About Heritage Commerce Corp

Heritage Commerce Corp (HCC) operates as a bank holding company for Heritage Bank of Commerce (HBC or the bank), a multi-community independent bank that provides a full range of commercial banking services to small and medium-sized businesses and their owners, managers, and employees. The company provides a wide range of banking services. The company operates through 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. The company’s market includes the headquarters of a number of technology based companies in the region commonly known as Silicon Valley. CSNK Working Capital Finance Corp. is doing business as Bay View Funding (Bay View Funding). The company’s lending activities are diversified and include commercial, real estate, construction and land development, consumer and Small Business Administration (SBA) guaranteed loans. The company generally lends in markets where it has a physical presence through its branch offices. The company attracts deposits throughout its market area with a customer-oriented product mix, competitive pricing, and convenient locations. The company offers a wide range of deposit products for business banking and retail markets. The company offers a multitude of other products and services to complement its lending and deposit services. In addition, Bay View Funding provides factoring financing throughout the United States. As a bank holding company, the company is subject to the supervision of the Board of Governors of the Federal Reserve System (the Federal Reserve). The company is required to file with the Federal Reserve reports and other information regarding its business operations and the business operations of its subsidiaries. As a California chartered bank, the bank 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. Lending Activities The company offers a diversified mix of business loans encompassing the following loan products: commercial and industrial loans; commercial real estate loans; construction loans; and Small Business Administration (SBA) loans. From time to time the company has purchased single family residential mortgage loans. The company also offers 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). The company encourages relationship banking, obtaining a substantial portion of each borrower’s banking business, including deposit accounts. As of December 31, 2022, the percentage of the company’s total loans for each of the principal areas in which it directed its lending activities were as follows: commercial and industrial loans 16% (including SBA loans, SBA Paycheck Protection Program (PPP) loans, asset-based lending, and factored receivables); commercial real estate loans 51%; land and construction loans 5%; residential mortgage loans 16%; and consumer and other loans (including home equity and multifamily loans) 12%. Commercial and Industrial Loans: The company’s commercial loan portfolio consists of operating secured and unsecured loans advanced for working capital, equipment purchases and other business purposes. The company’s 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. 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. Commercial Real Estate Loans: The commercial real estate (CRE) loan portfolio consists 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 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: The company makes commercial construction loans for rental properties, commercial buildings and homes built by developers on speculative, undeveloped property. The company also makes construction loans for homes and commercial buildings built by owner occupants. The terms of commercial construction loans are made in accordance with the company’s loan policy. At times, the company provides the permanent mortgage financing on its construction loans on income-producing property. Construction loans are interest-only loans during the construction period, which typically do not exceed 18 months. The company reviews and inspects 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. 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. The company’s SBA loans fall into four categories: loans originated under the SBA’s 7a Program (7a Loans); loans originated under the SBA’s 504 Program (504 Loans); SBA Express Loans, and U.S. Department of Agriculture guaranteed lending programs. 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. Home Equity Loans: The company’s home equity line portfolio is comprised of home equity lines of credit to customers in its 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. 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. Residential Mortgage Loans: From time to time the company has purchased single family residential mortgage loans. 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. Deposit Products As a full-service commercial bank, the company focuses deposit generation on relationship accounts, encompassing non-interest bearing demand, interest bearing demand, and money market accounts. In order to facilitate the generation of non-interest bearing demand deposits, the company requires, depending on the circumstances and the type of relationship, its borrowers to maintain deposit balances with it as a typical condition of granting loans. The company also offers certificates of deposit and savings accounts. The company offers a remote deposit capture product that allows deposits to be made via computer at the customer’s business location. The company also offers 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, the company offers 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 receivfFDes reciprocal deposits from other participating financial institutions. Electronic Banking While personalized, service-oriented banking is the cornerstone of its business plan, the company uses 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. The company offers sophisticated electronic or internet banking opportunities that permit commercial customers to conduct much of their banking business remotely from their home or business. However, its 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. The company also offers its 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. Other Banking Services The company offers a multitude of other products and services to complement its 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 operates ATMs at six different locations. In addition, the company has established a convenient customer service group accessible by toll free telephone to answer questions and promote a high level of customer service. 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 Securities As of December 31, 2022, the company’s investment portfolio included U.S. Treasury; and agency mortgage-backed securities. Sources of Funds Deposits traditionally have been the company’s primary source of funds for its investment and lending activities. The company is 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. 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. Supervision and Regulation 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 Financial Accounting Standards Board (FASB), securities laws administered by the SEC and state securities authorities, and anti-money laundering laws enforced by the Treasury have an impact on the company’s business. 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. As a bank holding company, HCC is subject to regulation, supervision and periodic examination by the Federal Reserve under the Bank Holding Company Act of 1956, as amended (the BHCA). HCC is required to file with the Federal Reserve periodic reports of its operations and such additional information as the Federal Reserve may require. In accordance with Federal Reserve laws and regulations, HCC is required to act as a source of financial strength to HBC and to commit resources to support HBC in circumstances where HCC might not otherwise do so. HCC is also a bank holding company within the meaning of Section 1280 of the California Financial Code. Consequently, HCC is subject to examination by, and may be required to file reports with, the DFPI. 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 reports with the SEC. HCC is subject to additional regulations, including but not limited to, the proxy and tender offer rules promulgated by the Securities and Exchange Commission (SEC) under Sections 13 and 14 of the Exchange Act, the reporting requirements of directors, executive officers and principal shareholders regarding transactions in HCC’s common stock and short swing profits rules promulgated by the SEC under Section 16 of the Exchange Act, and certain additional reporting requirements by principal shareholders of HCC promulgated by the SEC under Section 13 of the Exchange Act. HCC is subject to the accounting oversight and corporate governance requirements of the Sarbanes Oxley Act of 2002, as amended (the Sarbanes-Oxley Act). 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 as HBC’s primary federal regulator. 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, 2022, HBC was in compliance with the FHLB’s stock ownership requirement. 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 the company’s capital. FRB stock is carried at cost and may be sold back to the FRB at its carrying value. HBC is a member of the Deposit Insurance Fund (DIF) administered by the FDIC, which insures customer deposit accounts. The amount of federal deposit insurance coverage is $250,000 per depositor, for each account ownership category at each depository institution. The $250,000 amount is subject to periodic adjustments. In order to maintain the DIF, member institutions are assessed insurance premiums based on an insured institution’s average consolidated total assets less its average tangible equity capital. As a California corporation, HCC is subject to the limitations of California law. 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. 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. It further limits transactions with all affiliates in the aggregate to an amount equal to 20% of the depository institution’s capital stock and surplus. The company is subject to federal laws aiming to counter money laundering and terrorist financing, as well as transactions with persons, companies and foreign governments sanctioned by the United States. These laws include the PATRIOT Act, the Bank Secrecy Act (BSA), and the Anti-Money Laundering Act (AMLA), among others. 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 company is subject to a number of federal and state consumer protection laws that extensively govern its relationship with its 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). 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. History Heritage Commerce Corp was founded in 1994. The company, a California corporation, was incorporated in 1997.