervisory ratings, which can affect its ability to make acquisitions or take other
actions. In addition, under the incentive compensation guidance, a banking organization’s federal regulator may initiate
enforcement action if the organization’s incentive compensation arrangements pose a risk to the safety and soundness of
the organization.
In 2016, several federal financial agencies (including the Federal Reserve and FDIC) proposed restrictions on
incentive-based compensation pursuant to Section 956 of the Dodd-Frank Act for financial institutions with $1 billion or
more in total consolidated assets. For institutions with at least $1 billion but less than $50 billion in total consolidated
assets, the proposal would impose principles-based restrictions that are broadly consistent with existing interagency
guidance on incentive-based compensation. Such institutions would be prohibited from entering into incentive
compensation arrangements that encourage inappropriate risks by the institution (i) by providing an executive officer,
employee, director, or principal shareholder with excessive compensation, fees, or benefits, or (ii) that could lead to
material financial loss to the institution. The comment period for these proposed regulations has closed, but a final rule
has not been published. Depending upon the outcome of the rule making process, the application of this rule to us could
require us to revise our compensation strategy, increase our administrative costs and adversely affect our ability to recruit
and retain qualified employees.
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Further, as discussed above, the Basel III Capital Rules limit discretionary bonus payments to bank executives if
the institution’s regulatory capital ratios fail to exceed certain thresholds. See “—Regulatory Capital Requirements” above.
The scope and content of the U.S. banking regulators’ policies on executive compensation are continuing to
develop and are likely to continue evolving in the near future.
Financial Privacy. The federal bank regulatory agencies have adopted rules that limit the ability of banks and
other financial institutions to disclose non-public information about consumers to non-affiliated third parties. These
limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent
disclosure of certain personal information to a non-affiliated third party. These regulations affect how consumer
information is transmitted through financial services companies and conveyed to outside vendors. In addition, consumers
may also prevent disclosure of certain information among affiliated companies that is assembled or used to determine
eligibility for a product or service, such as that shown on consumer credit reports and asset and income information from
applications. Consumers also have the option to direct banks and other financial institutions not to share information about
transactions and experiences with affiliated companies for the purpose of marketing products or services.
The CFPB has recently announced its intention to embark on rulemaking about consumer control over their
financial data. California is also actively enacting legislation relating to data privacy and data protection, such as the
California Consumer Privacy Act (“CCPA”), which went into effect on January 1, 2020. The CCPA granted California
consumers robust data privacy rights and control over their personal information, including the right to know, the right to
delete, and the right to opt-out of the sale of their personal information. The CCPA was recently further expanded by the
California Privacy Rights Act of 2020 (“CPRA”), which provides additional privacy rights to California residents and
creates a new agency tasked with implementing regulations and conducting investigations and enforcement actions. The
CPRA is set to become effective on January 1, 2023.
Cybersecurity. The federal bank regulatory agencies have issued multiple statements regarding cybersecurity.
This guidance requires financial institutions to design multiple layers of security controls to establish lines of defense and
ensure that their risk management processes address the risk posed by compromised customer credentials and include
security measures to authenticate customers accessing internet-based services of the financial institution. The management
of a financial institution is expected to maintain sufficient business continuity planning processes to ensure the rapid
recovery, resumption and maintenance of operations in the event of a cyber-attack. A financial institution is also expected
to develop appropriate processes to enable recovery of data and business operations and address rebuilding network
capabilities and restoring data if the institution or its critical service providers fall victim to a cyber-attack. If we fail to
observe the regulatory guidance, we could be subject to various regulatory sanctions, including financial penalties.
State regulators have also been increasingly active in implementing privacy and cybersecurity standards and
regulations. Recently, several states, notably including California where we conduct substantially all our banking business,
have adopted laws and/or regulations requiring certain financial institutions to implement cybersecurity programs and
providing detailed requirements with respect to these programs, including data encryption requirements. Many such states
(including California) have also recently implemented or modified their data breach notification and data privacy
requirements. We expect this trend of state-level activity in those areas to continue, and we continue to monitor relevant
legislative and regulatory developments in California where nearly all our customers are located.
In the ordinary course of business, we rely on electronic communications and information systems to conduct our
operations and to store sensitive data. We employ a layered, defensive approach that leverages people, processes and
technology to manage and maintain cybersecurity controls. We employ a variety of preventative and detective tools to
monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent
threats. Notwithstanding the strength of our defensive measures, the threat from cyber-attacks is severe, attacks are
sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures. While to date we
have not detected a significant compromise, significant data loss or any material financial losses related to cybersecurity
attacks, our systems and those of our customers and third-party service providers are under constant threat and it is possible
that we could experience a significant event in the future. Risks and exposures related to cybersecurity attacks are expected
to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as
due to the expanding use of Internet banking, mobile banking and other technology-based products and services by us and
our customers. See Item 1A - “Risk Factors” for a further discussion of risks related to cybersecurity.
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Impact of Monetary Policy. The monetary policy of the Federal Reserve has a significant effect on the operating
results of financial or bank holding companies and their subsidiaries. Among the tools available to the Federal Reserve to
affect the money supply are open market transactions in U.S. government securities, changes in the discount rate on
member bank borrowings and changes in reserve requirements against member bank deposits. These means are used in
varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use
may affect interest rates charged on loans or paid on deposits.
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.
Further Legislative and Regulatory Initiatives. Federal and state legislators as well as regulatory agencies may
introduce or enact new laws or rules, or amend existing laws and rules, which may affect the regulation of financial
institutions and their holding companies. In addition, some of the financial laws and regulations aiming to ease regulatory
and compliance burden on financial institutions that were adopted during the last presidential administration could be
repealed or eliminated going forward. The impact of any future legislative or regulatory changes cannot be predicted, but
they could affect the Company and HBC’s business and operations.
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 adversely affect our business, financial condition
and results of operations, perhaps materially.
Summary of Risk Factors
Risks Related to Our Business
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• Unfavorable general business, economic and market conditions
• Adverse impact of the COVID-19 pandemic
• Participation in SBA Paycheck Protection Program
• Changes in U.S. trade policy, impositions of tariffs and retaliatory tariffs
• Fluctuations in interest rates
• Losses on our securities portfolio, particularly from increases in interest rates
• Liquidity risks
• Competition for customer deposits
• Failure to successfully manage credit risks
• Uncertainty relating to LIBOR calculation process
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Risks Related to Our Loans
• Negative changes in the economy affecting real estate values and liquidity
• Risks involved with construction and land development loans
• Failure to follow supervisory guidance on concentration in commercial real estate lending
• Unreliability of loan appraisals used in real property loan decisions
• Commercial loans are more sensitive to the borrower’s successful operations or property development
• Small and medium business loans are subject to greater risks from adverse business developments
• Underwriting criteria and practices may not prevent poor loan performance
Risks Related of our SBA Loan Program
• Dependence on U.S. federal government SBA loan program
• Recognition of gains on sale of loans and servicing asset valuations reflect certain assumptions we use
• Credit risks from non-guaranteed portion of SBA loans we retain and do not sell
• Credit risks from SBA loans we sell as a result of repurchase obligations
Risks Related to Credit Quality
• Non-performing assets require management time to resolve and can affect our financial results
• The allowance for loans losses may be insufficient to absorb potential losses in our loan portfolio
• Real estate market volatility may have an adverse effect on disposition of other real estate owned
• Exposure to environmental liabilities on foreclosed real estate collateral
• Adverse effect of new accounting standards for loan losses which may increase our allowance
Risks Related to our Growth Strategy
• General risks associated with acquisitions, including availability of suitable targets and integration risks
• Dilution affect resulting from the issuance of common stock consideration for acquisitions
• Impairment of the goodwill recorded for an acquisition
• Incorrect estimate of fair value for assets acquired in an acquisitions
• Managing our branch growth strategy
• Managing risks of adding newlines of business or new products
Risks Related to Our Capital
• Recent regulatory requirements
• Raising new capital in conditions beyond our control
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Risks Related to Management
• Our success depends on the skills of our management and their retention
• Competition for skilled and experienced management level senior level employees
Risks Related to Our Reputation and Operations
• Failure to maintain a favorable reputation with our customers and communities
• Failure of our risk management framework
• Failure to implement new technology
• System failures or breaches of our network security
• Difficulties of our third-party providers, termination of their services, or their failure to comply with
regulatory requirements
• Employee misconduct
• Breaches of customer information, computer viruses
• Inaccurate information provided to us by customers or counterparties
Risks from Competition
• Competition from financial service companies and other companies that offer commercial banking services
• Competitive need to implement new technology and related operational challenges
Other Business Risks
• Costs and effects of litigation, investigations or similar matters
• Company-owned life insurance is dependent on the financial strength of the underlying insurance company
• The soundness of other financial institutions
• Severe weather, natural disasters (including fire and earthquakes, pandemics, acts of war, terrorism, and
social unrest
Finance and Accounting Risks
• Reliance on estimates and risk management processes and analytical and forecasting models
• Changes in accounting standards
• Failure maintain effective internal controls over financial reporting
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• Realization of our deferred assets
Legislative and Regulatory Risks
• Extensive government regulation that could limit or restrict our activities
• Legislative and regulatory actions now or in the future increase our costs, and impact our business
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• Monetary policies and regulations of the Federal Reserve
• Federal and state regulatory exams
• Noncompliance with the Bank Secrecy Act and other anti-money laundering statutes and regulations
• Responsibility to financially support HBC
• Consumer protection laws and regulations
• Potential violation of predatory lending laws
• Failure to comply with privacy, data protection and information security legal requirements
• Potential regulatory limitations on incentive compensation affecting the hiring and retention of key
employees
Risks Related to Our Common Stock
• Investment in common stock is not an insured deposit
• Volatile trading price of our common stock
• Limited trading volume trading volume
• Changes in dividend policy
• Limitations on director liability for monetary damages for failure to exercise their fiduciary duty
• Potential dilution from issuance of additional equity securities
• Issuance of preferred stock which may have rights and preferences over our common stock
• Failure to satisfy our obligations under our subordinated notes would preclude the payment of dividends
• Our charter documents and California law may have an anti-takeover effect limiting changes of control
Risks Relating to Our Business
Our Business could be adversely affected by unfavorable economic and market conditions.
Our business and operations are sensitive to general business and economic conditions in the United States,
generally, and particularly the state of California and our market area. Unfavorable or uncertain economic and market
conditions could lead to credit quality concerns related to borrower repayment ability and collateral protection as well as
reduced demand for the products and services we offer. There are continuing concerns related to the level of U.S.
government debt and fiscal actions that may be taken to address that debt. In addition, geopolitical developments, such as
existing and potential trade wars and other events beyond our control, such as the Coronavirus epidemic, can increase
levels of political and economic unpredictability globally and increase the volatility of global financial markets. Concerns
about the performance of international economies, especially in Europe and emerging markets, and economic conditions
in Asia, can impact the economy and financial markets here in the United States. If the national, regional and local
economies experience worsening economic conditions, including high levels of unemployment, our growth and
profitability could be constrained. Weak economic conditions are characterized by, among other indicators, deflation,
elevated levels of unemployment, fluctuations in debt and equity capital markets, increased delinquencies on mortgage,
commercial and consumer loans, residential and commercial real estate price declines, and lower home sales and
commercial activity. Various market conditions may also negatively affect our operating results. Real estate market
conditions directly affect performance of our loans secured by real estate. Debt markets affect the availability of credit,
which affects the rates and terms at which we offer loans and leases. Stock market downturns affect businesses’ ability to
raise capital and invest in business expansion. Stock market downturns often signal broader economic deterioration and/or
a downward trend in business earnings, which adversely affects businesses’ ability to service their debts.
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There can be no assurance that economic conditions will continue to improve, and these conditions could worsen.
Economic pressure on consumers and uncertainty regarding continuing economic improvement may result in changes in
consumer and business spending, borrowing and saving habits. Such conditions could have a material adverse effect on
the credit quality of our loans or our business, financial condition or results of operations.
An economic recession or a downturn in various markets could have one or more of the following adverse effects
on our business:
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a decrease in the demand for our loan or other products and services offered by us;
a decrease in our deposit balances due to an overall reduction in customer accounts;
a decrease in the value of our investment securities and loans;
an increase in the level of nonperforming and classified loans;
an increase in the provision for credit losses and loan and lease charge-offs;
a decrease in net interest income derived from our lending and deposit gathering activities;
a decrease in the Company’s stock price;
an increase in our operating expenses associated with attending to the effects of the above-listed
circumstances; and/or
a decrease in real estate values or a general decrease in capital available to finance real estate transactions,
which could have a negative impact on borrowers’ ability to pay off their loans as they mature.
Our profitability is dependent upon the geographic concentration of the markets in which we operate.
We operate primarily in in the general San Francisco Bay Area of California in the counties of Alameda, Contra
Costa, Marin, San Benito, San Francisco, San Mateo, and Santa Clara and, as a result, our business, financial condition
and results of operations are subject 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 our customers' business and financial interests may extend well beyond
these market areas, adverse economic conditions that affect these market areas could reduce our growth rate, affect the
ability of our customers to repay their loans to us and generally affect our financial condition and results of operations.
Our lending operations are located in market areas dependent on technology and real estate industries and their supporting
companies. Thus, our borrowers could be adversely impacted by a downturn in these sectors of the economy that could
reduce the demand for loans and adversely impact the borrowers' ability to repay their loans, which would, in turn, increase
our nonperforming assets. 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.
Risks relating to the impact of COVID-19 could have a material adverse effect on our business, financial condition and
results of operations.
The COVID-19 pandemic has had, and continues to have, a material impact on businesses around the world and
the economic environments in which they operate. In March 2020, the United States declared a federal state of emergency
in response to the COVID-19 pandemic, which continues to spread throughout the United States. The outbreak of this
virus has disrupted global financial markets and negatively affected supply and demand across a broad range of industries.
There are a number of factors associated with the outbreak and its impact on global economies including the United States
that have had and could continue to have a material adverse effect on (among other things) the profitability, capital and
liquidity of financial institutions.
The COVID-19 pandemic has caused disruption to our customers, vendors and employees. California where we
primarily operate, has implemented restrictions on the movement of its citizens, with a resultant significant impact on
economic activity in the state. The pandemic has resulted in temporary closures of many businesses and the institution of
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social distancing and sheltering in place requirements in California, including our primary market area. As a result, the
demand for our products and services has been and may continue to be significantly impacted. The circumstances around
this pandemic are evolving rapidly and will continue to impact our business in future periods. In the United States, the
Federal Government has taken action to provide financial support to parts of the economy most impacted by the COVID-
19 pandemic. The details of how these actions will impact our customers and therefore the impact on the Company remains
uncertain at this stage. The actions taken by the U.S. Government and the Federal Reserve may indicate a view on the
potential severity of a downturn and post recovery environment, which from a commercial, regulatory and risk perspective
could be significantly different to past crises and persist for a prolonged period. The pandemic has led to a weakening in
gross domestic product and employment in the United States.
As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we
could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial
condition, or results of operations:
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demand for our products and services may decline, making it difficult to grow assets and income;
if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended
period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased
charges and reduced income;
collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;
our allowance for credit losses on loans may have to be increased if borrowers experience financial
difficulties beyond modeled projections, which will adversely affect our net income;
the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to
us;
as the result of the decline in the Federal Reserve Board’s target federal funds rate, the yield on our assets
may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net
interest margin and spread and reducing net income;
a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of
our quarterly cash dividend;
a prolonged weakness in economic conditions resulting in a reduction of future projected earnings could
result in our recording a valuation allowance against our current outstanding deferred tax assets;
the goodwill we recorded in connection with business acquisitions could become impaired and require
charges to earnings;
• we rely on third party vendors for certain services and the unavailability of a critical service due to the
COVID-19 outbreak could have an adverse effect on us; and
• Federal Deposit Insurance Corporation premiums may increase if the agency experiences additional
resolution costs.
Our future success and profitability substantially depends on the management skills of our executive officers and
directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or
unavailability of key employees due to the outbreak could harm our ability to operate our business or execute our business
strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or
unavailability.
Furthermore, if the U.S. economy experiences a recession as a result of the pandemic, our business could be
materially and adversely affected. To the extent the pandemic adversely affects our business, financial condition, or results
of operations, it may also have the effect of heightening many of the other risks described in this report. The extent of such
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impact will depend on the outcome of certain developments, including but not limited to, the duration and spread of the
pandemic as well as its continuing impact on our customers, vendors and employees, all of which are uncertain.
As a participating lender in the U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”),
we are subject to additional risks of litigation from our customers or other parties regarding our processing of loans
for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.
On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (“CARES
Act”), which included a loan program administered through the SBA referred to as the PPP. Under the PPP, small
businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated
lenders that enroll in the program, subject to numerous limitations and eligibility criteria. We are participating as a lender
in the PPP. The PPP opened on April 3, 2020; however, because of the short timeframe between the passing of the CARES
Act and the opening of the PPP, there was some ambiguity in the laws, rules and guidance regarding the operation of the
PPP, which exposes us to risks relating to noncompliance with the PPP.
Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and
procedures that such banks used in processing applications for the PPP and claims related to agent fees. We may be exposed
to the risk of similar litigation, from both customers and non-customers that approached the us regarding PPP loans,
regarding its process and procedures used in processing applications for the PPP, or litigation from agents with respect to
agent fees. If any such litigation is filed against us and is not resolved in a manner favorable to the Company or the Bank,
it may result in significant financial liability or adversely affect the Company’s reputation. In addition, litigation can be
costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related
litigation could have a material adverse effect on our business, financial condition or results of operations.
We also have credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the
manner in which the loan was originated, funded, or serviced by us, such as an issue with the eligibility of a borrower to
receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the
operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that
there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by us, the SBA may deny
its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek
recovery of any loss related to the deficiency from us.
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Changes in U.S. trade policies and other factors beyond our Company’s control, including the imposition of tariffs and
retaliatory tariffs, may adversely impact our business, financial condition and results of operations.
There have been changes and discussions with respect to U.S. trade policies, legislation, treaties and tariffs,
including trade policies and tariffs affecting other countries, including China, the European Union, Canada and Mexico
and retaliatory tariffs by such countries. Tariffs and retaliatory tariffs have been imposed, and additional tariffs and
retaliation tariffs have been proposed. Such tariffs, retaliatory tariffs or other trade restrictions on products and materials
that our customers import or export, including among others, agricultural products, could cause the prices of our customers’
products to increase which could reduce demand for such products, or reduce our customer margins, and adversely impact
their revenues, financial results and ability to service debt; which, in turn, could have a material adverse effect on our
business financial condition and results of operations. In addition, to the extent changes in the political environment have
a negative impact on us or on the markets in which we operate our business, results of operations and financial condition
could be materially and adversely impacted in the future. It remains unclear what the U.S. Administration or foreign
governments will or will not do with respect to tariffs already imposed, additional tariffs that may be imposed, or
international trade agreements and policies. On October 1, 2018, the United States, Canada and Mexico agreed to a new
trade deal to replace the North American Free Trade Agreement and it went into full force on July 1, 2020. The full impact
of this agreement on us, our customers and on the economic conditions in our states is currently unknown. A trade war or
other governmental action related to tariffs or international trade agreements or policies has the potential to negatively
impact ours and/or our customers' costs, demand for our customers' products, and/or the U.S. economy or certain sectors
thereof and, thus, have a material adverse effect on our business, financial condition and results of operations.
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Fluctuations in interest rates may reduce net interest income and otherwise negatively affect our 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 earn on our assets,
such as loans, typically 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 earn on our assets,
such as loans, typically 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. Interest rates are volatile and highly sensitive to many factors beyond
our control, including governmental monetary policies, inflation, recession, changes in unemployment, the money supply
and international disorder and instability in domestic and foreign financial markets.
Changes in interest rates also can affect the value of loans, securities and other assets. 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 financial condition. 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 could have a material adverse effect on our net interest income.
Rising interest rates result in a decline in value of fixed-rate debt securities we hold in our investment securities
portfolio. The unrealized losses resulting from holding these securities will be recognized in accumulated other
comprehensive income (loss) and reduce total shareholders’ equity. Unrealized losses do not negatively affect our
regulatory capital ratios; however, tangible common equity and the associated ratios would be reduced. If unrealized loss
debt securities are sold, such realized losses will reduce our regulatory capital ratios.
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.
We could recognize losses on securities held in our securities portfolio, particularly if interest rates increase or
economic and market conditions deteriorate.
As of December 31, 2020, the fair value of our securities portfolio was approximately $540.7 million. Factors
beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse
changes to the fair value of these securities. For example, fixed-rate securities acquired by us are generally subject to
decreases in market value when interest rates rise. 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, the
financial condition of issuers of the securities and the performance of the underlying collateral, we may recognize realized
and/or unrealized losses in future periods, which could have a material adverse effect on our business, financial condition
and results of operations.
Liquidity risks could affect operations and jeopardize our business, financial condition, and results of operations.
Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans
and/or investment securities and from other sources could have a substantial negative effect on our liquidity. Our most
important source of funds consists of our customer deposits. Such deposit balances can decrease when customers perceive
alternative investments, such as the stock market, as providing a better risk/return tradeoff. If customers move money out
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of bank deposits and into other investments, we could lose a relatively low cost source of funds, thereby increasing our
funding costs.
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.
Competition among U.S. banks for customer deposits is intense, may increase the cost of retaining current deposits or
procuring new deposits, and may otherwise negatively affect our ability to grow our deposit base.
Competition among U.S. banks for customer deposits is intense, may increase the cost of retaining current
deposits or procuring new deposits, and may otherwise negatively affect our ability to grow our deposit base. Maintaining
and attracting new deposits is integral to our business and a major decline in deposits or failure to attract deposits in the
future, including any such decline or failure related to an increase in interest rates paid by our competitors on interest-
bearing accounts, could have an adverse effect on our results of operations and financial condition. Interest-bearing
accounts earn interest at rates established by management based on competitive market factors. The demand for the deposit
products we offer may also be reduced due to a variety of factors, such as demographic patterns, changes in customer
preferences, reductions in consumers’ disposable income, regulatory actions that decrease customer access to particular
products, or the availability of competing products.
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 employees in underwriting and monitoring loans, the inability of our employees to adequately
adapt policies and procedures to changes in economic or any other conditions affecting borrowers and the quality of our
loan portfolio, may result in loan defaults, foreclosures and additional charge-offs and may necessitate that we significantly
increase our allowance for credit losses on loans, each of which could adversely affect our net income. 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.
An important feature of our credit risk management system is our use of an internal credit risk rating and control
system through which we identify, measure, monitor and mitigate existing and emerging credit risk of our customers. As
this process involves detailed analysis of the customer or credit risk, taking into account both quantitative and qualitative
factors, it is subject to human error. In exercising their judgment, our employees may not always be able to assign an
accurate credit rating to a customer or credit risk, which may result in our exposure to higher credit risks than indicated by
our risk rating and control system. Although our management seeks to address possible credit risk proactively, it is possible
that the credit risk rating and control system will not identify credit risk in our loan portfolio and that we may fail to
manage credit risk effectively.
Uncertainty relating to LIBOR calculation process and potential phasing out of LIBOR may adversely affect us.
Reforms to and uncertainty regarding LIBOR may adversely affect our business. On July 27, 2017, the United
Kingdom’s Financial Conduct Authority (“FCA”), which regulates LIBOR, announced that it will no longer compel banks
to submit rates for the calculation of LIBOR in the future. Until recently, it was generally expected that LIBOR would be
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discontinued on December 31, 2021. However, in November 2020, the ICE Benchmark Administrator (“IBA”), which
publishes the LIBOR rates and is regulated by the FCA, announced that it would initiate a consultation that would end 1-
week and 2-month LIBOR by December 31, 2021 and continue to publish all other LIBOR rates through June 30,
2023. The consultation period ended on January 25, 2021 and the IBA and FCA are discussing the results now. While
the 18-month extension of certain LIBOR rates is generally expected to be implemented, the FCA has not yet issued a
final decision on the matter. As such, the U.S. Federal Reserve Bank's Alternative Reference Rates Committee (“ARRC”)
continues to urge parties to implement the preferred alternative to LIBOR, which is SOFR, in all new contracts and use
the potential 18-month extension to allow time for existing agreements that use LIBOR to either expire or be re-
negotiated. ARRC selected SOFR in June 2017 as the preferred alternative rate to LIBOR. SOFR differs from LIBOR in
two respects: SOFR is a single overnight rate, while LIBOR includes rates of several tenors; and SOFR is deemed a credit
risk-free rate while LIBOR incorporates an evaluation of credit risk. The ARRC and other entities intend for the transition
to be economically neutral. The Federal Reserve Bank of New York has proposed a methodology for generating SOFRs
of three different tenors and an index is currently published with daily, 30, 90 and 180 day SOFR tenors. The ARRC has
developed a methodology for adjusting SOFR to reflect the risk considerations that underlie LIBOR. On July 12, 2019,
the SEC issued a statement on LIBOR transition, indicating the significant impact that the discontinuation of LIBOR could
have on financial markets and market participants. Since some of our products are indexed to LIBOR, the transition, if not
sufficiently planned for and managed by our cross-functional teams, could adversely affect the Company’s financial
condition and results of operations. Although implementation of the SOFR benchmark is intended to have minimal
economic effect on the parties to a LIBOR-based contract, the transition from LIBOR to a new benchmark rate could result
in significant operational, systems, increased compliance, legal and operational costs. This transition may also result in
our customers challenging the determination of their interest payments or entering into fewer transactions or postponing
their financing needs, which could reduce the Company’s revenue and adversely impact our business. In addition, the
uncertainty regarding the future of LIBOR as well as the transition from LIBOR to another benchmark rate or rates could
have adverse impacts on floating-rate obligations, loans, deposits, derivatives, and other financial instruments that
currently use LIBOR as a benchmark rate and, ultimately, adversely affect the Company’s 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 in the economy
affecting real estate values and liquidity could impair the value of collateral securing our real estate loans and result
in loan and other losses.
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, 2020, approximately $1.76 billion, or
67% of our loan portfolio, was comprised of loans with real estate as a primary or secondary component of collateral.
Included in CRE loans were $560.4 million or 21% of owner occupied loans. The real estate securing our loan portfolio is
concentrated in California.
As a result, adverse developments affecting real estate values in our market areas could increase the credit risk
associated with our real estate loan portfolio. 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, changes in tax laws and
other governmental statutes, regulations and policies and acts of nature, such as earthquakes and natural disasters. 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. In addition, if hazardous or toxic substances are found on properties pledged as collateral, the value of the
real estate could be impaired.
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Our construction and land development loans are based upon estimates of costs and value associated with the complete
project. These estimates may be inaccurate and we may be exposed to more losses on these projects than on other loans.
At December 31, 2020, land and construction loans, (including land acquisition and development loans) totaled
$144.6 million or 6% of our portfolio. Of these loans, 12% were comprised of owner occupied and 88% non-owner
occupied construction and land 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.
Supervisory guidance on commercial real estate concentrations could restrict our activities and impose financial
requirements or limits on the conduct of our business.
As a part of their regulatory oversight, in 2006 federal bank regulators issued guidance titled, “Concentrations in
Commercial Real Estate Lending, Sound Risk Management,” which we refer to as the CRE Concentration Guidance.
Additional guidance which focused on CRE lending, including an Interagency Statement titled, “Statement on Prudent
Risk Management for Commercial Real Estate Lending,” has been issued from time to time since 2006 and CRE lending
continues to be a significant focus of federal and state bank regulators. These various guidelines and pronouncements were
issued in response to the agencies’ concerns that rising CRE concentrations might expose institutions to unanticipated
earnings and capital volatility in the event of adverse changes in the commercial real estate market. The CRE Concentration
Guidance identifies certain concentration levels that, if exceeded, will expose the institution to additional supervisory
analysis with regard to the institution’s CRE concentration risk. The CRE Concentration Guidance is designed to promote
appropriate levels of capital and sound loan and risk management practices for institutions with a concentration of CRE
loans. In general, the CRE Concentration Guidance establishes the following supervisory criteria as preliminary indications
of possible CRE concentration risk: (i) the institution’s total construction, land development and other land loans represent
100% or more of total risk-based capital; or (ii) total CRE loans as defined in the regulatory guidelines represent 300% or
more of total risk-based capital, and the institution’s CRE loan portfolio has increased by 50% or more during the prior
36-month period. Pursuant to the CRE Concentration Guidelines, loans secured by owner-occupied commercial real estate
are not included for purposes of CRE Concentration calculation. As of December 31, 2020, using regulatory definitions in
the CRE Concentration Guidance, our CRE loans decreased to 245% of HBC total risk-based capital, as compared to
282% as of December 31, 2019. If the FDIC became concerned about our CRE loan concentrations, they could inhibit
our organic growth by restricting our ability to execute on our strategic plan.
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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, 2020, commercial loans totaled $846.4 million or 32% of our loan portfolio (including SBA
loans and PPP loans), asset-based lending, and factored receivables). Commercial loans often involve risks that are
different from other types of lending. Unlike residential property 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
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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 loans are primarily made based
on the identified cash flow of the borrower and secondarily on the collateral underlying the loans. Most often, this collateral
consists of accounts receivable, inventory and equipment. Inventory and equipment may depreciate over time, may be
difficult to appraise and may fluctuate in value based on the success of the business. If the cash flow from business
operations is reduced, the borrower’s ability to repay the loan may be impaired. Due to the larger average size of each
commercial loan, 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
results of operations and financial condition.
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 markets were
operate that adversely affect our medium-sized business borrowers may impair the borrower’s ability to repay a loan and
such impairment could have a material adverse effect on our business, financial condition and results of operation.
We may suffer losses in our loan portfolio despite our underwriting practices.
We mitigate the risks inherent in our loan portfolio by adhering to sound and proven underwriting practices,
managed by experienced and knowledgeable credit professionals. These practices include analysis of a borrower’s prior
credit history, financial statements, tax returns, and cash flow projections, valuations of collateral based on reports of
independent appraisers and verifications of liquid assets. Nonetheless, we may incur losses on loans that meet our
underwriting criteria, and these losses may exceed the amounts set aside as reserves in our allowance for loan loss.
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, 2020, SBA loans totaled $50.1 million, which are included in the commercial loan portfolio,
and SBA loans held-for-sale totaled $1.7 million. 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 customers 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
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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 customer 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 or results of operations.
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, 2020 was $839,000. 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, results of
operations and profitability.
The non-guaranteed portion of SBA loans that we retain on our balance sheet as well as the guaranteed portion of
SBA loans that we sell could expose us to various credit and default risks.
We originated $29.3 million of SBA loans for the year ended December 31, 2020. We sold $10.1 million of the
guaranteed portion of our SBA loans for the year ended December 31, 2020. We generally retain the non-guaranteed
portions of the SBA loans that we originate. Consequently, as of December 31, 2020, we held $50.1 million of SBA loans
on our balance sheet, $31.3 million of which consisted of the non-guaranteed portion of SBA loans and $1.7 million, or
3.4%, consisted of the guaranteed portion of SBA loans which we intend to sell in 2021. 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
Nonperforming assets take significant time to resolve and adversely affect our results of operations and financial
condition, and could result in further losses in the future.
As of December 31, 2020, our nonperforming loans (which consist of nonaccrual loans, loans past due 90 days
or more and still accruing interest and loans modified under troubled debt restructurings) totaled $7.9 million, or 0.30% of
our loan portfolio, and our nonperforming assets (which include nonperforming loans plus other real estate owned) totaled
$7.9 million, or 0.17% of total assets.
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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. 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.
Our allowance for credit losses on loans may prove to be insufficient to absorb potential losses in our loan portfolio.
A significant source of risk arises from the possibility that losses could be sustained because borrowers,
guarantors and related parties may fail to perform in accordance with the terms of their loans. The underwriting and credit
monitoring policies and procedures that we have adopted to address this risk may not prevent unexpected losses and such
losses could have a material adverse effect on our business, financial condition, results of operations and cash flows. These
unexpected losses may arise from a wide variety of specific or systemic factors, many of which are beyond our ability to
predict, influence or control.
Like all financial institutions, we maintain an allowance for credit losses on loans to provide for loan defaults and
non-performance. This allowance, expressed as a percentage of loans, was 1.70%, at December 31, 2020. Allowance for
credit losses on loans is funded from a provision for credit losses on loans, which is a charge to our income statement. Our
provision for credit losses on loans was $13.2 million for the year ended December 31, 2020.
The allowance for credit losses on loans reflects our estimate of the current expected credit losses in our loan
portfolio at the relevant balance sheet date. Our allowance for credit losses on loans is based on our prior experience, as
well as an evaluation of the known risks in the current portfolio, composition and growth of the loan portfolio and economic
forecasts for correlated economic factors. The determination of an appropriate level of credit allowance losses on loans is
an inherently difficult and subjective process, requiring complex judgments, and is based on numerous analytical
assumptions. The amount of future losses is susceptible to changes in economic and other conditions, including changes
in interest rates, changes in economic forecasts, changes in the financial condition of borrowers, and deteriorating values
of collateral that may be beyond our control, and these losses may exceed current estimates. 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 and adverse effect on our business, financial
condition, and results of operations.
We individually evaluate all nonperforming loans and allocate a specific reserve based upon our estimation of
the potential loss associated with those nonperforming 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 in our loan portfolio that may result in
losses, but that have not yet been identified as nonperforming 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 certain 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. These adjustments could have a material adverse
effect on our business, financial condition and results of operations.
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Real estate market volatility and future changes in our disposition strategies could result in net proceeds that differ
significantly from our other real estate owned fair value appraisals.
As of December 31, 2020 we had no other real estate owned (“OREO”) on our financial statements, but in the
ordinary course of our business we expect to hold some level of OREO from time to time. OREO typically consists of
properties that we obtain through foreclosure or through an in-substance foreclosure in satisfaction of an outstanding loan.
OREO properties are valued on our books at the lesser of the recorded investment in the loan for which the property
previously served as collateral or the property’s “fair value,” which represents the estimated sales price of the property on
the date acquired less estimated selling costs. Generally, in determining “fair value,” an orderly disposition of the property
is assumed, unless a different disposition strategy is expected. Significant judgment is required in estimating the fair value
of OREO property, and the period of time within which such estimates can be considered current is significantly shortened
during periods of market volatility.
In response to market conditions and other economic factors, we may utilize alternative sale strategies other than
orderly disposition as part of our OREO disposition strategy, such as immediate liquidation sales. In this event, as a result
of the significant judgments required in estimating fair value and the variables involved in different methods of disposition,
the net proceeds realized from such sales transactions could differ significantly from the appraisals, comparable sales and
other estimates used to determine the fair value of our OREO properties.
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 Growth Strategy
There are risks related to acquisitions.
We plan to continue to grow our business organically. However, from time to time, we may consider opportunistic
strategic acquisitions that we believe support our long-term business strategy. We face significant competition from
numerous other financial services institutions, many of which will have greater financial resources than we do, when
considering acquisition opportunities. Accordingly, attractive acquisition opportunities may not be available to us. We
may not be successful in identifying or completing any future acquisitions. Acquisitions of financial institutions involve
operational risks and uncertainties and acquired companies may have unforeseen liabilities, exposure to asset quality
problems, key employee and customer retention problems and other problems that could negatively affect our organization.
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 or inconsistencies in standards, controls,
procedures, and policies that adversely affect our ability to maintain relationships with customers and employees or achieve
the anticipated benefits of the transaction. The integration process 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.
In addition, we must generally satisfy a number of meaningful conditions prior to completing any acquisition,
including, in certain cases, federal and state bank regulatory approval. Bank regulators consider a number of factors when
determining whether to approve a proposed transaction, including the effect of the transaction on financial stability and
the ratings and compliance history of all institutions involved, including the CRA, examination results and anti-money
laundering and Bank Secrecy Act compliance records of all institutions involved. The process for obtaining required
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regulatory approvals has become substantially more difficult, which could affect our future business. We may fail to
pursue, evaluate or complete strategic and competitively significant business opportunities as a result of our inability, or
our perceived inability, to obtain any required regulatory approvals in a timely manner or at all.
Issuing additional shares of our common stock to acquire other banks and bank holding companies may result in
dilution for existing shareholders and may adversely affect the market price of our stock.
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. Resales of
substantial amounts of common stock in the public market and the potential of such sales could adversely affect the
prevailing market price of our common stock and impair our ability to raise additional capital through the sale of equity
securities. 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.
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. We review goodwill for impairment at least annually, or more frequently if
events or changes in circumstances indicate that the carrying value of the asset might be impaired. 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 of the reporting unit goodwill exceeds the implied fair value of that goodwill, 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.
Our decisions regarding the fair value of assets acquired could be different than initially estimated, which could
materially and adversely affect our business, financial condition, results of operations, and future prospects.
In business combinations, we acquire significant portfolios of loans that are marked to their estimated fair value.
There is no assurance that the acquired loans will not suffer deterioration in value. The fluctuations in national, regional
and local economic conditions, including those related to local residential, commercial real estate and construction
markets, may increase the level of charge offs in the loan portfolio that we acquire and correspondingly reduce our net
income. These fluctuations are not predictable, cannot be controlled and may have a material adverse effect on our
business, 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
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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 Capital
As a result of the Dodd-Frank Act and rulemaking, we are subject to more stringent capital requirements.
In July 2013, the U.S. federal banking authorities approved the implementation of the Basel III regulatory capital
reforms, or Basel III, and issued rules affecting certain changes required by the Dodd-Frank Act. Basel III is applicable to
all U.S. banks that are subject to minimum capital requirements as well as to bank and saving and loan holding companies,
other than “small bank holding companies” (generally bank holding companies with consolidated assets of less than $3.0
billion). Basel III not only increases most of the required minimum regulatory capital ratios, it introduces a new common
equity Tier 1 capital ratio and the concept of a capital conservation buffer. Basel III also expands the current definition of
capital by establishing additional criteria that capital instruments must meet to be considered additional Tier 1 and Tier 2
capital. In order to be a “well-capitalized” depository institution under the new regime, an institution must maintain a
common equity Tier 1 capital ratio of 6.5% or more; a Tier 1 capital ratio of 8% or more; a total capital ratio of 10% or
more; and a Tier 1 leverage ratio of 5% or more. The Basel III capital rules became effective as applied to the Company
and HBC on January 1, 2015 with a phase-in period that extended through January 1, 2019 for many of the changes.
The failure to meet applicable regulatory capital requirements could result in one or more of our regulators placing
limitations or conditions on our activities, including our growth initiatives, or restricting the commencement of new
activities, and could affect customer and investor confidence, our costs of funds and FDIC insurance costs, our ability to
pay dividends on our common stock, our ability to make acquisitions, and our business, results of operations and financial
condition, generally.
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. In addition, the Company, on a consolidated
basis, and HBC, on a stand-alone basis, must meet certain regulatory capital requirements and maintain sufficient liquidity.
Regulatory capital requirements could increase from current levels, which could require us to raise additional capital or
contract our operations. 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. Accordingly, we cannot assure you that we will be able to
raise additional capital if needed or on terms acceptable to us. Failure to meet regulatory requirements, could have a
material adverse effect on our business, financial condition and results of operations.
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Risks Related to our Management
We are highly dependent on our management team, and the loss of our senior executive officers or other key employees
could harm our ability to implement our strategic plan, impair our relationships with customers and adversely affect
our business, financial condition and results of operations.
Our success depends, in large degree, on the skills of our management team and our ability to retain, recruit and
motivate key officers and employees. Our senior management team has significant industry experience, and their
knowledge and relationships would be difficult to replace. Leadership changes will occur from time to time, and we cannot
predict whether significant resignations will occur or whether we will be able to recruit additional qualified personnel.
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. We need to continue
to attract and retain key personnel and to recruit qualified individuals to succeed existing key personnel to ensure the
continued growth and successful operation of our business. In addition, as a provider of relationship-based commercial
banking services, we must attract and retain qualified banking personnel to continue to grow our business, and competition
for such personnel can be intense. Our ability to effectively compete for senior executives and other qualified personnel
by offering competitive compensation and benefit arrangements may be restricted by applicable banking laws and
regulations as discussed in “Supervision and Regulation—Incentive Compensation Guidance and Proposed Restrictions.”
The loss of the services of any 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 or results of operations.
In addition, to attract and retain personnel with appropriate skills and knowledge to support our business, we may offer a
variety of benefits, which could reduce our earnings or could have a material adverse effect on our business, financial
condition and results of operations.
Risks Related to Our Reputation and Operations
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 and the value of our common stock.
We are a community bank, and our reputation is one of the most valuable components of our business. Threats
to our reputation can come from many sources, including adverse sentiment about financial institutions generally, unethical
practices, employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies, and
questionable or fraudulent activities of our customers. Negative publicity regarding our business, employees, or customers,
with or without merit, may result in the loss of customers, investors and employees, costly litigation, a decline in revenues
and increased governmental regulation. If our reputation is negatively affected, by the actions of our employees or
otherwise, our business and, therefore, our operating results and the value of our common stock may be materially
adversely affected.
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 to us. 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.
System failure or breaches of our network security could subject us to increased operating costs as well as litigation
and other liabilities.
The computer systems and network infrastructure we use could be vulnerable to hardware and cyber-security
issues. Our operations are dependent upon our ability to protect our computer equipment against damage from fire, power
loss, telecommunications failure or a similar catastrophic event. We could also experience a breach by intentional or
negligent conduct on the part of employees or other internal or external sources, including our third-party vendors. Any
damage or failure that causes an interruption in our operations could have a material adverse effect on our business,
financial condition and results of operations. In addition, our operations are dependent upon our ability to protect the
computer systems and network infrastructure utilized by us, including our internet banking activities, against damage from
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physical break-ins, cyber-security breaches and other disruptive problems caused by the internet or other users. Such
computer break-ins and other disruptions would jeopardize the security of information stored in and transmitted through
our computer systems and network infrastructure, which may result in significant liability, damage our reputation and
inhibit the use of our internet banking services by current and potential customers.
We rely heavily on communications, information systems (both internal and provided by third-parties) and the
internet to conduct our business. Our business is dependent on our ability to process and monitor large numbers of daily
transactions in compliance with legal, regulatory and internal standards and specifications. In addition, a significant portion
of our operations relies heavily on the secure processing, storage and transmission of personal and confidential
information, such as the personal information of our customers and clients. In recent periods, several governmental
agencies and large corporations, including financial service organizations and retail companies, have suffered major data
breaches, in some cases exposing not only their confidential and proprietary corporate information, but also sensitive
financial and other personal information of their clients or clients and their employees or other third-parties, and subjecting
those agencies and corporations to potential fraudulent activity and their clients, clients and other third-parties to identity
theft and fraudulent activity in their credit card and banking accounts. Therefore, security breaches and cyber-attacks can
cause significant increases in operating costs, including the costs of compensating clients and customers for any resulting
losses they may incur and the costs and capital expenditures required to correct the deficiencies in and strengthen the
security of data processing and storage systems. These risks may increase in the future as we continue to increase mobile
payments and other internet-based product offerings and expand our internal usage of web-based products and
applications.
In addition to well-known risks related to fraudulent activity, which take many forms, such as check “kiting” or
fraud, wire fraud, and other dishonest acts, information security breaches and cyber-security related incidents have become
a material risk in the financial services industry. Potential attacks have attempted to obtain unauthorized access to
confidential information, steal money, or manipulate or destroy data, often through the introduction of computer viruses
or malware, cyber-attacks and other means. Other threats of this type may include fraudulent or unauthorized access to
data processing or data storage systems used by us or by our clients, electronic identity theft, “phishing,” account takeover,
and malware or other cyber-attacks. To date, none of these type of attacks have had a material effect on our business or
operations. Such security attacks can originate from a wide variety of sources, including persons who are involved with
organized crime or who may be linked to terrorist organizations or hostile foreign governments. Those same parties may
also attempt to fraudulently induce employees, customers or other users of our systems to disclose sensitive information
in order to gain access to our data or that of our customers or clients.
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We are also subject to the risk that our employees may intercept and transmit unauthorized confidential or
proprietary information. An interception, misuse or mishandling of personal, confidential or proprietary information being
sent to or received from a customer or third-party could result in legal liabilities, remediation costs, regulatory actions and
reputational harm.
Unfortunately, it is not always possible to anticipate, detect, or recognize these threats to our systems, or to
implement effective preventative measures against all breaches, whether those breaches are malicious or accidental. Cyber-
security risks for banking organizations have significantly increased in recent years and have been difficult to detect before
they occur because of the following, among other reasons:
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the proliferation of new technologies, and the use of the Internet and telecommunications technologies to
conduct financial transactions;
threats arise from numerous sources, not all of which are in our control, including among others human error,
fraud or malice on the part of employees or third-parties, accidental technological failure, electrical or
telecommunication outages, failures of computer servers or other damage to our property or assets, natural
disasters or severe weather conditions, health emergencies or pandemics, or outbreaks of hostilities or
terrorist acts;
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the techniques used in cyber-attacks change frequently and may not be recognized until launched or until
well after the breach has occurred;
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the increased sophistication and activities of organized crime groups, hackers, terrorist organizations, hostile
foreign governments, disgruntled employees or vendors, activists and other external parties, including those
involved in corporate espionage;
the vulnerability of systems to third-parties seeking to gain access to such systems either directly or using
equipment or security passwords belonging to employees, customers, third-party service providers or other
users of our systems; and
our frequent transmission of sensitive information to, and storage of such information by, third-parties,
including our vendors and regulators, and possible weaknesses that go undetected in our data systems
notwithstanding the testing we conduct of those systems.
Our investments in systems and processes that are designed to detect and prevent security breaches and cyber-
attacks and our conduct of periodic tests of our security systems and processes, may not succeed in anticipating or
adequately protecting against or preventing all security breaches and cyber-attacks from occurring. Even the most
advanced internal control environment may be vulnerable to compromise. Targeted social engineering attacks are
becoming more sophisticated and are extremely difficult to prevent. Additionally, the existence of cyber-attacks or security
breaches at third-parties with access to our data, such as vendors, may not be disclosed to us in a timely manner. As cyber-
threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance
our protective measures or to investigate and remediate any information security vulnerabilities or incidents. We maintain
a system of internal controls and insurance coverage to mitigate against operational risks, including data processing system
failures and errors and customer or employee fraud. If our internal controls fail to prevent or detect an occurrence, 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.
As is the case with non-electronic fraudulent activity, cyber-attacks or other information or security breaches,
whether directed at us or third-parties, may result in a material loss or have material consequences. Furthermore, the public
perception that a cyber-attack on our systems has been successful, whether or not this perception is correct, may damage
our reputation with customers and third-parties with whom we do business. A successful penetration or circumvention of
system security could cause us negative consequences, including loss of customers and business opportunities, disruption
to our operations and business, misappropriation or destruction of our confidential information and/or that of our
customers, or damage to our customers’ and/or third-parties’ computers or systems, and could expose us to additional
regulatory scrutiny and result in a violation of applicable privacy laws and other laws, litigation exposure, regulatory fines,
penalties or intervention, loss of confidence in our security measures, reputational damage, reimbursement or other
compensatory costs, additional compliance costs, and could have a material adverse effect on our business, financial
condition and results from operations.
Our operations could be interrupted by our third-party service providers experiencing difficulty in providing their
services, terminating their services or failing to comply with banking regulations.
We depend to a significant extent on relationships with third party service providers. 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 and attention by our federal bank
regulators. Recent regulation requires us to enhance our due diligence, ongoing monitoring and control over our third party
vendors and other ongoing third party business relationships. In certain cases, we may be required to renegotiate our
agreements with these vendors to meet these enhanced requirements, which could increase our costs. We expect that our
regulators will hold us responsible for deficiencies in our oversight and control of our third party relationships and in the
performance of the parties with which we have these relationships, which could result in enforcement actions, including
civil money penalties or other administrative or judicial penalties or fines as well as requirements for customer remediation,
any of which could have a material adverse effect on our business, financial condition and results of operations. In addition,
if these third party service providers experience difficulties or terminate their services and we are unable to replace them
with other service providers, our operations could be interrupted. It may be difficult for us to replace some of our third
party vendors, particularly vendors providing our core banking, credit card and debit card services, in a timely manner if
they were unwilling or unable to provide us with these services in the future for any reason. If an interruption were to
continue for a significant period of time, it could have a material adverse effect on our business, financial condition or
results of operations. Even if we are able to replace them, it may be at higher cost to us, which could have a material
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adverse effect on our business, financial condition or results of operations. In addition, if a third party provider fails to
provide the services we require, fails to meet contractual requirements, such as compliance with applicable laws and
regulations, or suffers a cyber-attack or other security breach, our business could suffer economic and reputational harm
that could have a material adverse effect on our business, financial condition and results of operations.
Employee 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 customers are of critical importance. Our employees could engage in fraudulent, illegal, wrongful or suspicious
activities, and/or activities resulting in consumer harm that adversely affects our customers and/or our business. The
precautions we take to detect and prevent such misconduct may not always be effective and regulatory sanctions and/or
penalties, serious harm to our reputation, financial condition, customer relationships and ability to attract new customers.
In addition, improper use or disclosure of confidential information by our employees, even if inadvertent, could result in
serious harm to our reputation, financial condition and current and future business relationships. If our internal controls
against operational risks fail to prevent or detect an occurrence of such employee error or misconduct, or if any resulting
loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, financial
condition and results of operations.
We depend on the accuracy and completeness of information provided by customers and counterparties and any
misrepresented information could adversely affect our business, financial condition and results of operations.
In deciding whether to extend credit or to enter into other transactions with customers and counterparties, we may
rely on information furnished to us by or on behalf of customers and counterparties, including financial statements and
other financial information. Some of the information regarding customers provided to us is also used in our proprietary
credit decisioning and scoring models, which we use to determine whether to do business with customers and the risk
profiles of such customers which are subsequently utilized by counterparties who lend us capital to fund our operations.
We may also rely on representations of customers and counterparties as to the accuracy and completeness of that
information. In deciding whether to extend credit, we may rely upon our customers’ representations that their financial
statements conform to GAAP and present fairly, in all material respects, the financial condition, results of operations and
cash flows of the customer. We also may rely on customer representations and certifications, or other audit or accountants’
reports, with respect to the business and financial condition of our customers. Our financial condition, results of operations,
financial reporting and reputation could be negatively affected if those representations are misleading, false, inaccurate or
fraudulent and we rely on that materially misleading, false, inaccurate or fraudulent information.
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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 legislature, 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
customer segments, particularly the small business segment and the mass affluent segment, which offers a rich source of
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deposits as well as more profitable and less risky customer relationships. Further, with the rebound of the equity markets
our deposit customers may perceive alternative investment opportunities as providing superior expected returns.
Technology and other changes have made it more convenient for bank customers to transfer funds into alternative
investments or other deposit accounts such as online virtual banks and non-bank service providers. The current low interest
rate environment could increase such transfers of deposits to higher yielding deposits or other investments. Efforts and
initiatives we undertake to retain and increase deposits, including deposit pricing, can increase our costs. When our
customers move money into higher yielding deposits or in favor of alternative investments, we can lose a relatively
inexpensive source of funds, thus increasing our funding costs.
New technology and other changes are allowing parties to effectuate financial transactions that previously
required the involvement of banks. 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 customer deposits and the related
income generated from those deposits. The loss of these revenue streams and access to lower cost deposits as a source of
funds could have a material adverse effect on our business, financial condition and results of operations.
Increased competition in our markets may result in reduced loans, deposits and commissions and brokers’ fees,
as well as reduced net interest margin and profitability. Ultimately, we may not be able to compete successfully against
current and future competitors. If we are unable to attract and retain banking customers and expand our sales market for
such loans, then we may be unable to continue to grow our business which could have a material adverse effect on our
business, 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 customers and to reduce costs. Our future success depends, in part, upon our ability to address
the needs of our customers by using technology to provide products and services that will satisfy customer 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. We may not be able to effectively implement new, technology-driven
products and services or be successful in marketing these products and services to our customers. 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 or results
of operations.
We expect that new technologies and business processes applicable to the consumer credit industry will continue
to emerge, and these new technologies and business processes may be better than those we currently use. Because the pace
of technological change is high and our industry is intensely competitive, we may not be able to sustain our investment in
new technology as critical systems and applications become obsolete or as better ones become available. A failure to
maintain current technology and business processes could cause disruptions in our operations or cause our products and
services to be less competitive, all of which could have a material adverse effect on our business, financial condition or
results of operations.
Many of our larger competitors have substantially greater resources to invest in technological improvements. 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. Accordingly, a risk exists that we will not be able to effectively implement new
technology-driven products and services or be successful in marketing such products and services to our customers.
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Other Risks Related to Our Business
The costs and effects of litigation, investigations or similar matters, or adverse facts and developments related thereto,
could 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, investigations or similar
matters arising out 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 claims and lawsuits, and the disposition of such claims and lawsuits, whether through
settlement, or litigation, could be time-consuming and expensive to resolve, divert management attention from executing
our business plan, lead to attempts on the part of other parties to pursue similar claims. Any claims asserted against us,
regardless of merit or eventual outcome may harm our reputation. Any adverse determination related to pending or other
litigation could have a material adverse effect on our business, financial condition and results of operations.
We currently hold a significant amount of company-owned life insurance.
At December 31, 2020, we held company-owned life insurance (“COLI”) on current and former senior employees
and executives, with a cash surrender value of $77.5 million, as compared with a cash surrender value of $76.0 million at
December 31, 2019. The eventual repayment of the cash surrender value is subject to the ability of the various insurance
companies to pay death benefits or to return the cash surrender value to us if needed for liquidity purposes. We continually
monitor the financial strength of the various companies with whom we carry these policies. However, any one of these
companies could experience a decline in financial strength, which could impair its ability to pay benefits or return our cash
surrender value. If we need to liquidate these policies for liquidity purposes, we would be subject to taxation on the increase
in cash surrender value and penalties for early termination, both of which 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 customers 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. These losses or defaults could have a material adverse effect on our business,
financial condition and results of operations. Additionally, if our competitors were extending credit on terms we found to
pose excessive risks, or at interest rates which we believed did not warrant the credit exposure, we may not be able to
maintain our business volume and could experience deteriorating financial performances.
Severe weather, natural disasters, pandemics, acts of war or terrorism, social unrest and other external events could
significantly impact our business.
Severe weather, natural disasters (including fires and earthquakes), wide spread disease or pandemics (such as
COVID-19), acts of war or terrorism, social unrest and other adverse external events could have a significant impact on
our ability to conduct business. Such events could 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 and San
Francisco, California 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, and could have a material adverse effect on our business, financial condition and results of operations. In
addition, our customers and loan collateral may be severely impacted by such events, resulting in losses. Operations in our
market could be disrupted by both the evacuation of large portions of the population as well as damage to and/or lack of
access to our banking and operation facilities. 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.
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Finance and Accounting Risks
Accounting estimates and risk management processes rely on analytical models that may prove inaccurate resulting in
a material adverse effect on our business, financial condition and results of operations.
The processes we use to estimate probable incurred loan losses and to measure the fair value of financial
instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on
our financial condition and results of operations, depends upon the use of analytical models. These models reflect
assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even if
these assumptions are adequate, the models using those assumptions may prove to be inadequate or inaccurate because of
other flaws in their design or their 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 our probable loan losses 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.
Changes in accounting standards could materially impact our financial statements.
From time to time, the FASB or the SEC, may change the financial accounting and reporting standards that govern
the preparation of our financial statements. Such changes may result in us being subject to new or changing accounting
and reporting standards. 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.
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 SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act,
which will require management to certify financial and other information in our quarterly and annual reports and provide
an annual management report on the effectiveness of controls over financial reporting. In particular, we are required to
certify our compliance with Section 404 of the Sarbanes-Oxley Act, which requires us to furnish annually a report by
management on the effectiveness of our internal control over financial reporting and our independent registered public
accounting firm is required to report on the effectiveness of our internal control 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 customers may lose confidence in the accuracy
and completeness of our financial statements and reports; our liquidity, access to capital markets and perceptions of our
creditworthiness could be adversely affected; and the market price of our common stock could decline. 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 DBO or other regulatory authorities, which could require additional financial and management
resources. These events could have an adverse effect on our business, financial condition and results of operations.
We have significant deferred tax assets and cannot assure that it will be fully realized.
Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between the
carrying amounts and tax basis of assets and liabilities computed using enacted tax rates. We 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
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it requires estimates that cannot be made with certainty. At December 31, 2020, we had a net deferred tax assets of
$28.2 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 operations for the period in which the
determination was made.
Risks Related to Legislative and Regulatory Developments
We are subject to extensive government regulation that could limit or restrict our activities, which in turn may adversely
impact our ability to increase our assets and earnings.
We operate in a highly regulated environment and are subject to supervision and regulation by a number of
governmental regulatory agencies, including the Federal Reserve, the Department of Financial Protection and Innovation
(“DFPI”) and the FDIC. Regulations adopted by these agencies, which are generally intended to provide protection for
depositors and customers rather than for the benefit of shareholders, govern a comprehensive range of matters relating to
ownership and control of our shares, our acquisition of other companies and businesses, permissible activities for us to
engage in, maintenance of adequate capital levels, and other aspects of our operations. These bank regulators possess broad
authority to prevent or remedy unsafe or unsound practices or violations of law. The laws and regulations applicable to
the banking industry could change at any time and we cannot predict the effects of these changes on our business,
profitability or growth strategy. Increased regulation could increase our cost of compliance and adversely affect
profitability. Moreover, certain of these regulations contain significant punitive sanctions for violations, including
monetary penalties and limitations on a bank’s ability to implement components of its business plan, such as expansion
through mergers and acquisitions or the opening of new branch offices. In addition, changes in regulatory requirements
can significantly affect the services that we provide as well as the costs associated with compliance efforts. Furthermore,
government policy and regulation, particularly as implemented through the Federal Reserve System, significantly affect
credit conditions. Negative developments in the financial industry and the impact of new legislation and regulation in
response to those developments could negatively impact our business operations and adversely impact our financial
performance. In addition, adverse publicity and damage to our reputation arising from the failure or perceived failure to
comply with legal, regulatory or contractual requirements could affect our ability to attract and retain customers.
Legislative and regulatory actions taken now or in the future may impact our business, governance structure, financial
condition or results of operations. Proposed legislative and regulatory actions, including changes to financial
regulation and the corporate tax law, may not occur on the timeframe that is expected, or at all, which could result in
additional uncertainty for our business.
Current and recent-past economic conditions, particularly in the financial markets, have resulted in government
regulatory agencies and political bodies placing increased focus and scrutiny on the financial services industry. The Dodd-
Frank Act significantly changed the regulation of financial institutions and the financial services industry. The Dodd-Frank
Act and the regulations thereunder affect large and small financial institutions, including several provisions that will affect
how community banks, thrifts and small bank and thrift holding companies will be regulated in the future. Although the
applicability of certain elements of the Dodd-Frank Act is limited to institutions with more than $10 billion in assets, there
can be no guarantee that such applicability will not be extended in the future or that regulators or other third parties will
not seek to impose such requirements on institutions with less than $10 billion in assets, such as HBC. Compliance with
the Dodd-Frank Act and its implementing regulations has and will continue to result in additional operating and compliance
costs that could have a material adverse effect on our business, financial condition and results of operations.
New proposals for legislation continue to be introduced in the U.S. Congress that could substantially increase
regulation of the financial services industry, impose restrictions on the operations and general ability of firms within the
industry to conduct business consistent with historical practices, including in the areas of compensation, interest rates,
financial product offerings and disclosures, and have an effect on bankruptcy proceedings with respect to consumer
residential real estate mortgages, among other things. Federal and state regulatory agencies also frequently adopt changes
to their regulations or change the manner in which existing regulations are applied.
Certain aspects of current or proposed regulatory or legislative changes, including to laws applicable to the
financial industry, if enacted or adopted, may impact the profitability of our business activities, require more oversight or
change certain of our business practices, including the ability to offer new products, obtain financing, attract deposits,
make loans and achieve satisfactory interest spreads, and could expose us to additional costs, including increased
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compliance costs. These changes also may require us to invest significant management attention and resources to make
any necessary changes to operations to comply and could have a material adverse effect on our business, financial condition
and results of operations. In addition, any proposed legislative or regulatory changes, including those that could benefit
our business, financial condition and results of operations, may not occur on the timeframe that is proposed, or at all, which
could result in additional uncertainty for our business.
Monetary policies and regulations of the Federal Reserve could adversely affect our business, financial condition and
results of operations.
In addition to being affected by general economic conditions, our earnings and growth are affected by the policies
of the Federal Reserve. An important function of the Federal Reserve is to regulate the money supply and credit conditions.
Among the instruments used by the Federal Reserve to implement these objectives are open market purchases and sales
of U.S. government securities, adjustments of the discount rate and changes in banks’ reserve requirements against bank
deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution
of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.
The monetary policies and regulations of the Federal Reserve have had a significant effect on the operating results of
commercial banks in the past and are expected to continue to do so in the future.
Federal and state regulators periodically examine our business, and we may be required to remediate adverse
examination findings.
The Federal Reserve, the FDIC, and the DFPI periodically examine our business, including our compliance with
laws and regulations. If, as a result of an examination, a banking agency were to determine that our financial condition,
capital resources, asset quality, earnings prospects, management, liquidity or other aspects of any of our operations had
become unsatisfactory, or that we were in violation of any law or regulation, they may take a number of different remedial
actions as they deem appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require
affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that
can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil money penalties, to
fine or remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent
risk of loss to depositors, to terminate our deposit insurance and place us into receivership or conservatorship. Any
regulatory action against us could have an adverse effect on our business, financial condition and results of operations.
We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering
statutes and regulations.
The Bank Secrecy Act, the USA Patriot Act and other laws and regulations require financial institutions, among
other duties, to institute and maintain an effective anti-money laundering program and to file reports such as suspicious
activity reports and currency transaction reports. We are required to comply with these and other anti-money laundering
requirements. The federal banking agencies and Financial Crimes Enforcement Network are authorized to impose
significant civil money penalties for violations of those requirements and have recently engaged in coordinated
enforcement efforts against banks and other financial services providers with the U.S. Department of Justice, Drug
Enforcement Administration and Internal Revenue Service. We are also subject to increased scrutiny of compliance with
the rules enforced by the Office of Foreign Assets Control. If our policies, procedures and systems are deemed deficient,
we would be subject to liability, including fines and regulatory actions, which may include restrictions on our ability to
pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan,
including our acquisition plans. Failure to maintain and implement adequate programs to combat money laundering and
terrorist financing could also have serious reputational consequences for us. Any of these results could have a material
adverse effect on our business, financial condition and results of operations.
The Federal Reserve may require us to commit capital resources to support HBC.
As a matter of policy, the Federal Reserve expects a bank holding company to act as a source of financial and
managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank. The Dodd-Frank Act
codified the Federal Reserve’s policy on serving as a source of financial strength. Under the “source of strength” doctrine,
the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank and
may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to
a subsidiary bank. A capital injection may be required at times when the bank holding company may not have the resources
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to provide it and therefore may be required to borrow the funds or raise capital. Any loans by a bank holding company to
its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary
bank. In the event of a bank holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the
bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover,
bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the
claims of the institution’s general unsecured creditors, including the holders of its note obligations. Thus, any borrowing
that must be incurred by us to make a required capital injection to HBC becomes more difficult and expensive and could
have an adverse effect on our business, financial condition and results of operations.
We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and fair
lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.
The Community Reinvestment Act, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending
laws and regulations impose non-discriminatory lending and other requirements on financial institutions. The U.S.
Department of Justice and other federal agencies, including the FDIC and CFPB, are responsible for enforcing these laws
and regulations. A successful challenge to an institution’s performance under the Community Reinvestment Act, fair
lending and other compliance laws and regulations could result in a wide variety of sanctions, including the required
payment of damages and civil money penalties, injunctive relief, imposition of restrictions on mergers and acquisitions
activity and restrictions on expansion. Private parties may also have the ability to challenge an institution’s performance
under fair lending laws in private class action litigation. The costs of defending, and any adverse outcome from, any such
challenge could damage our reputation or could have a material adverse effect on our business, financial condition and
results of operations.
We may be subject to liability for potential violations of predatory lending laws, which could adversely impact our
business, financial condition and results of operations.
Various U.S. federal, state and local laws have been enacted that are designed to discourage predatory lending
practices. The U.S. Home Ownership and Equity Protection Act of 1994 (“HOEPA”) prohibits inclusion of certain
provisions in mortgages that have interest rates or origination costs in excess of prescribed levels and requires that
borrowers be given certain disclosures prior to origination. These laws also prohibit practices such as steering borrowers
away from more affordable products, selling unnecessary insurance to borrowers, repeatedly refinancing loans and making
loans without a reasonable expectation that the borrowers will be able to repay the loans irrespective of the value of the
underlying property. Some states have enacted, or may enact, similar laws or regulations, which in some cases impose
restrictions and requirements greater than those in HOEPA. In addition, under the anti-predatory lending laws of some
states, the origination of certain mortgages, including loans that are not classified as “high-cost” loans under applicable
law, must satisfy a net tangible benefit test with respect to the related borrower. Such tests may be highly subjective and
open to interpretation. As a result, a court may determine that a home mortgage, for example, does not meet the test even
if the related originator reasonably believed that the test was satisfied. It is our policy not to make predatory loans, but
these laws create the potential for liability with respect to our lending and loan investment activities. They increase our
cost of doing business and, ultimately, may prevent us from making certain loans and cause us to reduce the average
percentage rate or the points and fees on loans that we do make. If any of our mortgages are found to have been originated
in violation of predatory or abusive lending laws, we could incur losses, which could adversely impact our business,
financial condition and results of operations.
Regulations relating to privacy, information security and data protection could increase our costs, affect or limit how
we collect and use personal information.
We are subject to various privacy, information security and data protection laws, including requirements
concerning security breach notification, and we could be negatively impacted by these laws. For example, our business is
subject to the Gramm-Leach-Bliley Act of 1999 which, among other things: (i) imposes certain limitations on our ability
to share nonpublic personal information about our customers with nonaffiliated third parties; (ii) requires that we provide
certain disclosures to customers about our information collection, sharing and security practices and afford customers the
right to “opt out” of any information sharing by us with nonaffiliated third parties (with certain exceptions); and
(iii) requires we develop, implement and maintain a written comprehensive information security program containing
safeguards appropriate based on our size and complexity, the nature and scope of our activities, and the sensitivity of
customer information we process, as well as plans for responding to data security breaches. Various state and federal
banking regulators and states have also enacted data security breach notification requirements with varying levels of
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individual, consumer, regulatory or law enforcement notification in certain circumstances in the event of a security breach.
Moreover, legislators and regulators in the United States are increasingly adopting or revising privacy, information security
and data protection laws that potentially could have a significant impact on our current and planned privacy, data protection
and information security-related practices, our collection, use, sharing, retention and safeguarding of consumer or
employee information.
Compliance with current or future privacy, data protection and information security laws (including those
regarding security breach notification) affecting customer or employee data to which we are subject could result in higher
compliance and technology costs and could restrict our ability to provide certain products and services, which could have
a material adverse effect on our business, financial condition and results of operations. Our failure to comply with privacy,
data protection and information security laws could result in potentially significant regulatory or governmental
investigations or actions, litigation, fines, sanctions and damage to our reputation, which could have a material adverse
effect on our business, financial condition and results of operations.
Potential limitations on incentive compensation contained in proposed federal agency rulemaking may adversely affect
our ability to attract and retain our highest performing employees.
During the second quarter of 2016, the Federal Reserve and the FDIC, along with other U.S. regulatory agencies,
jointly published proposed rules designed to implement provisions of the Dodd-Frank Act prohibiting incentive
compensation arrangements that would encourage inappropriate risk taking at covered financial institutions, which
includes a bank or bank holding company with $1 billion or more in assets. It cannot be determined at this time whether
or when a final rule will be adopted and whether compliance with such a final rule will substantially affect the manner in
which we structure compensation for our executives and other employees. Depending on the nature and application of the
final rules, we may not be able to compete successfully with certain financial institutions and other companies that are not
subject to some or all of the rules to retain and attract executives and other high performing employees. If this were to
occur, relationships that we have established with our customers may be impaired and our business, financial condition
and results of operations could be materially adversely affected.
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.
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:
•
•
•
changes in business and economic condition;
actual or anticipated quarterly fluctuations in our operating results and financial condition;
actual occurrence of one or more of the risk factors outlined above;
54
•
•
•
•
•
•
•
•
•
•
•
•
•
recommendations by securities analysts or failure to meet, securities analysts’ estimates of our financial and
operating performance, or lack of research reports by industry analysts or ceasing of coverage;
speculation in the press or investment community generally or relating to our reputation, our operations, our
market area, our competitors or the financial services industry in general;
strategic actions by us or our competitors, such as acquisitions, restructurings, dispositions or financings;
actions by institutional investors;
fluctuations in the stock price and operating results of our competitors;
future sales of our equity, equity related or debt securities;
proposed or adopted regulatory changes or developments;
anticipated or pending investigations, proceedings, or litigation that involve or affect us;
the level and extent to which we do or are allowed to pay dividends;
trading activities in our common stock, including short selling;
deletion from well-known index or indices;
domestic and international economic factors unrelated to our performance; and
general market conditions and, in particular, developments related to market conditions for the financial
services industry.
The trading volume in our common stock is less than that of other larger financial services companies.
Although our common stock is listed for trading on the Nasdaq, its trading volume is generally 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.
Our dividend policy may change without notice, and our future ability to pay dividends is subject to restrictions.
Historically, our board of directors has declared quarterly dividends on our common stock. However, we have no
obligation to continue doing so and may change our dividend policy at any time without notice to holders of our common
stock. Holders of our common stock are only entitled to receive such cash dividends as our board of directors, in its
discretion, may declare out of funds legally available for such payments. 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. 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.
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As a bank holding company, we are subject to regulation by the Federal Reserve. The Federal Reserve has
indicated that bank holding companies should carefully review their dividend policy in relation to the organization’s
overall asset quality, current and prospective earnings and level, composition and quality of capital. The guidance provides
that we inform and consult with the Federal Reserve prior to declaring and paying a dividend that exceeds earnings for the
period for which the dividend is being paid or that could result in an adverse change to our capital structure, including
interest on our debt obligations. If required payments on our debt obligations are not made or are deferred, or dividends
on any preferred stock we may issue are not paid, we will be prohibited from paying dividends on our common stock.
The Basel III capital rules also introduced a new capital conservation buffer on top of the minimum risk-based
capital ratios. Failure to maintain a capital conservation buffer above certain levels will result in restrictions on HCC’s
ability to make dividend payments, redemptions or other capital distributions. These requirements, and any other new
regulations or capital distribution constraints, could adversely affect the ability of HBC to pay dividends to HCC and, in
turn, affect our ability to pay 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.
Future equity issuances could result in dilution, which could cause our common stock price to decline.
We are generally not restricted from issuing additional shares of our common stock, up to the 100 million shares
of voting common stock and 10 million shares of preferred stock authorized in our articles of incorporation (subject to
Nasdaq shareholder approval rules), which in each case could be increased by a vote of a majority of our shares. We may
issue additional shares of our common stock in the future pursuant to current or future equity compensation plans, upon
conversions of preferred stock or debt, upon exercise of warrants or in connection with future acquisitions or financings.
If we choose to raise capital by selling shares of our common stock for any reason, the issuance would have a dilutive
effect on the holders of our common stock and could have a material negative effect on the market price of our common
stock.
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 of directors to issue shares of preferred stock without any action on the part of our shareholders
may impede a takeover of us and prevent a transaction perceived to be favorable to our shareholders.
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The holders of our debt obligations and preferred stock, if any, 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 and preferred stock, if any, 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, 2020, we had $40.0 million principal amount
of subordinated notes outstanding due June 1, 2027. 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 of directors 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, or the CGCL, could make it
more difficult for a third party to acquire us, even if doing so would be perceived to be beneficial by our shareholders.
Furthermore, with certain limited exceptions, federal regulations prohibit a person or company or a group of persons
deemed to be “acting in concert” from, directly or indirectly, acquiring more than 10% (5% if the acquirer is a bank holding
company) of any class of our voting stock or obtaining the ability to control in any manner the election of a majority of
our directors or otherwise direct the management or policies of our company without prior notice or application to and the
approval of the Federal Reserve. Under the California Financial Code, no person may, directly or indirectly, acquire control
of a California state bank or its holding company unless the DBO has approved such acquisition of control. A person
would be deemed to have acquired control of HBC if such person, directly or indirectly, has the power (i) to vote 25% or
more of the voting power of HBC or (ii) to direct or cause the direction of the management and policies of HBC. For
purposes of this law, a person who directly or indirectly owns or controls 10% or more of our outstanding common stock
would be presumed to control HBC. Accordingly, prospective investors need to be aware of and comply with these
requirements, if applicable, in connection with any purchase of shares of our common stock. 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
None.
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 333 W. El Camino Real in Sunnyvale,
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California 94087, at 400 S. El Camino Real in San Mateo, California, 94402, at 325 Lytton Avenue in Palo Alto, California
94301, at 120 Kearny Street in San Francisco, California 94108, at 999 5th Avenue in San Rafael, California 94901 and at
2400 Broadway in Redwood City, California 94063. The Company has a loan production office at 101 Ygnacio Valley
Road in Walnut Creek, California 94596. 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, in a six - story Class - A type office building consisting of approximately 54,910
square feet, which are subject to a direct lease dated June 27, 2019, which expires on July 31, 2030. The current monthly
rent is $197,676 subject to 3% annual increases.
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 February 2020, the Company renewed 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 monthly rent payment is $10,128,
subject to annual increases of 3% until the lease expires on February 29, 2024.
In August of 2014, the Company amended and 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 $6,639, subject to annual increases of 2% until the lease expires on October 31, 2021. The Company has
reserved the right to extend the term of the lease for one additional period of five years.
In July of 2017, 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 $30,133, subject to annual increases of 3% until the lease expires on April 30, 2023. The Company has reserved
the right to extend the term of the lease for one additional period of five years.
In March of 2018, the Company extended its lease for approximately 3,022 square feet on the first floor of a
three - story multi - tenant office building located at 333 West El Camino Real in Sunnyvale, California. The current monthly
rent payment is $17,725, subject to annual increases of 3% until the lease expires on May 31, 2023.
In May of 2018, as part of the acquisition of United American Bank, the Company assumed a 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 $13,712, subject to annual increases of 5% until the
lease expires on October 31, 2022. The Company has reserved the right to extend the lease for one additional period of
two years.
In November of 2018, the Company extended its lease for approximately 1,920 square feet in a one-story
stand - alone building located in an office complex at 15575 Los Gatos Boulevard in Los Gatos, California. The current
monthly rent payment is $7,129, subject to annual increases of 3% until the lease expires on November 30, 2023. The
Company has reserved the right to extend the term of the lease for one additional period of five years.
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 $21,089, 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 June of 2019, the Company exercised its right to extend the lease term 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 $4,914 subject to 3% annual increases until the lease expires on June 30,
2024.
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In August of 2019, 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 $5,926 until the lease expires on September 30, 2021.
In August of 2019, the Company renewed a lease for approximately 3,772 square feet on the first and second
floors in a two-story multi-tenant multi-use building located at 1987 First Street in Livermore, California. The current
monthly rent payment is $9,045, until the lease expires on September 30, 2024. The Company has reserved the right to
extend the term of the lease for one additional period of five years.
In October of 2019, as part of the acquisition of Presidio Bank, the Company assumed a lease for approximately
8,565 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 $60,255 until the lease expires on March 31, 2021. In January 2021 the
Company renewed the lease for this office for approximately 6,233 square feet. The monthly rent beginning April 2021
will be $44,150, subject to annual increases of 3% until the lease expires in March 31, 2026.
In October of 2019, also as part of the acquisition of Presidio Bank, the Company assumed a lease for
approximately 4,188 square feet on the first floor in a multi-tenant office building located at 999 5th Avenue in San Rafael,
California. The current monthly rent payment is $19,099, subject to annual increases of 3% until the lease expires on
November 30, 2022. 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 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 $38,615 subject to annual increases of 3% until the lease expires
January 31, 2025. 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 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 $28,046, 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 expiring on October 31,2024. In January 2020, The Company amended this lease expiration date to
October 31, 2030 and executed a new lease for an additional suite on the tenth floor of comprised of 5,023 square feet.
The current monthly rent payment for the combined space of approximately 8,086 square feet is $54,704, subject to annual
increases of 3% until the lease expires October 31, 2030. The Company has reserved the right to extend the lease for one
additional period of five years.
Loan Production Office
As a result of the merger with Presidio Bank and the closing of its Walnut Creek Branch at 101 S. Ygnacio Valley
Road in Walnut Creek California, the Company retained approximately 1,461 square feet of office space at 101 S. Ygnacio
Valley Road to use as a loan production office. The current monthly rent payment is $4,967 until the lease expires on
August 15, 2021.
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 $29,095, which is included in the main office of HBC’s total rent of $197,676, 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
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 16 “Commitments and Contingencies” to the
consolidated financial statements.
ITEM 4 — MINE SAFETY DISCLOSURES
Not Applicable.
PART II
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 information in the following table for 2020 and 2019 indicates the high and low closing prices for the
common stock, based upon information provided by the NASDAQ Global Select Market and cash dividend payment for
each quarter presented.
Quarter
Year ended December 31, 2020:
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year ended December 31, 2019:
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock Price
High
Low
Dividend
Per Share
$
$
$
$
$
$
$
$
$
$
9.33
7.69
9.36
12.80
13.05
12.43
12.84
14.43
6.67
6.20
6.74
6.45
11.14
11.16
11.80
11.57
$
$
$
$
$
$
$
$
0.13
0.13
0.13
0.13
0.12
0.12
0.12
0.12
The closing price of our common stock on February 10, 2021 was $9.42 per share as reported by the NASDAQ
Global Select Market.
As of February 10, 2021, there were approximately 839 holders of record of common stock. There are no other
classes of common equity outstanding.
Dividend Policy
The amount of future dividends will depend upon our earnings, financial condition, capital requirements and
other factors, and will be determined by our board of directors on a quarterly basis. 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
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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 of directors in light of conditions then existing,
including factors such as our results of operations, financial condition, business conditions, regulatory capital requirements
and covenants under any applicable contractual arrangements, including agreements with regulatory authorities.
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.”
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of December 31, 2020 regarding equity compensation plans under
which equity securities of the Company were authorized for issuance:
Number of securities to Weighted average
be issued upon exercise of
outstanding options,
warrants and rights
(a)
outstanding options,
warrants and rights
(b)
exercise price of
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)
Equity compensation plans approved by
security holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity compensation plans not approved by
security holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,546,821 (1) $
N/A
9.30
N/A
2,409,062 (2)
N/A
(1)
Consists of 266,818 options to acquire shares under the Company’s Amended and Restated 2004 Equity Plan,
1,602,919 options to acquire shares under the Company’s 2013 Equity Incentive Plan, and the aggregate amount
of 677,084 stock options assumed from the Presidio stock option and equity incentive plans.
(2)
Available under the Company’s 2013 Equity Incentive Plan.
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Performance Graph
The following graph compares the stock performance of the Company from December 31, 2015 to December 31,
2020, to the performance of several specific industry indices. The performance of the S&P 500 Index, NASDAQ Stock
Index and NASDAQ Bank Stocks were used as comparisons to the Company’s stock performance. 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, 2015 to December 31,
2020, to the performance of several specific industry indices. The performance of the S&P 500 Index, NASDAQ Stock
Index and NASDAQ Bank Stocks were used as comparisons to the Company’s stock performance.
Period Ending
Index
Heritage Commerce Corp * . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
S&P 500 * . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NASDAQ - Total US* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NASDAQ Bank Index* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12/31/15 12/31/16 12/31/17 12/31/18 12/31/19 12/31/20
74
184
257
124
100
100
100
100
121
110
108
135
107
158
179
139
128
131
138
140
95
123
133
115
* Source: S&P Global — (434) 977 - 1600
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ITEM 6 — 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
INCOME STATEMENT DATA:
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income before provision for credit losses on loans(1) . . . . . .
Provision for credit losses on loans(1) . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income after provision for credit losses on loans(1) . . . . . . .
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends and discount accretion on preferred stock . . . . . . . . . . . . . . . .
Net income available to common shareholders . . . . . . . . . . . . . . . . . . .
Less: undistributed earnings allocated to Series C Preferred Stock . . . . . . .
Distributed and undistributed earnings allocated to
2020
150,471
8,581
141,890
13,233
128,657
9,922
89,511
49,068
13,769
35,299
—
35,299
—
AT OR FOR YEAR ENDED DECEMBER 31,
2018
(Dollars in thousands, except per share data)
2017
2019
$
$
$
$
142,659
10,847
131,812
846
130,966
10,244
84,898
56,312
15,851
40,461
—
40,461
—
129,845
7,822
122,023
7,421
114,602
9,574
75,521
48,655
13,324
35,331
—
35,331
—
106,911
5,387
101,524
99
101,425
9,612
60,738
50,299
26,471
23,828
—
23,828
—
2016
94,431
3,211
91,220
1,237
89,983
11,625
57,639
43,969
16,588
27,381
(1,512)
25,869
(1,278)
common shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
35,299
$
40,461
$
35,331
$
23,828
$
24,591
PER COMMON SHARE DATA:
Basic net income(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted net income(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Book value per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Tangible book value per common share . . . . . . . . . . . . . . . . . . . . . . . . . $
Dividend payout ratio(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average number of shares outstanding — basic . . . . . . . . . . . . .
Weighted average number of shares outstanding — diluted . . . . . . . . . . . .
Common shares outstanding at period end . . . . . . . . . . . . . . . . . . . . . . .
0.59
0.59
9.64
6.57
$
$
$
$
88.04 %
0.87
0.84
9.71
6.55
$
$
$
$
56.16 %
0.85
0.84
8.49
6.28
$
$
$
$
52.26 %
0.63
0.62
7.10
5.76
$
$
$
$
63.95 %
0.72
0.72
6.85
5.46
49.77 %
59,478,343
60,169,139
59,917,457
46,684,384
47,906,229
59,368,156
41,469,211
42,182,939
43,288,750
38,095,250
38,610,815
38,200,883
33,933,806
34,219,121
37,941,007
BALANCE SHEET DATA:
Securities (available-for sale and held-to-maturity) . . . . . . . . . . . . . . . . . $
533,163
Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,574,861
Allowance for credit losses on loans(5) . . . . . . . . . . . . . . . . . . . . . . . . . $
44,400
Goodwill and other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . $
184,295
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,634,114
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,914,486
39,740
Subordinated debt, net of issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . $
—
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
577,889
$
771,385
$ 2,510,559
23,285
$
$
187,835
$ 4,109,463
$ 3,414,768
39,554
$
328
$
576,708
$
$
836,241
$ 1,858,557
27,848
$
$
95,760
$ 3,096,562
$ 2,637,532
39,369
$
—
$
367,466
$
$
790,193
$ 1,563,009
19,658
$
$
51,253
$ 2,843,452
$ 2,482,989
39,183
$
—
$
353,566
$
$
630,599
$ 1,483,518
19,089
$
$
52,614
$ 2,570,880
$ 2,262,140
—
$
—
$
259,850
$
SELECTED PERFORMANCE RATIOS:(6)
Return on average assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average tangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average tangible equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest margin (fully tax equivalent) . . . . . . . . . . . . . . . . . . . . . . . .
Efficiency ratio (7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average net loans (excludes loans held-for-sale) as a percentage of
average deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average total shareholders’ equity as a percentage of average total assets . .
SELECTED ASSET QUALITY DATA:(8)
0.80 %
0.83 %
6.12 %
9.04 %
3.50 %
58.96 %
1.21 %
1.25 %
9.51 %
13.09 %
4.28 %
59.76 %
1.16 %
1.19 %
10.79 %
14.41 %
4.31 %
57.39 %
0.86 %
0.88 %
8.86 %
10.98 %
3.99 %
54.65 %
1.13 %
1.15 %
10.71 %
13.55 %
4.12 %
56.04 %
69.58 %
13.00 %
69.65 %
12.69 %
67.35 %
10.72 %
62.65 %
9.76 %
66.25 %
10.54 %
Net charge-offs (recoveries) to average loans . . . . . . . . . . . . . . . . . . . . .
Allowance for credit losses on loans to total loans (5) . . . . . . . . . . . . . . . .
Nonperforming loans to total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonperforming assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.03 %
1.70 %
0.30 %
$
7,869
0.27 %
0.92 %
0.39 %
$
9,828
(0.04)%
1.48 %
0.79 %
$
14,887
(0.03)%
1.24 %
0.16 %
$
2,485
0.08 %
1.27 %
0.20 %
3,288
HERITAGE COMMERCE CORP CAPITAL RATIOS:
Total risk-based . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 risk-based . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common equity Tier 1 risk-based capital . . . . . . . . . . . . . . . . . . . . . . . .
Leverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16.5 %
14.0 %
14.0 %
9.1 %
14.6 %
12.5 %
12.5 %
9.7 %
15.0 %
12.0 %
12.0 %
8.9 %
14.4 %
11.4 %
11.4 %
8.0 %
12.5 %
11.5 %
11.5 %
8.5 %
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Notes:
(1) Provision for credit losses on loans for the year ended December 31, 2020. Provision for loan losses for previous
years.
(2) Represents distributed and undistributed earnings allocated to common shareholders, divided by the average number
of shares of common stock outstanding for the respective period. See Note 17 to the consolidated financial statements.
(3) Represents distributed and undistributed earnings allocated to common shareholders, divided by the average number
of shares of common stock and common stock - equivalents outstanding for the respective period. See Note 17 to the
consolidated financial statements.
(4) Percentage is calculated based on dividends paid on common stock and Series C Preferred Stock for the year ended
December 31, 2016 (on an as converted basis) divided by net income.
(5) Allowance for credit losses on loans at December 31, 2020. Allowance for loan losses for previous years.
(6) Average balances used in this table and throughout this Annual Report are based on daily averages.
(7) The efficiency ratio is calculated by dividing noninterest expenses by the sum of net interest income before provision
for credit losses on loans and noninterest income.
(8) Average loans and total loans exclude loans held-for-sale.
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ITEM 7 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion provides information about the results of operations, financial condition, liquidity, and
capital resources of Heritage Commerce Corp (the “Company” or “HCC”), its wholly - owned subsidiary, Heritage Bank
of Commerce (the “Bank” or “HBC”), and HBC’s wholly - owned subsidiary, CSNK Working Capital Finance Corp, a
California Corporation, dba Bay View Funding. 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.
The Company completed its acquisition of Bay View Funding on November 1, 2014. The Company completed
its merger with Focus Business Bank (“Focus”) on August 20, 2015. The Company completed its merger with Tri-Valley
Bank (“Tri-Valley”) on April 6, 2018, and the Company completed its merger with United American Bank (“United
American”) on May 4, 2018. The Company completed its merger with Presidio Bank (“Presidio”) on October 11, 2019
(the “Presidio merger date”). These mergers are discussed in more detail below, and in Notes 1, 8, and 9 to the consolidated
financial statements.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with the accounting principles generally accepted in the
United States (“U.S. 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.
We have identified the following accounting policies and estimates that, due to the inherent judgments and
assumptions and the potential sensitivity of the financial statements to those judgments and assumptions, are critical to an
understanding of our financial statements. We believe that the judgments, estimates and assumptions used in the
preparation of the Company’s financial statements are appropriate. For a further description of our accounting policies,
see Note 1 — Summary of Significant Accounting Policies in the financial statements included in this Form 10 - K.
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Allowance for Credit Losses on Loans (“ACLL”)
As a result of our January 1, 2020, adoption of Accounting Standards Update (“ASU”) No. 2016-13,
Measurement of Credit Losses on Financial Instruments, and its related amendments, our methodology for estimating the
allowance for credit losses changed significantly from December 31, 2019. The standard replaced the “incurred loss”
method with an “expected loss” method known as current expected credit loss (“CECL”). The CECL approach requires
an estimate of the credit losses expected over the life of a loan (or pool of loans). It removes the incurred loss approach’s
threshold that delayed the recognition of a credit loss until it was “probable” a loss event was “incurred.”
The estimate of expected credit losses under the CECL approach is based on relevant information about past
events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts.
Historical loss experience is generally the starting point for estimating expected credit losses. We then consider whether
the historical loss experience should be adjusted for asset-specific risk characteristics or current conditions at the reporting
date that did not exist over the period from which historical experience was used. Finally, we consider forecasts about
future economic conditions that are reasonable and supportable.
Management’s evaluation of the appropriateness of the allowance for credit losses is often the most critical of
accounting estimates for a financial institution. Our determination of the amount of the ACLL is a critical accounting
estimate as it requires significant reliance on the use of estimates and significant judgment as to the amount and timing of
expected future cash flows on criticized loans, significant reliance on historical loss rates, consideration of our quantitative
and qualitative evaluation of economic factors, and the reliance on reasonable and supportable forecasts.
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The allowance for credit losses attributable to each portfolio segment considers relevant available information
from internal and external sources, relating to past events and current conditions. Adjustments to historical loss
information are made for differences in current loan-specific risk characteristics and environmental conditions such as
concentrations of credit risk (geographic, large borrower, and industry), economic conditions, changes in underwriting
standards, experience and depth of lending staff, trends in delinquencies, and the level of criticized loans. Going forward,
the impact of utilizing the CECL approach to calculate the reserve for credit losses will be significantly influenced by the
composition, characteristics and quality of our loan portfolio, and the prevailing economic conditions and forecasts
utilized. Material changes to these and other relevant factors may result in greater volatility to the reserve for credit losses,
and therefore, greater volatility to our reported earnings. See Note 4 to the Consolidated Financial Statements and the
“Credit Quality and Performance” and “Allowance for Credit Losses on Loans” sections for more information on the
Allowance.
Executive Summary
This summary is intended to identify the most important matters on which management focuses when it evaluates
the financial condition and performance of the Company. When evaluating financial condition and performance
management looks at certain key metrics and measures. The Company’s evaluation includes comparisons with peer group
financial institutions and its own performance objectives established in the internal planning process.
The primary activity of the Company is commercial banking. The Company’s 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. The Company’s market includes the cities of Oakland, San Francisco and San Jose and the
headquarters of a number of technology based companies in the region known commonly as Silicon Valley. The
Company’s customers are primarily closely held businesses and professionals.
Performance Overview
For the year ended December 31, 2020, net income was $35.3 million, or $0.59 per average diluted common
share, compared to $40.5 million, or $0.84 per average diluted common share, for the year ended December 31, 2019, and
$35.3 million, or $0.84 per average diluted common share for the year ended December 31, 2018. The Company’s
annualized return on average tangible assets was 0.83% and annualized return on average tangible equity was 9.04% for
the year ended December 31, 2020, compared to 1.25% and 13.09%, respectively, for the year ended December 31, 2019,
and 1.19% and 14.41%, respectively, for the year ended December 31, 2018.
Earnings for the year ended December 31, 2020 were impacted by the effect of our $13.3 million pre-tax CECL
related provision for credit losses on loans for the first quarter of 2020, driven by forecasted effects on economic activity
from the COVID-19 pandemic, and $2.6 million of pre-tax merger-related costs resulting from the merger with Presidio.
Earnings for the year ended December 31, 2019 were reduced by pre-tax merger-related costs of $11.1 million, related to
the merger with Presidio. Pre-tax earnings for the year ended December 31, 2019 were further reduced by an additional
$2.0 million of provision for loan losses for certain non-impaired loans acquired at a premium from Presidio. Earnings
for the years ended December 31, 2018 were reduced by pre-tax merger-related costs of $9.2 million, for the mergers with
Tri-Valley and United American.
Coronavirus (COVID-19)
In response to two economic stimulus laws passed by Congress in the first half of the 2020, the Bank funded
1,105 U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans, with total principal
balances of $333.4 million. Through 2020, PPP loan payoffs totaled $9.1 million while SBA loan forgiveness totaled
$33.7 million and the Bank ended the fourth quarter of 2020 with $290.7 million in outstanding PPP loan balances. These
loans generated $2.2 million in interest income and $3.9 million in net deferred fee revenue during 2020. At December 31,
2020, total loans included remaining deferred fees on PPP loans of ($6.8) million and deferred costs of $783,000.
On April 7, 2020, the U.S. banking agencies issued an Interagency Statement on Loan Modifications and
Reporting for Financial Institutions Working with Customers Affected by the Coronavirus. The statement describes
accounting for COVID-19-related loan modifications, including clarifying the interaction between current accounting rules
and the temporary relief provided by the Coronavirus Aid, Relief, and Economic Security (“CARES Act”). The Bank
made accommodations for initial payment deferrals for a number of customers of up to 90 days, generally, with the
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potential, upon application, of an additional 90 days of payment deferral (180 days maximum). The Bank also waived all
normal applicable fees. Most of the deferrals we originally granted have returned to regular payments. The following table
shows the deferments at December 31, 2020 by category:
Underlying Collateral
Business
Assets
Real
Estate
(Dollar in thousands)
Total
Initial Deferments(1) . . . . . . . . . . . . . . .
2nd Deferments(2) . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
- $
295
295 $
1,573 $
684
2,257 $
1,573
979
2,552
(1) Initial deferments were generally for 3 months
(2) 2nd deferments were for an additional 3 months
In addition to its portfolio of SBA PPP loans, the Bank also has a portfolio of SBA 7(a) loans totaling $50.3
million as of February 28, 2021 (the most recent available data). As part of the SBA’s Coronavirus debt relief efforts,
beginning in April of 2020, the SBA commenced a program to cover payments of principal, interest and any associated
fees for these borrowers. The following table reflects the status of these SBA 7(a) loans as of February 28, 2021:
Dollars
Number
of Loans
(Dollars in thousands)
SBA 7(a) loans (monthly payments are made
through the Economic Aid Act) . . . . . . . . . . . . . . . . . $
Payments Not Made / NSF / Returned . . . . . . . . . . . . .
New loans / No payment due . . . . . . . . . . . . . . . . . . . .
CARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Request for Deferral or on Deferment . . . . . . . . . . . . .
Total Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
46,245
604
752
2,483
234
50,318
239
7
6
10
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The CARES Act was recently amended to include $3.5 billion of extended debt relief payments for SBA
borrowers. The program will initially provide for 3 payments of principal and interest to a maximum of $9,000 per month
under various criteria and then an additional 5 payments for borrowers considered “underserved” as defined in the amended
legislation.
Credit Quality and Performance
At December 31, 2020, nonperforming assets (“NPAs”) declined by ($1.9) million, or (20%), to $7.9 million,
compared to $9.8 million at December 31, 2019. Classified assets increased to $34.0 million, or 0.73% of total assets, at
December 31, 2020, compared to $32.6 million, or 0.79% of total assets, at December 31, 2019.
There was a $13.2 million provision for credit losses on loans for the year ended December 31, 2020, compared
to an $846,000 provision for loan losses for the year ended December 31, 2019. The increase in the provision for credit
losses on loans for the year ended December 31, 2020, compared to the year ended December 31, 2019, was driven
primarily by a deteriorated economic outlook resulting from the COVID-19 pandemic. The three loan classes where the
largest increases in reserves were recorded under the CECL loss rate methodology were investor-owned CRE, land and
construction, and commercial and industrial (“C&I”). Ongoing impacts of the CECL methodology will be dependent upon
changes in economic conditions and forecasts, originated and acquired loan portfolio composition, portfolio duration, and
other factors.
67
The Company continues to monitor portfolio loans made to commercial customers with businesses in higher risk
sectors due to the COVID-19 pandemic. The following table provides a breakdown of such loans as a percentage of total
loans at December 31, 2020, September 30, 2020, June 30, 2020, and March 31, 2020:
% of Total
Loans at
% of Total
Loans at
September 30, 2020 June 30, 2020 March 31, 2020
% of Total
Loans at
1.86 %
0.74 %
0.27 %
2.15 %
5.02 %
1.97 %
2.44 %
4.41 %
1.40 %
0.74 %
0.92 %
0.68 %
3.74 %
0.57 %
0.43 %
0.17 %
1.17 %
1.27 %
0.68 %
16.29 %
1.79 %
0.76 %
0.27 %
2.21 %
5.03 %
1.90 %
2.44 %
4.34 %
1.38 %
0.79 %
0.89 %
0.70 %
3.76 %
0.65 %
0.40 %
0.24 %
1.29 %
1.26 %
0.80 %
16.48 %
1.63 %
0.70 %
0.11 %
1.84 %
4.28 %
1.98 %
2.18 %
4.16 %
0.86 %
0.63 %
0.94 %
0.52 %
2.95 %
0.15 %
0.15 %
0.17 %
0.47 %
1.09 %
0.95 %
13.90 %
HIGHER RISK SECTORS
Health care and social assistance:
% of Total
Loans at
December 31, 2020
Offices of dentists . . . . . . . . . . . . . . . . . . . . . . . . . .
Offices of physicians
(except mental health specialists) . . . . . . . . . . . . .
Other community housing services . . . . . . . . . . . . . .
All others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total health care and social assistance . . . . . . . . . .
Retail trade:
Gasoline stations with convenience stores . . . . . . . . .
All others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total retail trade . . . . . . . . . . . . . . . . . . . . . . . . . .
Accommodation and food services:
Full-service restaurants . . . . . . . . . . . . . . . . . . . . . .
Limited-service restaurants . . . . . . . . . . . . . . . . . . . .
Hotels (except casino hotels) and motels . . . . . . . . . .
All others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total accommodation and food services . . . . . . . . .
Educational services:
Elementary and secondary schools . . . . . . . . . . . . . .
Education support services . . . . . . . . . . . . . . . . . . . .
All others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total educational services . . . . . . . . . . . . . . . . . . .
Arts, entertainment, and recreation . . . . . . . . . . . . . . . . .
Purchased participations in micro loan portfolio . . . . . . . .
Total higher risk sectors . . . . . . . . . . . . . . . . . . . . . .
2.01 %
0.81 %
0.28 %
2.15 %
5.25 %
2.16 %
2.34 %
4.50 %
1.30 %
0.57 %
0.95 %
0.68 %
3.50 %
0.58 %
0.45 %
0.19 %
1.22 %
1.34 %
0.60 %
16.41 %
68
Presidio Merger
The Company completed its merger of its wholly-owned bank subsidiary Heritage Bank of Commerce with
Presidio effective October 11, 2019 (the “merger date”). Presidio’s results of operations were included in the Company’s
results of operations beginning October 12, 2019. The Presidio systems and integration conversion was successfully
completed in the first quarter of 2020. Merger-related costs reduced pre-tax earnings by $2.6 million for the year ended
December 31, 2020, compared to $11.1 million for year ended December 31, 2019.
Presidio was a full-service California state-chartered commercial bank headquartered in San Francisco with
branches in Palo Alto, San Francisco, San Mateo, San Rafael, and Walnut Creek, California.
Tri-Valley and United American Mergers
The Company completed the merger of its wholly-owned bank subsidiary Heritage Bank of Commerce with Tri-
Valley effective as of April 6, 2018. Tri-Valley’s results of operations have been included in the Company’s results of
operations beginning April 7, 2018. Tri-Valley was a full-service California state-chartered commercial bank with
branches in San Ramon and Livermore, California and served businesses and individuals primarily in Contra Costa and
Alameda counties in Northern California. The Company closed the San Ramon office on July 13, 2018.
The Company completed the merger of its wholly-owned bank subsidiary Heritage Bank of Commerce with
United American effective as of May 4, 2018. United American’s results of operations have been included in the
Company’s results of operations beginning May 5, 2018. United American was a full-service commercial bank located in
San Mateo County with full-service branches located in San Mateo, Redwood City and Half Moon Bay, California and
serviced businesses, professionals and individuals. The Company closed the Half Moon Bay office on August 10, 2018.
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Factoring Activities - Bay View Funding
Total factored receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Average factored receivables
For the year ended . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total full time equivalent employees . . . . . . . . . . . . . . . . . . . . . . . . . .
2019
2020
(Dollars in thousands)
47,201 $
45,980
45,765 $
31
46,710
34
December 31, December 31,
2020 Highlights
The following are major factors that impacted the Company’s results of operations:
• Net interest income increased 8% to $141.9 million for the year ended December 31, 2020, compared to
$131.8 million for the year ended December 31, 2019, primarily due to an increase in the average balance of
loans resulting from the Presidio merger, additional interest and fee income from PPP loans, and an increase
in the accretion of the loan discount into loan interest income from our merger with Presidio, partially offset
by decreases in the prime rate, and decreases in the yield on investment securities and overnight funds.
• The fully tax equivalent (“FTE”) net interest margin contracted 78 basis points to 3.50% for the year ended
December 31, 2020, compared to 4.28% for the year ended December 31, 2019, primarily due to a decline
in the average yield on loans, investment securities, and overnight funds, partially offset by a decline in the
cost of interest-bearing liabilities.
• The average yield on the total loan portfolio decreased to 5.06% for the year ended December 31, 2020
compared to 5.86% for the year ended December 31, 2019, primarily due to decreases in the prime rate on
loans and new average balances of lower yielding PPP loans, partially offset by higher PPP loan fees and an
increase in the accretion of the loan purchase discount into loan interest income from the acquisitions.
•
In aggregate, the original total net purchase discount on loans from the Focus, Tri-Valley, United American,
and Presidio loan portfolio was $25.2 million. In aggregate, the remaining net purchase discount on total
loans acquired was $12.1 million at December 31, 2020.
• The average cost of deposits was 0.17% for the year ended December 31, 2020, compared to 0.29% for the
year ended December 31, 2019.
• There was a $13.2 million provision for credit losses on loans for the year ended December 31, 2020,
compared to an $846,000 provision for loan losses for the year ended December 31, 2019. The increase in
the provision for credit losses on loans for the year ended December 31, 2020, compared to the year ended
December 31, 2019, was driven primarily by a significantly deteriorated economic outlook resulting from
the Coronavirus pandemic.
• Noninterest income was $9.9 million for the year ended December 31, 2020, compared to $10.2 million for
the year ended December 31, 2019, primarily due to lower service charges and fees on deposit accounts,
partially offset by an increase in the cash surrender value of life insurance, a gain realized on a warrant
exercised, and a gain on the disposition of foreclosed assets during the first quarter of 2020.
• Noninterest expense for the year ended December 31, 2020 increased to $89.5 million, compared to $84.9
million for the year ended December 31, 2019, primarily due to higher salaries and employee benefits as a
result of annual salary increases, and additional employees and operating costs added as a result of the
Presidio merger, partially offset by lower merger-related costs.
• The following table reflects pre-tax merger-related costs resulting from the mergers for the periods
indicated:
70
For the Year Ended
December 31, December 31, December 31,
Salaries and employee benefits . . . . . . $
Other . . . . . . . . . . . . . . . . . . . . . . . . . .
Total merger-related costs . . . . . . $
2020
2019
(Dollars in thousands)
6,580 $
4,500
11,080 $
356 $
2,245
2,601 $
2018
3,569
5,598
9,167
• The efficiency ratio for the year ended December 31, 2020 decreased to 58.96%, compared to 59.76% for
the year ended December 31, 2019.
•
Income tax expense for the year ended December 31, 2020 was $13.8 million, compared to $15.9 million for
the year ended December 31, 2019. The effective tax rate was 28.1% for the years ended December 31, 2020
and December 31, 2019.
The following are important factors in understanding our current financial condition and liquidity position:
• Cash, interest bearing deposits in other financial institutions and securities available-for-sale increased 59%
to $1.37 billion at December 31, 2020, from $862.2 million at December 31, 2019.
• Securities held-to-maturity, at amortized cost, totaled $297.4 million, at December 31, 2020, compared to
$366.6 million at December 31, 2019.
• Loans, excluding loans held-for-sale, increased $85.4 million, or 3%, to $2.62 billion at December 31, 2020,
compared to $2.53 billion at December 31, 2019. Total loans at December 31, 2020, included $290.7 million
in PPP loans.
• NPAs were $7.9 million, or 0.17% of total assets at December 31, 2020, compared to $9.8 million, or 0.24%
of total assets at December 31, 2019.
• Classified assets were $34.0 million at December 31, 2020, compared to $32.6 million at December 31, 2019.
There were no foreclosed assets at December 31, 2020 and December 31, 2019.
• Net charge-offs totaled $688,000 for the year ended December 31, 2020, compared to $5.4 million for the
year ended December 31, 2019. Net charge-offs of $5.4 million for the year ended December 31, 2019
primarily consisted of three lending relationships totaling $5.5 million in net charge-offs during the fourth
quarter of 2019, including one large relationship which was previously disclosed and specifically reserved
for during the second and third quarters of 2018. The three lending relationships totaling $5.5 million in net
charge-offs had a total of $4.7 million in specific reserves.
• The ACLL at December 31, 2020, was $44.4 million, or 1.70% of total loans, representing 564.24% of
nonperforming loans. The allowance for loan losses (“ALLL”) at December 31, 2019, was $23.3 million, or
0.92% of total loans, representing 236.93% of nonperforming loans.
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•
•
•
•
Total deposits increased $499.7 million, or 15%, to $3.91 billion at December 31, 2020, compared to
$3.41 billion at December 31, 2019.
Deposits, excluding all time deposits and CDARS deposits, increased $510.1 million, or 16%, to $3.74 billion
at December 31, 2020, compared to $3.23 billion at December 31, 2019.
The ratio of noncore funding (which consists of time deposits of $250,000 and over, CDARS deposits,
brokered deposits, securities under agreement to repurchase, subordinated debt and short - term borrowings)
to total assets was 3.61% at December 31, 2020, compared to 4.10% at December 31, 2019.
The loan to deposit ratio was 66.91% at December 31, 2020, compared to 74.20% at December 31, 2019.
71
•
The Company’s consolidated capital ratios exceeded regulatory guidelines and the Bank’s capital ratios
exceeded the regulatory guidelines for a well - capitalized financial institution under the Basel III regulatory
requirements at December 31, 2020.
Capital Ratios
Total Risk-Based . . . . . . . . . . . . . . . .
Tier 1 Risk-Based . . . . . . . . . . . . . . .
Common Equity Tier 1 Risk-based .
Leverage . . . . . . . . . . . . . . . . . . . . . . .
Heritage
Commerce
Corp
16.5 %
14.0 %
14.0 %
9.1 %
Heritage
Bank of
Commerce
15.8 %
14.6 %
14.6 %
9.5 %
Well-capitalized
Financial Institution
Basel III PCA Regulatory
Guidelines
10.0 %
8.0 %
6.5 %
5.0 %
Basel III Minimum
Regulatory
Requirement(1)
10.5 %
8.5 %
7.0 %
4.0 %
(1) Basel III minimum regulatory requirements for both HCC and HBC include a 2.5% capital conservation buffer, except
the leverage ratio.
RESULTS OF OPERATIONS
The Company earns income from two primary sources. The first is interest income, which is interest income
generated by earning assets less interest expense on interest - bearing liabilities. The second is noninterest income, which
primarily consists of gains on the sale of loans, loan servicing fees, customer service charges and fees, the increase in cash
surrender value of life insurance, and gains on the sale of securities. The majority of the Company’s noninterest expenses
are operating costs that relate to providing a full range of banking services to our customers.
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 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.
72
Year Ended December 31,
2020
2019
2018
Average
Balance
Interest Average
Income / Yield /
Average
Interest Average
Income / Yield /
Average
Interest Average
Income / Yield /
Expense Rate
Balance
Expense Rate
Balance
Expense Rate
(Dollars in thousands)
Assets:
Loans, gross (1)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,631,495 $ 133,169
Securities — taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,637
Securities — exempt from Federal tax (3) . . . . . . . . . . . . . . . . . . . .
Other investments, interest-bearing deposits
in other financial institutions and Federal funds sold . . . . . . . . . . .
786,955
Total interest earning assets (3) . . . . . . . . . . . . . . . . . . . . . . 4,071,805
40,401
578,506
74,849
2,415
3,757
150,978
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill and other intangible assets . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
126,387
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,434,329
9,497
186,239
5.06 % $ 1,994,917 $ 116,808
2.01 %
3.23 %
682,602
15,836
84,165
2,720
5.86 % $ 1,801,015 $ 105,635
2.32 %
669,994
15,211
3.23 %
87,639
2,817
0.48 %
332,905
3.71 % 3,094,589
40,070
7,395
116,481
95,235
$ 3,353,770
7,867
2.36 %
285,702
6,774
143,231
4.63 % 2,844,350
130,437
38,665
7,298
82,398
82,925
$ 3,055,636
Liabilities and shareholders’ equity:
Deposits:
Demand, noninterest-bearing . . . . . . . . . . . . . . . . . . . . . . . . $ 1,638,055
$ 1,131,098
$ 1,029,860
Demand, interest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . .
891,513
Savings and money market . . . . . . . . . . . . . . . . . . . . . . . . . 1,026,319
Time deposits — under $100 . . . . . . . . . . . . . . . . . . . . . . . .
17,659
Time deposits — $100 and over . . . . . . . . . . . . . . . . . . . . . .
CDARS — interest-bearing demand, money
market and time deposits . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest-bearing deposits . . . . . . . . . . . . . . . . . . . .
2,081,841
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,719,896
128,461
17,889
2,035
3,144
67
1,009
5
6,260
6,260
0.23 %
0.31 %
0.38 %
0.79 %
712,186
811,266
19,448
2,401
4,298
0.34 %
658,386
0.53 %
777,749
94
0.48 %
21,375
130,856
1,359
1.04 %
130,548
1,885
2,701
80
830
15,078
0.03 %
0.30 % 1,688,834
0.17 % 2,819,932
7
0.05 %
15,369
10
8,159
8,159
0.48 % 1,603,427
0.29 % 2,633,287
5,506
5,506
Subordinated debt, net of issuance costs . . . . . . . . . . . . . . . . . . . .
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
39,641
2,320
139
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest-bearing liabilities . . . . . . . . . . . . . . . . . . . . . . . 2,121,621
Total interest-bearing liabilities and demand,
noninterest-bearing / cost of funds . . . . . . . . . . . . . . . . . . 3,759,676
97,978
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,857,654
576,675
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . $ 4,434,329
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
8,581
8,581
41,278
5.85 %
0.72 %
0.40 % 1,730,320
208
0.23 % 2,861,418
66,678
2,928,096
425,674
$ 3,353,770
2,686
6.51 %
39,270
2,314
2
10,847
0.96 %
0.63 % 1,642,803
106
2
7,822
10,847
0.38 % 2,672,663
7,822
55,416
2,728,079
327,557
$ 3,055,636
5.87 %
2.27 %
3.21 %
2.37 %
4.59 %
0.29 %
0.35 %
0.37 %
0.64 %
0.07 %
0.34 %
0.21 %
5.89 %
1.89 %
0.48 %
0.29 %
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Less tax equivalent adjustment (3) . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
142,397
3.50 %
132,384
4.28 %
122,615
4.31 %
(507)
$ 141,890
(572)
$ 131,812
(592)
$ 122,023
(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 (amortization) of deferred loan fees (costs) into
loan interest income was $4.5 million for the year ended December 31, 2020 (of which $3.9 million was from PPP
loans), compared to $580,000 for the year ended December 31, 2019, and $375,000 for the year ended December 31,
2018.
(3) Reflects tax equivalent adjustment for Federal tax exempt income based on a 21% tax rate for the years ended
December 31, 2020, 2019 and 2018.
73
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,
2020 vs. 2019
Increase (Decrease)
Due to Change in:
Year Ended December 31,
2019 vs. 2018
Increase (Decrease)
Due to Change in:
Average Average
Volume
Rate
Net
Average Average
Net
Change Volume Rate
(Dollars in thousands)
Change
Income from the interest earning assets:
Loans, gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,226 $ (15,865) $ 16,361 $ 11,269 $
Securities — taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . .
292
Securities — exempt from Federal tax (1) . . . . . . . . . . . .
(111)
Other investments, interest-bearing deposits
in other financial institutions and Federal funds
(4,199)
(305)
(2,083)
(304)
(2,116)
(1)
(96) $ 11,173
625
333
(97)
14
sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest income on interest-earning assets . .
2,159
31,998
(6,269)
(24,251)
(4,110)
1,124
7,747 12,574
(31)
1,093
220 12,794
Expense from the interest-bearing liabilities:
397
629
(7)
(25)
(763)
(1,783)
(20)
(325)
(366)
(1,154)
(27)
(350)
162
354
176 1,421
23
528
(9)
1
516
1,597
14
529
Demand, interest-bearing . . . . . . . . . . . . . . . . . . . . . . . . .
Savings and money market . . . . . . . . . . . . . . . . . . . . . . .
Time deposits — under $100. . . . . . . . . . . . . . . . . . . . . .
Time deposits — $100 and over . . . . . . . . . . . . . . . . . . .
CDARS — interest-bearing demand, money market
and time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated debt, net of issuance costs . . . . . . . . . . . .
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense on interest-bearing liabilities . .
(2)
(271)
(1)
(3,165)
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 31,099 $ (21,086)
—
(95)
—
899
Less tax equivalent adjustment . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . .
65
$ 10,078
(1)
130
1
(2)
(2)
242
(366)
(1)
(1)
(2,266)
2,565
460
10,013 $ 12,114 $ (2,345)
(3)
372
—
3,025
9,769
20
$ 9,789
(1) Reflects tax equivalent adjustment for Federal tax exempt income based on a 21% tax rate for the years ended
December 31, 2020, 2019 and 2018.
The Company’s net interest margin (FTE), expressed as a percentage of average earning assets, contracted 78
basis points to 3.50% for the year ended December 31, 2020, compared to 4.28% for the year ended December 31, 2019,
primarily due to a decline in the average yield on loans, investment securities, and overnight funds, and an increase in the
average balance of lower yielding overnight funds, partially offset by a decline in the cost of interest-bearing liabilities.
The Company’s net interest margin (FTE), expressed as a percentage of average earning assets, contracted three
basis points to 4.28% for the year ended December 31, 2019, compared to 4.31% for the year ended December 31, 2018,
primarily due to a higher cost of deposits, and a decrease in the average balance of Bay View Funding’s factored
receivables, partially offset by an increase in the average balance of loans and securities and an increase in the accretion
of the loan purchase discount into loan interest income from a merger during the year ended December 31, 2019.
74
The following tables present the average balance of loans outstanding, interest income, and the average yield for
the periods indicated:
Average
Balance
2020
Interest Average
Income Yield
Year Ended December 31,
2019
Interest Average
Income Yield
Average
Balance
(Dollars in thousands)
Average
Balance
2018
Interest Average
Income Yield
Loans, core bank and asset-
based lending . . . . . . . . . . . . . . . . . . $ 2,327,624 $ 110,652
2,185
SBA PPP loans . . . . . . . . . . . . . . . . . .
3,877
PPP fees, net . . . . . . . . . . . . . . . . . . . .
Bay View Funding factored
218,391
—
4.75 % $ 1,890,079 $ 100,380
—
1.00 %
—
1.78 %
—
—
5.31 % $ 1,670,065 $ 86,610
N/A
N/A
—
—
—
—
5.19 %
N/A
N/A
receivables . . . . . . . . . . . . . . . . . . .
Purchased residential mortgages . . . . . .
Purchased CRE loans. . . . . . . . . . . . . .
Loan credit mark / accretion . . . . . . . . .
45,765
29,648
24,072
(14,005)
10,727
725
831
4,172
23.44 %
2.45 %
3.45 %
0.18 %
46,710
35,343
30,936
(8,151)
11,688
951
1,107
2,682
25.02 %
2.69 %
3.58 %
0.14 %
59,220
40,998
36,080
(5,348)
14,698
1,118
1,257
1,952
24.82 %
2.73 %
3.48 %
0.12 %
Total loans (includes loans
held-for-sale) . . . . . . . . . . . . . . . . $ 2,631,495 $ 133,169
5.06 % $ 1,994,917 $ 116,808
5.86 % $ 1,801,015 $ 105,635
5.87 %
The average yield on the total loan portfolio decreased to 5.06% for the year ended December 31, 2020, compared
to 5.86% for the year ended December 31, 2019, primarily due to decreases in the prime rate on loans and new average
balances of lower yielding PPP loans, partially offset by higher PPP loan fees and an increase in the accretion of the loan
purchase discount into loan interest income from the acquisitions. The average yield on the total loan portfolio decreased
to 5.86% for the year ended December 31, 2019, compared to 5.87% for the year ended December 31, 2018, primarily due
to a decrease in the average balance of Bay View Funding’s factored receivables, partially offset by the impact of the
increasing prime rate on loans over the course of 2018 (prior to the prime rate decreasing in the latter part of 2019), and
an increase in the accretion of the loan purchase discount into loan interest income from the acquisitions.
In aggregate, the original total net purchase discount on loans from the Focus, Tri-Valley, United American, and
Presidio loan portfolio was $25.2 million. In aggregate, the remaining net purchase discount on total loans acquired was
$12.1 million at December 31, 2020.
The average cost of deposits was 0.17% for the year ended December 31, 2020, compared to 0.29% for the year
ended December 31, 2019, and 0.21% for the year ended December 31, 2018.
Net interest income, before provision for credit losses on loans, for the year ended December 31, 2020 increased
8% to $141.9 million, compared to $131.8 million for the year ended December 31, 2019, primarily due to an increase in
the average balance of loans resulting from the Presidio merger, additional interest and fee income from PPP loans, and
an increase in the accretion of the loan discount into loan interest income from our merger with Presidio, partially offset
by decreases in the prime rate, and decreases in the yield on investment securities and overnight funds. Net interest income,
before provision for loan losses, for the year ended December 31, 2019 increased 8% to $131.8 million, compared to
$122.0 million for the year ended December 31, 2018, primarily due to the impact of the increase in loans and deposits
from the Presidio merger, in addition to the full year impact of the Tri-Valley and United American mergers.
A
n
n
u
a
l
R
e
p
o
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t
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 projections provided by the CEF, (www.CaliforniaForecast.com).
There was a $13.2 million provision for credit losses on loans for the year ended December 31, 2020, compared
to an $846,000 provision for loan losses for the year ended December 31, 2019, and a $7.4 million provision for loan
losses for the year ended December 31, 2018. The increase in the provision for credit losses on loans for the year ended
December 31, 2020, compared to the year ended December 31, 2019, was driven primarily by a significantly deteriorated
75
economic outlook resulting from the Coronavirus pandemic. The three loan classes where the largest increases in reserves
were recorded under the CECL loss rate methodology were investor-owned CRE, land and construction, and C&I.
Ongoing impacts of the CECL methodology will be dependent upon changes in economic conditions and forecasts,
originated and acquired loan portfolio composition, portfolio duration, and other factors. 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 the
Company based on the factors discussed under “Credit Quality and Performance” and “Allowance for Credit Losses on
Loans.”
The ACLL totaled $44.4 million, or 1.70% of total loans at December 31, 2020. Total loans at December 31,
2020, included $290.7 million of PPP loans which are guaranteed by the SBA, for which no ACLL was allocated. The
ALLL was $23.3 million, or 0.92% of total loans at December 31, 2019, and $27.8 million, or 1.48% of total loans at
December 31, 2018. The ACLL to total nonperforming loans was 564.24% at December 31, 2020. The ALLL to total
nonperforming loans was 236.93% at December 31, 2019, and 187.06% at December 31, 2018. The loans acquired from
Presidio are included in total loans. Due to the addition of the Presidio loans at fair value with no allowance, the ALLL
to total loans decreased at December 31, 2019, compared to December 31, 2018. However, the Company provided an
additional $2.0 million in provision for loan losses to increase the ALLL at December 31, 2019 for certain non-impaired
loans acquired at a premium from Presidio. This premium was due to higher interest rates on the loans versus market
interest rates at the time of the merger. Due to the net premium on these loans, a provision for loan losses was required
and it was not due to credit deterioration since the merger date.
Net charge-offs totaled $688,000 for the year ended December 31, 2020, compared to net charge-offs of $5.4
million for the year ended December 31, 2019, and net recoveries of $769,000 for the year ended December 31, 2018. Net
charge-offs of $5.4 million for the year ended December 31, 2019 primarily consisted of three lending relationships
totaling $5.5 million in net charge-offs during the fourth quarter of 2019, including one large relationship which was
previously disclosed and specifically reserved for during the second and third quarters of 2018. The three lending
relationships totaling $5.5 million in net charge-offs had a total of $4.7 million in specific reserves.
Noninterest Income
The following table sets forth the various components of the Company’s noninterest income:
Year Ended
December 31,
2019
Increase
(Decrease)
2019 versus 2018
2018 Amount Percent Amount Percent
Increase
(decrease)
2020 versus 2019
2020
(Dollars in thousands)
Service charges and fees on deposit accounts . . . . . . . $ 2,859 $ 4,510 $ 4,113 $ (1,651)
441
Increase in cash surrender value of life insurance . . . .
150
Gain on sales of SBA loans . . . . . . . . . . . . . . . . . . . . .
791
Gain on the disposition of foreclosed assets . . . . . . . .
Servicing income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
37
(384)
Gain on sales of securities . . . . . . . . . . . . . . . . . . . . . .
294
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(322)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,922 $ 10,244 $ 9,574 $
1,845
839
791
673
277
2,638
1,045
698
—
709
266
2,743
1,404
689
—
636
661
2,344
(37)% $
31 %
22 %
N/A %
6 %
(58)%
13 %
(3)% $
397
359
(9)
(73)
395
—
(399)
670
10 %
34 %
(1)%
(10)%
148 %
N/A
(15)%
7 %
For the year ended December 31, 2020, noninterest income was $9.9 million, compared to $10.2 million for the
year ended December 31, 2019, primarily due to lower service charges and fees on deposit accounts, and a decrease in the
gain on sale of securities, partially offset by an increase in the cash surrender value of life insurance, a gain realized on a
warrant exercised, and a gain on the disposition of foreclosed assets during the first quarter of 2020.
For the year ended December 31, 2019, noninterest income was $10.2 million, compared to $9.6 million for the
year ended December 31, 2018. The increase in noninterest income for the year ended December 31, 2019, was primarily
due to higher service charges and fees on deposit accounts, an increase in the cash surrender value of life insurance, and
an increase in the gain on sale of securities, partially offset by proceeds from a legal settlement in the year ended
December 31, 2018.
Historically, a portion of the Company’s noninterest income is associated with its SBA lending activity, as gain
76
on sales of loans sold in the secondary market and servicing income from loans sold with servicing rights retained. During
2020, SBA loan sales resulted in an $839,000 gain, compared to a $689,000 gain on sales of SBA loans in 2019, and a
$698,000 gain on sales of SBA loans in 2018.
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:
Year Ended
December 31,
2019
2018
2020
Increase
(Decrease)
2020 versus 2019
Increase
(Decrease)
2019 versus 2018
Amount Percent Amount Percent
(Dollars in thousands)
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . $ 50,571 $ 44,174 $ 40,193 $ 6,397
1,371
Occupancy and equipment . . . . . . . . . . . . . . . . . . . . . . . . . .
2,079
Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,012
Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . .
705
Software subscriptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(120)
Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
422
Insurance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
484
Supplemental retirement plan cost . . . . . . . . . . . . . . . . . . . .
Recovery of legal fees (1) . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Other, excluding merger-related costs . . . . . . . . . . . . . . . . . .
742
Total noninterest expense, excluding merger-related
5,411
2,891
1,943
2,343
1,978
1,685
202
(922)
10,630
8,018
5,338
3,751
3,102
2,770
2,286
1,724
—
9,350
6,647
3,259
2,739
2,397
2,890
1,864
1,240
—
8,608
14 % $ 3,981
21 %
1,236
64 %
368
37 %
796
29 %
54
(4)%
912
23 %
179
39 % 1,038
N/A
922
9 % (2,022)
costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Salaries and employee benefits merger-related costs (2) . . . .
Other merger-related costs (3) . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest expense, including merger-related
86,910
356
2,245
73,818
6,580
4,500
66,354
3,569
5,598
13,092
(6,224)
(2,255)
18 %
7,464
(95)%
3,011
(50)% (1,098)
10 %
23 %
13 %
41 %
2 %
46 %
11 %
514 %
(100)%
(19)%
11 %
84 %
(20)%
costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 89,511 $ 84,898 $ 75,521 $ 4,613
5 % $ 9,377
12 %
The following table indicates the percentage of noninterest expense in each category:
Year Ended December 31,
A
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n
u
a
l
R
e
p
o
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t
2020
Percent
of Total
Percent
of Total
(Dollars in thousands)
2019
Percent
of Total
2018
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50,571
8,018
Occupancy and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,338
Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,751
Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . .
3,102
Software subscriptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,770
Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,286
Insurance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,724
Supplemental retirement plan cost . . . . . . . . . . . . . . . . . . . . . . . .
—
Recovery of legal fees (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,350
Other, excluding merger-related costs . . . . . . . . . . . . . . . . . . . . .
Total noninterest expense, excluding merger-related costs . . 86,910
356
2,245
Total noninterest expense, including merger-related costs . . . $ 89,511
Salaries and employee benefits merger-related costs (2) . . . . . . .
Other merger-related costs (3) . . . . . . . . . . . . . . . . . . . . . . . . . . .
57 % $ 44,174
6,647
9 %
3,259
6 %
2,739
4 %
2,397
3 %
2,890
3 %
1,864
3 %
1,240
2 %
—
— %
10 %
8,608
97 % 73,818
6,580
0 %
4,500
3 %
100 % $ 84,898
52 % $ 40,193
5,411
8 %
2,891
4 %
1,943
3 %
2,343
3 %
1,978
3 %
1,685
2 %
202
2 %
— %
(922)
10 % 10,630
87 % 66,354
3,569
8 %
5,598
5 %
100 % 75,521
53 %
7 %
4 %
3 %
3 %
3 %
2 %
0 %
(1)%
14 %
88 %
5 %
7 %
100 %
(3) Included in the “Professional fees” category in the Consolidated Statements of Income.
(4) Included in “Salaries and employee benefits” category in the Consolidated Statements of Income.
(5) Included in the “Other noninterest expense” category in the Consolidated Statements of Income.
77
Noninterest expense for the year ended December 31, 2020 increased 5% to $89.5 million, compared to $84.9
million for the year ended December 31, 2019, primarily due to higher salaries and employee benefits as a result of annual
salary increases, and additional employees and operating costs added as a result of the Presidio merger, partially offset by
lower merger-related costs. Full-time equivalent employees were 331 at December 31, 2020, and 357 at December 31,
2019, and 302 at December 31, 2018. Average full-time equivalent employees were 341 during 2020, and 320 during
2019, and 292 during 2018.
Noninterest expense for the year ended December 31, 2019 increased 12% to $84.9 million, compared to $75.5
million for the year ended December 31, 2018, primarily due to higher merger-related costs, a full year of additional
operating costs of Tri-Valley and United American, and the operating costs of Presidio for most of the fourth quarter of
2019. Total noninterest expense for the year ended December 31, 2019 included total merger-related costs of $11.1 million
for the Presidio acquisition of which $6.6 million was included in salaries and employee benefits, and $4.5 million was
included in other noninterest expense. Total merger-related costs were $9.2 million for the year ended December 31, 2018
for the Tri-Valley and United American acquisitions, of which $3.6 million was included in salaries and employee benefits
and $5.6 million was included in other noninterest expense. Professional fees for the year ended December 31, 2018
included a recovery of $922,000 from a legal settlement.
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 income tax rates for the dates indicated:
Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28.1% 28.1%
2020
Year Ended December 31,
2018
27.4%
2019
The Company’s Federal and state income tax expense in 2020 was $13.8 million, compared to $15.9 million in
2019, and $13.3 million in 2018.
The difference in the effective tax rate for the periods reported compared to the combined Federal and state
statutory tax rate of 29.6% is primarily the result of the Company’s investment in life insurance policies whose earnings
are not subject to taxes, tax credits related to investments in low income housing limited partnerships (net of low income
housing investment losses), and tax-exempt interest income earned on municipal bonds.
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 $28.2 million and $24.3 million at December 31, 2020, and
December 31, 2019, respectively. After consideration of the matters in the preceding paragraph, the Company determined
78
that it is more likely than not that the net deferred tax assets at December 31, 2020 and December 31, 2019 will be fully
realized in future years.
FINANCIAL CONDITION
As of December 31, 2020, total assets increased 13% to $4.63 billion, compared to $4.11 billion at December 31,
2019. Securities available-for-sale, at fair value, were $235.8 million at December 31, 2020, a decrease of (42%) from
$404.8 million at December 31, 2019. Securities held-to-maturity, at amortized cost, were $297.4 million at December 31,
2020, a decrease of (19%) from $366.6 million at December 31, 2019. Total loans, excluding loans held-for-sale, increased
$85.4 million, or 3%, to $2.62 billion at December 31, 2020, compared to $2.53 billion at December 31, 2019.
Total deposits increased $499.7 million, or 15%, to $3.91 billion at December 31, 2020, compared to $3.41 billion
at December 31, 2019. Deposits, excluding all time deposits and CDARS deposits, increased $510.1 million, or 16%, to
$3.74 billion at December 31, 2020, from $3.23 billion at December 31, 2019.
Securities Portfolio
The following table reflects the balances for each category of securities at year - end:
2020
December 31,
2019
(Dollars in thousands)
2018
Securities available-for-sale (at fair value):
Agency mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Government sponsored entities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 175,326
60,448
—
$ 235,774
$ 284,361
120,464
—
$ 404,825
$ 302,854
148,753
7,436
$ 459,043
Securities held-to-maturity (at amortized cost):
Agency mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipals — exempt from Federal tax . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 228,652
68,791
$ 297,443
$ 285,344
81,216
$ 366,560
$ 291,241
85,957
$ 377,198
The table below summarizes the weighted average life and weighted average yields of securities as of
December 31, 2020:
A
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n
u
a
l
R
e
p
o
r
t
Within One
Year or Less
Amount Yield
After One and
Within Five
Years
Weighted Average Life
After Five and
Within Ten
Years
After Ten
Years
Total
Amount
Yield Amount Yield Amount Yield
Amount
Yield
(Dollars in thousands)
Securities available-for-sale (at fair value):
Agency mortgage-backed securities . . . . . . . . $ 5,540 0.62 % $ 169,786 1.66 % $
U.S. Treasury . . . . . . . . . . . . . . . . . . . . . . . .
60,448 2.83 %
— N/A
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 65,988 2.65 % $ 169,786 1.66 % $
Securities held-to-maturity (at amortized cost):
— N/A
— N/A
— N/A
$
$
— N/A
— N/A
— N/A
$ 175,326 1.62 %
60,448 2.83 %
$ 235,774 1.93 %
Agency mortgage-backed securities . . . . . . . . $ 8,674 0.84 % $ 175,898 1.79 % $ 2,173 2.87 % $ 41,907 1.82 % $ 228,652 1.77 %
68,791 3.26 %
Municipals — exempt from Federal tax (1) . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 36,875 2.63 % $ 216,488 2.08 % $ 2,173 2.87 % $ 41,907 1.82 % $ 297,443 2.11 %
28,201 3.18 %
40,590 3.31 %
— N/A
— N/A
(1) Reflects tax equivalent adjustment for Federal tax exempt income based on a 21% tax rate.
The portfolio serves the following purposes: (i) it provides a source of pledged assets for securing certain deposits
and borrowed funds, as may be required by law or by specific agreement with a depositor or lender; (ii) it provides liquidity
to even out cash flows from the loan and deposit activities of customers; (iii) it can be used as an interest rate risk
management tool, since it provides a large base of assets, the maturity and interest rate characteristics of which can be
changed more readily than the loan portfolio to better match changes in the deposit base and other funding sources of the
Company; and (iv) it is an alternative interest - earning use of funds when loan demand is weak or when deposits grow
more
79
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.
During the year ended December 31, 2020, the Company sold $56.6 million of investment securities available-
for-sale for a net gain of $259,000 and a net gain of $18,000 for held-to-maturity bonds that were called.
During the year ended December 31, 2020, the Company purchased $30.9 million of investment securities held-
to-maturity, which were all agency mortgage-backed securities, with an average book yield of 1.15%.
The Company has not used interest rate swaps or other derivative instruments to hedge fixed rate loans or
securities to otherwise mitigate interest rate risk.
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 57% of total
assets at December 31, 2020 and 62% at December 31, 2019. The ratio of loans to deposits decreased to 66.91% at
December 31, 2020 from 74.20% at December 31, 2019.
Loan Distribution
The Loan Distribution table that follows sets forth the Company’s gross loans outstanding, excluding loans
held - for - sale, and the percentage distribution in each category at the dates indicated.
2020
% to Total
2019
% to Total
2018
% to Total
2017
% to Total
2016
% to Total
December 31,
Commercial . . . . . . . . . . . . . . . . . $ 555,707
290,679
SBA PPP loans . . . . . . . . . . . . . . .
Real estate:
CRE - owner occupied . . . . . . .
CRE - non-owner occupied . . . .
Land and construction . . . . . . .
Home equity . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . .
Residential mortgages . . . . . . .
Consumer and other . . . . . . . . . . . .
560,362
693,103
144,594
111,885
166,425
85,116
18,116
Total Loans . . . . . . . . . . . . . 2,625,987
(6,726)
Loans, net of deferred fees . . 2,619,261
Deferred loan fees, net . . . . . . . . . .
21 % $ 603,345
—
11 %
24 % $ 549,998
—
0 %
29 % $
— %
516,952
—
33 % $
0 %
542,638
—
(Dollars in thousands)
21 %
27 %
6 %
4 %
6 %
3 %
1 %
548,907
767,821
147,189
151,775
180,623
100,759
33,744
100 % 2,534,163
—
(319)
100 % 2,533,844
22 %
30 %
6 %
6 %
7 %
4 %
1 %
430,813
477,928
122,403
95,478
88,614
100,586
20,912
100 % 1,886,732
—
(327)
100 % 1,886,405
23 %
25 %
7 %
5 %
5 %
5 %
1 %
389,289
357,141
103,619
77,175
56,058
62,579
20,364
100 % 1,583,177
—
(510)
100 % 1,582,667
25 %
23 %
6 %
5 %
3 %
4 %
1 %
401,362
263,079
83,480
82,410
37,812
67,162
25,424
100 % 1,503,367
—
(760)
100 % 1,502,607
36 %
— %
27 %
17 %
6 %
5 %
3 %
4 %
2 %
100 %
—
100 %
Allowance for credit losses on
loans . . . . . . . . . . . . . . . . . . . .
(44,400)
Loans, net . . . . . . . . . . . . . . $ 2,574,861
(23,285)
$ 2,510,559
(27,848)
$ 1,858,557
(19,658)
$ 1,563,009
(19,089)
$ 1,483,518
The Company’s loan portfolio is concentrated in commercial (primarily manufacturing, wholesale, and services
oriented entities) and commercial real estate, with the remaining balance in land development and construction and home
equity, purchased residential mortgages, and consumer loans. The Company does not have any concentrations by industry
or group of industries in its loan portfolio, however, 67% of its gross loans were secured by real property as of December 31,
2020, compared to 75% as of December 31, 2019. While no specific industry concentration is considered significant, the
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Company’s lending operations are located in areas that are dependent on the technology and real estate industries and their
supporting companies.
The Company has established concentration limits in its loan portfolio for commercial real estate loans,
commercial loans, construction loans and unsecured lending, among others. 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.
The Company’s commercial loans are made for working capital, financing the purchase of equipment or for other
business purposes. Commercial loans include loans with maturities ranging from thirty days to one year and “term loans”
with maturities normally ranging from one to five years. 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 2020, loans were sold resulting
in a gain on sales of SBA loans of $839,000, compared to a gain on sales of SBA loans of $689,000 for 2019, and $698,000
for 2018.
The Company’s factoring receivables are from the operations of Bay View Funding whose primary business is
purchasing and collecting factored receivables. Factored receivables are receivables that have been transferred by the
originating organization and typically have not been subject to previous collection efforts. 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 37
days for the years ended December 31, 2020 and December 31, 2019 and 36 days for December 31, 2018. The balance of
the purchased receivables as of December 31, 2020 and December 31, 2019 was $47.2 million and $46.0 million,
respectively.
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The commercial loan portfolio decreased $47.6 million, or (8%), to $555.7 million at December 31, 2020, from
$603.3 million at December 31, 2019. The commercial loan line usage was 28% at December 31, 2020, compared to 35%
at December 31, 2019. In addition, the Company had $290.7 million in PPP loans at December 31, 2020.
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. The Company offers both fixed and floating rate loans. Maturities on CRE loans are
generally between five and ten years (with amortization ranging from fifteen to twenty - five years and a balloon payment
due at maturity), however, SBA, and certain other real estate loans that can be sold in the secondary market, may be granted
for longer maturities.
The CRE owner-occupied loan portfolio increased $11.5 million, or 2% to $560.4 million at December 31, 2020,
from $548.9 million at December 31, 2019. CRE non-owner occupied loans decreased $74.7 million, or (10%) to $693.1
million at December 31, 2020. At December 31, 2020, 45% of the CRE loan portfolio was secured by owner-occupied
real estate.
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 $2.6 million, or (2%), to $144.6 million at December 31,
2020, from $147.2 million at December 31, 2019.
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The Company makes home equity lines of credit available to its existing customers. Home equity lines of credit
are underwritten initially with a maximum 75% loan to value ratio. Home equity lines of credit decreased $39.9 million,
or (26%), to $111.9 million at December 31, 2020, from $151.8 million at December 31, 2019.
Multifamily loans decreased $14.2 million, or (8%) to $166.4 million, at December 31, 2020, compared to $180.6
million at December 31, 2019
Residential mortgage loans decreased $15.7 million, or (16%) to $85.1 million, at December 31, 2020, compared
to $100.8 million at December 31, 2019.
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, real property
in the instances of home equity loans or lines of credit.
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 $96.0 million and $160.0 million at December 31, 2020,
respectively.
Loan Maturities
The following table presents the maturity distribution of the Company’s loans (excluding loans held - for - sale), as
of December 31, 2020. The table shows the distribution of such loans between those loans with predetermined (fixed)
interest rates and those with variable (floating) interest rates. Floating rates generally fluctuate with changes in the prime
rate as reflected in the Western Edition of The Wall Street Journal. As of December 31, 2020, approximately 42% of the
Company’s loan portfolio consisted of floating interest rate loans.
Commercial . . . . . . . . . . . . . . . . . . . . . . $
Real estate:
Due in
One Year
or Less
Over One
Year But
Less than
Five Years
Over
Five Years
Total
(Dollars in thousands)
421,369 $ 369,877 $
55,140 $
846,386
CRE - owner occupied . . . . . . . . . . .
CRE - non-owner occupied . . . . . . .
Land and construction . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . .
Residential mortgages . . . . . . . . . . .
Consumer and other . . . . . . . . . . . . . . .
560,362
122,418
693,103
238,373
144,594
124,587
111,885
111,768
166,425
1,779
85,116
1,545
18,116
12,723
Loans . . . . . . . . . . . . . . . . . . . . . . . $ 1,034,562 $ 771,725 $ 819,700 $ 2,625,987
288,206
289,589
9,789
117
114,638
60,496
1,725
149,738
165,141
10,218
—
50,008
23,075
3,668
Loans with variable interest rates . . . . . $
Loans with fixed interest rates . . . . . . .
89,444 $ 1,106,782
989,755 $
1,519,205
730,256
44,807
Loans . . . . . . . . . . . . . . . . . . . . . . . $ 1,034,562 $ 771,725 $ 819,700 $ 2,625,987
27,583 $
744,142
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Loan Servicing
As of December 31, 2020, 2019, and 2018 there were $78.0 million, $87.8 million, and $104.0 million,
respectively, of SBA loans that were serviced by the Company for others. Activity for loan servicing rights was as follows:
Beginning of period balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
End of period balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Dollars in thousands)
$ 583 $ 871 $ 1,373
200
157
213
(702)
(445)
(265)
$ 531 $ 583 $ 871
2020
2019
2018
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 as of December 31, 2020 and 2019, as the fair
market value of the assets was greater than the carrying value.
Activity for the I/O strip receivable was as follows:
2020
Beginning of period balance . . . . . . . . . . . . . . . . . . . .
Unrealized holding (loss) gain . . . . . . . . . . . . . . . . . .
End of period balance . . . . . . . . . . . . . . . . . . . . . . .
$
$
503
(198)
305
2019
(Dollars in thousands)
$
$
568
(65)
503
$
$
2018
968
(400)
568
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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, 2020, 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:
Carrying amount/fair value of Interest-Only (I/O) strip . . . . . . . . . . . . . . . . . . . . . . . . $
Prepayment speed assumption (annual rate) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impact on fair value of 10% adverse change in prepayment speed (CPR 16.1%) . . . $
Impact on fair value of 20% adverse change in prepayment speed (CPR 17.6%) . . . $
Residual cash flow discount rate assumption (annual) . . . . . . . . . . . . . . . . . . . . . . . . .
Impact on fair value of 1% adverse change in discount rate (14.2% discount rate) . . $
Impact on fair value of 2% adverse change in discount rate (15.5% discount rate) . . $
(Dollars in thousands)
305
14.6%
(3)
(6)
12.9%
(8)
(15)
Credit Quality and Allowance for Credit Losses on Loans
Financial institutions generally have a certain level of exposure to credit quality risk, and could potentially receive
less than a full return of principal and interest if a debtor becomes unable or unwilling to repay. Since loans are the most
significant assets of the Company and generate the largest portion of its revenues, the Company’s management of credit
quality risk is focused primarily on loan quality. Banks have generally suffered their most severe earnings declines as a
result of customers’ inability to generate sufficient cash flow to service their debts and/or downturns in national and
regional economies and declines in overall asset values including real estate. 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
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with loan customers as well as the relative diversity and geographic concentration of our loan portfolio.
The Company’s credit risk may also be affected by external factors such as the level of interest rates, employment,
general economic conditions, real estate values, and trends in particular industries or geographic markets. 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. Past due loans 30 days or greater totaled $6.2 million and $15.3
million at December 31, 2020 and December 31, 2019, respectively, of which $1.9 million and $7.4 million were on
nonaccrual. There were also $5.9 million and $1.3 million loans less than 30 days past due included in nonaccrual loans
held-for-investment, at December 31, 2020 and December 31, 2019, respectively.
Management’s classification of a loan as “nonaccrual” is an indication that there is reasonable doubt as to the full
recovery of principal or interest on the loan. At that point, the Company stops accruing interest income, and reverses any
uncollected interest that had been accrued as income. The Company begins recognizing interest income only as cash
interest payments are received and it has been determined the collection of all outstanding principal is not in doubt. 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.
The following table summarizes the Company’s nonperforming assets at the dates indicated:
2020
2019
2017
2016
December 31,
2018
(Dollars in thousands)
$ 13,699
$ 2,250
$ 8,675
Nonaccrual loans — held-for-investment . . . . . . . . . . . . $ 7,788
Restructured and loans 90 days past due and
still accruing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total nonperforming loans . . . . . . . . . . . . . . . . . . . . .
Foreclosed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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7,869
—
Total nonperforming assets . . . . . . . . . . . . . . . . . . . . . $ 7,869
1,153
9,828
—
$ 9,828
1,188
14,887
—
$ 14,887
235
2,485
—
$ 2,485
$ 3,059
—
3,059
229
$ 3,288
Nonperforming assets as a percentage of loans
plus foreclosed assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonperforming assets as a percentage of total assets . . .
0.30 %
0.17 %
0.39 %
0.24 %
0.79 %
0.48 %
0.16 %
0.09 %
0.22 %
0.13 %
Nonperforming assets were $7.9 million, or 0.17% of total assets, at December 31, 2020, compared to $9.8
million, or 0.24% of total assets, at December 31, 2019. The following table presents the amortized cost basis of
nonperforming loans and loans past due over 90 days and still accruing at December 31, 2020:
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Nonaccrual
Nonaccrual
with no Special with Special
Allowance for Allowance for
Restructured
and Loans
over 90 Days
Past Due
and Still
Accruing
Credit
Losses
(Dollars in thousands)
Credit
Losses
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Real estate: . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CRE - Owner Occupied . . . . . . . . . . . . . . .
CRE - Non-Owner Occupied . . . . . . . . . . .
Land and construction . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . .
Residential mortgages . . . . . . . . . . . . . . . . .
Consumer and other . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
752 $
—
3,706
—
—
949
—
—
407
5,814 $
1,974
—
—
—
—
—
—
—
—
1,974
$
$
81 $
—
—
—
—
—
—
—
—
81 $
The following table presents nonperforming loans by class at December 31, 2019:
Total
2,807
—
3,706
—
—
949
—
—
407
7,869
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Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate:
Restructured
and Loans
over 90 Days
Past Due
and Still
Accruing
(Dollars in thousands)
Nonaccrual
Total
$
3,444
$
1,153
$
4,597
CRE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
5,094
137
8,675
$
—
—
1,153
$
5,094
137
9,828
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
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.
The following table presents the amortized cost basis of collateral-dependent loans by loan classification
December 31, 2020:
Collateral Type
Real
Estate
Property
Business
Assets
Unsecured
Total
(Dollars in thousands)
Commercial . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . .
$
$
29 $
29 $
1,815 $
1,815 $
130 $
130 $
1,974
1,974
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
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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 loan losses.
Classified loans increased to $34.0 million, or 0.73% of total assets, at December 30, 2020, compared to $32.6
million, or 0.79% of total assets at December 31, 2019. Deferrals included in classified assets total $939,000 at
December 31, 2020.
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.
Beginning January 1, 2020, we calculated allowance for ACLL using CECL methodology. As of January 1, 2020,
the Company increased the ACLL by $8.6 million since the Topic 326 covers credit losses over the expected life of a loan
as well as considering future changes in macroeconomic conditions.
The allowance for credit loss estimation process involves procedures to appropriately consider the unique
characteristics of its 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.
Prior to January 1, 2020, we calculated ALLL using incurred losses methodology.
Loans are charged - off against the allowance when management determines that a loan balance has been
uncollectible. Subsequent recoveries, if any, are credited to the allowance for credit losses on loans.
The following provides a summary of the risks associated with various segments of the Company’s loan portfolio,
which are factors management regularly considers when evaluating the adequacy of the allowance:
Commercial
Commercial loans primarily rely on the identified cash flows of the borrower for repayment and secondarily on
the underlying collateral provided by the borrower. However, the cash flows of the borrowers may not be as expected and
the collateral securing these loans may vary in value. Most commercial loans are secured by the assets being financed or
other business assets such as accounts receivable, inventory or equipment and may incorporate a personal guarantee;
however, some loans may be unsecured. Included in commercial loans are $290.7 million of PPP loans at December 31,
2020.
Commercial Real Estate
Commercial real estate loans rely primarily on the cash flows of the properties securing the loan and secondarily
on the value of the property that is securing the loan. Commercial real estate loans comprise two segments differentiated
by owner occupied commercial real estate and non-owner commercial real estate. Owner occupied commercial real estate
loans are secured by commercial properties that are at least 50% occupied by the borrower or borrower affiliate. Non-
owner occupied commercial real estate loans are secured by commercial properties that are less than 50% occupied by the
borrower or borrower affiliate. Commercial real estate loans may be adversely affected by conditions in the real estate
markets or in the general economy.
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Land and Construction
Land and construction loans are generally based on estimates of costs and value associated with the complete
project. Construction loans usually involve the disbursement of funds with repayment substantially dependent on the
success of the completion of the project. Sources of repayment for these loans may be permanent loans from HBC or other
lenders, or proceeds from the sales of the completed project. These loans are monitored by on-site inspections and are
considered to have higher risk than other real estate loans due to the final repayment dependent on numerous factors
including general economic conditions.
Home Equity
Home equity loans are secured by 1-4 family residences that are generally owner occupied. Repayment of these
loans depends primarily on the personal income of the borrower and secondarily by the value of the property securing the
loan which can be impacted by changes in economic conditions such as the unemployment rate and property values.
Multifamily
Multifamily loans are loans on residential properties with five or more units. These loans rely primarily on the
cash flows of the properties securing the loan for repayment and secondarily on the value of the properties securing the
loan. The cash flows of these borrowers can fluctuate along with the values of the underlying property depending on
general economic conditions.
Residential Mortgages
Residential mortgage loans are secured by 1-4 family residences which are generally owner-occupied. Repayment
of these loans depends primarily on the personal income of the borrower and secondarily by the value of the property
securing the loan which can be impacted by changes in economic conditions such as the unemployment rate and property
values.
Consumer and Other
Consumer and other loans are secured by personal property or are unsecured and rely primarily on the income of
the borrower for repayment and secondarily on the collateral value for secured loans. Borrower income and collateral
value can vary dependent on economic conditions.
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.
The Federal Reserve Board and the California Department of Financial Protection and Innovation (“DFPI”) also review
the allowance for credit losses as an integral part of the examination process. Based on information currently available,
management believes that the allowance for credit losses on loans is adequate. However, the loan portfolio could be
adversely affected if California economic conditions and the real estate market in the Company’s market area were to
weaken. 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.
A
n
n
u
a
l
R
e
p
o
r
t
87
Changes in the allowance for credit losses on loans were as follows:
CRE
Owner Non-owner
CRE
Land &
Home Multi- Residential Consumer
Commercial Occupied Occupied Construction Equity Family Mortgages and Other Total
Year Ended December 31, 2020
(Dollars in thousands)
Beginning of period balance . . . . . . . . . . . . . $
Adoption of Topic 326 . . . . . . . . . . . . . . . . .
Balance at adoption on January 1, 2020 . . . . .
10,453 $ 3,825 $
3,169
(3,663)
6,994
6,790
3,760 $
7,912
11,672
57 $
2,621 $ 2,244 $
(923) 1,196
(1,163)
1,458 1,321 1,253
Charge-offs . . . . . . . . . . . . . . . . . . . . . . . . .
(1,776)
Recoveries . . . . . . . . . . . . . . . . . . . . . . . . .
Net (charge-offs) recoveries . . . . . . . . . .
Provision for credit losses on loans . . . . . . . .
End of period balance . . . . . . . . . . . . . . $
998
(778)
-
1
1
-
-
-
-
-
70
70
93
93
-
-
-
5,575
1,565
4,744
981
(117) 1,551
265
(1,331) 13,233
11,587 $ 8,560 $ 16,416 $
2,509 $ 1,297 $ 2,804 $
943 $
284 $ 44,400
243 $
435
678
82 $ 23,285
1,607
1,689 31,855
8,570
-
(104)
(1,880)
-
-
30
1,192
(74)
(688)
Year Ended December 31, 2019
Commercial Real Estate Consumer
Total
(Dollars in thousands)
Beginning of period balance . . . . . . . . . . . . . . . . . $
Charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (charge-offs) recoveries . . . . . . . . . . . . . .
Provision (credit) for loan losses . . . . . . . . . . . . . .
End of period balance . . . . . . . . . . . . . . . . . . . .
$
17,061 $
(6,609)
1,045
(5,564)
(1,044)
10,453 $
10,671 $
-
169
169
1,910
12,750 $
116 $
(14)
-
(14)
(20)
82 $
27,848
(6,623)
1,214
(5,409)
846
23,285
Year Ended December 31, 2018
Commercial Real Estate Consumer
Total
(Dollars in thousands)
Beginning of period balance . . . . . . . . . . . . . . . . . $
Charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (charge-offs) recoveries . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . .
End of period balance . . . . . . . . . . . . . . . . . . . . $
10,608 $
(2,002)
2,645
643
5,810
17,061 $
8,950 $
-
150
150
1,571
10,671 $
100 $
(24)
-
(24)
40
116 $
19,658
(2,026)
2,795
769
7,421
27,848
88
Allocation of Allowance for Credit Losses on Loans
The following table summarizes the Company’s loan loss experience, as well as provisions and charges to the
allowance for credit losses on loans and certain pertinent ratios for the periods indicated:
Beginning of year balance . . . . . . . . . . . . . . . . . . . . . .
Charge-offs:
Commercial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate:
CRE - non-owner occupied . . . . . . . . . . . . . . . . . .
Consumer and other . . . . . . . . . . . . . . . . . . . . . . . . .
Total charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . .
Recoveries:
Commercial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate:
CRE - owner occupied . . . . . . . . . . . . . . . . . . . . . .
Land and construction . . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer and other . . . . . . . . . . . . . . . . . . . . . . . . .
Total recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (charge-offs) recoveries . . . . . . . . . . . . . . . .
Impact of adopting Topic 326 . . . . . . . . . . . . . . . . . . .
Provision for credit losses on loans(1) . . . . . . . . . . . . . . .
End of year balance . . . . . . . . . . . . . . . . . . . . . . . . .
2020
2019
2018
(Dollars in thousands)
2017
2016
$ 23,285
$ 27,848 $ 19,658 $ 19,089 $ 18,926
(1,776)
(6,609)
(2,002)
(2,239)
(1,961)
—
(104)
(1,880)
—
(14)
(6,623)
—
(24)
(2,026)
—
—
(2,239)
(5)
(41)
(2,007)
998
1,045
2,645
1,585
365
1
70
93
30
1,192
(688)
8,570
13,233
$ 44,400
—
76
93
—
1,214
(5,409)
—
846
—
568
—
—
933
(1,074)
—
1,237
$ 23,285 $ 27,848 $ 19,658 $ 19,089
859
244
21
—
2,709
470
—
99
—
114
36
—
2,795
769
—
7,421
(1) Provision for credit losses on loans for the year ended December 31, 2020, Provision for loan losses for the previous
years
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.
2020
2019
December 31,
2018
2017
2016
A
n
n
u
a
l
R
e
p
o
r
t
Percent
of Loans
in each
category
to total
loans
Percent
of Loans
in each
category
to total
loans
Percent
of Loans
in each
category
to total
loans
(Dollars in thousands)
Allowance
Allowance
Allowance
Allowance
Percent
of Loans
in each
category
to total
loans Allowance
Percent
of Loans
in each
category
to total
loans
Commercial . . . . . . . . . . . . . . $ 11,587
Real estate: . . . . . . . . . . . . . . .
CRE - owner occupied . . . . .
8,560
CRE - non-owner occupied . 16,416
2,509
Land and construction . . . . .
1,297
Home equity . . . . . . . . . . . .
2,804
Multifamily . . . . . . . . . . . .
943
Residential mortgages . . . . .
Consumer and other . . . . . . . .
284
Total . . . . . . . . . . . . . . . . . . $ 44,400
32 % $ 10,453
24 % $ 17,061
21 %
27 %
6 %
4 %
6 %
3 %
1 %
3,825
3,760
2,621
2,244
57
243
82
100 % $ 23,285
22 %
30 %
6 %
6 %
7 %
4 %
1 %
2,907
3,456
2,008
1,609
374
317
116
100 % $ 27,848
29 % $ 10,608
—
23 %
25 %
7 %
5 %
5 %
5 %
1 %
2,873
2,724
1,441
1,390
312
210
100
100 % $ 19,658
33 % $ 10,656
36 %
25 %
23 %
6 %
5 %
3 %
4 %
1 %
2,968
1,935
1,221
1,639
278
286
106
99 % $ 19,089
27 %
17 %
6 %
5 %
3 %
4 %
2 %
100 %
The allowance for credit losses on loan totaled $44.4 million, or 1.70% of total loans at December 31, 2020. The
allowance for loan losses totaled $23.3 million, or 0.92% of total loans at December 31, 2019. The allowance for credit
losses on loan to total nonperforming loans increased to 564.24% at December 31, 2020, compared to 236.93% at
December 31, 2019. The Company had net charge-offs of $688,000 or 0.03% of average loans, for the year ended
89
December 31, 2020, compared to net charge-offs of $5.4 million, or 0.27% of average loans, for the year ended
December 31, 2019. Net charge-offs of $5.4 million for the year ended December 31, 2019 primarily consisted of three
lending relationships totaling $5.5 million in net charge-offs during the fourth quarter of 2019, including one large
relationship which was previously disclosed and specifically reserved for during the second and third quarters of 2018.
The three lending relationships totaling $5.5 million in net charge-offs had a total of $4.7 million in specific reserves.
The following table shows the results of adopting CECL for the year ended December 31, 2020:
DRIVERS OF CHANGE IN ACLL UNDER CECL
(in $000’s, unaudited)
ALLL at December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Day 1 adjustment impact of adopting Topic 326 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ACLL at January 1, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (charge-offs) during the first quarter of 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Portfolio changes during the first quarter of 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Economic factors during the first quarter of 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ACLL at March 31, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (charge-offs) during the second quarter of 2020 . . . . . . . . . . . . . . . . . . . . . . . .
Portfolio changes during the second quarter of 2020 . . . . . . . . . . . . . . . . . . . . . . . .
Qualitative and quantitative changes during the second
quarter of 2020 including changes in economic forecasts . . . . . . . . . . . . . . . . . . . . .
ACLL at June 30, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (charge-offs) during the third quarter of 2020 . . . . . . . . . . . . . . . . . . . . . . . . . .
Portfolio changes during the third quarter of 2020 . . . . . . . . . . . . . . . . . . . . . . . . . .
Qualitative and quantitative changes during the third
quarter of 2020 including changes in economic forecasts . . . . . . . . . . . . . . . . . . . . .
ACLL at September 30, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (charge-offs) during the fourth quarter of 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Portfolio changes during the fourth quarter of 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Qualitative and quantitative changes during the fourth
$
$
quarter of 2020 including changes in economic forecasts . . . . . . . . . . . . . . . . . . . . .
ACLL at December 31, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
23,285
8,570
31,855
(422)
1,216
12,054
44,703
(373)
(4,282)
5,396
45,444
(219)
488
(291)
45,422
326
(1,622)
274
44,400
Leases
On January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic
842). Under the new guidance, 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. While the new standard impacts lessors and lessees, the Company is impacted as a lessee
of the offices and real estate used for operations. Some of 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 liabilities included $35.9 million of right-of-use assets,
included in other assets, and lease liabilities, included in other liabilities, related to non-cancelable operating lease
agreements for office space. See Note 7 to the consolidated financial statements.
In June of 2019, the Company entered in to a lease agreement for 54,910 square feet of office space in San Jose,
California, which commenced on February 1, 2020. The Company moved its Bay View Funding office during the first
quarter of 2020, and moved the main office of HBC during the second and third quarters of 2020, to this new location.
The merger with Presidio resulted in the Company operating overlapping branch locations in the cities of Walnut
Creek and San Mateo, California. These branches were consolidated in 2020 by vacating the HBC leased locations prior
to the lease termination date, and moving the operations to the Presidio branch locations. The consolidation of these two
branches into the Presidio locations resulted in the impairment of both leases at December 31, 2019. The lease impairment
and write-off of fixed assets and tenant improvements totaled $434,000 for the Walnut Creek location, and $625,000 for
the San Mateo location during the fourth quarter of 2019.
Deposits
The composition and cost of the Company’s deposit base are important components in analyzing the Company’s
net interest margin and balance sheet liquidity characteristics, both of which are discussed in greater detail in other sections
in this report. 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
90
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 customers with
balances of that magnitude are typically more rate - sensitive than customers with smaller balances.
The following table summarizes the distribution of deposits and the percentage of distribution in each category
of deposits for the periods indicated:
December 31, 2020
Balance
% to Total
December 31, 2019
Balance
(Dollars in thousands)
% to Total
December 31, 2018
Balance
% to Total
Demand, noninterest-bearing . . . . . . . . . . . $ 1,661,655
Demand, interest-bearing . . . . . . . . . . . . . .
960,179
Savings and money market . . . . . . . . . . . . . 1,119,968
45,027
Time deposits — under $250 . . . . . . . . . . .
103,746
Time deposits — $250 and over . . . . . . . . .
CDARS — interest-bearing demand,
money market and time deposits . . . . . . .
23,911
Total deposits . . . . . . . . . . . . . . . . . . . $ 3,914,486
42 % $ 1,450,873
798,375
25 %
982,430
29 %
54,361
1 %
99,882
3 %
42 % $ 1,021,582
702,000
23 %
754,277
29 %
58,661
2 %
86,114
3 %
39 %
27 %
28 %
2 %
3 %
1 %
28,847
100 % $ 3,414,768
1 %
14,898
100 % $ 2,637,532
1 %
100 %
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, 2020 and December 31, 2019.
Total deposits increased $499.7 million, or 15%, to $3.91 billion at December 31, 2020, compared to $3.41 billion
at December 31, 2019. Deposits, excluding all time deposits and CDARS deposits, increased $510.1 million, or 16%, to
$3.74 billion at December 31, 2020, compared to $3.23 billion at December 31, 2019.
At December 31, 2020, the $23.9 million CDARS deposits were comprised of $18.6 million of interest-bearing
demand deposits, $663,000 of money market accounts and $4.6 million of time deposits. At December 31, 2019, the $28.8
million CDARS deposits were comprised of $12.9 million of interest-bearing demand deposits, $2.1 million of money
market accounts and $13.8 million of time deposits.
The following table indicates the contractual maturity schedule of the Company’s time deposits of $250,000 and
over, and all CDARS time deposits as of December 31, 2020:
A
n
n
u
a
l
R
e
p
o
r
t
Balance
% of Total
Three months or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Over three months through six months . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over six months through twelve months . . . . . . . . . . . . . . . . . . . . . . . . . .
Over twelve months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Dollars in thousands)
34,194
22,913
39,004
12,270
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 108,381
32 %
21 %
36 %
11 %
100 %
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.
91
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:
Return on average assets . . . . . . . . . . . . . . . . . . . .
Return on average tangible assets . . . . . . . . . . . . .
Return on average equity . . . . . . . . . . . . . . . . . . . .
Return on average tangible equity . . . . . . . . . . . . .
Average equity to average assets ratio . . . . . . . . .
2020
2019
2018
0.80 %
0.83 %
6.12 %
9.04 %
13.00 %
1.21 %
1.25 %
9.51 %
13.09 %
12.69 %
1.16 %
1.19 %
10.79 %
14.41 %
10.72 %
Off - Balance Sheet Arrangements
In the normal course of business, the Company makes commitments to extend credit to its customers as long as
there are no violations of any conditions established in contractual arrangements. These commitments are obligations that
represent a potential credit risk to the Company, yet are not reflected in any form within the Company’s consolidated
balance sheets. Total unused commitments to extend credit were $1.1 billion at December 31, 2020 and December 31,
2019. Unused commitments represented 42% and 44% of outstanding gross loans at December 31, 2020 and December 31,
2019, respectively.
The effect on the Company’s revenues, expenses, cash flows and liquidity from the unused portion of the
commitments to provide credit cannot be reasonably predicted, because there is no certainty that the lines of credit will
ever be fully utilized. For more information regarding the Company’s off - balance sheet arrangements, see Note 16 to the
consolidated financial statements located elsewhere herein.
The following table presents the Company’s commitments to extend credit for the periods indicated:
2020
Fixed
Rate
Variable
Rate
December 31,
Fixed
Rate
Total
(Dollars in thousands)
2019
Variable
Rate
Total
$
$
121,560 $
3,049
124,609 $
970,614 $
18,970
989,584 $
1,092,174 $
22,019
1,114,193 $
$
147,372
11,445
158,817 $
951,206 $
10,615
961,821 $
1,098,578
22,060
1,120,638
Unused lines of credit and commitments
to make loans . . . . . . . . . . . . . . . . . . . . . . . .
Standby letters of credit . . . . . . . . . . . . . . . . . . . .
Contractual Obligations
The contractual obligations of the Company, summarized by type of obligation and contractual maturity, at
December 31, 2020, are as follows:
Less Than
One Year
One to
Three to
Three Years Five Years
After
Five Years
Total
(Dollars in thousands)
Deposits(1) . . . . . . . . . . . . . . . . . . . . . . $
Subordinated debt . . . . . . . . . . . . . . . .
Operating leases . . . . . . . . . . . . . . . . .
Other long-term liabilities(2) . . . . . . .
Total contractual obligations . . . . . $
3,899,179 $
—
5,242
2,123
3,906,544 $
14,381 $
—
10,707
3,732
28,820 $
926 $
—
8,954
3,980
13,860 $
— $ 3,914,486
40,000
40,000
43,700
18,798
48,615
58,450
107,413 $ 4,056,637
(1) Deposits with indeterminate maturities, such as demand, savings and money market accounts, are reflected as
obligations due in less than one year.
(2) Includes maximum payments related to employee benefit plans, assuming all future vesting conditions are met.
Additional information is provided in Note 14 to the consolidated financial statements.
92
In addition to those obligations listed above, in the normal course of business, the Company will make cash
distributions for the payment of interest on interest - bearing deposit accounts and debt obligations, payments for quarterly
income tax estimates and contributions to certain employee benefit plans.
Liquidity and Asset/Liability Management
Liquidity refers to the Company’s ability to maintain cash flows sufficient to fund operations and to meet
obligations and other commitments in a timely and cost effective fashion. At various times the Company requires funds to
meet short - term cash requirements brought about by loan growth or deposit outflows, the purchase of assets, or liability
repayments. An integral part of the Company’s ability to manage its liquidity position appropriately is the Company’s
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. To manage liquidity needs properly, cash inflows must be timed to coincide
with anticipated outflows or sufficient liquidity resources must be available to meet varying demands. 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. Excess balance sheet liquidity can negatively impact the
Company’s interest margin. In order to meet short - term liquidity needs the Company may utilize overnight Federal funds
purchase arrangements and other borrowing arrangements with correspondent banks, solicit brokered deposits if cost
effective deposits are not available from local sources, and maintain collateralized lines of credit with the FHLB and FRB.
In addition, the Company can raise cash for temporary needs by selling securities under agreements to repurchase and
selling securities available - for - sale.
One of the measures of liquidity is our loan to deposit ratio. Our loan to deposit ratio was 66.91% at December 31,
2020, compared to 74.20% at December 31, 2019.
FHLB and FRB Borrowings and Available Lines of Credit
The Company 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. The Company can borrow from the FHLB on a short-
term (typically overnight) or long-term (over one year) basis. As of December 31, 2020, and December 31, 2019, the
Company had no overnight borrowings from the FHLB. The Company had $232.6 million of loans and pledged to the
FHLB as collateral on a line of credit of $160.5 million at December 31, 2020. The Company also had $3.2 million of
securities pledged to the FHLB as collateral on an available line of credit of $3.0 million at December 31, 2020, none of
which was outstanding.
The Company can also borrow from the FRB’s discount window. The Company had approximately $921.4
million of loans pledged to the FRB as collateral on an available line of credit of approximately $528.1 million at
December 31, 2020, none of which was outstanding.
At December 31, 2020 and 2019, the Company had Federal funds purchase arrangements available of $80.0
million. There were no Federal funds purchased outstanding at December 31, 2020 and 2019.
The Company has a $10.0 million line of credit with a correspondent bank, of which none was outstanding at
December 31, 2020. The Company had a $5,000,000 line of credit with a correspondent bank, of which none was
outstanding at December 31, 2019.
The Company 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, 2020, and 2019.
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 May 26, 2017, the Company completed an underwritten public offering of $40.0 million aggregate principal
amount of its fixed-to-floating rate subordinated notes (“Subordinated Debt”) due June 1, 2027. The Subordinated Debt
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initially bears a fixed interest rate of 5.25% per year. Commencing on June 1, 2022, the interest rate on the Subordinated
Debt resets quarterly to the three-month LIBOR rate plus a spread of 336.5 basis points, payable quarterly in arrears.
Interest on the Subordinated Debt is payable semi-annually on June 1st and December 1st of each year through June 1,
2022 and quarterly thereafter on March 1st, June 1st, September 1st and December 1st of each year through the maturity
date or early redemption date. The Company, at its option, may redeem the Subordinated Debt, in whole or in part, on
any interest payment date on or after June 1, 2022 without a premium.
It is anticipated that the LIBOR index will be phased-out by the end of 2021 and the Federal Reserve Bank of
New York has established the Secured Overnight Financing Rate (“SOFR”) as its recommended alternative to LIBOR.
We have created a sub-committee of our Asset Liability Management Committee to address LIBOR transition and phase-
out issues. We are currently reviewing loan documentation, technology systems and procedures we will need to implement
for the transition.
The Company acquired $10.0 million of subordinated debt from the Presidio transaction, which was redeemed
on December 19, 2019. As a result of the redemption of the Presidio subordinated debt, the Company paid a pre-payment
penalty of $300,000 during the fourth quarter of 2019.
The following table summarizes risk based capital, risk weighted assets, and risk based capital ratios of the
consolidated Company under the Basel III requirements for the periods indicated:
2020
December 31,
2019
(Dollars in thousands)
2018
Capital components:
Common equity Tier 1 capital . . . . . . . . . . . . . . . . . . . . $
Additional Tier 1 capital . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 2 Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total risk-based capital . . . . . . . . . . . . . . . . . . . . . . . . $
410,307
—
410,307
73,563
483,870
$
$
393,432
—
393,432
63,726
457,158
$
$
276,675
—
276,675
67,922
344,597
Risk-weighted assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,924,448
Average assets for capital purposes . . . . . . . . . . . . . . . . . . $ 4,507,032
$ 3,136,252
$ 4,041,927
$ 2,303,941
$ 3,118,150
Capital ratios:
Total risk-based capital . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 risk-based capital . . . . . . . . . . . . . . . . . . . . . . . .
Common equity Tier 1 risk-based capital . . . . . . . . . . .
Leverage(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16.5 %
14.0 %
14.0 %
9.1 %
14.6 %
12.5 %
12.5 %
9.7 %
15.0 %
12.0 %
12.0 %
8.9 %
(1) Tier 1 capital divided by quarterly average assets (excluding intangible assets and disallowed deferred tax assets).
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The following table summarizes risk - based capital, risk - weighted assets, and risk - based capital ratios of HBC
under the Basel III requirements for the periods indicated:
2020
December 31,
2019
(Dollars in thousands)
2018
Capital components:
Additional Tier 1 capital . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 2 Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common equity Tier 1 capital . . . . . . . . . . . . . . . . . . . . . . $ 428,109
—
428,109
33,824
Total risk-based capital . . . . . . . . . . . . . . . . . . . . . . . . . . $ 461,933
$ 411,585
—
411,585
24,172
$ 435,757
$ 293,730
—
293,730
28,553
$ 322,283
Risk-weighted assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,922,577
Average assets for capital purposes . . . . . . . . . . . . . . . . . . . . . $ 4,505,265
$ 3,134,848
$ 4,040,265
$ 2,302,751
$ 3,116,645
Capital ratios:
Total risk-based capital . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 risk-based capital . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common equity Tier 1 risk-based capital . . . . . . . . . . . . . .
Leverage(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15.8 %
14.6 %
14.6 %
9.5 %
13.9 %
13.1 %
13.1 %
10.2 %
14.0 %
12.8 %
12.8 %
9.4 %
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(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:
Minimum
Regulatory
Requirement(1)
Well-capitalized
Financial
Institution PCA
Regulatory
Guidelines
Capital ratios:
Total risk-based capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 risk-based capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common equity Tier 1 risk-based capital . . . . . . . . . . . . . . . . . . . .
Leverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.5 %
8.5 %
7.0 %
4.0 %
10.0 %
8.0 %
6.5 %
5.0 %
(1) Includes 2.5% capital conservation buffer, except the leverage ratio.
The Basel III capital rules introduce a new “capital conservation buffer,” for banking organizations to maintain a
common equity Tier 1 ratio more than 2.5% above these minimum risk - weighted asset ratios. The capital conservation
buffer is designed to absorb losses during periods of economic stress. 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, 2020, 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, 2020, December 31, 2019, and December 31, 2018, the Company and HBC
met all capital adequacy guidelines to which they were subject. There are no conditions or events since of December 31,
2020, that management believes have changed the categorization of the Company or HBC as well - capitalized.
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At December 31, 2020, the Company had total shareholders’ equity of $577.9 million, compared to $576.7
million at December 31, 2019. At December 31, 2020, total shareholders’ equity included $493.7 million in common
stock, $94.9 million in retained earnings, and ($10.7) million of accumulated other comprehensive loss. The book value
per common share was $9.64 at December 31, 2020, compared to $9.71 at December 31, 2019. The tangible book value
per common share was $6.57 at December 31, 2020, compared to $6.55 at December 31, 2019.
The following table reflects the components of accumulated other comprehensive loss, net of taxes, for the periods
indicated:
ACCUMULATED OTHER COMPREHENSIVE LOSS
(in $000's, unaudited)
Unrealized gain on securities available-for-sale . . . . . . . . . . . . . . . $
Remaining unamortized unrealized gain on securities
available-for-sale transferred to held-to-maturity . . . . . . . . . . .
Split dollar insurance contracts liability. . . . . . . . . . . . . . . . . . . . . .
Supplemental executive retirement plan liability . . . . . . . . . . . . . . .
Unrealized gain on interest-only strip from SBA loans . . . . . . . . . .
Total accumulated other comprehensive loss . . . . . . . . . . . . . . $
December 31,
2020
December 31,
2019
3,709
$
1,242
261
(6,140)
(8,767)
220
(10,717)
$
298
(4,835)
(6,843)
360
(9,778)
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 customer - related transactions. The objective
of market risk management is to avoid excessive exposure of the Company’s earnings and equity to loss and to reduce the
volatility inherent in certain financial instruments.
Interest Rate Management
Market risk arises from changes in interest rates, exchange rates, commodity prices and equity prices. The
Company’s market risk exposure is primarily that of interest rate risk, and it has established policies and procedures to
monitor and limit earnings and balance sheet exposure to changes in interest rates. 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. The Company’s exposure to market risk is reviewed on a regular basis by the
Asset/Liability Committee. Interest rate risk is the potential of economic losses due to future interest rate changes. These
economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. 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. The Company has generally been able to control its
exposure to changing interest rates by maintaining primarily floating interest rate loans and a majority of its time
certificates with relatively short maturities.
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
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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).
The following table sets forth the estimated changes in the Company’s annual net interest income that would
result from the designated instantaneous parallel shift in interest rates noted, as of December 31, 2020. Computations of
prospective effects of hypothetical interest rate changes 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.
Increase/(Decrease) in
Estimated Net
Interest Income
Amount
Percent
(Dollars in thousands)
Change in Interest Rates (basis points)
+400 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
+300 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
+200 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
+100 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
−100 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
−200 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
59,450
44,796
30,037
15,231
—
$ (11,927)
$ (22,135)
50.0 %
37.7 %
25.3 %
12.8 %
—
(10.0)%
(18.6)%
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This data does not reflect any actions that we may undertake in response to changes in interest rates such as
changes in rates paid on certain deposit accounts based on local competitive factors, which could reduce the actual impact
on net interest income, if any.
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 borrowers’ ability to service their debt. All of these factors
are considered in monitoring the Company’s exposure to interest rate 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
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risk. The Company has no market risk sensitive instruments held for trading purposes. As of December 31, 2020, the
Company did not use interest rate derivatives to hedge its interest rate risk.
The information concerning quantitative and qualitative disclosure or market risk called for by Item 305 of
Regulation S - K is included as part of Item 7 of this report.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and report of the Independent Registered Public Accounting Firm are set forth on
pages 104 through 162.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
None.
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 as of December 31, 2020. 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, 2020, 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.
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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 as of
December 31, 2020.
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.
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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, 2020 that has materially affected or is reasonably likely to materially affect our internal control over
financial reporting.
ITEM 9B OTHER INFORMATION
None.
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
PART III
Information required by this item will be contained in our Definitive Proxy Statement for our 2021 Annual
Meeting of Shareholders to be filed pursuant to Regulation 14A with the Securities and Exchange Commission within
120 days of December 31, 2020. 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. 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 within four business days following the date of such amendment or waiver.
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ITEM 11 EXECUTIVE COMPENSATION
Information required by this item will be contained in our Definitive Proxy Statement for our 2021 Annual
Meeting of Shareholders to be filed pursuant to Regulation 14A with the Securities and Exchange Commission within
120 days of December 31, 2020. Such information is incorporated herein by reference.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information required by this item will be contained in our Definitive Proxy Statement for our 2021 Annual
Meeting of Shareholders to be filed pursuant to Regulation 14A with the Securities and Exchange Commission within 120
days of December 31, 2020. Such information is incorporated herein by reference.
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 2021 Annual
Meeting of Shareholders to be filed pursuant to Regulation 14A with the Securities and Exchange Commission within 120
days of December 31, 2020. Such information is incorporated herein by reference.
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by this item will be contained in our Definitive Proxy Statement for our 2021 Annual
Meeting of Shareholders to be filed pursuant to Regulation 14A with the Securities and Exchange Commission within 120
days of December 31, 2020. Such information is incorporated herein by reference.
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(1) FINANCIAL STATEMENTS
PART IV
The Financial Statements of the Company and the Report of Independent Registered Public Accounting Firm are
set forth on pages 104 through 162.
(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
2.1
2.2
2.3
2.4
Description
Agreement and Plan of Merger and Reorganization, dated April 23, 2015, by and among Heritage
Commerce Corp, Heritage Bank of Commerce and Focus Business Bank (incorporated by reference from
the Registrant’s Current Report on Form 8 - K filed on April 23, 2015)
Agreement and Plan of Merger and Reorganization, dated December 20, 2017, by and among Heritage
Commerce Corp, Heritage Bank of Commerce and Tri-Valley Bank (incorporated by reference from the
Registrant’s Current Report on Form 8 - K filed on December 20, 2017)
Agreement and Plan of Merger and Reorganization, dated January 10, 2018, by and among Heritage
Commerce Corp, Heritage Bank of Commerce, AT Bancorp and United American Bank (incorporated
by reference from the Registrant’s Current Report on Form 8 - K filed on January 10, 2018)
Agreement and Plan of Merger, dated May 16, 2019, by and among Heritage Commerce Corp, Heritage
Bank of Commerce, and Presidio Bank (incorporated by reference from the Registrant’s Current Report
on Form 8 - K filed on May 17, 2019)
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Exhibit
Number
3.1
3.2
3.3
3.4
3.5
3.6
3.7
4.1
4.2
4.3
4.4
*10.1
*10.2
*10.3
*10.4
*10.5
*10.6
*10.7
*10.8
*10.9
*10.10
*10.11
*10.12
*10.13
Description
Restated Articles of Incorporation of Heritage Commerce Corp (incorporated by reference from the
Registrant’s Annual Report on Form 10 - K filed on March 16, 2009)
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 from the Registration Statement
on Form S - 1 filed July 23, 2010)
Bylaws, as amended, of Heritage Commerce Corp (incorporated by reference from the Registrant’s
Current Report Form 8 - K filed June 28, 2013)
Certificate of Amendment of Articles of Incorporation of Heritage Commerce Corp, as filed with the
Secretary of State on August 29, 2019 (incorporated by reference from Registrant’s Quarterly Report on
Form 10-Q filed November 11, 2019)
Certificate of Determination of the Articles of Incorporation (Revocation of Series A Preferred), as filed
with the Secretary of State on April 5, 2019 (incorporated by reference from the Registrant’s Annual
Report on Form 10 - K filed on March 11, 2020)
Certificate of Determination of the Articles of Incorporation (Revocation of Series B Preferred), as filed
with the Secretary of State on April 5, 2019 (incorporated by reference from the Registrant’s Annual
Report on Form 10 - K filed on March 11, 2020)
Certificate of Determination of the Articles of Incorporation (Revocation of Series C Preferred), as filed
with the Secretary of State on April 5, 2019 (incorporated by reference from the Registrant’s Annual
Report on Form 10 - K filed on March 11, 2020)
Subordinated Indenture, dated as of May 26, 2017, by and between Heritage Commerce Corp and
Wilmington Trust, National Association, as Trustee (incorporated by reference from the Registrant’s
Current Report on Form 8-K filed on May 26, 2017)
First Supplemental Indenture, dated as of May 26, 2017, by and between Heritage Commerce Corp and
Wilmington Trust, National Association, as Trustee (incorporated by reference from the Registrant’s
Current Report on Form 8-K filed on May 26, 2017)
Form of 5.25% Fixed-to-Floating Rate Subordinated Notes due 2027 (included in Exhibit 4.2)
(incorporated by reference from the Registrant’s Current Report on Form 8-K filed on May 26, 2017)
Description of Securities Registered under Section 12 of the Securities Exchange Act of 1934
(incorporated herein by reference from the Registrant’s Annual Report on Form 10 - K filed on March 11,
2020)
Heritage Commerce Corp Management Incentive Plan (incorporated herein by reference from the
Registrant’s Current Report on Form 8 - K filed May 3, 2005)
Amended and Restated 2004 Equity Plan (incorporated herein by reference from the Registrant’s Current
Report on Form 8 - K filed June 2, 2009)
Non - qualified Deferred Compensation Plan (incorporated herein by reference from the Registrant’s
Annual Report on Form 10 - K filed March 31, 2005)
Amended and Restated Employment Agreement with Lawrence McGovern, dated July 21, 2011
(incorporated herein by reference from the Registrant’s Current Report on Form 8 K filed July 21, 2011)
Employment Agreement with Michael E. Benito, dated February 1, 2012 (incorporated by reference from
the Registrant’s Current Report on Form 8 - K filed February 1, 2012)
Employment Agreement with Margo Butsch, dated June 26, 2017 (incorporated by reference from the
Registrant’s Current Report on Form 8 - K filed June 26, 2017)
Employment Agreement with Keith Wilton, dated August 8, 2019 (incorporated by reference from the
Registrant’s Current Report on Form 8 - K filed August 12, 2019)
Employment Agreement with Robertson Clay Jones, effective October 11, 2019 (incorporated by
reference from the Registrant’s Annual Report on Form 10-K filed March 11, 2020)
Form of Stock Option Agreement For Amended and Restated 2004 Equity Plan (incorporated by
reference from the Registrant’s Annual Report on Form 10 - K filed March 9, 2012)
Form of Restricted Stock Agreement For Amended and Restated 2004 Equity Plan (incorporated by
reference from the Registrant’s Annual Report on Form 10 - K filed March 9, 2012)
2013 Equity Incentive Plan (incorporated by reference from the Registrant’s Registration Statement on
Form S - 8 filed July 15, 2013)
Form of Restricted Stock Agreement For 2013 Equity Incentive Plan (incorporated by reference from the
Registrant’s Registration Statement on Form S - 8 filed July 15, 2013)
Form of Stock Option Agreement for 2013 Equity Incentive Plan (incorporated by reference from the
Registrant’s Registration Statement on Form S - 8 filed July 15, 2013)
101
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Exhibit
Number
*10.14
*10.15
*10.16
*10.17
*10.18
*10.19
*10.20
10.21
10.22
10.23
10.24
21.1
23.1
31.1
31.2
32.1
32.2
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
104
Description
2005 Amended and Restated Heritage Commerce Corp Supplemental Retirement Plan (incorporated
herein by reference from the Registrant’s Current Report on Form 8 - K filed September 30, 2008)
Form of Endorsement Method Split Dollar Plan Agreement for Executive Officers (incorporated herein
by reference from the Registrant’s Annual Report on Form 10 - K filed March 17, 2008)
Form of Endorsement Method Split Dollar Plan Agreement for Directors (incorporated herein by
reference from the Registrant’s Annual Report on Form 10 - K filed March 17, 2008)
First Amended and Restated Director Compensation Benefits Agreement dated December 29, 2008
between Jack Conner and the Company (incorporated herein by reference from the Registrant’s Current
Report on Form 8 - K filed January 2, 2009)
First Amended and Restated Director Compensation Benefits Agreement dated December 29, 2008
between Frank Bisceglia and the Company (incorporated herein by reference from the Registrant’s
Current Report on Form 8 - K filed January 2, 2009)
First Amended and Restated Director Compensation Benefits Agreement dated December 29, 2008
between Robert Moles and the Company (incorporated herein by reference from the Registrant’s Current
Report on Form 8 - K filed January 2, 2009)
First Amended and Restated Director Compensation Benefits Agreement dated December 29, 2008
between Ranson Webster and the Company (incorporated herein by reference from the Registrant’s
Current Report on Form 8 - K filed January 2, 2009)
Form of Indemnification Agreement between the Registrant and its directors and executive officers
(incorporated herein by reference from the Registrant’s Current Report on Form 8 - K filed December 23,
2009)
Stock Purchase Agreement, between Heritage Bank of Commerce, BVF Acquisition Corp and the
stockholders named therein dated October 8, 2014 (incorporated herein from the Registrant’s Current
Report on Form 8 - K, as filed October 9, 2014)
Presidio Bank Amended and Restated 2006 Stock Options Plan (incorporated herein by reference from
the Registrant’s Statement on Form S-8 filed October 15, 2019)
Presidio Bank 2016 Equity Incentive Plan (incorporated herein by reference from the Registrant’s
Statement on Form S-8 filed October 15, 2019)
Subsidiaries of the Registrant (incorporated herein from the Registrant’s 2016 Annual Report on
Form 10 - K, as filed March 3, 2017)
Consent of Crowe LLP
Certification of Registrant’s Chief Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act
of 2002
Certification of Registrant’s Chief Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act
of 2002
Certification of Registrant’s Chief Executive Officer Pursuant to 18 U.S.C. Section 1350
Certification of Registrant’s Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
XBRL Instance Document, filed herewith
XBRL Taxonomy Extension Schema Document, filed herewith
XBRL Taxonomy Extension Calculation Linkbase Document, filed herewith
XBRL Taxonomy Extension Definition Linkbase Document, filed herewith
XBRL Taxonomy Extension Label Linkbase Document, filed herewith
XBRL Taxonomy Extension Presentation Linkbase Document, filed herewith
Cover Page Interactive Data (formatted as inline XBRL)
* Management contract or compensatory plan or arrangement.
ITEM 16 FORM 10-K SUMMARY
Not applicable.
102
SIGNATURE
HERITAGE COMMERCE CORP
DATE: March 5, 2021
BY:
/s/ KEITH A. WILTON
Keith A. Wilton
Chief Executive Officer
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed below by the following persons on behalf of the registrant and in the capacities and on the date
indicated:
Signature
Title
Date
Director
Director
Director
March 5, 2021
March 5, 2021
March 5, 2021
Director and Chairman of the Board
March 5, 2021
/s/ JULIANNE M. BIAGINI-KOMAS
Julianne M. Biagini-Komas
/s/ FRANK G. BISCEGLIA
Frank G. Bisceglia
/s/ BRUCE H. CABRAL
Bruce H. Cabral
/s/ JACK W. CONNER
Jack W. Conner
/s/ JASON DINAPOLI
Jason DiNapoli
/s/ STEPHEN G. HEITEL
Stephen G. Heitel
/s/ WALTER T. KACZMAREK
Walter T. Kaczmarek
Director
Director
Director
/s/ LAWRENCE D. MCGOVERN
Lawrence D. McGovern
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ ROBERT T. MOLES
Robert T. Moles
/s/ MARINA H. PARK SUTTON
Marina H. Park Sutton
/s/ LAURA RODEN
Laura Roden
/s/ RANSON W. WEBSTER
Ranson W. Webster
/s/ KEITH A. WILTON
Keith A. Wilton
Director
Director
Director
Director
Director and Chief Executive Officer
(Principal Executive Officer)
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March 5, 2021
March 5, 2021
March 5, 2021
March 5, 2021
March 5, 2021
March 5, 2021
March 5, 2021
March 5, 2021
HERITAGE COMMERCE CORP
INDEX TO FINANCIAL STATEMENTS
DECEMBER 31, 2020
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets as of December 31, 2020 and 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Income for the years ended December 31, 2020, 2019 and 2018 . . . . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019 and 2018 . . . .
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2020, 2019
Page
105
108
109
110
and 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018 . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
111
112
113
104
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Heritage Commerce Corp
San Jose, California
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Heritage Commerce Corp (the "Company") as of
December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in
shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the
related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal control
over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework:
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of
the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years
in the three-year period ended December 31, 2020 in conformity with accounting principles generally accepted in the
United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework:
(2013) issued by COSO.
Change in Accounting Principle
As discussed in Note 1 to the financial statements, the Company changed its method for accounting for credit losses
effective January 1, 2020, due to the adoption of Financial Accounting Standards Board (FASB) Accounting Standards
Codification No. 326, Financial Instruments - Credit Losses (ASC 326). The Company adopted the new credit loss
standard using the modified retrospective method such that prior period amounts are not adjusted and continue to be
reported in accordance with previously applicable generally accepted accounting principles. The adoption of the new credit
loss standard and its subsequent application is also communicated as a critical audit matter below.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express
an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial
reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement,
whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material
respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the
financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary in the circumstances. We believe that
our audits provide a reasonable basis for our opinions.
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Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) 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 the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its 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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements
that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or
disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex
judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial
statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate
opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses on Loans – Model Techniques and Qualitative Factors
The Company adopted ASC 326, Financial Instruments – Credit Losses, on January 1, 2020, using a modified retrospective
approach. Under ASC 326 the Company developed their allowance for credit losses on loans (“ACLL”) utilizing the
current expected credit loss (“CECL”) methodology which requires, among other things, that the Company recognize
expected credit losses over the contractual life of financial assets within the scope of the standard. The Company recorded
an ACLL of $31,855,000 at adoption and recorded a reduction to retained earnings net of tax of $6,170,000 as a
cumulative-effect adjustment. See change in accounting principle explanatory paragraph above. As of December 31, 2020,
the Company’s ACLL was $44,400,000 and the provision for credit losses was $13,233,000 for the year then ended. Refer
to Notes 1 and 4 of the consolidated financial statements for information on the ACLL under CECL.
To estimate the ACLL, the Company implemented a discounted cash flow methodology that includes loan level cash flow
estimates for each loan segment based on peer and bank historic loss correlations with certain economic factors. The
Company used forecast data for the state of California including gross state product, unemployment rate, home price index
and a national commercial real estate value index in their forecasting models. Management used a four quarter forecast of
each economic factor that is used for each loan segment and the economic factors are assumed to revert to the historic
mean over an eight quarter period after the four quarter forecast period.The Company also developed a qualitative analysis
framework to address increased risk due to loan quality trends, collateral risk, or other risks management determines are
not adequately captured in the discounted cash flow loss estimation. Significant management judgment was required in
determining whether, and to what extent, qualitative adjustments were required.
The audit procedures over the modeling techniques used to determine loss estimates and the selection and application of
the macroeconomic variables involved a high degree of auditor judgment and required significant audit effort including
the use of more experienced audit personnel and use of our credit and valuation specialists due to its complexity.
Additionally, the audit procedures over the qualitative adjustments utilized in management’s methodology involved
especially challenging and subjective auditor judgment. Therefore, we identified auditing the CECL modeling techniques
and qualitative risk factors as a critical audit matter.
The primary audit procedures we performed to address this critical audit matter included the following:
• Tested the design and operating effectiveness of the Company’s controls over:
106
o Significant assumptions and judgments utilized in the modeling techniques employed and qualitative
adjustments applied.
o Completeness and accuracy of internal data utilized in the loss estimation models and in the qualitative
analysis framework.
o Evaluation of the relevance and reliability of external data utilized in the loss estimation models and in
the qualitative analysis framework.
o The reasonableness of the qualitative adjustments determined by management.
o The accuracy of forecasted macroeconomic variables applied as inputs into the model.
o Third-party model validation and testing of model performance including the conceptual soundness of
the modeling techniques employed and the qualitative analysis framework applied.
• Evaluated the reasonableness and appropriateness of the methodologies employed including, but not limited to,
evaluating their conceptual soundness and testing significant assumptions and judgments in estimating expected
credit losses.
• Tested the internal data utilized in the loss estimation models for completeness and accuracy.
• Evaluated the relevancy and reliability of external data utilized in the loss estimation models.
• Specific to the qualitative adjustments made to loss estimates we performed the following procedures:
o Assessed the appropriateness and reasonableness of the framework developed for the qualitative
adjustments including evaluating management’s judgments as to which factors impacted the qualitative
adjustments for each portfolio segment.
o Evaluated the reasonableness and the relevance of data used in the qualitative adjustment methodology.
o Performed testing over the accuracy of inputs utilized in the calculation of qualitative adjustments for
each portfolio segment.
o Tested the mathematical accuracy of the calculation of qualitative factor adjustments.
/s/ CROWE LLP
Crowe LLP
We have served as the Company's auditor since 2005.
Sacramento, California
March 5, 2021
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HERITAGE COMMERCE CORP
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2020
2019
(Dollars in thousands)
Assets
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other investments and interest-bearing deposits in other financial institutions . . . . . . . . . . . . . . . . . . . . . .
Total cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities available-for-sale, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities held-to-maturity, at amortized cost, net of allowance for credit losses of $54 at December 31,
2020 (fair value of $304,927 at December 31, 2020 and $368,107 at December 31, 2019) . . . . . . . . . . .
Loans held-for-sale - SBA, at lower of cost or fair value, including deferred costs . . . . . . . . . . . . . . . . . . .
Loans, net of deferred fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for credit losses on loans(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank, Federal Reserve Bank stock and other investments, at cost . . . . . . . . . . . . . . . .
Company-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
30,598 $
1,100,475
1,131,073
235,774
49,447
407,923
457,370
404,825
297,389
1,699
2,619,261
(44,400)
2,574,861
33,522
77,523
10,459
167,631
16,664
87,519
4,634,114 $
366,560
1,052
2,533,844
(23,285)
2,510,559
29,842
76,027
8,250
167,420
20,415
67,143
4,109,463
Liabilities:
Deposits:
Liabilities and Shareholders' Equity
Demand, noninterest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Demand, interest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Savings and money market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits - under $250 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits - $250 and over . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CDARS - interest-bearing demand, money market and time deposits . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated debt, net of issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest payable and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,661,655 $
960,179
1,119,968
45,027
103,746
23,911
3,914,486
39,740
—
101,999
4,056,225
1,450,873
798,375
982,430
54,361
99,882
28,847
3,414,768
39,554
328
78,105
3,532,755
Shareholders' equity:
Preferred stock, no par value; 10,000,000 shares authorized; none issued and outstanding
at December 31, 2020 and December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock, no par value; 100,000,000 shares authorized;
59,917,457 shares issued and outstanding at December 31, 2020 and
59,368,156 shares issued and outstanding at December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
—
—
493,707
94,899
(10,717)
577,889
4,634,114 $
489,745
96,741
(9,778)
576,708
4,109,463
(1)Allowance for credit losses on loans at December 31, 2020, Allowance for loan losses at December 31, 2019
See notes to consolidated financial statements
108
HERITAGE COMMERCE CORP
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
2019
(Dollars in thousands, except per share data)
2018
2020
Interest income:
Loans, including fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities, taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities, exempt from Federal tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investments, interest-bearing deposits
in other financial institutions and Federal funds sold . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 133,169
11,637
1,908
$ 116,808
15,836
2,148
$ 105,635
15,211
2,225
3,757
150,471
7,867
142,659
6,774
129,845
Interest expense:
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,260
2,320
1
8,581
8,159
2,686
2
10,847
5,506
2,314
2
7,822
Net interest income before provision for credit losses on loans(1) . . . . . . . . . . . . . . . . .
Provision for credit losses on loans(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income after provision for credit losses on loans(1) . . . . . . . . . . . . . . . . . . . . .
141,890
13,233
128,657
131,812
846
130,966
122,023
7,421
114,602
Noninterest income:
Service charges and fees on deposit accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in cash surrender value of life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sales of SBA loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on the disposition of foreclosed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Servicing income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sales of securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expense:
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per common share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,859
1,845
839
791
673
277
2,638
9,922
50,927
8,018
5,338
25,228
89,511
49,068
13,769
35,299
0.59
0.59
4,510
1,404
689
—
636
661
2,344
10,244
50,754
6,647
3,259
24,238
84,898
56,312
15,851
40,461
0.87
0.84
4,113
1,045
698
—
709
266
2,743
9,574
43,762
5,411
1,969
24,379
75,521
48,655
13,324
35,331
0.85
0.84
$
$
$
$
$
$
(1)Provision for credit losses on loans for the year ended December 31, 2020, Provision for loan losses for the years ended December 31, 2019 and 2018
See notes to consolidated financial statements
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HERITAGE COMMERCE CORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other comprehensive income (loss):
Change in net unrealized holding (losses) gains on available-for-sale
securities and I/O strips . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in net unamortized unrealized gain on securities available-for-
sale that were reclassified to securities held-to-maturity . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification adjustment for gains realized in income . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in unrealized (losses) gains on securities and I/O strips, net of
deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020
Year Ended December 31,
2019
(Dollars in thousands)
40,461 $
35,299 $
2018
35,331
3,553
(1,031)
10,620
(3,545)
(6,383)
1,925
(52)
15
(277)
82
(65)
19
(661)
195
(44)
13
(266)
79
2,290
6,563
(4,676)
Change in net pension and other benefit plan liability adjustment . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in pension and other benefit plan liability, net of
deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4,036)
807
(3,229)
(939)
(5,622)
1,662
(3,960)
2,603
2,196
(649)
1,547
(3,129)
Total comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
34,360 $
43,064 $
32,202
See notes to consolidated financial statements
110
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
HERITAGE COMMERCE CORP
Years Ended December 31, 2020, 2019 and 2018
Accumulated
Other
Total
Common Stock
Shares
Amount
Retained
Earnings
Comprehensive Shareholders’
Loss
Equity
(Dollars in thousands, except per share data)
—
1,109
30,725
—
—
—
—
1,889,613
—
—
47,280
—
2,826,032
95,378
—
—
—
276,844
Balance, January 1, 2018 . . . . . . . . . . . . . . . . . . . . . 38,200,883 $ 218,355 $ 62,136 $
35,331
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . .
—
Issuance of common shares to acquire
Tri-Valley Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common shares to acquire
United American Bank . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of restricted stock awards, net . . . . . . . . . . . . . . .
Amortization of restricted stock awards,
net of forfeitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividend declared $0.44 per share. . . . . . . . . . . . . . .
Stock option expense, net of forfeitures . . . . . . . . . . . . . .
Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, December 31, 2018 . . . . . . . . . . . . . . . . . . 43,288,750
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . . . . . . . . . . . . . . . . . . .
Issuance of common shares to acquire
Presidio Bank, net of offering costs of $246 . . . . . . . . . 15,684,064 177,926
Consideration for Presidio stock options exchanged
for Heritage Commerce Corp stock options . . . . . . . . . .
Issuance of restricted stock awards, net . . . . . . . . . . . . . . .
Amortization of restricted stock awards,
net of forfeitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividend declared $0.48 per share. . . . . . . . . . . . . . .
Stock option expense, net of forfeitures . . . . . . . . . . . . . .
Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, December 31, 2019 . . . . . . . . . . . . . . . . . . 59,368,156
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cumulative effect of change in accounting
—
— (18,464)
—
708
—
2,667
—
— (22,723)
—
—
—
—
—
266,689
79,003
40,461
—
—
128,653
96,741
35,299
7,426
—
640
1,626
—
—
—
—
—
—
489,745
300,844
1,283
—
—
—
(9,252) $ 271,239
35,331
(3,129)
—
(3,129)
—
30,725
—
—
47,280
—
—
—
—
—
(12,381)
—
2,603
1,109
(18,464)
708
2,667
367,466
40,461
2,603
— 177,926
—
—
7,426
—
—
—
—
—
(9,778)
—
1,283
(22,723)
640
1,626
576,708
35,299
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principles (Note 1) . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . .
Issuance of restricted stock awards, net . . . . . . . . . . .
Amortization of restricted stock awards,
—
1,689
net of forfeitures and taxes . . . . . . . . . . . . . . . . . . .
— (31,079)
Cash dividend declared $0.52 per share . . . . . . . . . .
559
—
Stock option expense, net of forfeitures and taxes . .
1,714
—
Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . .
Balance, December 31, 2020 . . . . . . . . . . . . . . . . . . 59,917,457 $ 493,707 $ 94,899 $ (10,717) $ 577,889
—
— (31,079)
—
—
—
—
—
381,184
—
—
168,117
(6,062)
—
—
—
(939)
—
(6,062)
(939)
—
—
—
—
559
1,714
1,689
See notes to consolidated financial statements
111
HERITAGE COMMERCE CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of discounts and premiums on securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of securities available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of SBA loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of SBA loans originated for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SBA loans originated for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (credit) for credit losses on loans(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in cash surrender value of life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock option expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of restricted stock awards, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of subordinated debt issuance costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on proceeds from company-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of changes in:
Accrued interest receivable and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest payable and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of securities held-to-maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturities/paydowns/calls of securities available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturities/paydowns/calls of securities held-to-maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of securities available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in Federal Home Loan Bank stock and other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from redemption of company-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash received in bank acquisition, net of cash paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemption of subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment for early debt extinguishment penalty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock offering costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020
Year Ended December 31,
2019
(Dollars in thousands)
2018
35,299 $
40,461 $
35,331
3,747
(277)
(839)
11,154
(10,962)
13,233
(1,845)
951
3,751
559
1,689
186
(20)
8,101
(6,641)
58,086
—
(30,916)
114,662
97,365
56,598
(85,646)
(3,680)
(3,160)
369
—
145,592
499,718
—
—
(328)
1,714
—
(31,079)
470,025
673,703
457,370
2,590
(661)
(689)
10,096
(8,504)
846
(1,404)
846
2,739
640
1,283
185
—
8,407
(6,492)
50,343
(111,954)
(50,041)
53,566
59,361
167,551
33,810
1,161
(203)
—
117,988
271,239
2,977
(10,000)
(300)
(114)
1,626
(246)
(22,723)
(28,780)
292,802
164,568
457,370 $
3,788
(266)
(698)
11,765
(15,214)
7,421
(1,045)
753
1,943
708
1,109
186
—
1,572
1,219
48,572
(162,806)
(31,496)
57,142
50,773
94,291
38,394
(4,483)
(187)
—
36,028
77,656
(262,085)
—
—
—
2,667
—
(18,464)
(277,882)
(151,654)
316,222
164,568
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,131,073 $
Supplemental disclosures of cash flow information:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Income taxes paid, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,558 $
10,640
9,935 $
17,730
7,528
12,838
Supplemental schedule of non-cash activity:
Recording of right to use assets in exchange for lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfer of loans held-for-sale to loan portfolio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
26,654
—
9,566
694
—
4,917
Summary of assets acquired and liabilities assumed through acquisitions:
Cash and cash equivalents, net of cash paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities held-to-maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Company owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock issued and stock options exchanged to acquire Presidio Bank, net of offering costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock issued to acquire Tri-Valley Bank and United American Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
117,988
45,069
463
685,964
1,756
83,878
11,147
12,764
29,397
(774,259)
(10,000)
(442)
(18,127)
185,598
—
36,028
63,723
—
336,446
350
38,039
8,361
—
14,736
(416,628)
—
(62)
(3,038)
—
78,005
(1)Provision for credit losses on loans for the year ended December 31, 2020, Provision for loan losses for the years ended December 31, 2019 and 2018
See notes to consolidated financial statements
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HERITAGE COMMERCE CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) Summary of Significant Accounting Policies
Description of Business and Basis of Presentation
Heritage Commerce Corp (“HCC”) operates as a registered bank holding company for its wholly-owned
subsidiary Heritage Bank of Commerce (“HBC” or the “Bank”), collectively referred to as the “Company”. HBC was
incorporated on November 23, 1993 and commenced operations on June 8, 1994. HBC is a California state chartered bank
which offers a full range of commercial and personal banking services to residents and the business/professional
community in Alameda, Contra Costa, Marin, San Benito, San Francisco, San Mateo, and Santa Clara counties of
California.
CSNK Working Capital Finance Corp. a California corporation, dba Bay View Funding (“Bay View Funding”)
is a wholly owned subsidiary of HBC. Bay View Funding’s primary business operation is purchasing and collecting
factored receivables. Factored receivables are receivables that have been transferred by the originating organization and
typically have not been subject to previous collection efforts. In a factoring transaction Bay View Funding directly
purchases the receivables generated by its clients at a discount to their face value. The transactions are structured to provide
the clients with immediate working capital when there is a mismatch between payments to the client for a good and service
and the payment of operating costs incurred to provide such good or service.
The Company acquired Tri-Valley Bank (“Tri-Valley”) on April 6, 2018. Tri-Valley was merged with HBC,
with HBC as the surviving bank. Tri-Valley’s results of operations have been included in the Company’s results of
operations beginning April 7, 2018.
The Company acquired United American Bank (“United American”) on May 4, 2018. United American was
merged with HBC, with HBC as the surviving bank. United American’s results of operations have been included in the
Company’s results of operations beginning May 5, 2018.
The Company acquired Presidio Bank (“Presidio”) on October 11, 2019. Presidio was merged with HBC, with
HBC as the surviving bank. Presidio’s results of operations have been included in the Company’s results of operations
beginning October 12, 2019.
The consolidated financial statements are prepared in accordance with accounting policies generally accepted in
the United States of America and general practices in the banking industry. The financial statements include the accounts
of the Company. All inter-company accounts and transactions have been eliminated in consolidation.
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Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from banks, amounts held at the Federal Reserve
Bank, and Federal funds sold. The Company is required to maintain reserves against certain of the deposit accounts with
the Federal Reserve Bank. Federal funds are generally sold and purchased for one - day periods.
Cash Flows
Net cash flows are reported for customer loan and deposit transactions, notes payable, repurchase agreements and
other short - term borrowings.
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Securities
The Company classifies its securities as either available-for-sale or held-to-maturity at the time of purchase. Debt
securities are classified as held-to-maturity and carried at amortized cost when management has the positive intent and
ability to hold them to maturity. Debt securities not classified as held-to-maturity are classified as available-for-sale.
Securities available-for-sale are carried at fair value, with unrealized holding gains and losses reported in other
comprehensive income, net of taxes.
Interest income includes amortization of purchase premiums or discounts. Premiums and discounts are amortized,
or accreted, over the life of the related security, or the earliest call date for callable securities, as an adjustment to income
using a method that approximates the interest method. Realized gains and losses are recorded on the trade date and
determined using the specific identification method for the cost of securities sold.
Allowance for Credit Losses – Available-for-sale Securities
For available-for-sale debt securities in an unrealized loss position, the Company assesses whether it intends to
sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If
either of the criteria regarding the intent or requirement to sell is met, the security’s amortized cost basis is written down
to fair value through income. For debt securities available-for-sale that do not meet the aforementioned criteria, the
Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this
assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of
the security by rating agency, and adverse conditions specifically related to the security. If the present value of cash flows
expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is
recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment
that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.
Allowance for Credit Losses – Held-to-Maturity Securities
Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major
security type and bond rating. The estimate of expected credit losses considers historical loss information that is adjusted
for current conditions and reasonable and supportable forecasts.
Management classifies the held-to-maturity portfolio in the following major security types: Agency mortgage-
backed and Municipals.
All the mortgage backed securities held by the Company are issued by U.S. government entities and agencies.
These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating
agencies, and have a long history of no credit losses.
Other securities are comprised primarily of tax exempt municipal securities. At December 31, 2020, these
securities are primarily rated A-Aaa (defined as investment grade), with a small portion of the portfolio rated Baa2 (defined
as medium grade). The issuers in these securities are primarily municipal entities and school districts.
Changes in the allowance for credit losses are recorded as a provision (or reversal of) credit loss expense. Losses
are charged against the allowance when management believes the uncollectibility of an available-for-sale security is
confirmed or when either of the criteria regarding intent or requirement to sell is met.
Loan Sales and Servicing
The Company holds for sale the conditionally guaranteed portion of certain loans guaranteed by the Small
Business Administration or the U.S. Department of Agriculture (collectively referred to as “SBA loans”). These loans are
carried at the lower of aggregate cost or fair value. Net unrealized losses, if any, are recorded as a valuation allowance and
charged to earnings.
Gains or losses on SBA loans held-for-sale are recognized upon completion of the sale, based on the difference
between the selling price and the carrying value of the related loan sold.
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SBA loans are sold with servicing retained. Servicing assets recognized separately upon the sale of SBA loans
consist of servicing rights and, for loans sold prior to 2009, interest - only strip receivables (“I/O strips”). The Company
accounts for the sale and servicing of SBA loans based on the financial and servicing assets it controls and liabilities it has
incurred, reversing recognition of financial assets when control has been surrendered, and reversing recognition of
liabilities when extinguished. Servicing rights are initially recorded at fair value with the income statement effect recorded
in gains on sale of loans. Servicing rights are amortized in proportion to and over the period of net servicing income and
are assessed for impairment on an ongoing basis. Impairment is determined by stratifying the servicing rights based on
interest rates and terms. Any servicing assets in excess of the contractually specified servicing fees are reclassified at fair
value as an I/O strip receivable and treated like an available for sale security. Fair value is determined using prices for
similar assets with similar characteristics, when available, or based upon discounted cash flows using market - based
assumptions. Impairment is recognized through a valuation allowance. The servicing rights, net of any required valuation
allowance, and I/O strip receivable are included in other assets on the consolidated balance sheets.
Servicing income, net of amortization of servicing rights, is recognized as noninterest income. The initial fair
value of I/O strip receivables is amortized against interest income on loans.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are
stated at the principal amount outstanding, net of deferred loan origination fees and costs on originated loans, or
unamortized premiums or discounts on purchased or acquired loans, and an allowance for credit losses on loans. Accrued
interest receivable is excluded from the estimate of credit losses. Interest on loans is accrued on the unpaid principal
balance and is credited to income using the effective yield interest method. Interest on purchased or acquired loans and
the accretion (amortization) of the related purchase discount (premium) is also credited to income using the effective yield
interest method.
A loan portfolio segment is defined as the level at which the Company uses a systematic methodology to
determine the allowance for credit losses on loans. A loan portfolio class is defined as a group of loans having similar risk
characteristics and methods for monitoring and assessing risk.
For all loan classes, when a loan is classified as nonaccrual, the accrual of interest is discontinued, any accrued
and unpaid interest is reversed, and the amortization of deferred loan fees and costs is discontinued. For all loan classes,
loans are classified as nonaccrual when the payment of principal or interest is 90 days past due, unless the loan is well
secured and in the process of collection. Nonaccrual loans and loans past due 90 days still on accrual include both smaller
balance homogeneous loans that are collectively evaluated for credit loss and individually evaluated loans. In certain
circumstances, loans that are under 90 days past due may also be classified as nonaccrual. Any interest or principal
payments received on nonaccrual loans are applied toward reduction of principal. Nonaccrual loans generally are not
returned to performing status until the obligation is brought current, the loan has performed in accordance with the contract
terms for a reasonable period of time, and the ultimate collectability of the contractual principal and interest is no longer
in doubt.
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Non - refundable loan fees and direct origination costs are deferred and recognized over the expected lives of the
related loans using the effective yield interest method.
Allowance for Credit Losses on Loans
The allowance for credit losses on loans is an estimate of the current expected credit losses in the loan portfolio.
Loans are charged - off against the allowance when management determines that a loan balance has become uncollectible.
Subsequent recoveries, if any, are credited to the allowance for credit losses on loans. Management’s methodology for
estimating the allowance balance consists of several key elements, which include pooling loans with similar characteristics
into segments and using a discounted cash flow calculation to estimate losses. The discounted cash flow model inputs
include loan level cash flow estimates for each loan segment based on peer and bank historic loss correlations with certain
economic factors. Management uses a four quarter forecast of each economic factor that is used for each loan segment and
the economic factors are assumed to revert to the historic mean over an eight quarter period after the four quarter forecast
period. The economic factors management has selected include the California unemployment rate, California gross state
product, California home price index, and a national CRE value index. These factors are evaluated and updated
occasionally and as economic conditions change. Additionally, management uses qualitative adjustments to the discounted
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cash flow quantitative loss estimates in certain cases when management has assessed an adjustment is necessary. These
qualitative adjustments are applied by pooled loan segment and have been made for increased risk due to loan quality
trends, collateral risk, or other risks management determines are not adequately captured in the discounted cash flow loss
estimation. Specific allowances on individually analyzed loans are added to the allowance on pools of collectively
evaluated loans to derive the total allowance for credit losses on loans.
Loans that do not share risk characteristics with pooled segments are evaluated on an individual basis. Loans for
which the terms have been modified with a concession granted, and for which the borrower is experiencing financial
difficulties, are considered troubled debt restructurings. When foreclosure is probable or when the borrower is experiencing
financial difficulty and repayment is expected to be provided substantially through the operation or sale of collateral
expected credit losses are based on the fair value of the collateral adjusted for selling costs as appropriate. When the
discounted cash flow method is utilized the amount of credit loss is measured using the net present value of expected future
cash flows adjusted for the effective interest rate used to discount expected cash flows to incorporate expected
prepayments. The amount of any impairment will be charged off against the allowance for credit losses on loans if the
amount is a confirmed loss or, alternatively, a specific allocation within the allowance will be established. Loans evaluated
individually are specifically excluded from the collective evaluation in the allowance for credit losses.
The allowance for credit losses on loans was calculated by pooling loans of similar credit risk characteristics and
credit monitoring procedures. The loan portfolio is classified into eight segments of loans - commercial, commercial real
estate – owner occupied, commercial real estate – non-owner occupied, land and construction, home equity, multifamily,
residential mortgage and consumer and other.
The risk characteristics of each loan portfolio segment are as follows:
Commercial
Commercial loans primarily rely on the identified cash flows of the borrower for repayment and secondarily on
the underlying collateral provided by the borrower. However, the cash flows of the borrowers may not be as expected and
the collateral securing these loans may vary in value. Most commercial loans are secured by the assets being financed or
other business assets such as accounts receivable, inventory or equipment and may incorporate a personal guarantee;
however, some loans may be unsecured. Included in commercial loans are $290,679,000 of PPP loans at December 31,
2020.
Commercial Real Estate
Commercial real estate loans rely primarily on the cash flows of the properties securing the loan and secondarily
on the value of the property that is securing the loan. Commercial real estate loans comprise two segments differentiated
by owner occupied commercial real estate and non-owner commercial real estate. Owner occupied commercial real estate
loans are secured by commercial properties that are at least 50% occupied by the borrower or borrower affiliate. Non-
owner occupied commercial real estate loans are secured by commercial properties that are less than 50% occupied by the
borrower or borrower affiliate. Commercial real estate loans may be adversely affected by conditions in the real estate
markets or in the general economy.
Land and Construction
Land and construction loans are generally based on estimates of costs and value associated with the complete
project. Construction loans usually involve the disbursement of funds with repayment substantially dependent on the
success of the completion of the project. Sources of repayment for these loans may be permanent loans from HBC or other
lenders, or proceeds from the sales of the completed project. These loans are monitored by on-site inspections and are
considered to have higher risk than other real estate loans due to the final repayment dependent on numerous factors
including general economic conditions.
Home Equity
Home equity loans are secured by 1-4 family residences that are generally owner occupied. Repayment of these
loans depends primarily on the personal income of the borrower and secondarily by the value of the property securing the
loan which can be impacted by changes in economic conditions such as the unemployment rate and property values.
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Multifamily
Multifamily loans are loans on 5+ residential properties. These loans rely primarily on the cash flows of the
properties securing the loan for repayment and secondarily on the value of the properties securing the loan. The cash flows
of these borrowers can fluctuate along with the values of the underlying property depending on general economic
conditions.
Residential Mortgages
Residential mortgage loans are secured by 1-4 family residences which are generally owner-occupied. Repayment
of these loans depends primarily on the personal income of the borrower and secondarily by the value of the property
securing the loan which can be impacted by changes in economic conditions such as the unemployment rate and property
values.
Consumer and Other
Consumer and other loans are secured by personal property or are unsecured and rely primarily on the income of
the borrower for repayment and secondarily on the collateral value for secured loans. Borrower income and collateral
value can vary dependent on economic conditions.
Loan Commitments and Related Financial Instruments
Financial instruments include off - balance sheet credit instruments, such as commitments to make loans and
commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the
exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when
they are funded. The notional amount of these commitments is not reflected in the consolidated financial statement until
they are funded. The Company maintains an allowance for credit losses on unfunded commercial lending commitments
and letters of credit to provide for the risk of loss inherent in these arrangements. The allowance is computed using a
methodology similar to that used to determine the allowance for credit losses for loans, modified to take into account the
probability of a drawdown on the commitment. The allowance for credit losses on unfunded loan commitments is classified
as a liability account on the balance sheet and is adjusted as a provision for credit loss expense included in other noninterest
expense.
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Federal Home Loan Bank and Federal Reserve Bank Stock
As a member of the Federal Home Loan Bank (“FHLB”) system, the Bank is required to own common stock in
the FHLB based on the Bank’s level of borrowings and outstanding FHLB advances. FHLB stock is carried at cost and
classified as a restricted security. Both cash and stock dividends from the FHLB are reported as income.
As a member of the Federal Reserve Bank (“FRB”) of San Francisco, the Bank is required to own stock in the
FRB of San Francisco based on a specified ratio relative to our capital. FRB stock is carried at cost and may be sold back
to the FRB at its carrying value. Cash dividends received from the FRB are reported as income.
Company-Owned Life Insurance and Split - Dollar Life Insurance Benefit Plan
The Company has purchased life insurance policies on certain directors and officers. Company-owned life
insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the
cash surrender value adjusted for charges or other amounts due that are probable at settlement. The purchased insurance
is subject to split - dollar insurance agreements with the insured participants, which continues after the participant’s
employment and retirement.
Accounting guidance requires that a liability be recorded primarily over the participant’s service period when a
split-dollar life insurance agreement continues after a participant’s employment or retirement. The required accrued
liability is based on either the post-employment benefit cost for the continuing life insurance or the future death benefit
depending on the contractual terms of the underlying agreement.
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Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation
and amortization are computed on the straight - line basis over the lesser of the respective lease terms or estimated useful
lives. The Company owns one building which is being depreciated over 40 years. Furniture, equipment, and leasehold
improvements are depreciated over estimated useful lives generally ranging from five to fifteen years. The Company
evaluates the recoverability of long - lived assets on an ongoing basis.
Business Combinations
The Company accounts for acquisitions of businesses using the acquisition method of accounting. Under the
acquisition method, assets acquired and liabilities assumed are recorded at their estimated fair values at the date of
acquisition. Management utilizes various valuation techniques including discounted cash flow analyses to determine these
fair values. Any excess of the purchase price over amounts allocated to the acquired assets, including identifiable intangible
assets, and liabilities assumed is recorded as goodwill.
Goodwill and Other Intangible Assets
Goodwill resulting from business combinations represents the excess of the purchase price over the fair value of
the net assets of businesses acquired. Goodwill is assessed at least annually for impairment and any such impairment is
recognized in the period identified.
Other intangible assets consist of a core deposit intangible, a below market lease, an above market lease liability,
a customer relationship and brokered relationship intangible assets. They are initially measured at fair value and then are
amortized over their estimated useful lives. The core deposits intangible assets from the acquisitions are being amortized
on an accelerated method over ten years. The below market value lease intangible assets are being amortized on the
straight line method over three years. The above market lease adjustment is being amortized on the straight line method
over 60 months. The customer relationship and brokered relationship intangible assets are being amortized over ten years.
Foreclosed Assets
Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when
acquired, establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation allowance is recorded
through operations. Operating costs after acquisition are expensed. Gains and losses on disposition are included in
noninterest expense. There were no foreclosed assets at December 31, 2020 and 2019.
Retirement Plans
Expenses for the Company’s non - qualified, unfunded defined benefits plan consists of service and interest cost
and amortization of gains and losses not immediately recognized. Employee 401(k) and profit sharing plan expense is the
amount of matching contributions. Deferred compensation and supplemental retirement plan expense allocates the benefits
over years of service.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as
liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. The
Company’s accounting policy for legal costs related to loss contingencies is to accrue for the probable fees that can be
reasonably estimated. The Company’s accounting policy for uncertain recoveries is to recognize the anticipated recovery
when realization is deemed probable.
Income Taxes
The Company files consolidated Federal and combined and separate state income tax returns. Income tax expense
is the total of the current year income tax payable or refunded, the change in deferred tax assets and liabilities, and low
income housing investment losses, net of tax benefits received. Some items of income and expense are recognized in
different years for tax purposes when applying generally accepted accounting principles, leading to timing differences
118
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
taxable income to obtain benefit from the reversal of net deductible temporary differences and utilization of tax credit
carryforwards for Federal and California 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 a deferred tax
asset 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.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained
in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax
benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely
than not” test, no tax benefit is recorded. The Company recognizes interest and penalties related to uncertain tax positions
as income tax expense.
Stock - Based Compensation
Compensation cost is recognized for stock options and restricted stock awards issued to employees and directors,
based on the fair value of these awards at the date of grant. A Black - Scholes model is utilized to estimate the fair value of
stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock
awards. Compensation cost is recognized over the required service period, generally defined as the vesting period. For
awards with graded vesting, compensation cost is recognized on a straight - line basis over the requisite service period for
the entire award. Compensation cost recognized reflects estimated forfeitures, adjusted as necessary for actual forfeitures.
Comprehensive Income (Loss)
Total comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). Other
comprehensive income (loss) refers to gains and losses that are included in comprehensive income (loss) but are excluded
from net income (loss) because they have been recorded directly in equity, net of tax, under the provisions of certain
accounting guidance. The Company’s sources of other comprehensive income (loss) are unrealized gains and losses on
securities available - for - sale, and I/O strips, which are treated like available - for - sale securities, and the liabilities related
to the Company’s defined benefit pension plan and the split - dollar life insurance benefit plan. Reclassification adjustments
result from gains or losses that were realized and included in net income (loss) of the current period that also had been
included in other comprehensive income as unrealized holding gains and losses.
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Segment Reporting
HBC is a commercial bank serving customers located in Alameda, Contra Costa, Marin, San Benito, San
Francisco, San Mateo, and Santa Clara counties of California. Bay View Funding provides business essential working
capital factoring financing to various industries throughout the United States. No customer accounts for more than 10
percent of revenue for HBC or the Company. With the previous acquisition of Bay View Funding, the Company has two
reportable segments consisting of Banking and Factoring.
Reclassifications
Certain items in the consolidated financial statements for the years ended December 31, 2019 and 2018 were
reclassified to conform to the 2020 presentation. These reclassifications did not affect previously reported net income or
shareholders’ equity.
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London Inter-Bank Offered Rate (“LIBOR”) Transition and Phase-Out
We have loans and borrowings that are tied to LIBOR benchmark interest rates. It is anticipated that the LIBOR
index will be phased-out by the end of 2021 and the Federal Reserve Bank of New York has established the Secured
Overnight Financing Rate (“SOFR”) as its recommended alternative to LIBOR. We have created a sub-committee of our
Asset Liability Management Committee to address LIBOR transition and phase-out issues. We are currently reviewing
loan documentation, technology systems and procedures we will need to implement for the transition.
COVID-19
Capital and Liquidity
While the Company believes that it has sufficient capital to withstand an extended economic recession brought
about by COVID-19, its reported and regulatory capital ratios could be adversely impacted by credit losses. The Company
relies on cash on hand as well as dividends from its subsidiary bank to service its debt. If the Company’s capital deteriorates
such that its subsidiary bank is unable to pay dividends to it for an extended period of time, the Company may not be able
to service its debt.
The Company maintains access to multiple sources of liquidity. Wholesale funding markets have remained open
to us, but rates for short term funding have recently been volatile. If funding costs are elevated for an extended period of
time, it could have an adverse effect on the Company’s net interest margin. If an extended recession caused large numbers
of the Company’s deposit customers to withdraw their funds, the Company might become more reliant on volatile or more
expensive sources of funding.
Asset Valuation
The extent to which the COVID-19 pandemic will impact our business, results of operations and financial
condition will depend on future developments, which are highly uncertain and difficult to predict. Those developments
and factors include the duration and spread of the pandemic, its severity, the actions to contain the pandemic or address its
impact, and how quickly and to what extent normal economic and operating conditions can resume. We do not yet know
the full extent of the impact. However, the effects could have a material adverse impact on our business, asset valuations,
financial condition and results of operations. Material adverse impacts may include all or a combination of valuation
impairments on our intangible assets, investments, loans, or deferred tax assets.
Adoption of New Accounting Standards
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments. The amendments in this update replace the incurred loss
impairment methodology in prior GAAP with a methodology that reflects expected life-of-instrument credit losses and
requires consideration of a broader range of reasonable and supportable information to estimate future credit loss estimates.
As CECL encompasses all financial assets carried at amortized cost, the requirement that reserves be established based on
an organization’s reasonable and supportable estimate of expected credit losses extends to held-to-maturity debt securities.
The Company adopted CECL on January 1, 2020, using the modified retrospective method for all financial assets measured
at amortized cost and off-balance sheet credit exposures. Results for the reporting periods after January 1, 2020, are
presented under Topic 326, while prior period amounts continue to be reported in accordance with previously applicable
GAAP.
120
The following table shows the impact of adopting CECL on January 1, 2020:
As Reported
Under
Topic 326
Pre-
Topic 326
Adoption
(Dollars in thousands)
Impact of
Topic 326
Adoption
Assets:
Allowance for credit losses on debt securities
Held-to-maturity municipal securities . . . . . . . . . . . . . $
58
$
-
$
58
Loans
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CRE - owner occupied . . . . . . . . . . . . . . . . . . . . . . . . .
CRE - non-owner occupied . . . . . . . . . . . . . . . . . . . . .
Land and construction . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential mortgage . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer and other . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for credit losses on loans . . . . . . . . . . . . $
6,790
6,994
11,672
1,458
1,321
1,253
678
1,689
31,855
10,453
3,825
3,760
2,621
2,244
57
243
82
23,285
$
(3,663)
3,169
7,912
(1,163)
(923)
1,196
435
1,607
8,570
$
Liabilities:
Allowance for credit losses on off-balance sheet
credit exposures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
679 $
886 $
(207)
As of the implementation date of January 1, 2020, the Company recognized an increase of $8,570,000 to its
allowance for credit losses for loans. The majority of this increase is related to loan portfolios acquired in our recent
acquisitions that under the previous methodology had no recognized allowance for loan losses until the estimated
allowance exceeded the unaccreted discount.
As of the implementation date, there was a $58,000 allowance for losses recorded on the Company’s held-to-
maturity municipal investment securities portfolio. The allowance for losses on held-to-maturity securities is based on
historic loss rates of municipal securities by bond ratings and change in bond ratings of the municipal securities held by
the Company will impact the reserve. Any significant ratings downgrades on these securities will impact the allowance
for losses on these securities.
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In the normal course of business, the Company makes commitments to extend credit to its customers as long as
there are no violations of any conditions established in contractual arrangements. 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. As of the implementation date, there was a reduction of $207,000 to the allowance for losses recorded for
the Company’s off-balance sheet credit exposures. The reduction in reserves for off-balance sheet credit exposures at
implementation was primarily driven by applying a lower estimated CECL loss factor for unfunded commercial loan and
construction loan commitments.
The cumulative-effect adjustment as a result of the adoption of this guidance was recorded, net of tax of
$2,359,000, as a $6,062,000 reduction to retained earnings effective January 1, 2020.
In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. The
provisions of the update eliminated the existing second step of the goodwill impairment test which provides for the
allocation of reporting unit fair value among existing assets and liabilities, with the net remaining amount representing the
implied fair value of goodwill. In replacement of the existing goodwill impairment rule, the update provided that
impairment should be recognized as the excess of any of the reporting unit’s goodwill over the fair value of the reporting
unit. Under the provisions of this update, the amount of the impairment is limited to the carrying value of the reporting
unit’s goodwill. The Company adopted the new guidance on January 1, 2020 and there was no material impact to the
financial statements and no cumulative adjustments were made.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects
of Reference Rate Reform on Financial Reporting, which provides temporary, optional guidance to ease the potential
121
burden in accounting for, or recognizing the effects of, the transition away from the LIBOR or other interbank offered rate
on financial reporting. To help with the transition to new reference rates, the ASU provides optional expedients and
exceptions for applying GAAP to affected contract modifications and hedge accounting relationships. The main provisions
include:
• A change in a contract’s reference interest rate would be accounted for as a continuation of that contract rather
than as the creation of a new one for contracts, including loans, debt, leases, and other arrangements, that meet
specific criteria.
• When updating its hedging strategies in response to reference rate reform, an entity would be allowed to preserve
its hedge accounting.
The guidance is applicable only to contracts or hedge accounting relationships that reference LIBOR or another
reference rate expected to be discontinued. Because the guidance is meant to help entities through the transition period, it
will be in effect for a limited time and will not apply to contract modifications made and hedging relationships entered
into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, for which
an entity has elected certain optional expedients that are retained through the end of the hedging relationship. The
amendments in this ASU are effective March 12, 2020 through December 31, 2022.
ASU 2020-04 permits relief solely for reference rate reform actions and permits different elections over the
effective date for legacy and new activity. Accordingly, the Company is evaluating and reassessing the elections on a
quarterly basis. For current elections in effect regarding the assertion of the probability of forecasted transactions, the
Company elects the expedient to assert the probability of the hedged interest payments and receipts regardless of any
expected modification in terms related to reference rate reform.
The Company believes the adoption of this guidance on activities subsequent to December 31, 2020 through
December 31, 2022 will not have a material impact on the consolidated financial statements.
122
2) Accumulated Other Comprehensive Income (“AOCI”)
The following table reflects the changes in AOCI by component for the periods indicated:
Year Ended December 31, 2020 and 2019
Unamortized
Unrealized
Gain on
Unrealized
Gains (Losses) on Available-
Available-
for-Sale
Securities
and I/O
Strips
for-Sale
Securities
Reclassified
to Held-to-
Defined
Benefit
Pension
Plan
Items(1)
Maturity
(Dollars in thousands)
Total
Beginning balance January 1, 2020, net of taxes . . . . . . . . . . . . . . . . $
1,602 $
298 $ (11,678) $ (9,778)
Other comprehensive income (loss) before reclassification,
net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amounts reclassified from other comprehensive income (loss),
net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net current period other comprehensive income (loss),
net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,522
—
(3,459)
(937)
(195)
(37)
230
(2)
2,327
(37)
(3,229)
(939)
Ending balance December 31, 2020, net of taxes . . . . . . . . . . . . . . . . $
3,929 $
261 $ (14,907) $ (10,717)
Beginning balance January 1, 2019, net of taxes . . . . . . . . . . . . . . . . $
(5,007) $
344 $ (7,718) $ (12,381)
Other comprehensive income (loss) before reclassification,
net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amounts reclassified from other comprehensive income (loss),
net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net current period other comprehensive income (loss),
net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,075
—
(4,022)
3,053
(466)
(46)
62
(450)
6,609
(46)
(3,960)
2,603
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Ending balance December 31, 2019, net of taxes . . . . . . . . . . . . . . . . $
1,602 $
298 $ (11,678) $ (9,778)
(1) This AOCI component is included in the computation of net periodic benefit cost (see Note 14—Benefit Plans) and
includes split-dollar life insurance benefit plan.
123
Amounts Reclassified from
Details About AOCI Components
2020
AOCI(1)
Year Ended
December 31,
2019
2018
Affected Line Item Where
Net Income is Presented
Unrealized gains on available-for-sale securities
and I/O strips . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 277 $ 661 $ 266 Gain on sales of securities
(Dollars in thousands)
(82)
195
(195)
466
(79) Income tax expense
187 Net of tax
Amortization of unrealized gain on securities
available-for-sale that were reclassified to
securities held-to-maturity . . . . . . . . . . . . . . . . . . . . .
Amortization of defined benefit pension plan
items (1)
Prior transition obligation and actuarial losses (2) . . .
Actuarial losses (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
52
(15)
37
65
(19)
46
44 Interest income on taxable securities
(13) Income tax expense
31 Net of tax
60
(387)
(327)
97
(230)
96
(184)
(88)
26
(62)
2 $ 450 $ 58
65
(292)
(227) Other noninterest expense
67 Income tax benefit
(160) Net of tax
Total reclassification from AOCI for the period . . . . . $
(1) This AOCI component is included in the computation of net periodic benefit cost (see Note 14 — Benefit Plans).
(2) This is related to the split dollar life insurance benefit plan.
(3) This is related to the supplemental executive retirement plan.
3) Securities
The amortized cost and estimated fair value of securities at year - end were as follows:
December 31, 2020
Cost
Gains
Amortized
Unrealized Unrealized
Gross
Gross
Allowance
for Credit
Losses
Estimated
Fair
Value
(Losses)
(Dollars in thousands)
Securities available-for-sale:
Agency mortgage-backed securities . . . . . . . . . . $ 170,215 $
U.S. Treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . .
59,797
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 230,012 $
5,111 $
651
5,762 $
— $
—
— $
— $ 175,326
—
60,448
— $ 235,774
December 31, 2020
Securities held-to-maturity:
Gross
Amortized Unrecognized Unrecognized
Gains
(Losses)
Gross
Cost
Estimated
Fair
Value
Allowance
for Credit
Losses
(Dollars in thousands)
Agency mortgage-backed securities . . . . . . . . . . $ 228,652 $
Municipals - exempt from Federal tax . . . . . . . .
68,791
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 297,443 $
6,075 $
1,639
7,714 $
(230) $
—
(230) $
234,497 $
70,430
304,927 $
—
(54)
(54)
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December 31, 2019
Securities available-for-sale:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
(Losses)
Estimated
Fair
Value
(Dollars in thousands)
Agency mortgage-backed securities . . . . . . . . . . . . . . . . $ 283,598 $
U.S. Treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
118,939
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 402,537 $
934 $
1,525
2,459 $
(171)
—
(171)
$ 284,361
120,464
$ 404,825
December 31, 2019
Securities held-to-maturity:
Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
(Losses)
Estimated
Fair
Value
(Dollars in thousands)
Agency mortgage-backed securities . . . . . . . . . . . . . . . . $ 285,344 $
Municipals - exempt from Federal tax . . . . . . . . . . . . . .
81,216
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 366,560 $
1,206 $
1,313
2,519 $
(968)
(4)
(972)
$ 285,582
82,525
$ 368,107
Securities with unrealized losses at year end, aggregated by investment category and length of time that individual
securities have been in an unrealized loss position are as follows:
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December 31, 2020
Securities held-to-maturity:
Fair
Value
Less Than 12 Months
Unrealized
12 Months or More
Fair
(Losses) Value
Unrealized
(Losses)
(Dollars in thousands)
Fair
Value
Total
Unrealized
(Losses)
Agency mortgage-backed securities . . . . . $ 30,930
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,930 $
(230) $
(230) $
— $
— $
— $ 30,930 $
— $ 30,930 $
(230)
(230)
December 31, 2019
Securities available-for-sale:
Fair
Value
Less Than 12 Months
12 Months or More
Unrealized
Fair
(Losses) Value
Unrealized
(Losses)
(Dollars in thousands)
Total
Fair
Value
Unrealized
(Losses)
Agency mortgage-backed securities . . . . . $ 100,816 $
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 100,816 $
(105) $ 27,534 $
(105) $ 27,534 $
(66) $ 128,350 $
(66) $ 128,350 $
(171)
(171)
Securities held-to-maturity:
Agency mortgage-backed securities . . . . . $ 50,060 $
Municipals - exempt from Federal tax . . .
1,556
(178) $ 88,128 $
(790) $ 138,188 $
(4)
—
—
1,556
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 51,616 $
(182) $ 88,128 $
(790) $ 139,744 $
(968)
(4)
(972)
There were no holdings of securities of any one issuer, other than the U.S. Government and its sponsored entities,
in an amount greater than 10% of shareholders’ equity. At December 31, 2020, the Company held 407 securities (116
available-for-sale and 291 held-to-maturity), of which five had fair values below amortized cost. At December 31, 2020,
there were $30,930,000 of agency mortgage-backed securities held-to-maturity, carried with an unrealized loss for less
than 12 months. The total unrealized loss for securities less than 12 months was ($230,000) at December 31, 2020. The
unrealized losses were due to higher interest rates at period end compared to when the securities were purchased. The
issuers are of high credit quality and all principal amounts are expected to be paid when securities mature. The fair value
is expected to recover as the securities approach their maturity date and/or market rates decline. The Company does not
believe that it is more likely than not that the Company will be required to sell a security in an unrealized loss position
prior to recovery in value. The Company does not consider these securities to have credit-related losses at December 31,
2020.
125
The proceeds from sales of securities and the resulting gains and losses are listed below:
Proceeds . . . . . . . . . . . . . . . . . . . . .
Gross gains . . . . . . . . . . . . . . . . . .
Gross losses . . . . . . . . . . . . . . . . . .
$
56,598 $
277
—
167,551 $
1,094
(433)
94,291
1,243
(977)
2020
2019
(Dollars in thousands)
2018
The amortized cost and fair value of debt securities as of December 31, 2020, by contractual maturity, are shown
below. The expected maturities will differ from contractual maturities if borrowers have the right to call or prepay
obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.
Due 3 months or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,988 $ 15,039
Due after 3 months through one year . . . . . . . . . . . . . . . . . . . . . . . . . . . .
45,409
175,326
Agency mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 230,012 $ 235,774
44,809
170,215
Available-for-sale
Amortized Estimated
Fair Value
Cost
(Dollars in thousands)
Held-to-maturity
Amortized Estimated
Fair Value
Cost
(Dollars in thousands)
Due after 3 months through one year . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Due after one through five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after five through ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agency mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
499
10,757
32,149
27,025
234,497
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 297,443 $ 304,927
10,390
31,509
26,399
228,652
493 $
Securities with amortized cost of $40,238,000 and $32,773,000 as of December 31, 2020 and 2019 were pledged
to secure public deposits and for other purposes as required or permitted by law or contract.
The table below presents a roll-forward by major security type for the year ended December 31, 2020 of the
allowance for credit losses on debt securities held-to-maturity held at period end:
Beginning balance January 1, 2020 . . . . . . . . . . . . . . . . $
Impact of adopting Topic 326 . . . . . . . . . . . . . . . . . . . .
Provision (credit) for credit loss . . . . . . . . . . . . . . . . . .
Ending balance December 31, 2020 . . . . . . . . . . . . . . . $
Municipals
(Dollars in thousands)
-
58
(4)
54
For the year ended December 31, 2020, there was a reduction of $4,000 to the allowance for credit losses on the
Company’s held-to-maturity municipal investment securities portfolio. This reduction was the result of a reduction in
municipal securities amortized balances resulting from regular payments. The bond ratings for the Company’s municipal
investment securities at December 31, 2020 were consistent with the ratings at January 1, 2020.
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4) Loans and Allowance for Credit Losses on Loans
The allowance for credit losses on loans was calculated by pooling loans of similar credit risk characteristics and
credit monitoring procedures. The loan portfolio is classified into eight segments of loans - commercial, commercial real
estate – owner occupied, commercial real estate – non-owner occupied, land and construction, home equity, multifamily,
residential mortgage and consumer and other. See Note 1 – Summary of Significant Accounting Polices - Allowance for
Credit Losses on Loans for the summary of risk characteristics of each loan segment.
Loans by portfolio segment and the allowance for credit losses on loans were as follows for the periods indicated:
Loans held-for-investment:
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Real estate:
846,386 $
603,345
December 31, December 31,
2020
2019
(Dollars in thousands)
CRE - owner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CRE - non-owner occupied . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land and construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred loan fees, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans, net of deferred fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for credit losses on loans(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
548,907
767,821
147,189
151,775
180,623
100,759
33,744
2,534,163
(319)
2,533,844
(23,285)
Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,574,861 $ 2,510,559
560,362
693,103
144,594
111,885
166,425
85,116
18,116
2,625,987
(6,726)
2,619,261
(44,400)
(1)Allowance for credit losses on loans at December 31, 2020, Allowance for loan losses at December 31, 2019.
Changes in the allowance for credit losses on loans were as follows:
Owner Non-owner
Land &
Home Multi- Residential Consumer
Commercial Occupied Occupied Construction Equity Family Mortgage and Other Total
Year Ended December 31, 2020
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Beginning of period balance . . . . . . . . . . . . . $
Adoption of Topic 326 . . . . . . . . . . . . . . . . .
Balance at adoption on January 1, 2020 . . . . .
Charge-offs . . . . . . . . . . . . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . . . . . . . . . . . .
Net (charge-offs) recoveries . . . . . . . . .
Provision (credit) for credit losses on loans . .
End of period balance . . . . . . . . . . . . . . $
10,453 $
(3,663)
6,790
(1,776)
998
(778)
5,575
11,587 $
3,825 $
3,169
6,994
—
1
1
1,565
8,560 $
3,760 $
7,912
11,672
—
—
—
4,744
16,416 $
57 $
(Dollars in thousands)
2,621 $ 2,244 $
(1,163)
(923) 1,196
1,458 1,321 1,253
—
—
—
(117) 1,551
—
70
70
981
—
93
93
2,509 $ 1,297 $ 2,804 $
243 $
435
678
—
—
—
265
943 $
1,607
1,689
(104)
30
(74)
(1,331)
82 $ 23,285
8,570
31,855
(1,880)
1,192
(688)
13,233
284 $ 44,400
Management’s methodology for estimating the allowance balance consists of several key elements, which include
pooling loans with similar characteristics into segments and using a discounted cash flow calculation to estimate losses.
The discounted cash flow model inputs include loan level cash flow estimates for each loan segment based on peer and
bank historic loss correlations with certain economic factors. Management uses a four quarter forecast of each economic
factor that is used for each loan segment and the economic factors are assumed to revert to the historic mean over an eight
quarter period after the four quarter forecast period. The economic factors management has selected include the California
unemployment rate, California gross state product, California home price index, and a national CRE value index. These
factors are evaluated and updated occasionally and as economic conditions change. Additionally, management uses
qualitative adjustments to the discounted cash flow quantitative loss estimates in certain cases when management has
assessed an adjustment is necessary. These qualitative adjustments are applied by pooled loan segment and have been
made for increased risk due to loan quality trends, collateral risk, or other risks management determines are not adequately
captured in the discounted cash flow loss estimation. Specific allowances on individually
127
evaluated loans are combined to the allowance on pools of loans with similar risk characteristics to derive to total allowance
for credit losses on loans.
The increase in the allowance for credit loss and related provision during the year ended December 31, 2020 is
primarily attributable to the change in projected economic conditions resulting from the COVID-19 pandemic, with
elevated levels of unemployment being the most significant factor. Management has also considered other qualitative risks
such as collateral values, concentrations of credit risk (geographic, large borrower, and industry), economic conditions,
changes in underwriting standards, experience and depth of lending staff, trends in delinquencies, and the level of criticized
loans to address asset-specific risks and current conditions that were not fully considered by the macroeconomic variables
driving the quantitative estimate.
Changes in the allowance for loan losses were as follows:
Commercial Real Estate
Consumer
Total
Year Ended December 31, 2019
Beginning of period balance . . . . . . . . . . . . . . . . . . . . . .
Charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (credit) for loan losses . . . . . . . . . . . . . . . . . . .
End of period balance . . . . . . . . . . . . . . . . . . . . . . . .
$
$
17,061
(6,609)
1,045
(5,564)
(1,044)
10,453
(Dollars in thousands)
116
10,671
$
(14)
—
—
169
(14)
169
(20)
1,910
82
12,750
$
$
$
$
$
27,848
(6,623)
1,214
(5,409)
846
23,285
Commercial Real Estate
Consumer
Total
Year Ended December 31, 2018
Beginning of period balance . . . . . . . . . . . . . . . . . . . . . .
Charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . .
End of period balance . . . . . . . . . . . . . . . . . . . . . . . .
$
$
10,608
(2,002)
2,645
643
5,810
17,061
(Dollars in thousands)
100
8,950
$
—
(24)
—
150
(24)
150
40
1,571
116
10,671
$
$
$
$
$
19,658
(2,026)
2,795
769
7,421
27,848
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by
portfolio segment, based on the impairment method as follows at year - end:
December 31, 2019
Commercial Real Estate
Consumer
and other
Total
(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment . . . . . . . . . .
Collectively evaluated for impairment . . . . . . . . . .
Total allowance balance . . . . . . . . . . . . . . . . . . . .
Loans:
Individually evaluated for impairment . . . . . . . . . .
Collectively evaluated for impairment . . . . . . . . . .
Total loan balance . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
1,835 $
8,618
10,453 $
— $
12,750
12,750 $
— $
82
82 $
1,835
21,450
23,285
4,810 $
5,454 $
598,535
603,345 $ 1,897,074 $
1,891,620
— $
10,264
2,523,899
33,744
33,744 $ 2,534,163
128
The following table presents the amortized cost basis of nonaccrual loans and loans past due over 90 days and
still accruing at December 31, 2020:
Nonaccrual
Nonaccrual
with no Specific with Specific
Allowance for Allowance for
Credit
Losses
Credit
Losses
Restructured
and Loans
over 90 Days
Past Due
and Still
Accruing
Total
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Real estate:
CRE - Owner Occupied . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . .
Consumer and other . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
752 $
(Dollars in thousands)
1,974 $
81 $ 2,807
3,706
949
407
5,814 $
—
—
1,974 $
3,706
—
949
—
407
—
81 $ 7,869
The following table presents nonperforming loans by class at December 31, 2019:
Restructured
and Loans
over 90 Days
Past Due
and Still
Accruing
(Dollars in thousands)
Nonaccrual
Total
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate:
$
3,444
$
1,153
$
4,597
CRE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
5,094
137
8,675
$
—
—
1,153
$
5,094
137
9,828
The following tables presents the aging of past due loans by class for the periods indicated:
A
n
n
u
a
l
R
e
p
o
r
t
30 - 59
Days
Past Due
60 - 89
Days
Past Due
90 Days or
Greater
Past Due
Total
Past Due
December 31, 2020
(Dollars in thousands)
Current
Total
Commercial . . . . . . . . . . . . . . . . . . . . . . . $
3,524 $
259 $
392 $ 4,175 $
842,211 $
846,386
29
—
—
560,362
693,103
144,594
111,885
166,425
—
85,116
—
407
18,116
828 $ 6,229 $ 2,619,758 $ 2,625,987
559,200
692,618
144,594
111,885
166,425
85,116
17,709
1,162
485
—
—
—
—
407
Real estate:
CRE - Owner Occupied . . . . . . . . . . .
CRE - Non-Owner Occupied . . . . . . .
Land and construction . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . .
Residential mortgages . . . . . . . . . . . .
Consumer and other . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,133
—
—
—
—
—
—
4,657 $
—
485
—
—
—
—
—
744 $
129
30 - 59
Days
Past Due
60 - 89
Days
Past Due
90 Days or
Greater
Past Due
Total
Past Due
December 31, 2019
Current
Total
Commercial . . . . . . . . . . . . . . . . . . . . . . . $
Real estate:
CRE - Owner Occupied . . . . . . . . . . .
CRE - Non-Owner Occupied . . . . . . .
Land and construction . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . .
Residential mortgages . . . . . . . . . . . .
Consumer and other . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $
4,770 $
2,097 $
(Dollars in thousands)
3,217 $ 10,084 $
593,261 $
603,345
—
—
—
—
—
—
—
4,770 $
—
—
—
137
—
—
—
2,234 $
5,094
—
—
—
—
—
—
548,907
767,821
147,189
151,775
180,623
100,759
33,744
8,311 $ 15,315 $ 2,518,848 $ 2,534,163
543,813
767,821
147,189
151,638
180,623
100,759
33,744
5,094
—
—
137
—
—
—
Past due loans 30 days or greater totaled $6,229,000 and $15,315,000 at December 31, 2020 and December 31,
2019, respectively, of which $1,918,000 and $7,413,000 were on nonaccrual. At December 31, 2020, there were also
$5,870,000 loans less than 30 days past due included in nonaccrual loans held-for-investment. At December 31, 2019,
there were also $1,262,000 loans less than 30 days past due included in nonaccrual loans held-for-investment.
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 begins recognizing interest income only as cash interest payments
are received and it has been determined the collection of all outstanding principal is not in doubt.
Credit Quality Indicators
Concentrations of credit risk arise when a number of customers are engaged in similar business activities, or
activities in the same geographic region, or have similar features that would cause their ability to meet contractual
obligations to be similarly affected by changes in economic conditions. The Company’s loan portfolio is concentrated in
commercial (primarily manufacturing, wholesale, and service) and real estate lending, with the remaining balance in
consumer loans. While no specific industry concentration is considered significant, the Company’s lending operations are
located in the Company’s market areas that are dependent on the technology and real estate industries and their supporting
companies. Thus, the Company’s borrowers could be adversely impacted by a downturn in these sectors of the economy
which could reduce the demand for loans and adversely impact the borrowers’ ability to repay their loans.
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers
to service their debt such as: current financial information, historical payment experience, credit documentation, public
information, and current economic trends, and other factors. The Company analyzes loans individually by classifying the
loans as to credit risk. This analysis is performed on a quarterly basis. Pass loans generally include those loans that are
expected to be repaid in accordance with contractual loans terms. Loans not categorized as pass are assigned a rating using
the following definitions:
Special Mention. A Special Mention asset has potential weaknesses that deserve management's close attention. If
left uncorrected, these potential weaknesses may result in a deterioration of the repayment prospects for the asset or in the
credit position at some future date. Special Mention assets are not adversely classified and do not expose an institution to
sufficient risk to warrant adverse classification.
Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well - defined weakness or weaknesses
that will jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will
sustain some loss if the deficiencies are not corrected.
Substandard - Nonaccrual. Loans classified as substandard - nonaccrual are inadequately protected by the current
net worth and paying capacity of the obligor or of the collateral pledged, if any, and it is probable that the Company will
not receive payment of the full contractual principal and interest. Loans so classified have a well - defined weakness or
weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution
will sustain some loss if the deficiencies are not corrected. In addition, the Company no longer accrues interest on the loan
130
because of the underlying weaknesses.
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with
the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts,
conditions, and values, highly questionable and improbable.
Loss. Loans classified as loss are considered uncollectable or of so little value that their continuance as assets is
not warranted. This classification does not necessarily mean that a loan has no recovery or salvage value; but rather, there
is much doubt about whether, how much, or when the recovery would occur. Loans classified as loss are immediately
charged off against the allowance for credit losses on loans. Therefore, there is no balance to report as of December 31,
2020 and December 31, 2019.
Loans may be reviewed at any time throughout a loan’s duration. If new information is provided, a new risk
assessment may be performed if warranted.
The following table presents term loans amortized cost by vintage and loan grade classification, and revolving
loans amortized cost by loan grade classification. The loan grade classifications are based on the Bank’s internal loan
grading methodology. Loan grade categories for doubtful and loss rated loans are not included on the table below as there
are no loans with those grades at December 31, 2020. The vintage year represents the period the loan was originated or in
the case of renewed loans, the period last renewed. The amortized balance is the loan balance less any purchase discounts,
and plus any loan purchase premiums. The loan categories are based on the loan segmentation in the Company's
CECL reserve methodology based on loan purpose and type.
A
n
n
u
a
l
R
e
p
o
r
t
131
Term Loans Amortized Cost Basis by Originated Period
2020
2019
2018
2017
(Dollars in thousands)
2016
Revolving
Loans
Amortized
Cost
Basis
2015 and
Prior
Total
431,369 $
15,720
4,036
2,106
453,231
33,350 $
716
-
56
34,122
21,154 $
1,301
19
36
22,510
13,840 $
953
758
-
15,551
7,341 $
713
2,396
115
10,565
8,292 $
170
73
26
8,561
296,286 $
1,937
3,236
387
301,846
811,632
21,510
10,518
2,726
846,386
Commercial:
Pass . . . . . . . . . . . . . . . . . . . $
Special Mention . . . . . . . . . . .
Substandard . . . . . . . . . . . . . .
Substandard-Nonaccrual . . . . .
Total . . . . . . . . . . . . . . . . .
CRE - Owner Occupied:
Pass . . . . . . . . . . . . . . . . . . .
168,224
73,064
68,068
51,705
50,716
109,350
Special Mention . . . . . . . . . . .
Substandard . . . . . . . . . . . . . .
3,151
2,561
Substandard-Nonaccrual . . . . .
Total . . . . . . . . . . . . . . . . .
3,678
177,614
2,568
-
-
75,632
4,128
400
-
72,596
783
2,954
-
55,442
-
-
2,569
451
-
50,716
28
112,398
CRE - Non-Owner Occupied:
Pass . . . . . . . . . . . . . . . . . . .
166,550
128,361
68,796
99,816
57,422
150,683
Special Mention . . . . . . . . . . .
11,930
Substandard . . . . . . . . . . . . . .
3,166
-
-
Substandard-Nonaccrual . . . . .
Total . . . . . . . . . . . . . . . . .
-
181,646
-
128,361
2,557
1,411
-
72,764
-
-
-
485
-
-
-
99,816
-
57,907
-
150,683
Land and construction:
Pass . . . . . . . . . . . . . . . . . . .
Special Mention . . . . . . . . . . .
Substandard . . . . . . . . . . . . . .
Substandard-Nonaccrual . . . . .
Total . . . . . . . . . . . . . . . . .
Home equity:
Pass . . . . . . . . . . . . . . . . . . .
Special Mention . . . . . . . . . . .
Substandard . . . . . . . . . . . . . .
Substandard-Nonaccrual . . . . .
Total . . . . . . . . . . . . . . . . .
Multifamily:
Pass . . . . . . . . . . . . . . . . . . .
Special Mention . . . . . . . . . . .
Substandard . . . . . . . . . . . . . .
Substandard-Nonaccrual . . . . .
Total . . . . . . . . . . . . . . . . .
Residential mortgage:
Pass . . . . . . . . . . . . . . . . . . .
Special Mention . . . . . . . . . . .
Substandard . . . . . . . . . . . . . .
Substandard-Nonaccrual . . . . .
Total . . . . . . . . . . . . . . . . .
Consumer and other:
Pass . . . . . . . . . . . . . . . . . . .
Special Mention . . . . . . . . . . .
Substandard . . . . . . . . . . . . . .
Substandard-Nonaccrual . . . . .
Total . . . . . . . . . . . . . . . . .
114,932
-
1,359
-
116,291
22,054
-
-
-
22,054
266
-
-
117
383
31,481
-
889
-
32,370
12,798
5,089
-
-
17,887
10
-
-
-
10
-
-
-
-
-
39,183
-
-
-
39,183
10,048
-
-
-
10,048
522
-
-
-
522
-
-
-
-
-
74
-
-
-
74
17,248
-
-
-
17,248
3,246
1,630
-
-
4,876
1,486
-
-
407
1,893
-
-
-
-
-
-
-
-
-
-
24,572
-
-
-
24,572
7,324
-
-
-
7,324
20
-
-
-
20
-
-
-
-
-
-
-
-
-
-
16,235
-
-
-
16,235
28,115
-
-
28,115
116
-
-
-
116
1,343
-
-
-
1,343
-
-
143
-
143
30,751
5,186
-
-
35,937
15,568
-
1,298
-
16,866
987
-
-
-
987
15,964
-
-
-
15,964
1,926
-
-
-
1,926
4,906
-
-
-
4,906
109,848
-
605
832
111,285
880
-
-
-
880
-
-
-
-
-
14,568
-
-
-
14,568
537,091
13,199
6,366
3,706
560,362
673,554
14,487
5,062
-
693,103
143,235
-
1,359
-
144,594
110,188
-
748
949
111,885
160,350
5,186
889
-
166,425
77,099
6,719
1,298
-
85,116
17,709
-
-
407
18,116
Total loans . . . . . . . . . . . . $
979,432 $
309,922 $
191,961 $
202,725 $
163,654 $
326,918 $
451,375 $
2,625,987
Risk Grades:.
Pass . . . . . . . . . . . . . . . . . . . $
Special Mention . . . . . . . . . . .
Substandard . . . . . . . . . . . . . .
Substandard-Nonaccrual . . . . .
Grand Total . . . . . . . . . . $
925,630 $
35,890
12,011
5,901
979,432 $
306,582 $
3,284
-
56
309,922 $
180,072 $
9,616
1,830
443
191,961 $
197,277 $
1,736
3,712
-
202,725 $
159,945 $
713
2,881
115
163,654 $
316,974 $
7,925
1,965
54
326,918 $
444,378 $
1,937
3,841
1,219
451,375 $
2,530,858
61,101
26,240
7,788
2,625,987
132
The following table provides a summary of the loan portfolio by loan type and credit quality classification at
December 31, 2019:
Nonclassified Classified
Total
December 31, 2019
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate:
CRE - Owner Occupied . . . . . . . . . . . . . . . . . . . . .
CRE - Non-Owner Occupied . . . . . . . . . . . . . . . . .
Land and construction . . . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential mortgages . . . . . . . . . . . . . . . . . . . . . . .
Consumer and other . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
599,143
4,202
$
603,345
538,229
761,801
144,108
149,131
180,623
100,262
28,287
$ 2,501,584
10,678
6,020
3,081
2,644
—
497
5,457
32,579
548,907
767,821
147,189
151,775
180,623
100,759
33,744
$ 2,534,163
$
Nonclassified loans include those rated as Pass or Special Mention using the definitions listed above. Classified
loans are those rated Substandard, Substandard-Nonaccrual, Doubtful and Loss, using those definitions.
The following table presents the amortized cost basis of collateral-dependent loans by loan classification at
December 31, 2020:
Collateral Type
Real
Estate
Property
Business
Assets
Unsecured
Total
(Dollars in thousands)
Commercial . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . .
$
$
29 $
29 $
1,815 $
1,815 $
130 $
130 $
1,974
1,974
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
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.
A
n
n
u
a
l
R
e
p
o
r
t
133
The following table details the allowance for loan losses and recorded investment in loans individually evaluated
for impairment by loan classification as of December 31, 2019, as determined in accordance with ASC 310 prior to
adoption of Topic 326:
Unpaid
Principal
Balance
Allowance
for Loan
Losses
Recorded
Investment Allocated
(Dollars in thousands)
With no related allowance recorded:
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,113 $ 2,113 $
Real estate:
CRE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total with no related allowance recorded . . . . . . . . . . . . . . . . . .
5,094
360
7,567
5,094
360
7,567
—
—
—
—
With an allowance recorded:
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total with an allowance recorded . . . . . . . . . . . . . . . . . . . . . . . .
1,835
1,835
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,264 $ 10,264 $ 1,835
2,697
2,697
2,697
2,697
The book balance of troubled debt restructurings at December 31, 2020 was $674,000, which included $468,000
of nonaccrual loans and $206,000 of accruing loans. The book balance of troubled debt restructurings at December 31,
2019 was $1,039,000, which included $590,000 of nonaccrual loans and $449,000 of accruing loans. Approximately
$352,000 and $20,000 in specific reserves were established with respect to these loans as of December 31, 2020 and
December 31, 2019. As of December 31, 2020 and December 31, 2019, the Company had no additional amounts
committed on any loan classified as a troubled debt restructuring.
The following table presents loans by class modified as troubled debt restructurings for the periods indicated:
Troubled Debt Restructurings:
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Troubled Debt Restructurings:
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
During the Year Ended
December 31, 2020
Number
of
Contracts
Pre-modification
Outstanding
Recorded
Investment
Post-modification
Outstanding
Recorded
Investment
15
15
$
$
(Dollars in thousands)
$
$
630
630
630
630
During the Year Ended
December 31, 2019
Number
of
Contracts
Pre-modification
Outstanding
Recorded
Investment
Post-modification
Outstanding
Recorded
Investment
(Dollars in thousands)
$
$
591
591
3
3
$
$
591
591
There were 15 new loans with total recorded investment of $630,000 that were modified as troubled debt
restructurings during the year ended December 31, 2020.
During the twelve months ended December 31, 2020, there were debt restructurings in which the amount of
principal or accrued interest owed from the borrower was forgiven or which resulted in a charge-off or change to the
allowance for credit losses on loans.
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A loan is considered to be in payment default when it is 30 days contractually past due under the modified terms.
There were no defaults on troubled debt restructurings, within twelve months following the modification, during the years
ended December 31, 2020 and 2019.
A loan that is a troubled debt restructuring on nonaccrual status may return to accruing status after a period of at
least six months of consecutive payments in accordance with the modified terms.
On March 22, 2020, the Interagency Statement was issued by our banking regulators that encourages financial
institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due
to the effects of COVID-19. Additionally, Section 4013 of the CARES Act further provides that a qualified loan
modification is exempt by law from classification as a TDR as defined by GAAP, from the period beginning March 1,
2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency
concerning the COVID-19 outbreak declared by the President of the United States under the National Emergencies Act
terminates. The Interagency Statement was subsequently revised in April 2020 to clarify the interaction of the original
guidance with Section 4013 of the CARES Act, as well as setting forth the banking regulators’ views on consumer
protection considerations. Section 541 of the Consolidated Appropriations Act extends this relief to the earlier of January 1,
2022 or 60 days after the national emergency termination date.
In accordance with such guidance, we are offering short-term modifications made in response to COVID-19 to
borrowers who are current and otherwise not past due. These include short-term (180 days or less) modifications in the
form of payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant.
The table below presents these loan deferrals by loan category:
Underlying Collateral
Real
Estate
Business
Assets
Total
(in $000's, unaudited)
Initial Deferments(1) . . . . . . . . . . . . . . . $
2nd Deferments(2) . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
- $
295
295 $
1,573 $
684
2,257 $
1,573
979
2,552
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(1) Initial deferments were generally for 3 months
(2) 2nd deferments were for an additional 3 months
5) Loan Servicing
At December 31, 2020, 2019, and 2018, the Company serviced SBA loans sold to the secondary market of
approximately $77,973,000, $87,835,000, and $104,016,000, respectively.
Servicing assets represent the servicing spread generated from the sold guaranteed portions of SBA loans. The
weighted average servicing rate for all loans serviced was 1.12%, 1.16%, and 1.12% at December 31, 2020, 2019, and
2018, respectively.
Servicing rights are included in “accrued interest receivable and other assets” on the consolidated balance sheets.
Activity for loan servicing rights follows:
2020
2019
(Dollars in thousands)
2018
Beginning of year balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 583 $ 871 $ 1,373
200
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(702)
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
871
End of year balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 531 $ 583 $
213
(265)
157
(445)
There was no valuation allowance for servicing rights at December 31, 2020, 2019, and 2018, because the
estimated fair value of the servicing rights was greater than the carrying value. The estimated fair value of loan servicing
rights was $1,172,000, $1,295,000, and $1,651,000, at December 31, 2020, 2019, and 2018, respectively. The fair value
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of servicing rights at December 31, 2020, was estimated using a weighted average constant prepayment rate (“CPR”)
assumption of 14.65%, and a weighted average discount rate assumption of 12.91%. The fair value of servicing rights at
December 31, 2019, was estimated using a weighted average CPR assumption of 13.50%, and a weighted average discount
rate assumption of 15.90%. The fair value of servicing rights at December 31, 2018, was estimated using a weighted
average CPR assumption of 10.89%, and a weighted average discount rate assumption of 16.40%.
The weighted average discount rate and CPR assumptions used to estimate the fair value of the I/O strip
receivables are the same as for the servicing rights. 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.
I/O strip receivables are included in “accrued interest receivable and other assets” on the consolidated balance
sheets. Activity for I/O strip receivables follows:
2020
2019
(Dollars in thousands)
2018
Beginning of year balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 503 $ 568 $
Unrealized loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
End of year balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 305 $ 503 $
(198)
968
(400)
568
(65)
6) Premises and Equipment
Premises and equipment at year - end were as follows:
Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . .
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2020
2019
(Dollars in thousands)
3,508 $
2,900
12,721
6,726
25,855
(15,396)
10,459 $
3,508
2,900
10,067
7,372
23,847
(15,597)
8,250
Depreciation and amortization expense was $951,000, $846,000, and $753,000 in 2020, 2019, and 2018, respectively.
7) Leases
On January 1, 2019, the Company adopted ASU No. 2016-02, Leases (Topic 842). Under the new guidance, 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 is impacted as a lessee of the offices and real estate used for operations. Some of the Company's lease
agreements include options to renew at the Company's option. No lease extensions are reasonably certain to be exercised,
therefore it was not considered in the calculation of the ROU asset and lease liability. As of December 31, 2020, operating
lease ROU assets, included in other assets and lease liabilities, included in other liabilities, totaled $35,873,000.
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The following table presents the quantitative information for the Company’s leases:
Operating Lease Cost (Cost resulting from lease payments) . . . . . . $
Operating Lease - Operating Cash Flows (Fixed Payments) . . . . . . $
Operating Lease - ROU assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Operating Lease – Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Weighted Average Lease Term - Operating Leases . . . . . . . . . . . . .
Weighted Average Discount Rate - Operating Leases . . . . . . . . . . .
December 31,
2020
2019
(Dollars in thousands)
6,837 $
5,572 $
35,873 $
35,873 $
8.30 yrs
4.55%
1,490
1,519
12,173
13,032
4.79 yrs
3.86%
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The following maturity analysis shows the undiscounted cash flows due on the Company’s operating lease
liabilities:
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total undiscounted cash flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discount on cash flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total lease liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(Dollars in thousands)
5,242
5,668
5,039
4,692
4,262
18,798
43,701
(7,828)
35,873
The merger with Presidio resulted in the Company operating overlapping branch locations in the cities of Walnut
Creek and San Mateo, California. These branches were consolidated in 2020 by vacating the HBC leased locations prior
to the lease termination date, and moving the operations to the Presidio branch locations. The consolidation of these two
branches into the Presidio locations resulted in the impairment of both Heritage leases at December 31, 2019. The lease
impairment and write-off of fixed assets and tenant improvements totaled $434,000 for the Walnut Creek location, and
$625,000 for the San Mateo location during the fourth quarter of 2019.
In June of 2019, the Company entered into a lease agreement for 54,910 square feet of office space in San Jose,
California, commencing on February 1, 2020. The Company completed the relocation of its corporate headquarters, San
Jose Branch and factoring subsidiary, Bay View Funding to 224 Airport Parkway, San Jose, California in the third
quarter of 2020.
8) Business Combinations
On April 6, 2018, the Company completed its acquisition of Tri-Valley for a transaction value of $32,320,000.
At closing the Company issued 1,889,613 shares of the Company’s common stock with an aggregate market value of
$30,725,000 on the date of closing. The number of shares issued was based on a fixed exchange ratio of 0.0489 of a share
of the Company’s common stock for each outstanding share of Tri-Valley common stock. In addition, at closing the
Company paid cash to the holder of a stock warrant and holders of outstanding stock options and related fees and fractional
shares totaling $1,595,000. Tri-Valley’s results of operations were included in the Company’s results of operations
beginning April 7, 2018.
On May 4, 2018, the Company completed its acquisition of United American for a transaction value of
$56,417,000. At closing the Company issued 2,826,032 shares of the Company’s common stock with an aggregate market
value of $47,280,000 on the date of closing. The number of shares issued was based on a fixed exchange ratio of 2.1644
of a share of the Company’s common stock for each outstanding share of United American common stock and each
common stock equivalent underlying the United American Series D Preferred Stock and Series E Preferred Stock. The
shareholders of the United American Series A Preferred Stock and Series B Preferred Stock received $1,000 cash for each
share totaling $8,700,000 and $435,000, respectively. In addition, the Company paid $2,000 in cash for fractional shares,
for total cash consideration of $9,137,000. United American’s results of operations were included in the Company’s
results of operations beginning May 5, 2018.
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On October 11, 2019, the Company completed its merger with Presidio for an aggregate transaction value of
$185,598,000. Shareholders of Presidio received a fixed exchange ratio at closing of 2.47 shares of the Company’s
common stock for each share of Presidio common stock. Upon closing of the transaction, the Company issued 15,684,064
shares of the Company’s common stock to Presidio shareholders and holders of restricted stock units for a total value of
$178,171,000 based on the Company’s closing stock price of $11.36 on the closing date of October 11, 2019. In addition,
the consideration for Presidio stock options exchanged for the Company’s stock options totaled $7,426,000 and cash-in-
lieu of fractional shares totaled $1,000 on October 11, 2019. The following table summarizes the consideration paid for
Presidio:
(Dollars in thousands)
Issuance of 15,684,064 shares of common stock
to Presidio shareholders and holders of restricted stock
(stock price = $11.36 on October 11, 2019) . . . . . . . . . . . . . $
Consideration for Presidio stock options exchanged for
Heritage Commerce Corp stock options . . . . . . . . . . . . . . .
Cash paid for fractional shares . . . . . . . . . . . . . . . . . . . . . . . .
Total consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
178,171
7,426
1
185,598
The following table summarizes the estimated fair values of the Presidio assets acquired and liabilities assumed
at the date of the merger.
As
Recorded
by
Presidio
Fair
Value
Adjustments
(Dollars in thousands)
As
Recorded
at
Acquisition
Assets acquired:
Cash and cash equivalents . . . . . . . . . . . . . . . . . $
Securities available-for-sale . . . . . . . . . . . . . . . .
Securities held-to-maturity . . . . . . . . . . . . . . . . .
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses . . . . . . . . . . . . . . . . .
Premises and equipment, net . . . . . . . . . . . . . . .
Other intangible assets . . . . . . . . . . . . . . . . . . . .
Other assets, net . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets acquired . . . . . . . . . . . . . . . . . . . . $
Liabilities assumed:
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Subordinated Debt . . . . . . . . . . . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities assumed . . . . . . . . . . . . . . . . . $
Net assets acquired . . . . . . . . . . . . . . . . . . .
Purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill recorded in the merger . . . . . . . . . .
117,989
44,647
463
698,493
(7,463)
1,756
—
43,539
899,424
774,260
10,000
442
17,916
802,618
$
$
$
$
(1)
422
—
(12,529)
7,463
—
11,147
(1,378)
5,124
(1)
—
—
211
210
(a) $
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
$
117,988
45,069
463
685,964
—
1,756
11,147
42,161
904,548
774,259
10,000
442
18,127
802,828
101,720
185,598
83,878
Explanation of certain fair value related adjustments for the Presidio merger:
(a) Represents cash paid for fractional shares in the transaction.
(b) Represents the fair value adjustment on investment securities available-for-sale.
(c) Represents the fair value adjustment to the net book value of loans includes an interest rate mark and credit
mark adjustment.
(d) Represents the elimination of Presidio’s allowance for loan losses.
(e) Represents intangible assets recorded to reflect the fair value of core deposits and an above market lease.
The core deposit asset was recorded as an identifiable intangible asset and is amortized on an accelerated
basis over the estimated average life of the deposit base. The above market lease liability will be accreted
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on the straight line method over 60 months.
(f) Represents an adjustment to net deferred tax assets resulting from the fair value adjustments related to the
acquired assets, liabilities assumed and identifiable intangible assets recorded.
(g) Represents the fair value adjustment on time deposits, which was amortized as interest expense.
(h) The Company acquired $10,000,000 of subordinated debt from the Presidio transaction. The Presidio
subordinated debt was redeemed on December 19, 2019.
(i) Represents adjustments to accrued accounts payable.
Presidio’s results of operations were included in the Company’s results of operations beginning October 12, 2019.
The following table presents pro forma financial information as if the merger had occurred on January 1, 2018,
which includes the pre - acquisition period for Presidio. The historical unaudited pro forma financial information has been
adjusted to reflect supportable items that are directly attributable to the acquisition and expected to have a continuing
impact on consolidated results of operations, as such, one - time acquisition costs are not included. The unaudited pro forma
financial information is provided for informational purposes only. The unaudited pro forma financial information is not
necessarily, and should not be assumed to be, an indication of the results that would have been achieved had the acquisition
been completed as of the dates indicated or that may be achieved in the future. The preparation of the unaudited pro forma
combined consolidated financial statements and related adjustments required management to make certain assumptions
and estimates.
(Unaudited)
Net interest income . . . . . . . . . . . . . . . . . . . . . $
Provision for loan losses . . . . . . . . . . . . . . . . .
Noninterest income . . . . . . . . . . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net income per share - basic . . . . . . . . . . . . . $
Net income per share - diluted . . . . . . . . . . . . $
For the Year Ended
December 31, 2019
December 31, 2018
(Dollars in thousands, except per share amounts)
163,555 $
870
11,291
92,708
81,268
23,730
57,538 $
0.98 $
0.96 $
160,044
7,694
10,795
97,563
65,582
17,549
48,033
0.84
0.83
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The Company believes the mergers provide the opportunity to combine independent business banking franchises
with similar philosophies and cultures into a combined over $4,000,000,000 business bank based in San Jose, California.
The pooling of the four banks’ resources and knowledge enhance the Company’s capabilities, operational efficiencies, and
community outreach. The Company also believes the combined bank will be much better positioned to meet the needs of
the Company’s customers, shareholders and the community. The following table summarizes the pre-tax merger-related
costs for the year ended December 31, 2020 for the Presidio merger, and the pre-tax merger-related costs for the years
ended December 31, 2019 and 2018 for the Tri-Valley and United American acquisitions:
For the Year Ended
December 31, December 31, December 31,
Salaries and employee benefits . . . . . . $
Other . . . . . . . . . . . . . . . . . . . . . . . . . .
Total merger-related costs . . . . . . $
2020
2019
(Dollars in thousands)
6,580 $
4,500
11,080 $
356 $
2,245
2,601 $
2018
3,569
5,598
9,167
Goodwill of $13,819,000 arising from the Tri-Valley acquisition, $24,271,000 from the United American
acquisition and $83,878,000 from the Presidio merger is largely attributable to synergies and cost savings resulting from
combining the operations of the companies. As these transactions were structured as tax-free exchanges, the goodwill will
not be deductible for tax purposes. As of April 6, 2019, May 4, 2019, and October 11, 2020, the Company finalized its
valuation of all assets acquired and liabilities assumed in its acquisition of Tri-Valley, United American, and Presidio
respectively, resulting in no material changes to acquisition accounting adjustments.
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9) Goodwill and Other Intangible Assets
Goodwill
At December 31, 2020, the carrying value of goodwill was $167,631,000, which included $13,044,000 of
goodwill related to its acquisition of Bay View Funding, $32,619,000 from its acquisition of Focus Business Bank
(“Bank”), $13,819,000 from its acquisition of Tri-Valley, $24,271,000 from its acquisition of United American and
$83,878,000 from Presidio.
Goodwill impairment exists when a reporting unit’s carrying value exceeds its fair value, which is determined
through a qualitative assessment whether it is more likely than not that the fair value of equity of the reporting unit exceeds
the carrying value (“Step Zero”). If the qualitative assessment indicates it is more likely than not that the fair value of
equity of a reporting unit is less than book value, then a quantitative two-step impairment test is required. Step 1 includes
the determination of the carrying value of the Company’s reporting units, including the existing goodwill and intangible
assets, and estimating the fair value of each reporting unit.
The Company completed its annual goodwill impairment analysis as of November 30, 2020 with the assistance
of an independent valuation firm. The goodwill related to the acquisition of Bay View Funding was tested separately for
impairment under this analysis. No events or circumstances since the November 30, 2020 annual impairment test were
noted that would indicate it was more likely than not a goodwill impairment exists, for either the Company’s banking or
factoring reporting units.
The following table summarizes the carrying amount of goodwill by segment at December 31, 2020 and 2019:
December 31,
2020
2019
(Dollars in thousands)
Banking . . . . . . . . . . . . . . . . . . . . . . $
Factoring . . . . . . . . . . . . . . . . . . . . .
Total Goodwill . . . . . . . . . . . . $
154,587
13,044
167,631
$
$
154,376
13,044
167,420
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Other Intangible Assets
The Company’s intangible assets are summarized as follows for the periods indicated:
December 31, 2020
Core deposit intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Customer relationship and brokered relationship
intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Below market leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Gross
Carrying
Amount
Accumulated
Amortization
(Dollars in thousands)
(9,153) $
Total
15,870
25,023 $
1,900
770
27,693 $
(1,171)
(705)
(11,029) $
729
65
16,664
December 31, 2019
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Core deposit intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Customer relationship and brokered relationship
intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Below market leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Gross
Carrying
Amount
Accumulated
Amortization
(Dollars in thousands)
(5,846) $
25,023 $
1,900
770
27,693 $
(981)
(451)
(7,278) $
Total
19,177
919
319
20,415
Estimated amortization expense for each of the next five years and thereafter is as follows:
Presidio Presidio American American Tri-Valley Tri-Valley
United
United
Core
Above
Deposit Market Deposit
Intangible Lease
Core
Intangible
Below
Core
Market Deposit
Lease
Intangible
Below
Market
Lease
Year
Focus
Core
Deposit
Intangible
Bay View Funding
Customer &
Brokered
Relationship
Intangible
Total
Amortization
Expense
(Dollars in thousands)
2021 . . . . . . $ 1,447 $
1,225
2022 . . . . . .
1,118
2023 . . . . . .
1,026
2024 . . . . . .
970
2025 . . . . . .
Thereafter . .
3,211
$ 8,997 $
(20) $
(20)
(20)
(13)
—
—
(73) $
602 $
553
521
499
478
1,042
3,695 $
(21) $
—
—
—
—
—
(21) $ 1,112 $
184 $
167
158
152
145
306
18 $
18
18
18
18
69
596 $
502
420
346
202
—
159 $ 2,066 $
190 $
190
190
159
—
—
729 $
2,996
2,635
2,405
2,187
1,813
4,628
16,664
Impairment testing of the intangible assets is performed at the individual asset level. Impairment exists if the
carrying amount of the asset is not recoverable and exceeds its fair value at the date of the impairment test. For intangible
assets, estimates of expected future cash flows (cash inflows less cash outflows) that are directly associated with an
intangible asset are used to determine the fair value of that asset. Management makes certain estimates and assumptions
in determining the expected future cash flows from core deposit and customer relationship intangibles including account
attrition, expected lives, discount rates, interest rates, servicing costs and other factors. Significant changes in these
estimates and assumptions could adversely impact the valuation of these intangible assets. If an impairment loss exists,
the carrying amount of the intangible asset is adjusted to a new cost basis. The new cost basis is then amortized over the
remaining useful life of the asset. Based on its assessment, management concluded that there was no impairment of
intangible assets at December 31, 2020 and December 31, 2019.
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10) Deposits
The following table presents the scheduled maturities of all time deposits for the next five years:
2021 . . . . . . . . . . . . . . . . $
2022 . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . $
(Dollars in thousands)
138,100
10,255
4,126
435
491
153,407
Time deposits of $250,000 and over were $103,746,000 and $99,882,000 at December 31, 2020 and 2019,
respectively. At December 31, 2020, Certificate of Deposit Account Registry Service (“CDARS”) deposits totaled
$23,911,000 which were comprised of money market deposits of $663,000, and interest-bearing demand deposits of
$18,614,000, (which have no scheduled maturity date, and therefore, are excluded from the table above), and time deposits
of $4,634,000, (which are included in the table above). At December 31, 2019, CDARS deposits totaled $28,847,000,
which were comprised of money market deposits of $2,171,000, and interest-bearing demand deposits of $12,885,000,
(which have no scheduled maturity date, and therefore, are excluded from the table above), and time deposits of
$13,791,000, (which are included in the table above). The CDARS program allows customers with deposits in excess of
FDIC-insured limits to obtain full coverage on time deposits through a network of banks within the CDARS program.
Deposits gathered through these programs are not considered brokered deposits under current regulatory reporting
guidelines.
Deposits from executive officers, directors, and their affiliates were $4,491,000 and $12,636,000 at December 31,
2020 and 2019, respectively.
11) Borrowing Arrangements
Federal Home Loan Bank Borrowings, Federal Reserve Bank Borrowings, and Available Lines of Credit
HBC maintains a collateralized line of credit with the FHLB of San Francisco. Under this line, the Company can
borrow from the FHLB on a short-term (typically overnight) or long-term (over one year) basis. As of December 31, 2020,
and December 31, 2019, HBC had no overnight borrowings from the FHLB. HBC had $232,632,000 of loans and pledged
to the FHLB as collateral on a line of credit of $160,523,000 at December 31, 2020. HBC also had $3,202,000 of securities
pledged to the FHLB as collateral on an available line of credit of $3,041,000 at December 31, 2020, none of which was
outstanding. HBC had $272,879,000 of loans and no securities pledged to the FHLB as collateral on a line of credit of
$228,103,000 at December 31, 2019.
HBC can also borrow from the FRB’s discount window. HBC had approximately $921,373,000 of loans pledged
to the FRB as collateral on an available line of credit of approximately $528,064,000 at December 31, 2020, none of which
was outstanding. HBC had approximately $726,709,000 of loans pledged to the FRB as collateral on an available line of
credit of approximately $408,401,000 at December 31, 2019, none of which was outstanding
At December 31, 2020, HBC had Federal funds purchase arrangements available of $80,000,000. There were no
Federal funds purchased outstanding at December 31, 2020 and 2019.
HCC has a $10,000,000 line of credit with a correspondent bank, of which none was outstanding at December 31,
2020. HCC had a $5,000,000 line of credit with a correspondent bank, of which none was outstanding at December 31,
2019.
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, 2020, and 2019.
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Subordinated Debt
On May 26, 2017, the Company completed an underwritten public offering of $40,000,000 aggregate principal
amount of its fixed-to-floating rate subordinated notes (“Subordinated Debt”) due June 1, 2027. The Subordinated Debt
initially bears a fixed interest rate of 5.25% per year. Commencing on June 1, 2022, the interest rate on the Subordinated
Debt resets quarterly to the three-month LIBOR rate plus a spread of 336.5 basis points, payable quarterly in arrears.
Interest on the Subordinated Debt is payable semi-annually on June 1st and December 1st of each year through June 1,
2022 and quarterly thereafter on March 1st, June 1st, September 1st and December 1st of each year through the maturity
date or early redemption date. The Company, at its option, may redeem the Subordinated Debt, in whole or in part, on
any interest payment date on or after June 1, 2022 without a premium. Unamortized debt issuance cost totaled $260,000
at December 31, 2020. See “LIBOR Transition and Phase–Out” above.
The Company acquired $10,000,000 of subordinated debt from the Presidio transaction with an interest rate of
8%, which was redeemed on December 19, 2019. As a result of the redemption of the Presidio subordinated debt, the
Company paid a pre-payment penalty of $300,000 during the fourth quarter of 2019.
12) Income Taxes
Income tax expense (benefit) consisted of the following for the year ended December 31, as follows:
Currently payable tax:
Federal . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . .
Total currently payable . . . . . . . . . .
Deferred tax expense (benefit):
Federal . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . .
$
$
2020
2019
(Dollars in thousands)
2018
9,630
5,828
15,458
(932)
(757)
(1,689)
13,769
$
$
7,631
4,689
12,320
2,200
1,331
3,531
15,851
$
$
9,187
5,416
14,603
(1,133)
(146)
(1,279)
13,324
The effective tax rate differs from the Federal statutory rate for the years ended December 31, as follows:
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2020 2019 2018
Statutory Federal income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.0 % 21.0 % 21.0 %
State income taxes, net of federal tax benefit . . . . . . . . . . . . . . . . . . . . . . 8.2 % 8.5 % 8.5 %
Low income housing credits, net of investment losses . . . . . . . . . . . . . . (0.5)% (0.5)% (0.8) %
Increase in cash surrender value of life insurance . . . . . . . . . . . . . . . . . . (0.8)% (0.5)% (0.5) %
0.6 % (0.3)% (0.9) %
Stock option/restricted stock windfall tax benefit . . . . . . . . . . . . . . . . . .
Non-taxable interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.8)% (0.8)% (0.9) %
Split-dollar term insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.1 % 0.1 % 0.1 %
Merger cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.0 % 0.5 % 0.5 %
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.3 % 0.1 % 0.4 %
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28.1 % 28.1 % 27.4 %
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Deferred tax assets and liabilities that result from the tax effects of temporary differences between the carrying
amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes at
December 31, are as follows:
2020
2019
(Dollars in thousands)
Deferred tax assets:
Allowance for credit losses on loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,827 $ 7,231
1,647
Lease accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,901
Defined postretirement benefit obligation . . . . . . . . . . . . . . . . . . . . . . . .
2,562
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,662
Federal net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . .
1,636
Stock compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
954
State income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,489
California net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . .
695
Premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
61
Nonaccrual interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
75
Split-dollar life insurance benefit plan . . . . . . . . . . . . . . . . . . . . . . . . . .
57
Tax credit carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
654
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30,624
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,537
10,419
2,896
2,846
1,894
1,142
1,106
459
101
80
57
469
44,833
Deferred tax liabilities:
Lease accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
I/O strips . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,647)
(1,842)
(772)
(1,321)
(289)
(177)
(144)
(130)
(6,322)
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28,221 $ 24,302
(10,537)
(1,820)
(1,764)
(1,388)
(689)
(166)
(87)
(161)
(16,612)
At December 31, 2020, the Company's federal net operating loss (“NOL”) carryforwards were $13,553,000 and
the Company's California net operating loss carryforwards were $12,903,000. These amounts are attributable to the merger
transactions. The realization of these NOL carryforwards for Federal and State tax purposes are limited on the amount of
net operating losses that can be utilized annually under the current tax law. The Company does not believe that its annual
limitation on each acquisition will impact the ultimate deductibility of the NOL carryforwards. The State tax credit
carryforwards, net of Federal tax effects, were $72,567 as of December 31, 2020 which will begin to expire in 2022. Since
the Company will be able to fully utilize the net operating loss carryforwards before they begin to expire in 2029, no
valuation allowance is required against the deferred tax assets.
Under generally accepted accounting principles, a valuation allowance is required if it is “more likely than not”
that a deferred tax asset 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. As of December 31, 2020 and 2019 the Company’s recorded amount of uncertain
tax positions was not considered significant for financial reporting and the Company does not expect this amount to
significantly increase or decrease in the next twelve months.
At December 31, 2020, and December 31, 2019, the Company had net deferred tax assets of $28,221,000 and
$24,302,000, respectively. At December 31, 2020, the Company determined that a valuation allowance for deferred tax
assets was not necessary.
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The Company and its subsidiaries are subject to U.S. Federal income tax as well as income tax of the State of
California. The Company is no longer subject to examination by Federal and state taxing authorities for years before 2017,
and by the State of California taxing authority for years before 2016.
The following table reflects the carrying amounts of the low income housing investments included in accrued
interest receivable and other assets, and the future commitments included in accrued interest payable and other liabilities
for the periods indicated:
Low income housing investments . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Future commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
5,246 $
596 $
6,126
625
December 31, December 31,
2019
2020
(Dollars in thousands)
The Company expects $46,000 of the future commitments to be paid in 2021, and $550,000 in 2022 through
2025.
For tax purposes, the Company recognized low income housing tax credits of $839,000 and $511,000 for the
years ended December 31, 2020 and December 2019, respectively, and low income housing investment expense of
$850,000 and $520,000, respectively. The Company recognizes low income housing investment expenses as a component
of income tax expense.
13) Equity Plan
The Company maintained an Amended and Restated 2004 Equity Plan (the “2004 Plan”) for directors, officers,
and key employees. The 2004 Plan was terminated on May 23, 2013. The Company’s shareholders approved the 2013
Equity Incentive Plan (the “2013 Plan”). The equity plans provide for the grant of incentive and nonqualified stock options
and restricted stock. The equity plans provide that the option price for both incentive and nonqualified stock options will
be determined by the Board of Directors at no less than the fair value at the date of grant. Options granted vest on a
schedule determined by the Board of Directors at the time of grant. Generally options vest over four years. All options
expire no later than ten years from the date of grant. Restricted stock is subject to time vesting. In 2020, the Company
granted 329,500 shares of nonqualified stock options and 168,117 shares of restricted stock subject to time vesting
requirements. There were 2,409,062 shares available for the issuance of equity awards under the 2013 Plan as of
December 31, 2020.
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The Presidio equity plans were assumed by the Company and the outstanding options issued under the Presidio
equity plans were converted into the right to receive the Company’s shares at the exercise price pursuant to the formula
defined in the merger agreement. Consideration for the assumed Presidio stock options exchanged for 1,176,757 shares of
the Company’s stock options totaled $7,426,000.
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Stock option activity under the equity plans is as follows:
Total Stock Options
Outstanding at January 1, 2020 . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2020 . . . . . . . . . . . . . . .
Vested or expected to vest . . . . . . . . . . . . . . . . . . . . . . . . .
Exercisable at December 31, 2020 . . . . . . . . . . . . . . . . . .
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life (Years)
Aggregate
Intrinsic
Value
Number
of Shares
$
$
$
$
$
2,712,846
329,500
(381,184)
(114,341)
2,546,821
2,394,012
2,017,899
8.80
9.11
4.50
12.93
9.30
5.43
5.43
4.60
$
$
$
3,473,312
3,264,913
3,473,312
Information related to the equity plans for each of the last three years:
Intrinsic value of options exercised . . . . . . . . . . . . . . . . . . . . . . . . $ 2,258,245
Cash received from option exercise . . . . . . . . . . . . . . . . . . . . . . . . $ 1,713,737
63,124
Tax benefit realized from option exercises . . . . . . . . . . . . . . . . . . . $
1.15
Weighted average fair value of options granted . . . . . . . . . . . . . . . $
2020
December 31,
2019
$ 1,618,615
$ 1,626,113
$ 258,037
1.91
$
2018
$ 1,844,909
$ 2,667,305
$ 534,638
3.03
$
As of December 31, 2020, there was $894,000 of total unrecognized compensation cost related to nonvested stock
options granted under the equity plans. That cost is expected to be recognized over a weighted - average period of
approximately 2.63 years.
The fair value of each option grant is estimated on the date of grant using the Black - Scholes option pricing model
that uses the assumptions noted in the following table, including the weighted average assumptions for the option grants
in each year.
Expected life in months(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Volatility(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average risk-free interest rate(2) . . . . . . . . . . . . . . . .
Expected dividends(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
72
29 %
0.53 %
5.71 %
72
24 %
2.23 %
3.95 %
72
21 %
2.88 %
2.64 %
December 31,
2020
2019
2018
(1) The expected life of employee stock options represents the weighted average period the stock options are expected to
remain outstanding based on historical experience. Volatility is based on the historical volatility of the stock price
over the same period of the expected life of the option.
(2) Based on the U.S. Treasury constant maturity interest rate with a term consistent with the expected life of the option
granted.
(3) Each grant’s dividend yield is calculated by annualizing the most recent quarterly cash dividend and dividing that
amount by the market price of the Company’s common stock as of the grant date
The Company estimates the impact of forfeitures based on historical experience. Should the Company’s current
estimate change, additional expense could be recognized or reversed in future periods. The Company issues authorized
shares of common stock to satisfy stock option exercises.
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Restricted stock activity under the equity plans is as follows:
Total Restricted Stock Award
Nonvested shares at January 1, 2020 . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonvested shares at December 31, 2020 . . . . . . . . . . . . . . .
Weighted
Average Grant
Date Fair
Value
$
$
$
$
$
11.23
9.20
13.19
—
10.83
Number
of Shares
239,453
168,117
(108,870)
—
298,700
As of December 31, 2020, there was $2,198,000 of total unrecognized compensation cost related to nonvested
restricted stock awards granted under the 2013 Plan. The cost is expected to be recognized over a weighted-average period
of approximately 1.76 years.
The Company has two share based compensation plans. Total compensation cost has been charged against income
for those plans was $2,248,000, $1,924,000, $1,817,000, for 2020, 2019, and 2018, respectively. The total income tax
expense was $301,000 for the year ended December 31, 2020. The total income tax benefit was ($146,000), and
($424,000) for the years ended December 31, 2019, and 2018, respectively.
14) Benefit Plans
401(k) Savings Plan
The Company offers a 401(k) savings plan that allows employees to contribute up to a maximum percentage of
their compensation, as established by the Internal Revenue Code. The Company made a discretionary matching
contribution of up to $3,000 for each employee’s contributions in 2020 and 2019. Contribution expense was $942,000,
$934,000, and $749,000 in 2020, 2019 and 2018, respectively.
Employee Stock Ownership Plan
The Company sponsors a non - contributory employee stock ownership plan (“ESOP”). To participate in this plan,
an employee must have worked at least 1,000 hours during the year and must be employed by the Company at year - end.
Employer contributions to the ESOP are discretionary. The Company has suspended contributions to the ESOP since 2010.
The Plan was “frozen” as of January 1, 2019. At December 31, 2020, the ESOP owned 101,231 shares of the Company’s
common stock.
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Deferred Compensation Plan
The Company has a nonqualified deferred compensation plan for some of its employees. Under the deferred
compensation plan, an employee may defer up to 100% of their bonus and 50% of their regular salary into a deferred
account. Amounts deferred are invested in a portfolio of approved investment choices as directed by the employee.
Amounts deferred by employees to the deferred compensation plan will be distributed at a future date they have selected
or upon termination of employment. There were eight and five employees who elected to participate in the deferred
compensation plan during 2020 and 2019, respectively.
Nonqualified Defined Benefit Pension Plan
The Company has a supplemental retirement plan (“SERP”) covering some current and some former key
executives and directors. The SERP is an unfunded, nonqualified defined benefit plan. The combined number of active
and retired/terminated participants in the SERP was 53 at December 31, 2020. The defined benefit represents a stated
amount for key executives and directors that generally vests over nine years and is reduced for early retirement. The
projected benefit obligation is included in “Accrued interest payable and other liabilities” on the consolidated balance
sheets. The SERP has no assets and the projected benefit obligation is unfunded. The measurement date of the SERP is
December 31.
147
The following table sets forth the SERP’s status at December 31:
Change in projected benefit obligation:
Projected benefit obligation at beginning of year . . . . . . . . . . . . . . . . . . . $ 33,689 $ 26,781
Projected benefit obligation of SERP agreements acquired from
2020
2019
(Dollars in thousands)
Presidio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plan amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,541
263
4,182
1,059
(1,137)
—
Projected benefit obligation at end of year . . . . . . . . . . . . . . . . . . . . . . . $ 35,404 $ 33,689
—
492
3,008
935
(3,118)
398
Amounts recognized in accumulated other comprehensive loss:
Net actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,445 $
9,714
Weighted - average assumptions used to determine the benefit obligation at year - end:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.26 % 3.01 %
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N/A
N/A
2020 2019
Estimated benefit payments over the next ten years, which reflect anticipated future events, service and other
assumptions, are as follows:
Year
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2026 to 2030 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated
Benefit
Payments
(Dollars in thousands)
2,123
$
1,814
1,918
1,954
2,026
11,465
The components of pension cost for the SERP follow:
2020
2019
(Dollars in thousands)
Components of net periodic benefit cost:
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of prior transition obligation . . . . . . . . . . . . . .
Amortization of net actuarial loss . . . . . . . . . . . . . . . . . . . . . .
Accelerated benefits for Presidio SERP agreements
due to change in control . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net periodic benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . $
$
492
935
299
387
—
2,113
$
Amount recognized in other comprehensive income . . . . . . . . . $
1,924
$
263
1,059
—
184
1,465
2,971
2,847
The components of net periodic benefit cost other than the service cost component are included in the line item
“other noninterest expense” in the Consolidated Statements of Income. The estimated net actuarial loss and prior service
cost for the SERP that will be amortized from Accumulated Other Comprehensive Loss into net periodic benefit cost over
the next fiscal year are $643,000 as of December 31, 2020.
148
Net periodic benefit cost for the years ended December 31, 2020 and 2019 were determined using the following
assumption:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.01 %
N/A
2020
2019
4.03 %
N/A
Split - Dollar Life Insurance Benefit Plan
The Company maintains life insurance policies for some current and some former directors and officers that are
subject to split - dollar life insurance agreements, some of which continues after the participant’s employment and
retirement. The policies acquired from Focus and Presidio do not include a post retirement benefit. All participants are
fully vested in their split - dollar life insurance benefits. The accrued benefit liability for the split - dollar insurance
agreements represents either the present value of the future death benefits payable to the participants’ beneficiaries or the
present value of the estimated cost to maintain life insurance, depending on the contractual terms of the participant’s
underlying agreement.
The split - dollar life insurance projected benefit obligation is included in “Accrued interest payable and other
liabilities” on the consolidated balance sheets. The measurement date of the split - dollar life insurance benefit plan is
December 31.
The following sets forth the funded status of the split dollar life insurance benefits:
A
n
n
u
a
l
R
e
p
o
r
t
December 31, December 31,
2019
2020
(Dollars in thousands)
Change in projected benefit obligation:
Projected benefit obligation at beginning of year . . . . . . . . . . . . . $
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Projected benefit obligation at end of period . . . . . . . . . . . . . . . . $
8,198 $
246
1,245
9,689 $
6,903
278
1,017
8,198
Amounts recognized in accumulated other comprehensive loss at December 31 consist of:
Net actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Prior transition obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . $
2019
2020
(Dollars in thousands)
5,170 $
970
6,140 $
3,776
1,059
4,835
December 31, December 31,
Weighted - average assumption used to determine the benefit obligation at year - end follow:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020
2.26 %
2019
3.01 %
Components of net periodic benefit cost during the year are:
Amortization of prior transition obligation and actuarial losses . . . . . . $
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net periodic benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(60) $
246
186 $
(96)
278
182
Amount recognized in other comprehensive income . . . . . . . . . . . . . . . $
1,305 $
1,113
2020
2019
(Dollars in thousands)
149
The estimated net actuarial loss and prior transition obligation for the split - dollar life insurance benefit plan that
will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year are
$90,000 as of December 31, 2020 and 2019.
Weighted - average assumption used to determine the net periodic benefit cost:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.01 % 4.03 %
2020 2019
15) Fair Value
Accounting guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of
inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability
to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or
liabilities in active markets; quoted prices for identical assets or liabilities in markets that are not active; or other inputs
that are observable or can be corroborated by observable market data (for example, interest rates and yield curves
observable at commonly quoted intervals, prepayment speeds, credit risks, and default rates).
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions
that market participants would use in pricing an asset or liability.
Financial Assets and Liabilities Measured on a Recurring Basis
The fair values of securities available-for-sale are determined by obtaining quoted prices on nationally recognized
securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to
value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the
securities’ relationship to other benchmark quoted securities (Level 2 inputs). The Company uses matrix pricing (Level 2
inputs) to establish the fair value of its securities available-for-sale.
The fair value of interest - only (“I/O”) strip receivable assets is based on a valuation model used by a third party.
The Company is able to compare the valuation model inputs and results to widely available published industry data for
reasonableness (Level 2 inputs).
Fair Value Measurements Using
Significant
Quoted Prices in
Active Markets for Observable Unobservable
Significant
Other
Balance
Identical Assets
(Level 1)
Inputs
(Level 2)
(Dollars in thousands)
Inputs
(Level 3)
Assets at December 31, 2020
Available-for-sale securities:
Agency mortgage-backed securities . . . . . . . . . . . . . . . $ 175,326
60,448
U.S. Treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
305
I/O strip receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— $ 175,326
—
305
60,448
—
Assets at December 31, 2019
Available-for-sale securities:
Agency mortgage-backed securities . . . . . . . . . . . . . . . $ 284,361
120,464
U.S. Treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
503
I/O strip receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— $ 284,361
—
503
120,464
—
—
—
—
—
—
—
150
Assets and Liabilities Measured on a Non - Recurring Basis
The fair value of collateral dependent loans individually evaluated with specific allocations of the allowance for
credit losses on loans is generally based on recent real estate appraisals. The appraisals may utilize a single valuation
approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely
made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data
available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for
determining fair value. Assets carried at fair value on a non-recurring basis are immaterial.
Foreclosed assets are valued at the time the loan is foreclosed upon and the asset is transferred to foreclosed
assets. The fair value is based primarily on third party appraisals, less costs to sell. The appraisals may utilize a single
valuation approach or a combination of approaches including the comparable sales and income approach. Adjustments are
routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income
data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining
fair value. At December 31, 2020 and December 31, 2019, there were no foreclosed assets on the balance sheet.
The carrying amounts and estimated fair values of financial instruments at December 31, 2020 are as follows:
Estimated Fair Value
Significant
Quoted Prices in
Active Markets for Observable Unobservable
Significant
Other
Carrying
Amounts
Identical Assets
(Level 1)
Inputs
(Level 2)
Inputs
(Level 3)
Total
(Dollars in thousands)
Assets:
Cash and cash equivalents . . . . . . . . . . . . $ 1,131,073 $
Securities available-for-sale . . . . . . . . . .
Securities held-to-maturity . . . . . . . . . . .
Loans
235,774
297,389
(including loans held-for-sale), net . . .
2,576,560
FHLB stock, FRB stock, and other
investments . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . .
I/O strips receivables . . . . . . . . . . . . . . . .
33,522
10,546
305
Liabilities:
1,131,073 $
60,448
—
— $
175,326
304,927
— $ 1,131,073
235,774
—
304,927
—
—
1,699
2,572,993
2,574,692
—
309
—
—
1,512
305
—
8,725
—
N/A
10,546
305
Time deposits . . . . . . . . . . . . . . . . . . . . . . $ 153,407 $
Other deposits . . . . . . . . . . . . . . . . . . . . . .
Subordinated debt . . . . . . . . . . . . . . . . . . .
Accrued interest payable . . . . . . . . . . . . .
3,761,079
39,740
545
— $ 153,740 $
—
—
—
3,761,079
40,340
545
— $ 153,740
3,761,079
—
40,340
—
545
—
A
n
n
u
a
l
R
e
p
o
r
t
151
The carrying amounts and estimated fair values of financial instruments at December 31, 2019 are as follows:
Estimated Fair Value
Significant
Quoted Prices in
Active Markets for Observable Unobservable
Significant
Other
Carrying
Amounts
Identical Assets
(Level 1)
Inputs
(Level 2)
Inputs
(Level 3)
Total
(Dollars in thousands)
`
Assets:
Cash and cash equivalents . . . . . . . . . . . . $
Securities available-for-sale . . . . . . . . . .
Securities held-to-maturity . . . . . . . . . . .
Loans
457,370 $
404,825
366,560
457,370 $
120,464
—
— $
284,361
368,107
— $
—
—
457,370
404,825
368,107
(including loans held-for-sale), net . . .
2,511,611
—
1,052
2,512,277
2,513,329
FHLB stock, FRB stock, and other
investments . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . .
I/O strips receivables . . . . . . . . . . . . . . . .
Liabilities:
29,842
10,915
503
168,034 $
Time deposits . . . . . . . . . . . . . . . . . . . . . . $
Other deposits . . . . . . . . . . . . . . . . . . . . . .
Subordinated debt . . . . . . . . . . . . . . . . . . .
Accrued interest payable . . . . . . . . . . . . .
3,246,734
39,554
707
—
446
—
—
2,218
503
—
8,251
—
N/A
10,915
503
158,704 $
— $
—
—
—
3,246,734
40,404
707
— $
—
—
—
158,704
3,246,734
40,404
707
16) Commitments and Contingencies
Loss Contingencies
Within the ordinary course of our business, we are subject to private lawsuits, government audits, administrative
proceedings and other claims. A number of these claims may exist at any given time, and some of the claims may be pled
as class actions. We could be affected by adverse publicity and litigation costs resulting from such allegations, regardless
of whether they are valid or whether we are legally determined to be liable.
The Company had the following outstanding matters as of February 25, 2021.
•
•
•
In December 2020, Solar Eclipse Investment Fund III, et al v. Heritage Bank of Commerce, et al., was filed
against Heritage, and others, in the Solano County Superior Court for the State of California (“Solar Eclipse”).
Also in December 2020, Solarmore Management Services, Inc. v. Jeff Carpoff et al., (“Solarmore”) filed an
amended complaint in the United States District Court for the Eastern District of California against Heritage and
others. Both of these cases relate to our former deposit relationships with D.C. Solar and their affiliates
(collectively “D.C. Solar”) and its sponsored investment funds. D.C. Solar is a former customer that allegedly
perpetrated a Ponzi scheme and declared bankruptcy. These actions seek unspecified damages and are in an early
phase. We intend to vigorously defend these actions.
In re Double Jump, Inc. is pending in the United States Bankruptcy Court of Nevada and was filed by D.C. Solar
and some of its affiliated entities. One of the chapter 7 trustees has indicated that it may bring an adversary action
against Heritage related to our former deposit relationships with D.C. Solar and its sponsored investment funds.
The parties have agreed to attend a pre-filing mediation.
In November 2020, a present and a former bank employee purporting to represent a class of Bank employees,
have alleged in a lawsuit that the Bank violated the California Labor Code and California Business and
Professions Code, by failing to permit required meal and rest breaks, and failing to provide accurate wage
statements, among other claims. The lawsuit seeks unspecified penalties under the California Private Attorneys
General Act (“PAGA”) in addition to other monetary payments. The case is in the early phase. In February 2021,
152
the Bank was notified of another set of PAGA and potential class claims alleged by letter to the California Labor
and Workforce Development Agency transmitted on behalf of another former Bank employee. The notice to the
California Labor and Workforce Development Agency, which is a prerequisite to a PAGA filing, alleged the
same claims, class, and relief requested that are the subject of the lawsuit filed in November 2020, and disclosed
no new claims. We intend to vigorously defend the filed class and PAGA complaint and any subsequent related
class action and PAGA filing.
The Company makes a provision for a liability relating to legal matters when it is both probable that a liability
has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly
and adjusted to reflect the impacts of negotiations, estimated settlements, legal rulings, advice of legal counsel and other
information and events pertaining to a particular matter. The outcomes of legal proceedings and other contingencies are,
however, inherently unpredictable and subject to significant uncertainties. As a result, the Company is not able to
reasonably estimate the amount or range of possible losses, including losses that could arise as a result of application of
non-monetary remedies, with respect to the contingencies it faces, and the Company’s estimates may not prove to be
accurate.
At this time, we believe that the amount of reasonably possible losses resulting from final disposition of any
pending lawsuits, audits, proceedings and claims will not have a material adverse effect individually or in the aggregate
on our financial position, results of operations or liquidity. It is possible, however, that our future results of operations for
a particular quarter or fiscal year could be impacted by changes in circumstances relating to lawsuits, audits, proceedings
or claims. Legal costs related to such claims are expensed as incurred.
Off - Balance Sheet Arrangements
In the normal course of business the Company makes commitments to extend credit to its customers as long as
there are no violations of any conditions established in the contractual arrangements. These commitments are obligations
that represent a potential credit risk to the Company, but are not reflected on the Company’s consolidated balance sheets.
Total unused commitments to extend credit were $1,114,193,000 at December 31, 2020, compared to $1,120,638,000 at
December 31, 2019. Unused commitments represented 42% outstanding gross loans at December 31, 2020, and 44% at
December 31, 2019.
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 lines of credit and letters
of credit will ever be fully utilized. The following table presents the Company’s commitments to extend credit for the
periods indicated:
A
n
n
u
a
l
R
e
p
o
r
t
Unused lines of credit and commitments to
make loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Standby letters of credit . . . . . . . . . . . . . . . . . . . . . . .
2020
Fixed
Rate
Variable
Rate
December 31,
Fixed
Rate
Total
(Dollars in thousands)
2019
Variable
Rate
Total
$
$
121,560 $
3,049
124,609 $
970,614 $ 1,092,174 $
147,372 $
18,970
22,019
11,445
989,584 $ 1,114,193 $
158,817 $
951,206 $ 1,098,578
22,060
961,821 $ 1,120,638
10,615
For the year ended December 31, 2020, there was an increase of $192,000 to the allowance for credit losses on
loans for the Company’s off-balance sheet credit exposures, compared to the year ended December 31, 2019. The
allowance for losses for the Company’s off-balance sheet credit exposures was $1,078,000 at December 31, 2020. As of
the implementation date, there was a reduction of $207,000 to allowance for credit losses on loans recorded for the
Company’s off-balance sheet credit exposures. The offsetting increase of $399,000 in 2020 in the allowance for credit
losses on loans for off-balance sheet credit exposures was driven by increased loss factors in the CECL model for all loan
segments with off-balance sheet exposures which resulted from deterioration in the economic forecast assumptions used
in the CECL model.
153
17) Shareholders’ Equity and Earnings Per Share
Authorized Shares of Common Stock — At a Special Meeting of Shareholders on August 27, 2019, the
Company’s shareholders approved an amendment to the Company’s articles of incorporation to increase the number of
authorized shares of common stock from 60,000,000 to 100,000,000 shares of common stock.
Earnings Per Share — Basic earnings per common share is computed by dividing net income, less dividends
and discount accretion on preferred stock, by the weighted average common shares outstanding. Diluted earnings per share
reflect potential dilution from outstanding stock options using the treasury stock method. There were 1,524,757 stock
options for the year ended December 31, 2020, considered to be antidilutive and excluded from the computation of diluted
earnings per share. There were 789,065 stock options for the year ended December 31, 2019, considered to be antidilutive
and excluded from the computation of diluted earnings per share. There were 534,106 stock options for the year ended
December 31, 2018, considered to be antidilutive and excluded from the computation of diluted earnings per share. A
reconciliation of these factors used in computing basic and diluted earnings per common share is as follows:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Weighted average common shares outstanding for basic
earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dilutive potential common shares . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares used in computing diluted earnings per
2020
Year Ended December 31,
2019
(Dollars in thousands, except per share amounts)
35,299
40,461
$
$
2018
$ 35,331
59,478,343
690,796
46,684,384
1,221,845
41,469,211
713,728
common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
60,169,139
47,906,229
42,182,939
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
0.59
0.59
$
$
0.87
0.84
$
$
0.85
0.84
18) Capital Requirements
The Company and its subsidiary bank are subject to various regulatory capital requirements administered by the
banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory—and possibly additional
discretionary—actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial
statements and operations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and HBC must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and
certain off balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are
also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. There are no
conditions or events since December 31, 2020, that management believes have changed the categorization of the Company
or HBC as “well-capitalized.”
The Company’s consolidated capital ratios and the HBC’s capital ratios exceeded the regulatory guidelines for a
well-capitalized financial institution under the Basel III regulatory requirements at December 31, 2020.
As permitted by the interim final rule issued on March 27, 2020 by our federal regulatory agency, we elected the
option to delay the estimated impact of the adoption of the CECL Standard in our regulatory capital for two years. This
two-year delay is in addition to the three-year transition period the agency had already made available. The adoption will
delay the effects of CECL on our regulatory capital for the next two years, after which the effects will be phased-in over
a three-year period from January 1, 2022 through December 31, 2024. Under the interim final rule, the amount of
adjustments to regulatory capital deferred until the phase-in period include both the initial impact of adoption of the CECL
Standard at January 1, 2020 and 25% of subsequent changes in our allowance for credit losses during each quarter of the
two-year period ending December 31, 2021.
Quantitative measures established by regulation to help ensure capital adequacy require the Company and HBC
to maintain minimum amounts and ratios (set forth in the tables below) of total, Tier 1 capital, and common equity Tier 1
capital (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, 2020 and December 31, 2019, the Company and HBC met all
154
capital adequacy guidelines to which they were subject.
The Company’s consolidated capital amounts and ratios are presented in the following table, together with capital
adequacy requirements, under the Basel III regulatory requirements as of December 31, 2020, and December 31, 2019.
As of December 31, 2020
Total Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(to risk-weighted assets)
Tier 1 Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(to risk-weighted assets)
Common Equity Tier 1 Capital . . . . . . . . . . . . . . . . . .
(to risk-weighted assets)
Tier 1 Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(to average assets)
Actual
Required For
Capital
Adequacy
Purposes
Under Basel III
Amount
Ratio
Amount
Ratio (1)
(Dollars in thousands)
$
483,870
16.5 %
$
307,067
10.5 %
$
410,307
14.0 %
$
248,578
8.5 %
$
410,307
14.0 %
$
204,711
7.0 %
$
410,307
9.1 %
$
180,281
4.0 %
(1) Includes 2.5% capital conservation buffer, except the Tier 1 Capital to average assets ratio.
Actual
Required For
Capital
Adequacy
Purposes
Under Basel III
Amount
Ratio
Amount
Ratio (1)
(Dollars in thousands)
$
457,158
14.6 %
$
329,306
10.5 %
$
393,432
12.5 %
$
266,581
8.5 %
$
393,432
12.5 %
$
219,538
7.0 %
$
393,432
9.7 %
$
161,677
4.0 %
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As of December 31, 2019
Total Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(to risk-weighted assets)
Tier 1 Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(to risk-weighted assets)
Common Equity Tier 1 Capital . . . . . . . . . . . . . . . . . .
(to risk-weighted assets)
Tier 1 Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(to average assets)
(1) Includes 2.5% capital conservation buffer, except the Tier 1 Capital to average assets ratio.
HBC’s actual capital amounts and ratios are presented in the following table, together with capital adequacy
requirements, under the Basel III regulatory requirements as of December 31, 2020, and December 31, 2019.
155
Actual
To Be Well-Capitalized
Under Basel III PCA Regulatory
Requirements
Required For
Capital
Adequacy
Purposes
Under Basel III
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
Amount
Ratio (1)
As of December 31, 2020
Total Capital . . . . . . . . . . . . . . . . . . . . . . . $ 461,933 15.8 % $
(to risk-weighted assets)
Tier 1 Capital . . . . . . . . . . . . . . . . . . . . . . . $ 428,109 14.6 % $
(to risk-weighted assets)
Common Equity Tier 1 Capital . . . . . . . . $ 428,109
(to risk-weighted assets)
Tier 1 Capital . . . . . . . . . . . . . . . . . . . . . . . $ 428,109
(to average assets)
14.6 % $
9.5 % $
292,258
10.0 % $ 306,871
10.5 %
233,806
8.0 % $ 248,419
8.5 %
189,968
6.5 % $ 204,580
7.0 %
225,263
5.0 % $ 180,211
4.0 %
(1) Includes 2.5% capital conservation buffer, except the Tier 1 Capital to average assets ratio.
Actual
To Be Well-Capitalized
Under Basel III PCA Regulatory
Requirements
Required For
Capital
Adequacy
Purposes
Under Basel III
Amount
Ratio
Amount
Ratio
Amount
Ratio (1)
(Dollars in thousands)
As of December 31, 2019
Total Capital . . . . . . . . . . . . . . . . . . . . . . $ 435,757 13.9 % $
(to risk-weighted assets)
Tier 1 Capital . . . . . . . . . . . . . . . . . . . . . . $ 411,585 13.1 % $
(to risk-weighted assets)
Common Equity Tier 1 Capital . . . . . . . $ 411,585
(to risk-weighted assets)
Tier 1 Capital . . . . . . . . . . . . . . . . . . . . . . $ 411,585 10.2 % $
(to average assets)
13.1 % $
313,485
10.0 % $ 329,159
10.5 %
250,788
8.0 % $ 266,462
8.5 %
203,765
6.5 % $ 219,439
7.0 %
202,013
5.0 % $ 161,611
4.0 %
(1) Includes 2.5% capital conservation buffer, except the Tier 1 Capital to average assets.
The Subordinated Debt, net of unamortized issuance costs, totaled $39,740,000 at December 31, 2020, and
qualifies as Tier 2 capital for the Company under the guidelines established by the Federal Reserve Bank.
Under California General Corporation Law, the holders of common stock are entitled to receive dividends when
and as declared by the Board of Directors, out of funds legally available. The California Financial Code provides that a
state licensed bank may not make a cash distribution to its shareholders in excess of the lesser of the following: (i) the
bank’s retained earnings; or (ii) the bank’s net income for its last three fiscal years, less the amount of any distributions
made by the bank to its shareholders during such period. However, a bank, with the prior approval of the Commissioner
of the California Department of Business Oversight—Division of Financial Institutions (“DBO”) may make a distribution
to its shareholders of an amount not to exceed the greater of (i) a bank’s retained earnings; (ii) its net income for its last
fiscal year; or (iii) its net income for the current fiscal year. Also with the prior approval of the Commissioner of the DBO
and the shareholders of the bank, the bank may make a distribution to its shareholders, as a reduction in capital of the bank.
In the event that the Commissioner determines that the shareholders’ equity of a bank is inadequate or that the making of
a distribution by a bank would be unsafe or unsound, the Commissioner may order a bank to refrain from making such a
proposed distribution. As of December 31, 2020, HBC would not be required to obtain regulatory approval, and the amount
available for cash dividends is $21,996,000. Similar restrictions applied to the amount and sum of loan advances and other
transfers of funds from HBC to the parent company. HBC distributed to HCC dividends of $32,000,000 and $22,500,000
for the years ended December 31, 2020 and 2019, respectively.
156
19) Revenue Recognition
On January 1, 2018, the Company adopted ASU No. 2014-09 (Topic 606) and all subsequent ASUs that modified
Topic 606. Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and
securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial
guarantees, gain on sale of securities, bank-owned life insurance, gain on sales of SBA loans, and certain credit card fees
are also not in scope of the new guidance. Topic 606 is applicable to noninterest revenue streams such as deposit related
fees, interchange fees, and merchant income. However, the recognition of these revenue streams did not change
significantly upon adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with
customers. The following noninterest income revenue streams are in-scope of Topic 606:
Service charges and fees on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed
business and public checking accounts), monthly service fees, check orders, and other deposit account related fees. We
sometimes charge customers fees that are not specifically related to the customer accessing its funds, such as account
maintenance or dormancy fees. The amount of deposit fees assessed varies based on a number of factors, such as the type
of customer and account, the quantity of transactions, and the size of the deposit balance. We charge, and in some
circumstances do not charge, fees to earn additional revenue and influence certain customer behavior. An example would
be where we do not charge a monthly service fee, or do not charge for certain transactions, for customers that have a high
deposit balance. Deposit fees are considered either transactional in nature (such as wire transfers, nonsufficient fund fees,
and stop payment orders) or non-transactional (such as account maintenance and dormancy fees). These fees are
recognized as earned or as transactions occur and services are provided. Check orders and other deposit account related
fees are largely transactional based and, therefore, the Company’s performance obligation is satisfied, and related revenue
recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the
following month through a direct charge to customers’ accounts.
The Company currently accounts for sales of foreclosed assets in accordance with Topic 360-20. In most cases
the Company will seek to engage a real estate agent for the sale of foreclosed assets immediately upon foreclosure.
However, in some cases, where there is clear demand for the property in question, the Company may elect to allow for a
marketing period on no more than six months to attempt a direct sale of the property. We generally recognize the sale, and
any associated gain or loss, of a real estate property when control of the property transfers. Any gains or losses from the
sale are recorded to noninterest income/expense.
The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic
606, for the periods indicated:
A
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l
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o
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t
2020
Year Ended
December 31,
2019
(Dollars in thousands)
2018
Noninterest Income In-scope of Topic 606:
Service charges and fees on deposit accounts . . . . . . . . . . . . . . . . . . . . $ 2,859 $ 4,510 $ 4,113
—
Gain on the disposition of foreclosed assets . . . . . . . . . . . . . . . . . . . . .
4,113
Total noninterest income in-scope of Topic 606 . . . . . . . . . . . . . . . .
5,461
Noninterest Income Out-of-scope of Topic 606 . . . . . . . . . . . . . . . . . . .
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,922 $ 10,244 $ 9,574
791
3,650
6,272
—
4,510
5,734
157
20) Noninterest Expense
The following table indicates the various components of the Company’s noninterest expense in each category for
the periods indicated:
2020
Year Ended December 31,
2019
(Dollars in thousands)
$
$
Salaries and employee benefits . . . . . . . . . . . . . . . $
Occupancy and equipment . . . . . . . . . . . . . . . . . . .
Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangible assets . . . . . . . . . . . . .
Software subscriptions . . . . . . . . . . . . . . . . . . . . . .
Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance expense . . . . . . . . . . . . . . . . . . . . . . . . .
Supplemental retirement plan cost . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest expense . . . . . . . . . . . . . . . . . $
50,927
8,018
5,338
3,751
3,102
2,770
2,286
1,724
11,595
89,511
50,754
6,647
3,259
2,739
2,397
2,890
1,864
1,240
13,108
84,898
$
$
2018
43,762
5,411
1,969
1,943
2,343
1,978
1,685
202
16,228
75,521
The following table presents the merger-related costs by category for the periods indicated:
December 31, December 31, December 31,
For the Year Ended
2020
2019
(Dollars in thousands)
6,580 $
4,500
11,080 $
356 $
2,245
2,601 $
2018
3,569
5,598
9,167
Salaries and employee benefits . . . . . . . . . . . . . $
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total merger-related costs . . . . . . . . . . . . . $
158
21) Business Segment Information
The following presents the Company’s operating segments. The Company operates through two business
segments: Banking segment and Factoring segment. Transactions between segments consist primarily of borrowed funds.
Intersegment interest expense is allocated to the Factoring segment based on the Company’s prime rate and funding costs.
The provision for loan loss is allocated based on the segment’s allowance for loan loss determination which considers the
effects of charge-offs. Noninterest income and expense directly attributable to a segment are assigned to it. Taxes are paid
on a consolidated basis and allocated for segment purposes. The Factoring segment includes only factoring originated by
Bay View Funding.
Year Ended December 31, 2020
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Intersegment interest allocations . . . . . . . . . . . . . . . .
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for credit losses on loans . . . . . . . . . . . . . .
Net interest income after provision . . . . . . . . . . . .
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expense (2) . . . . . . . . . . . . . . . . . . . . . . .
Intersegment expense allocations . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Banking (1)
Consolidated
Factoring
(Dollars in thousands)
10,727 $
(923)
—
9,804
305
9,499
645
6,362
(404)
3,378
999
2,379 $
139,744 $
923
8,581
132,086
12,928
119,158
9,277
83,149
404
45,690
12,770
32,920 $
150,471
—
8,581
141,890
13,233
128,657
9,922
89,511
—
49,068
13,769
35,299
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,567,239 $
Loans, net of deferred fees . . . . . . . . . . . . . . . . . . . . . $ 2,572,060 $
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
154,587 $
66,875 $ 4,634,114
47,201 $ 2,619,261
167,631
13,044 $
(1) Includes the holding company’s results of operations.
(2) The banking segment’s noninterest expense includes merger-related costs of $2,601,000.
159
A
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Year Ended December 31, 2019
Banking (1)
Factoring
Consolidated
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Intersegment interest allocations . . . . . . . . . . . . . . .
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . .
Net interest income after provision . . . . . . . . . . .
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expense (2) . . . . . . . . . . . . . . . . . . . . . .
Intersegment expense allocations . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
130,971 $
1,182
10,847
121,306
517
120,789
9,643
78,159
547
52,820
14,819
38,001 $
(Dollars in thousands)
11,688 $
(1,182)
—
10,506
329
10,177
601
6,739
(547)
3,492
1,032
2,460 $
142,659
—
10,847
131,812
846
130,966
10,244
84,898
—
56,312
15,851
40,461
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,045,801 $
Loans, net of deferred fees . . . . . . . . . . . . . . . . . . . . $ 2,487,864 $
154,376 $
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
63,662 $ 4,109,463
45,980 $ 2,533,844
13,044 $
167,420
(1) Includes the holding company’s results of operations.
(2) The banking segment’s noninterest expense includes merger-related costs of $11,080,000.
Year Ended December 31, 2018
Banking (1)
Factoring
Consolidated
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Intersegment interest allocations . . . . . . . . . . . . . . .
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . .
Net interest income after provision . . . . . . . . . . .
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expense (2) . . . . . . . . . . . . . . . . . . . . . .
Intersegment expense allocations . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
115,147 $
1,856
7,822
109,181
7,224
101,957
8,662
69,164
753
42,208
11,418
30,790 $
(Dollars in thousands)
14,698 $
(1,856)
—
12,842
197
12,645
912
6,357
(753)
6,447
1,906
4,541 $
129,845
—
7,822
122,023
7,421
114,602
9,574
75,521
—
48,655
13,324
35,331
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,028,721 $
Loans, net of deferred fees . . . . . . . . . . . . . . . . . . . . $ 1,832,815 $
70,709 $
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
67,841 $ 3,096,562
53,590 $ 1,886,405
13,044 $
83,753
(1) Includes the holding company’s results of operations.
(2) The banking segment’s noninterest expense includes merger-related costs of $9,167,000.
160
22) Parent Company only Condensed Financial Information
The condensed financial statements of Heritage Commerce Corp (parent company only) are as follows:
Condensed Balance Sheets
December 31,
2020
2019
(Dollars in thousands)
Assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Investment in subsidiary bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
20,378 $
595,681
1,881
617,940 $
20,260
594,868
1,761
616,889
Liabilities and Shareholders' Equity
Subordinated debt, net of issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
39,740 $
311
577,889
617,940 $
39,554
627
576,708
616,889
Condensed Statements of Operations
2020
Year Ended December 31,
2019
(Dollars in thousands)
2018
Dividend from subsidiary bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,000 $ 22,500 $ 17,000
—
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2,315)
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3,030)
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,655
Income before income taxes and equity in net income of subsidiary bank . . . . . .
22,161
Equity in undistributed net income of subsidiary bank . . . . . . . . . . . . . . . . . . . . . . . .
1,515
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 35,299 $ 40,461 $ 35,331
—
(2,321)
(3,263)
26,416
7,255
1,628
121
(2,314)
(3,084)
17,223
21,757
1,481
Condensed Statements of Cash Flows
A
n
n
u
a
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R
e
p
o
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t
2020
Year Ended December 31,
2019
(Dollars in thousands)
2018
Cash flows from operating activities:
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 35,299 $ 40,461 $ 35,331
Adjustments to reconcile net income to net cash provided by operations:
Amortization of restricted stock awards, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in undistributed net income of subsidiary bank . . . . . . . . . . . . . . . . . . . . . .
Net change in other assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,689
(7,255)
(250)
29,483
1,283
(21,757)
12
19,999
1,109
(22,161)
(64)
14,215
Cash flows from financing activities:
Payment of cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(18,464)
2,667
(15,797)
(1,582)
22,940
Cash and cash equivalents, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,378 $ 20,260 $ 21,358
(22,723)
1,626
(21,097)
(1,098)
21,358
(31,079)
1,714
(29,365)
118
20,260
161
23) Quarterly Financial Data (Unaudited)
The following table discloses the Company’s selected unaudited quarterly financial data:
Quarter Ended
12/31/2020 9/30/2020 6/30/2020 3/31/2020
(Dollars in thousands, except per share amounts)
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 36,145 $ 36,252 $ 37,132 $ 40,942
2,362
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
38,580
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,270
Provision (recapture) for credit losses on loans . . . . . . . . . . . . . . . . . . . . .
25,310
Net interest income after provision for credit losses on loans . . . . . . . .
3,193
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25,774
Noninterest expense (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,729
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
868
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,623 $ 11,197 $ 10,618 $ 1,861
1,940
34,205
(1,348)
35,553
2,056
21,557
16,052
4,429
2,087
34,165
197
33,968
2,595
21,168
15,395
4,198
2,192
34,940
1,114
33,826
2,078
21,012
14,892
4,274
Earnings per common share
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.19 $
0.19 $
0.19 $
0.19 $
0.18 $
0.18 $
0.03
0.03
(1) Includes $101,000, $17,000, $59,000, and $2,424,000 pre-tax acquisition costs in the fourth, third, second and first
quarters of 2020, respectively, related to the Presidio merger.
Quarter Ended
12/31/2019 9/30/2019 6/30/2019 3/31/2019
(Dollars in thousands, except per share amounts)
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 42,471 $ 33,250 $ 33,489 $ 33,449
2,407
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
31,042
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,061)
Provision (credit) for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
32,103
Net interest income after provision for loan losses . . . . . . . . . . . . . . . .
2,468
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17,918
Noninterest expense (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,653
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,507
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,685 $ 11,277 $ 11,353 $ 12,146
2,625
30,625
(576)
31,201
2,618
17,909
15,910
4,633
3,242
39,229
3,223
36,006
2,393
30,626
7,773
2,088
2,573
30,916
(740)
31,656
2,765
18,445
15,976
4,623
Earnings per common share
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.10 $
0.10 $
0.26 $
0.26 $
0.26 $
0.26 $
0.28
0.28
(1) Includes $9,879,000, $661,000, and $540,000 pre-tax acquisition costs in the fourth, third, and second quarters of
2019, respectively, related to the Presidio merger.
24) Subsequent Events
On January 28, 2021, the Company announced that its Board of Directors declared a $0.13 per share quarterly
cash dividend to holders of common stock. The dividend will be paid on February 26, 2021 to shareholders of record on
February 12, 2021.
162
Exhibit 31.1
CERTIFICATIONS UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
REGARDING THE ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2020
I, Keith A. Wilton, certify that:
1.
I have reviewed this Annual Report on Form 10-K for the Year Ended December 31, 2020 of Heritage
Commerce Corp;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, 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;
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(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of
an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 5, 2021
/s/ KEITH A. WILTON
Keith A. Wilton
President and Chief Executive Officer
Heritage Commerce Corp
Exhibit 31.2
CERTIFICATIONS UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
REGARDING THE ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2020
I, Lawrence D. McGovern, certify that:
1.
I have reviewed this Annual Report on Form 10-K for the Year Ended December 31, 2020 of Heritage
Commerce Corp;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, 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;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of
an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 5, 2021
/s/ LAWRENCE D. MCGOVERN
Lawrence D. McGovern
Executive Vice President and Chief Financial Officer
Heritage Commerce Corp
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
REGARDING THE ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2020
Exhibit 32.1
In connection with the Annual Report of Heritage Commerce Corp (the “Company”) on Form 10-K for the year
ended December 31, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I,
Keith A. Wilton, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
March 5, 2021
/s/ KEITH A. WILTON
Keith A. Wilton
President and Chief Executive Officer
Heritage Commerce Corp
A
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CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
REGARDING THE ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2020
Exhibit 32.2
In connection with the Annual Report of Heritage Commerce Corp (the “Company”) on Form 10-K for the year
ended December 31, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I,
Lawrence D. McGovern, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
March 5, 2021
/s/ LAWRENCE D. MCGOVERN
Lawrence D. McGovern
Executive Vice President and Chief Financial Officer
Heritage Commerce Corp
Information
Board of Directors
Jack W. Conner, Chair
Ranson W. Webster, Vice Chair
Julianne M. Biagini-Komas
Frank G. Bisceglia
Bruce H. Cabral
Jason DiNapoli
Stephen G. Heitel
Walter T. Kaczmarek
Robert T. Moles
Marina H. Park Sutton
Laura Roden
Executive Management
Walter T. Kaczmarek
President and Chief Executive Officer
Michael E. Benito
Executive Vice President
Business Banking Manager
Margo G. Butsch
Executive Vice President
Chief Credit Officer
Jeffrey L. Javits
Executive Vice President
Chief Information Officer
Robertson Clay Jones
Executive Vice President
President of Community Business
Banking
Lawrence D. McGovern
Executive Vice President
Chief Financial Officer
Teresa L. Powell
Executive Vice President
HOA & Deposit Services
Deborah K. Reuter
Executive Vice President
Chief Risk Officer &
Corporate Secretary
Glen E. Shu
Executive Vice President
President of Specialty Finance Group
May K. Y. Wong
Executive Vice President
Controller
Subsidiary Bank Offices
Heritage Bank of Commerce
San Jose Main
224 Airport Parkway
San Jose, CA 95110
408.947.6900
Danville
387 Diablo Road
Danville, CA 94526
925.314.2851
Fremont
3137 Stevenson Boulevard
Fremont, CA 94538
510.445.0400
Gilroy
7598 Monterey Street, Suite 110
Gilroy, CA 95020
408.842.8310
Hollister
351 Tres Pinos Road, Suite 102A
Hollister, CA 95023
831.637.2152
Livermore
1987 First Street
Livermore, CA 94550
925.791.4360
Los Altos
419 S. San Antonio Road
Los Altos, CA 94022
650.941.9300
Los Gatos
15575 Los Gatos Boulevard,
Suite B
Los Gatos, CA 95032
408.356.6190
Morgan Hill
18625 Sutter Boulevard, Suite 100
Morgan Hill, CA 95037
408.778.2320
Palo Alto
325 Lytton Avenue, Suite 100
Palo Alto, CA 94301
650.321.0500
Pleasanton
300 Main Street
Pleasanton, CA 94566
925.314.2876
Member FDIC
Redwood City
2400 Broadway, Suite 100
Redwood City, CA 94063
650.298.7000
San Francisco
120 Kearny St., Suite 2300
San Francisco, CA 94108
415.229.8400
San Mateo
400 S. EL Camino, Suite 150
San Mateo, CA 94402
650.645.6480
San Rafael
999 Fifth Ave., Suite 100
San Rafael, CA 94901
415.456.6000
Sunnyvale
333 W. El Camino Real, Suite 150
Sunnyvale, CA 94087
650.919.2159
Walnut Creek
1990 N. California Boulevard,
Suite 100
Walnut Creek, CA 94596
925.287.4818
Walnut Creek
Loan Production Office
101 Ygnacio Valley Road, Suite 108
Walnut Creek, CA 94596
925.930.9287
Bay View Funding
Administrative Office
224 Airport Parkway Suite 200
San Jose, CA 95110
650.294.6600
Heritage Commerce Corp
Investor Relations Contact
Deborah K. Reuter
Executive Vice President
Chief Risk Officer &
Corporate Secretary
408.947.6900
Transfer Agent
Equiniti Trust Company
EQ Shareowner Services
1110 Centre Pointe Curve,
Suite 101
Mendota Heights, MN 55120
800.468.9716
Independent Auditors
Crowe LLP
400 Capitol Mall, Suite 1400
Sacramento, CA 95814
916.441.1000
Corporate Counsel
Buchalter
A Professional Corporation
1000 Wilshire Boulevard,
Suite 1500
Los Angeles, CA 90017
213.891.0700
To get further information on
Heritage Commerce Corp, or to
receive regular financial updates,
please visit our website at
HeritageCommerceCorp.com
and click on ‘‘Information Request.’’
CorporateCorporate 224 Airport Parkway | San Jose, CA 95110 | 408.947.6900
HeritageCommerceCorp.com