Heritage Commerce (HTBK) reported $42.14 million in revenue for the quarter ended March 2024, representing a year-over-year decline of 19%. EPS of $0.17 for the same period compares to $0.31 a year ago.The reported revenue compares to the Zacks Consensus Estimate of $43.83 million, representing a surprise of -3.86%. The company delivered an EPS surprise of -10.53%, with the consensus EPS estimate being $0.19.While investors closely watch year-over-year changes in headline numbers -- revenue and earnings -- ...

Heritage Commerce (HTBK) came out with quarterly earnings of $0.17 per share, missing the Zacks Consensus Estimate of $0.19 per share. This compares to earnings of $0.31 per share a year ago. These figures are adjusted for non-recurring items.This quarterly report represents an earnings surprise of -10.53%. A quarter ago, it was expected that this holding company for Heritage Bank of Commerce would post earnings of $0.24 per share when it actually produced earnings of $0.22, delivering a surprise of -8.33%. ...

[Executive Summary & Company Highlights](index=1&type=section&id=Executive%20Summary%20%26%20Company%20Highlights) This section provides an overview of the company's Q1 2024 financial performance, key strategic recognitions, and CEO commentary on operational highlights and challenges [Q1 2024 Performance Overview](index=1&type=section&id=Q1%202024%20Performance%20Overview) Heritage Commerce Corp reported Q1 2024 net income of $10.2 million, or $0.17 per diluted common share, a decrease from both the prior year and prior quarter, despite solid growth in client deposits and its loan portfolio Net Income and Diluted EPS | Period | Net Income ($M) | Diluted EPS ($) | | :------------- | :-------------- | :-------------- | | Q1 2024 | 10.2 | 0.17 | | Q4 2023 | 13.3 | 0.22 | | Q1 2023 | 18.9 | 0.31 | - Total client deposits increased over **$66 million** from the prior quarter (**2%**)[2](index=2&type=chunk) - The loan portfolio increased over **$74 million** year-over-year[2](index=2&type=chunk) [CEO Commentary & Strategic Recognitions](index=1&type=section&id=CEO%20Commentary%20%26%20Strategic%20Recognitions) CEO Clay Jones highlighted solid Q1 earnings, growth in deposits and loans, and strong credit quality despite seasonal expenses and net interest margin compression, with the bank receiving prestigious recognitions and celebrating its 30th anniversary - First quarter earnings typically reflect increased seasonal expenses such as payroll taxes and other employee benefits[2](index=2&type=chunk) - Net interest margin experienced slight compression due to higher cost of deposits, despite benefiting from higher yields on assets[2](index=2&type=chunk) - Heritage Bank of Commerce was recognized on Forbes' List of World's Best Banks and ranked 25th on S&P Global Market Intelligence's top 50 list of best-performing community banks[2](index=2&type=chunk) - The Bank is celebrating its **30th anniversary** in 2024[3](index=3&type=chunk) [Financial Performance Analysis](index=1&type=section&id=Financial%20Performance%20Analysis) This section analyzes the company's operating results, net interest income, credit loss provisions, noninterest income and expense, and income tax for the quarter [Operating Results Overview](index=1&type=section&id=Operating%20Results%20Overview) The company's operating results for Q1 2024 showed a decline in profitability metrics compared to both the prior year and prior quarter, with return on average assets and equity decreasing Key Performance Ratios | Metric | Q1 2024 | Q4 2023 | Q1 2023 | | :-------------------------------- | :------ | :------ | :------ | | Return on average assets | 0.79 % | 1.00 % | 1.47 % | | Return on average tangible assets | 0.82 % | 1.04 % | 1.52 % | | Return on average equity | 6.08 % | 7.96 % | 12.03 % | | Return on average tangible common equity | 8.24 % | 10.84 % | 16.71 % | - Diluted earnings per share were **$0.17** for the first quarter of 2024, compared to **$0.31** for the first quarter of 2023, and **$0.22** for the fourth quarter of 2023[4](index=4&type=chunk) [Net Interest Income](index=2&type=section&id=Net%20Interest%20Income) Net interest income and net interest margin contracted significantly year-over-year and modestly quarter-over-quarter, primarily driven by higher deposit costs and shifts in deposit mix, despite an increase in average loan yields Net Interest Income | Period | Amount ($M) | Change YoY | Change QoQ | | :------------- | :---------- | :--------- | :--------- | | Q1 2024 | 40.1 | (19)% | (5)% | | Q1 2023 | 49.3 | - | - | | Q4 2023 | 42.3 | - | - | FTE Net Interest Margin | Period | Margin (%) | Change YoY (bps) | Change QoQ (bps) | | :------------- | :--------- | :--------------- | :--------------- | | Q1 2024 | 3.34 % | (75) | (7) | | Q1 2023 | 4.09 % | - | - | | Q4 2023 | 3.41 % | - | - | - The average cost of total deposits increased to **1.56%** for the first quarter of 2024, compared to **1.43%** for the fourth quarter of 2023 and **0.54%** for the first quarter of 2023[13](index=13&type=chunk) - The increase in the average cost of total deposits and the average cost of funds was primarily due to clients seeking higher yields and moving noninterest-bearing deposits to ICS/CDARS deposits and interest-bearing money market accounts[13](index=13&type=chunk) [Provision for Credit Losses on Loans](index=4&type=section&id=Provision%20for%20Credit%20Losses%20on%20Loans) The provision for credit losses on loans in Q1 2024 was $184 thousand, an increase from the prior year but a decrease from the prior quarter Provision for Credit Losses on Loans | Period | Amount ($K) | | :------------- | :---------- | | Q1 2024 | 184 | | Q4 2023 | 289 | | Q1 2023 | 32 | [Noninterest Income](index=4&type=section&id=Noninterest%20Income) Total noninterest income decreased significantly year-over-year in Q1 2024, primarily due to lower service charges and fees on deposit accounts, while remaining relatively flat quarter-over-quarter Total Noninterest Income | Period | Amount ($M) | Change YoY | Change QoQ | | :------------- | :---------- | :--------- | :--------- | | Q1 2024 | 2.0 | (26)% | 5% | | Q1 2023 | 2.8 | - | - | | Q4 2023 | 1.9 | - | - | - The decrease in noninterest income year-over-year was primarily due to lower service charges and fees on deposit accounts[15](index=15&type=chunk) [Noninterest Expense](index=4&type=section&id=Noninterest%20Expense) Noninterest expense increased in Q1 2024 compared to both prior periods, driven by higher seasonal employee benefits and other operational costs, leading to a notable increase in the efficiency ratio Total Noninterest Expense | Period | Amount ($M) | Change YoY | Change QoQ | | :------------- | :---------- | :--------- | :--------- | | Q1 2024 | 27.5 | 8% | 8% | | Q1 2023 | 25.4 | - | - | | Q4 2023 | 25.5 | - | - | Efficiency Ratio | Period | Ratio (%) | Change YoY | Change QoQ | | :------------- | :-------- | :--------- | :--------- | | Q1 2024 | 65.34 % | 34% | 13% | | Q1 2023 | 48.83 % | - | - | | Q4 2023 | 57.62 % | - | - | - The increase in noninterest expense was primarily due to higher seasonal salaries and employee benefits, marketing, insurance costs, regulatory assessments, information technology expenses, and ICS/CDARS fee expense[20](index=20&type=chunk) [Income Tax Expense](index=4&type=section&id=Income%20Tax%20Expense) Income tax expense decreased significantly year-over-year and quarter-over-quarter in Q1 2024, while the effective tax rate saw a slight increase Income Tax Expense | Period | Amount ($M) | Change YoY | Change QoQ | | :------------- | :---------- | :--------- | :--------- | | Q1 2024 | 4.3 | (45)% | (17)% | | Q1 2023 | 7.7 | - | - | | Q4 2023 | 5.1 | - | - | Effective Tax Rate | Period | Rate (%) | | :------------- | :------- | | Q1 2024 | 29.5 % | | Q1 2023 | 28.9 % | | Q4 2023 | 27.8 % | [Financial Condition & Capital Management](index=4&type=section&id=Financial%20Condition%20%26%20Capital%20Management) This section details the company's liquidity, investment securities, loan portfolio, credit quality, deposit trends, and capital adequacy [Liquidity and Available Lines of Credit](index=4&type=section&id=Liquidity%20and%20Available%20Lines%20of%20Credit) The company maintained robust liquidity and borrowing capacity at March 31, 2024, with total available liquidity increasing year-over-year and quarter-over-quarter, providing strong coverage for total and uninsured deposits Total Available Liquidity and Borrowing Capacity | Period | Amount ($B) | Change YoY | Change QoQ | | :------------- | :---------- | :--------- | :--------- | | Mar 31, 2024 | 3.00 | 14% | 4.5% | | Mar 31, 2023 | 2.64 | - | - | | Dec 31, 2023 | 2.87 | - | - | - The available liquidity and borrowing capacity was **67%** of the Company's total deposits and approximately **149%** of the Bank's estimated uninsured deposits at March 31, 2024[21](index=21&type=chunk)[22](index=22&type=chunk) [Investment Securities](index=5&type=section&id=Investment%20Securities) Total investment securities stood at $1.04 billion at March 31, 2024, comprising both available-for-sale and held-to-maturity portfolios, both of which carried unrealized/unrecognized losses due to higher interest rates, though principal repayment is expected - Total assets declined **(5%)** to **$5.26 billion** at March 31, 2024, compared to **$5.54 billion** at March 31, 2023, and increased **1%** from **$5.19 billion** at December 31, 2023[24](index=24&type=chunk) - Investment securities totaled **$1.04 billion** at March 31, 2024, consisting of **$404.5 million** in available-for-sale (AFS) and **$636.2 million** in held-to-maturity (HTM) portfolios[24](index=24&type=chunk) - The pre-tax unrealized loss on the AFS portfolio was **($9.7) million**, and the pre-tax unrecognized loss on the HTM portfolio was **($93.4) million**, primarily due to higher interest rates[25](index=25&type=chunk)[26](index=26&type=chunk) - The issuers are of high credit quality, and all principal amounts are expected to be repaid when the securities mature, with fair value expected to recover as market rates decline[26](index=26&type=chunk)[27](index=27&type=chunk) [Loans Portfolio Analysis](index=6&type=section&id=Loans%20Portfolio%20Analysis) The total loan portfolio increased year-over-year but slightly decreased quarter-over-quarter, with core loans showing growth. Commercial real estate (CRE) loans remain a significant portion, characterized by strong collateral metrics and personal guarantees [Loan Distribution by Category](index=6&type=section&id=Loan%20Distribution%20by%20Category) This subsection details the composition and changes within the company's total loan portfolio, including core loans and commercial and industrial line utilization Total Loans (excluding held-for-sale) | Period | Amount ($B) | Change YoY | Change QoQ | | :------------- | :---------- | :--------- | :--------- | | Mar 31, 2024 | 3.34 | 2% | (0.4)% | | Mar 31, 2023 | 3.26 | - | - | | Dec 31, 2023 | 3.35 | - | - | - Core loans, excluding residential mortgages, increased **$112.8 million**, or **4%**, to **$2.85 billion** at March 31, 2024, compared to **$2.73 billion** at March 31, 2023, and remained relatively flat from **$2.85 billion** at December 31, 2023[30](index=30&type=chunk) - Commercial and industrial ("C&I") line utilization was **28%** at March 31, 2024, compared to **31%** at March 31, 2023, and **29%** at December 31, 2023[30](index=30&type=chunk) [Commercial Real Estate (CRE) Loan Details](index=6&type=section&id=Commercial%20Real%20Estate%20(CRE)%20Loan%20Details) This subsection provides specific details on the commercial real estate loan portfolio, including its composition, new originations, and associated risk metrics - Commercial real estate ("CRE") loans totaled **$1.86 billion** at March 31, 2024, of which **32%** were owner occupied and **68%** were investor CRE loans[30](index=30&type=chunk) - During the first quarter of 2024, **23 new CRE loans** were originated totaling **$40 million** with a weighted average loan-to-value ("LTV") of **51%** and debt-service coverage ratio ("DSCR") of **1.84 times** for the non-owner occupied portfolio[30](index=30&type=chunk) - The Company has personal guarantees on **92%** of its CRE portfolio[31](index=31&type=chunk) - Total office exposure (excluding medical/dental offices) in the CRE portfolio was **$398 million**, with non-owner occupied office exposure totaling **$311 million** at March 31, 2024[31](index=31&type=chunk) [Loan Maturity Distribution](index=9&type=section&id=Loan%20Maturity%20Distribution) This subsection outlines the maturity profile of the loan portfolio, specifically highlighting the proportion of floating interest rate loans - At March 31, 2024, approximately **26%** of the Company's loan portfolio consisted of floating interest rate loans, compared to **31%** at March 31, 2023, and **27%** at December 31, 2023[34](index=34&type=chunk) [Credit Quality](index=9&type=section&id=Credit%20Quality) Credit quality metrics showed an increase in nonperforming loans and classified assets year-over-year, though the allowance for credit losses remained stable relative to total loans and provided strong coverage for nonperforming loans, with no CRE loans being nonperforming Key Credit Quality Metrics | Metric | Mar 31, 2024 | Dec 31, 2023 | Mar 31, 2023 | | :------------------------------------------ | :----------- | :----------- | :----------- | | Allowance for credit losses on loans (ACLL) | $47,888K | $47,958K | $47,273K | | ACLL to total loans | 1.44 % | 1.43 % | 1.45 % | | Total nonperforming loans (NPL) | $7,871K | $7,707K | $2,240K | | ACLL to total nonperforming loans | 608.41 % | 622.27 % | 2,110.40 % | | Nonperforming assets to total assets | 0.15 % | 0.15 % | 0.04 % | | Classified assets | $35,392K | $31,763K | $26,800K | - The increase in classified assets during the first quarter of 2024 was primarily due to the downgrade of one well-collateralized, fully leased, cash-flowing, and personally guaranteed CRE investor loan[37](index=37&type=chunk) - There were no CRE loans included in nonperforming assets at March 31, 2024, March 31, 2023, or December 31, 2023[36](index=36&type=chunk) [Deposits Analysis](index=10&type=section&id=Deposits%20Analysis) Total deposits remained stable year-over-year but increased quarter-over-quarter, with a significant migration of client deposits into interest-bearing accounts, particularly ICS/CDARS, leading to a decrease in noninterest-bearing demand deposits and a reduction in uninsured deposits as a percentage of total deposits - Total deposits were relatively flat at **$4.44 billion** at both March 31, 2024 and March 31, 2023, but increased **$66.2 million**, or **2%**, from **$4.38 billion** at December 31, 2023[38](index=38&type=chunk) - Migration of client deposits into interest-bearing accounts resulted in an increase in ICS/CDARS deposits to **$913.8 million** at March 31, 2024, compared to **$304.1 million** at March 31, 2023[38](index=38&type=chunk) - Noninterest-bearing demand deposits decreased **($227.0) million**, or **(15%)**, to **$1.24 billion** at March 31, 2024 from **$1.47 billion** at March 31, 2023, largely in response to the increasing interest rate environment[38](index=38&type=chunk) - The Bank's uninsured deposits were approximately **$2.02 billion**, or **45%** of total deposits, at March 31, 2024, down from **$2.56 billion**, or **58%** of total deposits, at March 31, 2023[38](index=38&type=chunk) [Capital Management](index=11&type=section&id=Capital%20Management) Heritage Commerce Corp and Heritage Bank of Commerce maintained strong capital positions, with all key capital ratios exceeding regulatory guidelines for a well-capitalized institution and Basel III minimum requirements at March 31, 2024 Heritage Commerce Corp Capital Ratios (Mar 31, 2024) | Ratio | Company | PCA Regulatory Guidelines | Basel III Minimum Requirements | | :-------------------------- | :------ | :------------------------ | :----------------------------- | | Total Capital | 15.6 % | 10.0 % | 10.5 % | | Tier 1 Capital | 13.4 % | 8.0 % | 8.5 % | | Common Equity Tier 1 Capital | 13.4 % | 6.5 % | 7.0 % | | Tier 1 Leverage | 10.2 % | 5.0 % | 4.0 % | - The Bank's capital ratios also exceeded regulatory guidelines under the prompt corrective action ("PCA") regulatory guidelines for a well-capitalized financial institution, and the Basel III minimum regulatory requirements at March 31, 2024[39](index=39&type=chunk) - Tangible common equity / tangible assets was **9.9%** for Heritage Commerce Corp and **10.2%** for Heritage Bank of Commerce at March 31, 2024[39](index=39&type=chunk)[53](index=53&type=chunk)[54](index=54&type=chunk) - Total accumulated other comprehensive loss improved to **($12.59) million** at March 31, 2024, from **($14.32) million** at March 31, 2023[40](index=40&type=chunk) [Forward-Looking Statements & Company Information](index=12&type=section&id=Forward-Looking%20Statements%20%26%20Company%20Information) This section includes important disclaimers regarding forward-looking statements and provides essential information about the company's structure and operations [Forward-Looking Statement Disclaimer](index=12&type=section&id=Forward-Looking%20Statement%20Disclaimer) This section provides a standard disclaimer that certain statements in the press release are forward-looking and subject to various risks and uncertainties, which could cause actual results to differ materially from projections - Statements relating to future financial performance, projected cash flows of investment securities, loan portfolio performance, estimated net interest income, and anticipated effects of developments are considered forward-looking[43](index=43&type=chunk) - Actual results may differ materially from projected results due to various risks and uncertainties, many of which are outside the company's control, including factors affecting liquidity, market fluctuations, credit loss estimation, economic conditions, and regulatory changes[43](index=43&type=chunk)[44](index=44&type=chunk) [Company Information & Contact](index=13&type=section&id=Company%20Information%20%26%20Contact) Heritage Commerce Corp is the holding company for Heritage Bank of Commerce, headquartered in San Jose, CA, with a network of full-service branches and a factoring subsidiary, Bay View Funding - Heritage Commerce Corp is the parent company of Heritage Bank of Commerce, established in 1994 and headquartered in San Jose, CA[40](index=40&type=chunk) - Heritage Bank of Commerce operates full-service branches in multiple locations across Northern California and is an SBA Preferred Lender[40](index=40&type=chunk) - Bay View Funding, a subsidiary, provides business-essential working capital factoring financing to various industries throughout the United States[40](index=40&type=chunk) [Consolidated Financial Statements & Key Ratios](index=14&type=section&id=Consolidated%20Financial%20Statements%20%26%20Key%20Ratios) This section presents the company's detailed consolidated income statements, balance sheets, credit quality data, and net interest income analysis [Consolidated Income Statements](index=14&type=section&id=Consolidated%20Income%20Statements) This section presents the consolidated income statements, detailing interest income, interest expense, net interest income, noninterest income, noninterest expense, and net income for the first quarter of 2024, compared to prior quarters and the prior year Consolidated Income Statement Summary ($ thousands) | Metric | Q1 2024 | Q4 2023 | Q1 2023 | | :------------------------------------------ | :------ | :------ | :------ | | Interest income | 57,551 | 58,892 | 56,274 | | Interest expense | 17,458 | 16,591 | 7,016 | | Net interest income before provision | 40,093 | 42,301 | 49,258 | | Provision for credit losses on loans | 184 | 289 | 32 | | Total noninterest income | 2,047 | 1,942 | 2,766 | | Total noninterest expense | 27,536 | 25,491 | 25,401 | | Net income | 10,166 | 13,328 | 18,917 | Key Financial Ratios | Ratio | Q1 2024 | Q4 2023 | Q1 2023 | | :------------------------------------------ | :------ | :------ | :------ | | Annualized return on average equity | 6.08 % | 7.96 % | 12.03 % | | Annualized return on average assets | 0.79 % | 1.00 % | 1.47 % | | Net interest margin (FTE) | 3.34 % | 3.41 % | 4.09 % | | Efficiency ratio | 65.34 % | 57.62 % | 48.83 % | [Consolidated Balance Sheets](index=16&type=section&id=Consolidated%20Balance%20Sheets) This section provides the consolidated balance sheets, detailing assets, liabilities, and shareholders' equity at March 31, 2024, compared to prior quarter and prior year-end, showing changes in key components like deposits and loan portfolios Consolidated Balance Sheet Summary ($ thousands) | Metric | Mar 31, 2024 | Dec 31, 2023 | Mar 31, 2023 | | :------------------------------------------ | :----------- | :----------- | :----------- | | Total assets | 5,256,074 | 5,194,095 | 5,536,540 | | Total loans, net of deferred costs and fees | 3,336,102 | 3,350,378 | 3,261,915 | | Total deposits | 4,444,660 | 4,378,458 | 4,444,538 | | Total liabilities | 4,579,778 | 4,521,194 | 4,889,332 | | Total shareholders' equity | 676,296 | 672,901 | 647,208 | - Total assets increased **1%** quarter-over-quarter but declined **(5%)** year-over-year[49](index=49&type=chunk) - Total deposits increased **2%** quarter-over-quarter and were flat year-over-year[49](index=49&type=chunk) [Credit Quality Data](index=18&type=section&id=Credit%20Quality%20Data) This section provides detailed credit quality data, including nonperforming loans, net charge-offs, provision for credit losses, allowance for credit losses, and classified assets, along with relevant ratios for Q1 2024 and comparative periods Credit Quality Metrics ($ thousands) | Metric | Mar 31, 2024 | Dec 31, 2023 | Mar 31, 2023 | | :------------------------------------------ | :----------- | :----------- | :----------- | | Total nonperforming loans | 7,871 | 7,707 | 2,240 | | Net charge-offs (recoveries) during the quarter | 254 | 33 | 271 | | Provision for credit losses on loans during the quarter | 184 | 289 | 32 | | Allowance for credit losses on loans | 47,888 | 47,958 | 47,273 | | Classified assets | 35,392 | 31,763 | 26,800 | Credit Quality Ratios | Ratio | Mar 31, 2024 | Dec 31, 2023 | Mar 31, 2023 | | :------------------------------------------ | :----------- | :----------- | :----------- | | Allowance for credit losses on loans to total loans | 1.44 % | 1.43 % | 1.45 % | | Nonperforming assets to total assets | 0.15 % | 0.15 % | 0.04 % | | Nonperforming loans to total loans | 0.24 % | 0.23 % | 0.07 % | [Net Interest Income and Net Interest Margin Details](index=20&type=section&id=Net%20Interest%20Income%20and%20Net%20Interest%20Margin%20Details) This section provides a detailed breakdown of average balances, interest income/expense, and average yields/rates for interest-earning assets and interest-bearing liabilities, illustrating the components contributing to net interest income and margin for Q1 2024 compared to Q1 2023 and Q4 2023 Average Yields on Interest-Earning Assets (Q1 2024) | Asset Category | Average Yield (%) | | :------------------------------------------ | :---------------- | | Loans, gross | 5.44 % | | Securities - taxable | 2.39 % | | Securities - exempt from Federal tax | 3.60 % | | Other investments and interest-bearing deposits | 5.62 % | | Total interest earning assets | 4.79 % | Average Rates on Interest-Bearing Liabilities (Q1 2024) | Liability Category | Average Rate (%) | | :------------------------------------------ | :--------------- | | Demand, interest-bearing deposits | 0.68 % | | Savings and money market deposits | 2.50 % | | Time deposits - under $100 | 1.54 % | | Time deposits - $100 and over | 3.75 % | | ICS/CDARS - interest-bearing deposits | 2.76 % | | Total interest-bearing deposits | 2.14 % | | Total interest-bearing liabilities | 2.18 % | - The fully tax equivalent (FTE) net interest margin was **3.34%** for Q1 2024, down from **4.09%** in Q1 2023 and **3.41%** in Q4 2023[57](index=57&type=chunk)[59](index=59&type=chunk) [Non-GAAP Financial Measures Reconciliation](index=22&type=section&id=Non-GAAP%20Financial%20Measures%20Reconciliation) This section reconciles non-GAAP financial measures such as tangible assets, tangible common equity, and tangible book value per share to their most directly comparable GAAP measures [Return on Average Tangible Assets and Average Tangible Common Equity](index=22&type=section&id=RETURN%20ON%20AVERAGE%20TANGIBLE%20ASSETS%20AND%20AVERAGE%20TANGIBLE%20COMMON%20EQUITY) This section reconciles GAAP net income to non-GAAP average tangible assets and average tangible common equity to derive the respective return ratios for Q1 2024 and comparative periods Annualized Return on Average Tangible Assets | Period | Ratio (%) | | :------------- | :-------- | | Q1 2024 | 0.82 % | | Q4 2023 | 1.04 % | | Q1 2023 | 1.52 % | Annualized Return on Average Tangible Common Equity | Period | Ratio (%) | | :------------- | :-------- | | Q1 2024 | 8.24 % | | Q4 2023 | 10.84 % | | Q1 2023 | 16.71 % | [Tangible Common Equity to Tangible Assets](index=22&type=section&id=TANGIBLE%20COMMON%20EQUITY%20TO%20TANGIBLE%20ASSETS) This section provides the reconciliation of GAAP total equity and total assets to non-GAAP tangible common equity and tangible assets, respectively, to calculate the tangible common equity to tangible assets ratio for Heritage Commerce Corp and Heritage Bank of Commerce Tangible Common Equity / Tangible Assets (Heritage Commerce Corp) | Period | Ratio (%) | | :------------- | :-------- | | Mar 31, 2024 | 9.85 % | | Dec 31, 2023 | 9.90 % | | Mar 31, 2023 | 8.76 % | Tangible Common Equity / Tangible Assets (Heritage Bank of Commerce) | Period | Ratio (%) | | :------------- | :-------- | | Mar 31, 2024 | 10.22 % | | Dec 31, 2023 | 10.26 % | | Mar 31, 2023 | 9.07 % | [Tangible Book Value Per Share](index=23&type=section&id=TANGIBLE%20BOOK%20VALUE%20PER%20SHARE) This section reconciles GAAP common equity to non-GAAP tangible common equity to calculate the tangible book value per share for Q1 2024 and comparative periods Tangible Book Value Per Share | Period | Amount ($) | | :------------- | :--------- | | Mar 31, 2024 | 8.17 | | Dec 31, 2023 | 8.12 | | Mar 31, 2023 | 7.70 |

SAN JOSE, Calif., April 25, 2024 (GLOBE NEWSWIRE) -- Heritage Commerce Corp (NASDAQ:HTBK), the holding company for Heritage Bank of Commerce (the "Bank"), today announced that its Board of Directors had declared its regular quarterly cash dividend of $0.13 per share to holders of its common stock. The dividend will be payable on May 23, 2024, to shareholders of record at the close of the business day on May 9, 2024. Heritage Commerce Corp has paid a cash dividend each quarter since 2013. "As a result of ano ...

Table of Contents 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 ☐ 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) For ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (MARK ONE) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2023 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 95110 (Zip ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (MARK ONE) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2023 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 ...

[Cautionary Note on Forward-Looking Statements](index=4&type=section&id=Cautionary%20Note%20on%20Forward-Looking%20Statements) This report contains forward-looking statements subject to risks and uncertainties that may cause actual results to differ materially from projections - This report contains forward-looking statements, which are not historical facts and are based on current expectations and projections about future events. These statements are subject to various risks and uncertainties that may cause actual results to differ materially from projected results[7](index=7&type=chunk)[8](index=8&type=chunk) - Key risks include geopolitical and domestic political developments, economic and market conditions, changes in trade, monetary and fiscal policies (including interest rates), inflationary pressures, ability to manage deposit liabilities, changes in nonperforming assets and credit quality, volatility in credit and equity markets, impacts of the COVID-19 pandemic, competition, loan growth and deposit retention, concentrations in real estate loans, and regulatory changes[8](index=8&type=chunk)[9](index=9&type=chunk)[11](index=11&type=chunk) Part I. FINANCIAL INFORMATION [Item 1. Consolidated Financial Statements (unaudited)](index=8&type=section&id=Item%201.%20Consolidated%20Financial%20Statements%20(unaudited)) This section presents the unaudited consolidated financial statements of Heritage Commerce Corp and its subsidiary, Heritage Bank of Commerce, for the period ended March 31, 2023, including balance sheets, income statements, comprehensive income, changes in shareholders' equity, and cash flows, along with detailed notes explaining the basis of presentation, significant accounting policies, and specific financial line items [Consolidated Balance Sheets](index=8&type=section&id=Consolidated%20Balance%20Sheets) This section provides a snapshot of the company's financial position, detailing assets, liabilities, and shareholders' equity at specific points in time Consolidated Balance Sheet Highlights (Dollars in thousands) | Metric | March 31, 2023 | December 31, 2022 | | :------------------------------------- | :------------- | :---------------- | | Total assets | $5,536,540 | $5,157,580 | | Total cash and cash equivalents | $740,008 | $306,603 | | Loans, net | $3,214,642 | $3,251,038 | | Total deposits | $4,444,538 | $4,389,604 | | Total liabilities | $4,889,332 | $4,525,124 | | Total shareholders' equity | $647,208 | $632,456 | - Total assets increased by **$378.96 million (7.3%)** from December 31, 2022, to March 31, 2023, primarily driven by a significant increase in cash and cash equivalents[14](index=14&type=chunk) - Total deposits saw a modest increase of **$54.93 million (1.25%)** over the same period, while total liabilities increased by **$364.21 million (8.05%)**[14](index=14&type=chunk) [Consolidated Statements of Income](index=9&type=section&id=Consolidated%20Statements%20of%20Income) This section outlines the company's financial performance over a period, detailing revenues, expenses, and net income Consolidated Statements of Income Highlights (Three Months Ended March 31, Dollars in thousands, except per share amounts) | Metric | 2023 | 2022 | | :------------------------------------- | :----- | :----- | | Total interest income | $56,274 | $39,906 | | Total interest expense | $7,016 | $1,685 | | Net interest income before provision for credit losses on loans | $49,258 | $38,221 | | Provision for (recapture of) credit losses on loans | $32 | ($567) | | Net interest income after provision for credit losses on loans | $49,226 | $38,788 | | Total noninterest income | $2,766 | $2,460 | | Total noninterest expense | $25,401 | $23,252 | | Net income | $18,917 | $12,866 | | Basic earnings per common share | $0.31 | $0.21 | | Diluted earnings per common share | $0.31 | $0.21 | - Net income increased by **$6.051 million (47.03%)** year-over-year, driven by a substantial increase in net interest income before provision for credit losses on loans, which rose by **$11.037 million (28.88%)**[17](index=17&type=chunk) - Interest expense surged from **$1.685 million** in Q1 2022 to **$7.016 million** in Q1 2023, reflecting a higher cost of funds. The company recorded a provision for credit losses of **$32,000** in Q1 2023, compared to a recapture of **$567,000** in Q1 2022[17](index=17&type=chunk) [Consolidated Statements of Comprehensive Income](index=10&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) This section presents a broader view of financial performance, including net income and other comprehensive income items not recognized in the income statement Consolidated Statements of Comprehensive Income Highlights (Three Months Ended March 31, Dollars in thousands) | Metric | 2023 | 2022 | | :-------------------------------------------------------------------------------- | :----- | :------- | | Net income | $18,917 | $12,866 | | Change in unrealized gains (losses) on securities and I/O strips, net of deferred income taxes | $2,577 | ($3,128) | | Change in pension and other benefit plan liability, net of deferred income taxes | ($38) | $70 | | Other comprehensive income (loss) | $2,539 | ($3,058) | | Total comprehensive income | $21,456 | $9,808 | - Total comprehensive income significantly increased to **$21.456 million** in Q1 2023 from **$9.808 million** in Q1 2022, primarily due to a positive change in unrealized gains on available-for-sale securities and I/O strips, net of taxes, which shifted from a loss of **$3.128 million** in Q1 2022 to a gain of **$2.577 million** in Q1 2023[19](index=19&type=chunk) [Consolidated Statements of Changes in Shareholders' Equity](index=11&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Shareholders'%20Equity) This section details the changes in the company's equity over a period, reflecting net income, dividends, and other comprehensive income Consolidated Statements of Changes in Shareholders' Equity Highlights (Dollars in thousands) | Metric | Balance, January 1, 2023 | Net Income | Other Comprehensive Income | Amortization of Restricted Stock Awards | Cash Dividend Declared | Stock Option Expense | Stock Options Exercised | Balance March 31, 2023 | | :------------------------------------- | :----------------------- | :--------- | :------------------------- | :-------------------------------------- | :--------------------- | :------------------- | :---------------------- | :--------------------- | | Common Stock Amount | $502,923 | — | — | $382 | $0 | $147 | $683 | $504,135 | | Retained Earnings | $146,389 | $18,917 | — | — | ($7,916) | — | — | $157,390 | | Accumulated Other Comprehensive Loss | ($16,856) | — | $2,539 | — | — | — | — | ($14,317) | | Total Shareholders' Equity | $632,456 | $18,917 | $2,539 | $382 | ($7,916) | $147 | $683 | $647,208 | - Total shareholders' equity increased by **$14.752 million** from January 1, 2023, to March 31, 2023, primarily due to net income of **$18.917 million** and other comprehensive income of **$2.539 million**, partially offset by cash dividends declared of **$7.916 million**[21](index=21&type=chunk) [Consolidated Statements of Cash Flows](index=12&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) This section reports the cash generated and used by the company across operating, investing, and financing activities over a period Consolidated Statements of Cash Flows Highlights (Three Months Ended March 31, Dollars in thousands) | Metric | 2023 | 2022 | | :------------------------------------- | :----- | :------- | | Net cash provided by operating activities | $29,958 | $16,783 | | Net cash provided by (used in) investing activities | $55,746 | ($28,880) | | Net cash provided by (used in) financing activities | $347,701 | ($76,954) | | Net increase in cash and cash equivalents | $433,405 | ($89,051) | | Cash and cash equivalents, end of period | $740,008 | $1,217,165 | - The company experienced a significant net increase in cash and cash equivalents of **$433.405 million** in Q1 2023, a stark contrast to the net decrease of **$89.051 million** in Q1 2022. This was primarily driven by substantial cash provided by financing activities (**$347.701 million**) and a positive shift in investing activities from a net outflow to a net inflow[23](index=23&type=chunk) - Financing activities in Q1 2023 were boosted by a net change in deposits of **$54.934 million** and a **$300.0 million** increase in short-term borrowings[23](index=23&type=chunk) [Notes to Unaudited Consolidated Financial Statements](index=13&type=section&id=Notes%20to%20Unaudited%20Financial%20Statements) This section provides detailed explanations and additional information supporting the consolidated financial statements, including accounting policies and specific line item breakdowns [1) Basis of Presentation](index=13&type=section&id=1)%29%20Basis%20of%20Presentation) This note describes the accounting principles and methods used in preparing the financial statements, including segment reporting and recent accounting standard adoptions - The unaudited consolidated financial statements are prepared in accordance with Form 10-Q rules and GAAP, with certain annual financial statement information and notes omitted. The Company operates in two segments: banking (Heritage Bank of Commerce) and factoring (Bay View Funding), serving primarily the San Francisco Bay Area[25](index=25&type=chunk)[26](index=26&type=chunk) - The Company adopted ASU 2022-02 on January 1, 2023, eliminating accounting guidance for troubled debt restructurings and enhancing disclosures for loan refinancings/restructurings for borrowers experiencing financial difficulty. This adoption had no impact on financial position or results of operations[31](index=31&type=chunk) [2) Earnings Per Share](index=15&type=section&id=2)%29%20Earnings%20Per%20Share) This note details the calculation of basic and diluted earnings per share, reflecting the company's profitability on a per-share basis Earnings Per Common Share (Three Months Ended March 31, Dollars in thousands, except per share amounts) | Metric | 2023 | 2022 | | :------------------------------------------ | :----- | :----- | | Net income | $18,917 | $12,866 | | Weighted average common shares outstanding for basic EPS | 60,908,221 | 60,393,883 | | Dilutive potential common shares | 359,851 | 527,952 | | Shares used in computing diluted EPS | 61,268,072 | 60,921,835 | | Basic earnings per share | $0.31 | $0.21 | | Diluted earnings per share | $0.31 | $0.21 | - Basic and diluted EPS increased from **$0.21** in Q1 2022 to **$0.31** in Q1 2023, reflecting higher net income. Weighted average common shares outstanding for diluted EPS increased slightly, but the number of dilutive potential common shares decreased[34](index=34&type=chunk) [3) Accumulated Other Comprehensive Income (Loss) ("AOCI")](index=16&type=section&id=3)%29%20Accumulated%20Other%20Comprehensive%20Income%20(Loss)%20(%22AOCI%22)) This note explains the components and changes in accumulated other comprehensive income (loss), which includes unrealized gains/losses on securities and pension adjustments Changes in AOCI by Component (Three Months Ended March 31, Dollars in thousands) | Component | Beginning Balance Jan 1, 2023 | Net Current Period OCI (Loss) | Ending Balance Mar 31, 2023 | | :---------------------------------------------------------------- | :---------------------------- | :---------------------------- | :-------------------------- | | Unrealized Gains (Losses) on Available-for-Sale Securities and I/O Strips, net of taxes | ($11,394) | $2,577 | ($8,817) | | Defined Benefit Pension Plan Items, net of taxes | ($5,462) | ($38) | ($5,500) | | Total AOCI, net of taxes | ($16,856) | $2,539 | ($14,317) | - AOCI improved from a loss of **$16.856 million** at January 1, 2023, to a loss of **$14.317 million** at March 31, 2023, primarily due to a positive change in unrealized gains on available-for-sale securities and I/O strips[37](index=37&type=chunk) [4) Securities](index=18&type=section&id=4)%29%20Securities) This note provides details on the company's investment securities portfolio, including available-for-sale and held-to-maturity categories, and associated unrealized gains or losses Securities Portfolio (Dollars in thousands) | Category | March 31, 2023 (Fair Value) | December 31, 2022 (Fair Value) | | :------------------------------------- | :-------------------------- | :----------------------------- | | Securities available-for-sale | $491,751 | $489,596 | | Securities held-to-maturity (fair value) | $607,986 | $614,452 | | Total Securities | $1,099,737 | $1,104,048 | Unrealized Losses on Securities (Dollars in thousands) | Category | March 31, 2023 (Unrealized Losses) | December 31, 2022 (Unrealized Losses) | | :------------------------------------- | :--------------------------------- | :------------------------------------ | | Securities available-for-sale | ($12,479) | ($16,117) | | Securities held-to-maturity | ($90,659) | ($100,796) | | Total Unrealized Losses | ($103,138) | ($116,913) | - The company held 404 securities with fair value below amortized cost at March 31, 2023, primarily due to higher interest rates. However, the issuers are of high credit quality, and principal amounts are expected to be paid at maturity, with fair value expected to recover[42](index=42&type=chunk) [5) Loans and Allowance for Credit Losses on Loans](index=21&type=section&id=5)%29%20Loans%20and%20Allowance%20for%20Credit%20Losses%20on%20Loans) This note details the composition of the loan portfolio, credit quality indicators, and the methodology for the allowance for credit losses [Loan Distribution](index=24&type=section&id=Loan%20Distribution) This subsection provides a breakdown of the loan portfolio by segment, highlighting changes in loan categories over time Loans Held-for-Investment by Segment (Dollars in thousands) | Loan Segment | March 31, 2023 | December 31, 2022 | | :------------------------------------- | :------------- | :---------------- | | Commercial | $506,602 | $533,915 | | CRE - owner occupied | $603,298 | $614,663 | | CRE - non-owner occupied | $1,083,852 | $1,066,368 | | Land and construction | $166,408 | $163,577 | | Home equity | $124,481 | $120,724 | | Multifamily | $231,242 | $244,882 | | Residential mortgages | $528,639 | $537,905 | | Consumer and other | $17,905 | $17,033 | | Total Loans, net of deferred fees | $3,261,915 | $3,298,550 | | Allowance for credit losses on loans | ($47,273) | ($47,512) | | Loans, net | $3,214,642 | $3,251,038 | - Total loans, net of deferred fees, decreased by **$36.635 million (1.11%)** from December 31, 2022, to March 31, 2023. Notable changes include a decrease in Commercial loans and Multifamily loans, while CRE - non-owner occupied loans saw an increase[58](index=58&type=chunk) [Credit Quality Indicators](index=26&type=section&id=Credit%20Quality%20Indicators) This subsection presents key metrics related to loan credit quality, including nonperforming loans and past due loans, and the company's risk categorization framework Nonperforming Loans (Dollars in thousands) | Category | March 31, 2023 | December 31, 2022 | | :------------------------------------- | :------------- | :---------------- | | Commercial | $808 | $991 | | CRE - Owner Occupied | $1,336 | — | | CRE - Non-Owner Occupied | — | $1,336 | | Home equity | $96 | $98 | | Total Nonperforming Loans | $2,240 | $2,425 | Past Due Loans (30 Days or Greater) (Dollars in thousands) | Category | March 31, 2023 | December 31, 2022 | | :------------------------------------- | :------------- | :---------------- | | Commercial | $10,431 | $10,458 | | CRE - Owner Occupied | $1,121 | $252 | | CRE - Non-Owner Occupied | $1,336 | $1,336 | | Residential mortgages | $8,080 | $4,922 | | Total Past Due Loans (30+ days) | $21,064 | $17,066 | - Past due loans (30 days or greater) increased to **$21.064 million** at March 31, 2023, from **$17.066 million** at December 31, 2022. Nonaccrual loans included in this total were **$410,000** at March 31, 2023[60](index=60&type=chunk) - The Company categorizes loans into risk categories (Pass, Special Mention, Substandard, Doubtful, Loss) based on borrower's ability to service debt, financial information, payment history, and economic trends. No loans were classified as Doubtful or Loss at March 31, 2023, or December 31, 2022[62](index=62&type=chunk)[63](index=63&type=chunk)[65](index=65&type=chunk)[66](index=66&type=chunk)[67](index=67&type=chunk)[69](index=69&type=chunk) [Loan Modifications](index=31&type=section&id=Loan%20Modifications) This subsection details loan modifications made for borrowers experiencing financial difficulty, including types of modifications and their impact Loan Modifications for Borrowers Experiencing Financial Difficulty (March 31, 2023, Dollars in thousands) | Type of Modification | Commercial | | :------------------------------------- | :--------- | | Principal Forgiveness | $6 | | Payment Delay | $88 | | Term Extension | $36 | | Total | $130 | - For the quarter ended March 31, 2023, the Company modified **$130,000** in commercial loans for borrowers experiencing financial difficulty, primarily through payment delays and term extensions. There were no payment defaults for these modified loans during the quarter[78](index=78&type=chunk)[80](index=80&type=chunk)[81](index=81&type=chunk) [6) Goodwill and Other Intangible Assets](index=33&type=section&id=6)%29%20Goodwill%20and%20Other%20Intangible%20Assets) This note provides information on the company's goodwill and other intangible assets, including their carrying values and any impairment assessments [Goodwill](index=33&type=section&id=Goodwill) This subsection details the goodwill recognized by segment and confirms the absence of impairment Goodwill by Segment (Dollars in thousands) | Segment | March 31, 2023 | December 31, 2022 | | :------------------------------------- | :------------- | :---------------- | | Banking | $154,587 | $154,587 | | Factoring | $13,044 | $13,044 | | Total Goodwill | $167,631 | $167,631 | - Goodwill remained stable at **$167.631 million** at March 31, 2023, with no impairment identified since the annual analysis as of November 30, 2022[85](index=85&type=chunk)[87](index=87&type=chunk) [Other Intangible Assets](index=35&type=section&id=Other%20Intangible%20Assets) This subsection outlines the company's other intangible assets, such as core deposit intangibles and customer relationships, and their amortization Other Intangible Assets (Dollars in thousands) | Intangible Asset | March 31, 2023 (Total) | December 31, 2022 (Total) | | :------------------------------------- | :--------------------- | :------------------------ | | Core deposit intangibles | $10,039 | $10,594 | | Customer relationship and brokered relationship intangibles | $302 | $349 | | Below market leases | $90 | $90 | | Total Other Intangible Assets | $10,431 | $11,033 | - Total other intangible assets decreased to **$10.431 million** at March 31, 2023, from **$11.033 million** at December 31, 2022, primarily due to amortization of core deposit intangibles and customer relationship intangibles. No impairment was identified[88](index=88&type=chunk) [7) Income Taxes](index=37&type=section&id=7)%29%20Income%20Taxes) This note provides information on the company's income tax expense, effective tax rate, and deferred tax assets and liabilities Net Deferred Tax Assets (Dollars in thousands) | Metric | March 31, 2023 | December 31, 2022 | | :------------------------------------- | :------------- | :---------------- | | Net deferred tax assets | $29,841 | $32,176 | - Net deferred tax assets decreased to **$29.841 million** at March 31, 2023, from **$32.176 million** at December 31, 2022. Management believes these assets will be fully realized in future years[91](index=91&type=chunk) - The Company recognized **$180,000** in low income housing tax credits and **$186,000** in low income housing investment expense for the three months ended March 31, 2023[93](index=93&type=chunk) [8) Benefit Plans](index=37&type=section&id=8)%29%20Benefit%20Plans) This note describes the company's various employee benefit plans, including supplemental retirement and split-dollar life insurance, and their associated costs and obligations [Supplemental Retirement Plan](index=37&type=section&id=Supplemental%20Retirement%20Plan) This subsection details the net periodic benefit cost for the company's supplemental retirement plan Net Periodic Benefit Cost - Supplemental Retirement Plan (Three Months Ended March 31, Dollars in thousands) | Component | 2023 | 2022 | | :------------------------------------- | :----- | :----- | | Service cost | $48 | $87 | | Interest cost | $324 | $216 | | Amortization of net actuarial loss | $13 | $114 | | Net periodic benefit cost | $385 | $417 | - Net periodic benefit cost for the supplemental retirement plan decreased to **$385,000** in Q1 2023 from **$417,000** in Q1 2022, primarily due to lower service cost and amortization of net actuarial loss[94](index=94&type=chunk) [Split-Dollar Life Insurance Benefit Plan](index=39&type=section&id=Split-Dollar%20Life%20Insurance%20Benefit%20Plan) This subsection provides information on the split-dollar life insurance benefit plan, including its projected benefit obligation and net periodic benefit cost Split-Dollar Life Insurance Benefit Plan (Dollars in thousands) | Metric | March 31, 2023 | December 31, 2022 | | :------------------------------------- | :------------- | :---------------- | | Projected benefit obligation at end of period | $7,151 | $7,060 | | Accumulated other comprehensive loss | $3,139 | $3,091 | Net Periodic Benefit Cost - Split-Dollar Life Insurance (Three Months Ended March 31, Dollars in thousands) | Component | 2023 | 2022 | | :------------------------------------- | :----- | :----- | | Amortization of prior transition obligation and actuarial losses | ($47) | ($11) | | Interest cost | $91 | $62 | | Net periodic benefit cost | $44 | $51 | [9) Fair Value](index=39&type=section&id=9)%29%20Fair%20Value) This note discusses the fair value measurements of financial assets and liabilities, categorized into a three-level hierarchy based on input observability [Financial Assets and Liabilities Measured on a Recurring Basis](index=39&type=section&id=Financial%20Assets%20and%20Liabilities%20Measured%20on%20a%20Recurring%20Basis) This subsection details financial instruments measured at fair value on an ongoing basis, including their valuation techniques and hierarchy levels Fair Value Measurements of Recurring Assets (March 31, 2023, Dollars in thousands) | Asset | Balance | Level 1 | Level 2 | Level 3 | | :------------------------------------- | :------ | :------ | :------ | :------ | | U.S. Treasury | $422,903 | $422,903 | — | — | | Agency mortgage-backed securities | $68,848 | — | $68,848 | — | | I/O strip receivables | $145 | — | $145 | — | - Fair values for available-for-sale securities are determined using quoted prices (Level 1) or matrix pricing (Level 2). I/O strip receivables are valued using a third-party model (Level 2). There were no transfers between Level 1 and Level 2 during the period[100](index=100&type=chunk)[101](index=101&type=chunk)[102](index=102&type=chunk) [Assets and Liabilities Measured on a Non-Recurring Basis](index=40&type=section&id=Assets%20and%20Liabilities%20Measured%20on%20a%20Non-Recurring%20Basis) This subsection describes assets and liabilities measured at fair value only when specific conditions are met, such as impairment, and provides estimated fair values for all financial instruments - Collateral-dependent loans and foreclosed assets are measured at fair value on a non-recurring basis, typically based on real estate appraisals adjusted for selling costs, resulting in Level 3 classification. There were no material collateral-dependent loans or foreclosed assets at March 31, 2023, or December 31, 2022[103](index=103&type=chunk)[104](index=104&type=chunk) Estimated Fair Values of Financial Instruments (March 31, 2023, Dollars in thousands) | Instrument | Carrying Amounts | Total Estimated Fair Value | | :------------------------------------- | :--------------- | :------------------------- | | Cash and cash equivalents | $740,008 | $740,008 | | Securities available-for-sale | $491,751 | $491,751 | | Securities held-to-maturity | $698,231 | $607,986 | | Loans (including loans held-for-sale) | $3,264,707 | $3,061,489 | | Total deposits | $4,444,538 | $4,446,674 | | Other short-term borrowings | $300,000 | $300,000 | | Subordinated debt | $39,387 | $32,787 | [10) Equity Plan](index=42&type=section&id=10)%29%20Equity%20Plan) This note details the company's equity compensation plans, including stock option activity, restricted stock awards, and associated unrecognized compensation costs Stock Option Activity (March 31, 2023) | Metric | Number of Shares | Weighted Average Exercise Price | | :------------------------------------- | :--------------- | :------------------------------ | | Outstanding at January 1, 2023 | 2,527,173 | $10.44 | | Exercised | 95,884 | $7.12 | | Forfeited or expired | (23,728) | $13.62 | | Outstanding at March 31, 2023 | 2,407,561 | $10.54 | | Exercisable at March 31, 2023 | 1,858,557 | N/A | - As of March 31, 2023, there was **$1.141 million** of unrecognized compensation cost related to nonvested stock options, expected to be recognized over approximately **2.50 years**. For restricted stock awards, **$1.500 million** of unrecognized compensation cost remains, to be recognized over approximately **1.84 years**[108](index=108&type=chunk)[109](index=109&type=chunk) [11) Borrowing Arrangements](index=44&type=section&id=11)%29%20Borrowing%20Arrangements) This note outlines the company's various borrowing arrangements, including lines of credit with federal banks and subordinated debt [Federal Home Loan Bank Borrowings, Federal Reserve Bank Borrowings, and Available Lines of Credit](index=44&type=section&id=Federal%20Home%20Loan%20Bank%20Borrowings%2C%20Federal%20Reserve%20Bank%20Borrowings%2C%20and%20Available%20Lines%20of%20Credit) This subsection details the company's available and utilized credit lines with the Federal Home Loan Bank and Federal Reserve Bank, along with other short-term borrowing arrangements - At March 31, 2023, HBC had an available FHLB line of credit of **$789.909 million**, with **$150.0 million** outstanding. It also had an available FRB line of credit of **$1.231 billion**, with **$150.0 million** outstanding. Both outstanding amounts were repaid in full on April 20, 2023[111](index=111&type=chunk)[112](index=112&type=chunk) - HBC had **$80.0 million** in Federal funds purchased arrangements available and a **$20.0 million** line of credit with a correspondent bank, with no outstanding balances on either at March 31, 2023[113](index=113&type=chunk)[114](index=114&type=chunk) [Subordinated Debt](index=44&type=section&id=Subordinated%20Debt) This subsection describes the company's subordinated debt, its qualification as Tier 2 capital, and key terms - The Company's subordinated debt, net of issuance costs, totaled **$39.387 million** at March 31, 2023, qualifying as Tier 2 capital. This debt is from a **$40.0 million** private placement offering of 5.00% fixed-to-floating rate notes due May 15, 2032, which replaced a prior **$40.0 million** subordinated debt due June 1, 2027[115](index=115&type=chunk) [12) Capital Requirements](index=44&type=section&id=12)%29%20Capital%20Requirements) This note presents the company's and its subsidiary's capital ratios, demonstrating compliance with regulatory capital adequacy guidelines Company Consolidated Capital Ratios (March 31, 2023, Dollars in thousands) | Capital Ratio | Actual Amount | Actual Ratio | Required for Capital Adequacy (Amount) | Required for Capital Adequacy (Ratio) | | :------------------------------------- | :------------ | :----------- | :------------------------------------- | :------------------------------------ | | Total Capital | $567,562 | 15.3% | $389,554 | 10.5% | | Tier 1 Capital | $485,738 | 13.1% | $315,353 | 8.5% | | Common Equity Tier 1 Capital | $485,738 | 13.1% | $259,703 | 7.0% | | Tier 1 Capital (to average assets) | $485,738 | 9.6% | $202,798 | 4.0% | - Both the Company and HBC exceeded all regulatory capital guidelines for a well-capitalized financial institution under Basel III requirements at March 31, 2023. The Company's consolidated Total Capital ratio was **15.3%**, Tier 1 Capital was **13.1%**, and Common Equity Tier 1 Capital was **13.1%**, all well above minimum requirements[117](index=117&type=chunk)[120](index=120&type=chunk)[121](index=121&type=chunk)[125](index=125&type=chunk)[126](index=126&type=chunk) - HBC distributed **$8.0 million** in dividends to HCC during Q1 2023. As of March 31, 2023, HBC had **$58.084 million** available for cash dividends without requiring regulatory approval[128](index=128&type=chunk) [13) Commitments and Loss Contingencies](index=50&type=section&id=13)%29%20Commitments%20and%20Loss%20Contingencies) This note discloses the company's legal proceedings, off-balance sheet arrangements, and other commitments that could impact its financial position [Loss Contingencies](index=50&type=section&id=Loss%20Contingencies) This subsection details the company's involvement in various legal proceedings and management's assessment of potential financial impacts - The Company is involved in various legal proceedings, including a lawsuit related to a former customer's alleged Ponzi scheme (D.C. Solar) and employee-related class/PAGA actions alleging California Labor Code violations. The D.C. Solar case has seen favorable rulings for the Bank, with plaintiffs dismissing the remaining count. Employee lawsuits are stayed pending appeal of arbitration denials[131](index=131&type=chunk)[134](index=134&type=chunk) - Management believes that the reasonably possible losses from pending lawsuits, audits, proceedings, and claims will not have a material adverse effect on the Company's financial position, results of operations, or liquidity[136](index=136&type=chunk) [Off-Balance Sheet Arrangements](index=52&type=section&id=Off-Balance%20Sheet%20Arrangements) This subsection describes the company's off-balance sheet commitments, such as unused lines of credit and standby letters of credit Commitments to Extend Credit (Dollars in thousands) | Type | March 31, 2023 | December 31, 2022 | | :------------------------------------- | :------------- | :---------------- | | Unused lines of credit and commitments to make loans | $1,075,165 | $1,124,195 | | Standby letters of credit | $13,533 | $10,424 | | Total Unused Commitments | $1,088,698 | $1,134,619 | - Total unused commitments to extend credit decreased to **$1.088 billion** at March 31, 2023, from **$1.134 billion** at December 31, 2022, representing **33%** of outstanding gross loans. The allowance for credit losses on off-balance sheet credit exposures decreased slightly to **$818,000**[137](index=137&type=chunk)[138](index=138&type=chunk) [14) Revenue Recognition](index=52&type=section&id=14)%29%20Revenue%20Recognition) This note explains the company's policies for recognizing revenue from various sources, particularly noninterest income streams - The Company adopted ASU No. 2014-09 (Topic 606) for revenue recognition, though it does not apply to financial instruments. In-scope revenue streams, such as service charges and fees on deposit accounts, are recognized as earned or as transactions occur. Sales of foreclosed assets are recognized when control transfers[139](index=139&type=chunk)[141](index=141&type=chunk) Noninterest Income Segregated by Topic 606 Scope (Three Months Ended March 31, Dollars in thousands) | Category | 2023 | 2022 | | :------------------------------------- | :----- | :----- | | Noninterest Income In-scope of Topic 606 | $1,743 | $612 | | Noninterest Income Out-of-scope of Topic 606 | $1,023 | $1,848 | | Total noninterest income | $2,766 | $2,460 | [15) Noninterest Expense](index=54&type=section&id=15)%29%20Noninterest%20Expense) This note provides a detailed breakdown of the company's noninterest expenses, highlighting significant changes and their drivers Noninterest Expense Components (Three Months Ended March 31, Dollars in thousands) | Expense Category | 2023 | 2022 | Change (Amount) | Change (Percent) | | :------------------------------------- | :----- | :----- | :-------------- | :--------------- | | Salaries and employee benefits | $14,809 | $13,821 | $988 | 7% | | Occupancy and equipment | $2,400 | $2,437 | ($37) | (2)% | | Insurance expense | $1,520 | $1,043 | $477 | 46% | | Professional fees | $1,399 | $1,080 | $319 | 30% | | Amortization of intangible assets | $602 | $659 | ($57) | (9)% | | Data processing | $774 | $651 | $123 | 19% | | Other | $3,897 | $3,561 | $336 | 9% | | Total noninterest expense | $25,401 | $23,252 | $2,149 | 9% | - Total noninterest expense increased by **$2.149 million (9%)** to **$25.401 million** in Q1 2023 compared to Q1 2022, primarily due to higher salaries and employee benefits, insurance expense, and professional fees[143](index=143&type=chunk) [16) Leases](index=54&type=section&id=16)%29%20Leases) This note provides information on the company's operating lease arrangements, including right-of-use assets, lease liabilities, and associated costs Operating Lease Information (Dollars in thousands) | Metric | March 31, 2023 | March 31, 2022 | | :------------------------------------- | :------------- | :------------- | | Operating Lease Cost | $1,701 | $1,620 | | Operating Lease - ROU assets | $32,123 | $33,669 | | Operating Lease - Liabilities | $32,123 | $33,669 | | Weighted Average Lease Term | 6.44 years | 7.19 years | | Weighted Average Discount Rate | 4.54% | 4.49% | - As of March 31, 2023, operating lease ROU assets and lease liabilities totaled **$32.123 million**. The total undiscounted cash flows for operating lease liabilities are **$37.303 million**, with the majority due in 2023-2027[144](index=144&type=chunk)[145](index=145&type=chunk) [17) Business Segment Information](index=56&type=section&id=17)%29%20Business%20Segment%20Information) This note provides financial information disaggregated by the company's operating segments, Banking and Factoring, to assess their performance Segment Net Income (Three Months Ended March 31, Dollars in thousands) | Segment | 2023 | 2022 | | :------------------------------------- | :----- | :----- | | Banking | $17,758 | $12,128 | | Factoring | $1,159 | $738 | | Consolidated Net Income | $18,917 | $12,866 | - Both the Banking and Factoring segments contributed to the overall increase in net income. The Banking segment's net income rose by **$5.630 million (46.42%)** and the Factoring segment's net income increased by **$421,000 (57.05%)** year-over-year[147](index=147&type=chunk)[149](index=149&type=chunk) Segment Total Assets (March 31, Dollars in thousands) | Segment | 2023 | 2022 | | :------------------------------------- | :----------- | :----------- | | Banking | $5,453,352 | $5,352,709 | | Factoring | $83,188 | $74,689 | | Consolidated Total Assets | $5,536,540 | $5,427,398 | [18) Subsequent Events](index=57&type=section&id=18)%29%20Subsequent%20Events) This note discloses significant events that occurred after the balance sheet date but before the financial statements were issued - On April 27, 2023, the Board of Directors declared a **$0.13 per share** quarterly cash dividend, payable on May 25, 2023, to shareholders of record on May 11, 2023[150](index=150&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=58&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the Company's financial condition, results of operations, liquidity, and capital resources, highlighting key performance metrics, significant changes, and the impact of economic factors. It covers critical accounting policies, an executive summary of performance and liquidity, detailed analysis of net interest income, noninterest income and expense, income taxes, and a comprehensive review of financial condition including securities, loans, credit quality, deposits, and capital [CRITICAL ACCOUNTING POLICIES](index=58&type=section&id=CRITICAL%20ACCOUNTING%20POLICIES) This section discusses the accounting policies that require management's most difficult, subjective, or complex judgments and estimates - The Company's critical accounting policies remain consistent with those discussed in its 2022 Form 10-K, with the exception of the adoption of ASU 2022-02 on January 1, 2023. This new guidance, which eliminates TDR accounting and enhances disclosures for loan refinancings/restructurings, did not materially impact the consolidated financial statements[153](index=153&type=chunk) [EXECUTIVE SUMMARY](index=58&type=section&id=EXECUTIVE%20SUMMARY) This section provides a high-level overview of the company's financial performance, key highlights, and strategic initiatives for the reporting period [Performance Overview](index=58&type=section&id=Performance%20Overview) This subsection summarizes the company's financial performance, including net income, earnings per share, and key profitability ratios Performance Overview (Three Months Ended March 31) | Metric | 2023 | 2022 | | :------------------------------------- | :----- | :----- | | Net income (in millions) | $18.9 | $12.9 | | Diluted EPS | $0.31 | $0.21 | | Annualized return on average tangible assets | 1.52% | 0.99% | | Annualized return on average tangible common equity | 16.71% | 12.47% | - Net income increased by **$6.0 million (46.5%)** to **$18.9 million** in Q1 2023 compared to Q1 2022, with diluted EPS rising from **$0.21** to **$0.31**. This led to improved returns on average tangible assets and tangible common equity[156](index=156&type=chunk) [Factoring Activities - Bay View Funding](index=59&type=section&id=Factoring%20Activities%20-%20Bay%20View%20Funding) This subsection provides an overview of the performance and key metrics of the company's factoring segment, Bay View Funding Bay View Funding Selected Financial Information (Dollars in thousands) | Metric | March 31, 2023 | March 31, 2022 | | :------------------------------------- | :------------- | :------------- | | Total factored receivables at period-end | $69,424 | $61,241 | | Average factored receivables (for the three months ended) | $77,754 | $57,761 | | Total full time equivalent employees at period-end | 26 | 30 | - Bay View Funding's total factored receivables increased by **$8.183 million (13.36%)** year-over-year to **$69.424 million** at March 31, 2023, with average factored receivables also showing a significant increase[157](index=157&type=chunk) [First Quarter 2023 Highlights](index=59&type=section&id=First%20Quarter%202023%20Highlights) This subsection summarizes the most significant financial and operational achievements and trends during the first quarter of 2023 Q1 2023 Financial Highlights (Dollars in millions, except percentages) | Metric | Q1 2023 | Q1 2022 | YoY Change | QoQ Change (vs. Q4 2022) | | :------------------------------------- | :------ | :------ | :--------- | :----------------------- | | Net interest income (before provision) | $49.3 | $38.2 | +29% | -5% | | FTE net interest margin | 4.09% | 3.05% | +104 bps | -1 bp | | Average yield on total loan portfolio | 5.46% | 4.70% | +76 bps | +27 bps | | Average cost of total deposits | 0.54% | 0.10% | +44 bps | +29 bps | | Provision for credit losses on loans | $0.032 | ($0.567) | N/A | N/A | | Total noninterest income | $2.8 | $2.5 | +12% | N/A | | Total noninterest expense | $25.4 | $23.3 | +9% | N/A | | Efficiency ratio | 48.83% | 57.16% | -8.33% | N/A | | Effective tax rate | 28.9% | 28.5% | +0.4% | N/A | - Net interest income before provision for credit losses increased **29%** YoY to **$49.3 million**, driven by higher prime rates and yields on earning assets, despite a **5%** QoQ decrease due to higher cost of funds and lower noninterest-bearing deposits[158](index=158&type=chunk)[179](index=179&type=chunk)[180](index=180&type=chunk) - Total liquidity and borrowing capacity was **$3.073 billion** at March 31, 2023, with **$2.773 billion** remaining available, representing **62%** of total deposits and **110%** of estimated uninsured deposits. The Bank increased its credit line availability from FRB and FHLB to **$2.022 billion**[161](index=161&type=chunk)[163](index=163&type=chunk) - Nonperforming assets decreased to **$2.2 million (0.04% of total assets)** at March 31, 2023, from **$2.4 million (0.05%)** at December 31, 2022. Classified assets increased to **$26.8 million (0.48% of total assets)** from **$14.5 million (0.28%)** QoQ[167](index=167&type=chunk) - Total deposits increased **1%** QoQ to **$4.445 billion**, but noninterest-bearing demand deposits decreased **15%** QoQ. ICS/CDARS deposits surged **901%** QoQ to **$304.1 million**, partly by bringing off-balance sheet client deposits onto the balance sheet. Uninsured deposits represented approximately **57%** of total deposits[167](index=167&type=chunk) [RESULTS OF OPERATIONS](index=65&type=section&id=RESULTS%20OF%20OPERATIONS) This section analyzes the company's financial performance, focusing on key revenue and expense drivers and their impact on profitability [Net Interest Income and Net Interest Margin](index=65&type=section&id=Net%20Interest%20Income%20and%20Net%20Interest%20Margin) This subsection analyzes the primary source of the company's earnings, detailing interest income, interest expense, and the resulting net interest margin Net Interest Income and Margin (Three Months Ended March 31, Dollars in thousands) | Metric | 2023 | 2022 | | :------------------------------------- | :----- | :----- | | Net interest income before provision for credit losses on loans | $49,258 | $38,221 | | FTE net interest margin | 4.09% | 3.05% | | Average yield on total loan portfolio | 5.46% | 4.70% | | Average cost of total deposits | 0.54% | 0.10% | | Average cost of funds | 0.63% | 0.14% | - Net interest income before provision for credit losses increased **29%** YoY to **$49.3 million**, and the FTE net interest margin expanded by **104 basis points** to **4.09%** in Q1 2023, primarily due to increases in the prime rate and overnight funds rates, and a shift to higher-yielding assets[179](index=179&type=chunk) - The average yield on the total loan portfolio increased to **5.46%** in Q1 2023 from **4.70%** in Q1 2022, and from **5.19%** in Q4 2022, driven by prime rate increases and higher accretion of loan purchase discounts[181](index=181&type=chunk)[183](index=183&type=chunk) - The average cost of total deposits significantly increased to **0.54%** in Q1 2023 from **0.10%** in Q1 2022 and **0.25%** in Q4 2022, reflecting rising interest rates[184](index=184&type=chunk) [Provision for Credit Losses on Loans](index=70&type=section&id=Provision%20for%20Credit%20Losses%20on%20Loans) This subsection discusses the company's provision for credit losses, reflecting management's assessment of potential loan defaults and changes in the allowance for credit losses Provision for Credit Losses on Loans (Three Months Ended March 31, Dollars in thousands) | Metric | 2023 | 2022 | | :------------------------------------- | :----- | :------- | | Provision for (recapture of) credit losses on loans | $32 | ($567) | - The Company recorded a provision for credit losses on loans of **$32,000** in Q1 2023, a shift from a recapture of **$567,000** in Q1 2022. This reflects management's ongoing evaluation of loan portfolio adequacy under the CECL model, considering factors like loan growth, net charge-offs, and economic conditions[185](index=185&type=chunk)[186](index=186&type=chunk) [Noninterest Income](index=72&type=section&id=Noninterest%20Income) This subsection analyzes the company's noninterest income streams, including service charges, fees, and gains on asset sales Noninterest Income Components (Three Months Ended March 31, Dollars in thousands) | Income Category | 2023 | 2022 | Change (Amount) | Change (Percent) | | :------------------------------------- | :----- | :----- | :-------------- | :--------------- | | Service charges and fees on deposit accounts | $1,743 | $612 | $1,131 | 185% | | Increase in cash surrender value of life insurance | $493 | $480 | $13 | 3% | | Servicing income | $131 | $106 | $25 | 24% | | Gain on sales of SBA loans | $76 | $156 | ($80) | (51)% | | Termination fees | $11 | — | $11 | N/A | | Gain on warrants | — | $637 | ($637) | (100)% | | Other | $312 | $469 | ($157) | (33)% | | Total | $2,766 | $2,460 | $306 | 12% | - Total noninterest income increased **12%** to **$2.8 million** in Q1 2023, primarily driven by a significant **185%** increase in service charges and fees on deposit accounts. This was partially offset by a **51%** decrease in gains on sales of SBA loans and the absence of gains on warrants compared to Q1 2022[187](index=187&type=chunk)[188](index=188&type=chunk) [Noninterest Expense](index=72&type=section&id=Noninterest%20Expense) This subsection analyzes the company's noninterest expenses, detailing changes in categories such as salaries, occupancy, and professional fees Noninterest Expense Components (Three Months Ended March 31, Dollars in thousands) | Expense Category | 2023 | 2022 | Change (Amount) | Change (Percent) | | :------------------------------------- | :----- | :----- | :-------------- | :--------------- | | Salaries and employee benefits | $14,809 | $13,821 | $988 | 7% | | Occupancy and equipment | $2,400 | $2,437 | ($37) | (2)% | | Insurance expense | $1,520 | $1,043 | $477 | 46% | | Professional fees | $1,399 | $1,080 | $319 | 30% | | Amortization of intangible assets | $602 | $659 | ($57) | (9)% | | Data processing | $774 | $651 | $123 | 19% | | Other | $3,897 | $3,561 | $336 | 9% | | Total noninterest expense | $25,401 | $23,252 | $2,149 | 9% | - Total noninterest expense increased by **$2.149 million (9%)** to **$25.4 million** in Q1 2023, primarily due to higher payroll taxes and employee benefits, professional fees, and insurance and information technology-related expenses. Full-time equivalent employees increased to **339** at March 31, 2023, from **325** at March 31, 2022[190](index=190&type=chunk)[192](index=192&type=chunk) [Income Tax Expense](index=73&type=section&id=Income%20Tax%20Expense) This subsection discusses the company's income tax expense and effective tax rate, along with the status of deferred tax assets Effective Income Tax Rate (Three Months Ended March 31) | Metric | 2023 | 2022 | | :------------------------------------- | :----- | :----- | | Effective income tax rate | 28.9% | 28.5% | - Income tax expense for Q1 2023 was **$7.7 million**, up from **$5.1 million** in Q1 2022, with the effective tax rate slightly increasing to **28.9%**. Net deferred tax assets were **$29.8 million** at March 31, 2023, and management expects full realization in future years[194](index=194&type=chunk)[198](index=198&type=chunk) [FINANCIAL CONDITION](index=75&type=section&id=FINANCIAL%20CONDITION) This section provides an in-depth review of the company's balance sheet, including assets, liabilities, and equity, and their changes over time [Securities Portfolio](index=75&type=section&id=Securities%20Portfolio) This subsection analyzes the company's investment securities, including available-for-sale and held-to-maturity categories, and their fair values and unrealized gains/losses Securities Portfolio Balances (Dollars in thousands) | Category | March 31, 2023 | March 31, 2022 | December 31, 2022 | | :------------------------------------- | :------------- | :------------- | :---------------- | | Securities available-for-sale (fair value) | $491,751 | $111,217 | $489,596 | | Securities held-to-maturity (amortized cost) | $698,245 | $736,862 | $715,004 | | Total Securities | $1,189,996 | $848,079 | $1,204,600 | - The securities available-for-sale portfolio significantly increased by **342%** YoY to **$491.8 million** at March 31, 2023, while securities held-to-maturity decreased by **5%** YoY to **$698.2 million**. The total investment securities portfolio had an average life of **4.82 years** and a modified duration of **4.04 years**[200](index=200&type=chunk)[210](index=210&type=chunk) Pre-tax Unrealized Losses on Securities (Dollars in thousands) | Category | March 31, 2023 | March 31, 2022 | December 31, 2022 | | :------------------------------------- | :------------- | :------------- | :---------------- | | Securities available-for-sale | ($12,479) | ($1,499) | ($16,117) | | Securities held-to-maturity | ($90,259) | ($46,078) | ($100,552) | | Total Pre-tax Unrealized Losses | ($102,738) | ($47,577) | ($116,669) | - Pre-tax unrealized losses on securities held-to-maturity were **($90.3) million** at March 31, 2023, or **($64.5) million** net of taxes, representing **10%** of total shareholders' equity. These losses are attributed to higher interest rates, but principal is expected to be repaid[209](index=209&type=chunk) [Loans](index=77&type=section&id=Loans) This subsection provides a comprehensive analysis of the company's loan portfolio, including its composition, maturities, and servicing activities [Loan Distribution](index=78&type=section&id=Loan%20Distribution) This subsection details the breakdown of gross loans by category, highlighting changes and concentrations within the portfolio Gross Loans by Category (Dollars in thousands) | Loan Category | March 31, 2023 | % to Total | March 31, 2022 | % to Total | December 31, 2022 | % to Total | | :------------------------------------- | :------------- | :--------- | :------------- | :--------- | :---------------- | :--------- | | Commercial | $506,037 | 16% | $568,053 | 19% | $532,749 | 16% | | PPP loans | $565 | 0% | $37,393 | 1% | $1,166 | 0% | | CRE - owner occupied | $603,298 | 18% | $597,542 | 20% | $614,663 | 19% | | CRE - non-owner occupied | $1,083,852 | 33% | $928,220 | 31% | $1,066,368 | 32% | | Land and construction | $166,408 | 5% | $153,323 | 5% | $163,577 | 5% | | Home equity | $124,481 | 4% | $111,609 | 3% | $120,724 | 4% | | Multifamily | $231,242 | 7% | $221,767 | 7% | $244,882 | 7% | | Residential mortgages | $528,639 | 16% | $391,171 | 13% | $537,905 | 16% | | Consumer and other | $17,905 | 1% | $17,110 | 1% | $17,033 | 1% | | Total Loans, net of deferred fees | $3,261,915 | 100% | $3,024,064 | 100% | $3,298,550 | 100% | - Gross loans, excluding held-for-sale, increased **8%** YoY to **$3.262 billion** at March 31, 2023, but decreased **1%** QoQ. Real estate-secured loans constituted **83%** of gross loans. CRE non-owner occupied loans increased **17%** YoY to **$1.084 billion**[211](index=211&type=chunk)[214](index=214&type=chunk)[223](index=223&type=chunk) - The Company actively participates in SBA and USDA guaranteed lending programs, selling the guaranteed portion of SBA loans in the secondary market while retaining servicing rights. Gains on SBA loan sales were **$76,000** in Q1 2023[217](index=217&type=chunk) - The commercial loan portfolio, excluding PPP loans, decreased **11%** YoY to **$506.0 million**. PPP loans significantly declined to **$565,000** at March 31, 2023, from **$37.4 million** a year prior[221](index=221&type=chunk) [Loan Maturities](index=82&type=section&id=Loan%20Maturities) This subsection presents the maturity distribution of the loan portfolio, distinguishing between variable and fixed interest rate loans Loan Maturity Distribution (March 31, 2023, Dollars in thousands) | Maturity Period | Total Loans | Loans with Variable Interest Rates | Loans with Fixed Interest Rates | | :------------------------------------- | :---------- | :------------------------------- | :------------------------------ | | One Year or Less | $474,858 | $409,059 | $65,799 | | Over One Year But Less than Five Years | $787,080 | $286,346 | $500,734 | | Over Five Years | $2,000,489 | $312,341 | $1,688,148 | | Total Loans | $3,262,427 | $1,007,746 | $2,254,681 | - As of March 31, 2023, approximately **31%** of the Company's loan portfolio consisted of floating interest rate loans, with the majority of loans maturing over five years having fixed interest rates[234](index=234&type=chunk)[235](index=235&type=chunk) [Loan Servicing](index=83&type=section&id=Loan%20Servicing) This subsection details the company's loan servicing activities and the associated loan servicing rights Loan Servicing Rights Activity (Three Months Ended March 31, Dollars in thousands) | Metric | 2023 | 2022 | | :------------------------------------- | :----- | :----- | | Beginning of period balance | $549 | $655 | | Additions | $18 | $38 | | Amortization | ($45) | ($87) | | End of period balance | $522 | $606 | - The Company serviced **$61.7 million** in SBA loans for others at March 31, 2023. Loan servicing rights, included in other assets, decreased to **$522,000** at March 31, 2023, from **$606,000** at March 31, 2022, due to amortization[236](index=236&type=chunk) [Credit Quality and Allowance for Credit Losses on Loans](index=83&type=section&id=Credit%20Quality%20and%20Allowance%20for%20Credit%20Losses%20on%20Loans) This subsection evaluates the overall credit quality of the loan portfolio and the adequacy of the allowance for credit losses [Allocation of Allowance for Credit Losses on Loans](index=90&type=section&id=Allocation%20of%20Allowance%20for%20Credit%20Losses%20on%20Loans) This subsection details the allocation of the allowance for credit losses across different loan categories and presents key credit quality metrics Nonperforming Assets (Dollars in thousands) | Metric | March 31, 2023 | March 31, 2022 | December 31, 2022 | | :------------------------------------- | :------------- | :------------- | :---------------- | | Total nonperforming loans | $2,240 | $3,830 | $2,425 | | Total nonperforming assets | $2,240 | $3,830 | $2,425 | | Nonperforming assets as % of total assets | 0.04% | 0.07% | 0.05% | - Nonperforming assets decreased to **$2.2 million (0.04% of total assets)** at March 31, 2023, from **$2.4 million (0.05%)** at December 31, 2022, and **$3.8 million (0.07%)** at March 31, 2022[245](index=245&type=chunk) Allowance for Credit Losses on Loans (ACLL) (Dollars in thousands) | Metric | March 31, 2023 | March 31, 2022 | December 31, 2022 | | :------------------------------------- | :------------- | :------------- | :---------------- | | ACLL | $47,273 | $42,788 | $47,512 | | ACLL as % of total loans | 1.45% | 1.41% | 1.44% | | ACLL as % of nonperforming loans | 2,110% | 1,117% | 1,959% | | Net charge-offs (recoveries) | $271 | ($65) | ($83) | - The ACLL decreased slightly to **$47.3 million** at March 31, 2023, from **$47.5 million** at December 31, 2022, primarily due to a net decrease in pooled loan reserves, partially offset by an increase in specific reserves. The ACLL covered nonperforming loans by **2,110%**[265](index=265&type=chunk)[267](index=267&type=chunk) [Leases](index=92&type=section&id=Leases) This subsection discusses the company's lease accounting under ASC 842, including the recognition of right-of-use assets and lease liabilities - The Company recognized **$32.1 million** in right-of-use (ROU) assets and lease liabilities on its consolidated balance sheet at March 31, 2023, related to non-cancelable operating lease agreements for office space[269](index=269&type=chunk) [Deposits](index=92&type=section&id=Deposits) This subsection analyzes the company's deposit base, including its composition, changes in categories, and the proportion of uninsured deposits Deposit Distribution (Dollars in thousands) | Deposit Category | March 31, 2023 | % to Total | March 31, 2022 | % to Total | December 31, 2022 | % to Total | | :------------------------------------- | :------------- | :--------- | :------------- | :--------- | :---------------- | :--------- | | Demand, noninterest-bearing | $1,469,081 | 33% | $1,811,943 | 38% | $1,736,722 | 40% | | Demand, interest-bearing | $1,196,789 | 27% | $1,268,942 | 27% | $1,196,427 | 27% | | Savings and money market | $1,264,567 | 28% | $1,447,434 | 31% | $1,285,444 | 29% | | Time deposits — under $250 | $37,884 | 1% | $38,417 | 1% | $32,445 | 1% | | Time deposits — $250 and over | $172,070 | 4% | $93,161 | 2% | $108,192 | 2% | | ICS/CDARS — interest-bearing demand, money market and time deposits | $304,147 | 7% | $30,008 | 1% | $30,374 | 1% | | Total deposits | $4,444,538 | 100% | $4,689,905 | 100% | $4,389,604 | 100% | - Total deposits increased **1%** QoQ to **$4.445 billion** at March 31, 2023, but decreased **5%** YoY. Noninterest-bearing demand deposits decreased **19%** YoY and **15%** QoQ, as customers shifted to interest-bearing accounts due to rising rates[273](index=273&type=chunk) - ICS/CDARS deposits surged **914%** YoY and **901%** QoQ to **$304.1 million**, partly by bringing **$128.0 million** of off-balance sheet client deposits onto the balance sheet. Uninsured deposits represented approximately **57%** of total deposits[273](index=273&type=chunk)[274](index=274&type=chunk) [Return on Equity and Assets](index=95&type=section&id=Return%20on%20Equity%20and%20Assets) This subsection evaluates the company's profitability and efficiency in utilizing its assets and equity to generate returns Return on Equity and Assets (Three Months Ended March 31) | Metric | 2023 | 2022 | | :------------------------------------- | :----- | :----- | | Return on average assets | 1.47% | 0.96% | | Return on average tangible assets | 1.52% | 0.99% | | Return on average equity | 12.03% | 8.71% | | Return on average tangible common equity | 16.71% | 12.47% | | Average equity to average assets ratio | 12.18% | 11.01% | - The Company demonstrated improved profitability in Q1 2023, with return on average assets increasing to **1.47%** from **0.96%** in Q1 2022, and return on average tangible common equity rising to **16.71%** from **12.47%**[277](index=277&type=chunk) [Liquidity, Asset/Liability Management and Available Lines of Credit](index=95&type=section&id=Liquidity%2C%20Asset%2FLiability%20Management%20and%20Available%20Lines%20of%20Credit) This subsection assesses the company's ability to meet its financial obligations, manage its balance sheet, and access external funding sources - The Company's total liquidity and borrowing capacity was **$3.073 billion** at March 31, 2023, with **$2.773 billion** remaining available. This available liquidity represented **62%** of total deposits and approximately **110%** of estimated uninsured deposits[281](index=281&type=chunk) - The loan to deposit ratio was **73.39%** at March 31, 2023, up from **64.48%** at March 31, 2022, but down from **75.14%** at December 31, 2022[280](index=280&type=chunk) - HBC increased its credit line availability from the FRB and FHLB to **$2.022 billion** at March 31, 2023, from **$839.5 million** at December 31, 2022. The **$150.0 million** borrowed from each institution during Q1 2023 was repaid in full on April 20, 2023[281](index=281&type=chunk)[282](index=282&type=chunk)[283](index=283&type=chunk) [Capital Resources](index=97&type=section&id=Capital%20Resources) This subsection reviews the company's capital structure, regulatory capital ratios, and overall capital adequacy Consolidated Capital Ratios (March 31, Dollars in thousands) | Capital Ratio | 2023 | 2022 | 2022 (Dec 31) | | :------------------------------------- | :----- | :----- | :------------ | | Total Capital | 15.3% | 14.6% | 14.8% | | Tier 1 Capital | 13.1% | 12.4% | 12.7% | | Common equity Tier 1 Capital | 13.1% | 12.4% | 12.7% | | Tier 1 Leverage | 9.6% | 8.3% | 9.2% | - The Company's consolidated capital ratios and HBC's capital ratios exceeded all regulatory guidelines for a well-capitalized financial institution under Basel III requirements at March 31, 2023. Total shareholders' equity was **$647.2 million**, with book value per share at **$10.62** and tangible book value per share at **$7.70**[294](index=294&type=chunk)[296](index=296&type=chunk) Accumulated Other Comprehensive Loss (Net of Taxes, Dollars in thousands) | Component | March 31, 2023 | December 31, 2022 | | :------------------------------------- | :------------- | :---------------- | | Unrealized loss on securities available-for-sale | ($8,924) | ($11,506) | | Split dollar insurance contracts liability | ($3,139) | ($3,091) | | Supplemental executive retirement plan liability | ($2,361) | ($2,371) | | Unrealized gain on interest-only strip from SBA loans | $107 | $112 | | Total accumulated other comprehensive loss | ($14,317) | ($16,856) | - Accumulated other comprehensive loss improved to **($14.3) million** at March 31, 2023, from **($16.9) million** at December 31, 2022, primarily due to a reduction in unrealized losses on available-for-sale securities[297](index=297&type=chunk) [Market Risk](index=101&type=section&id=Market%20Risk) This subsection identifies and assesses the company's exposure to market risks, particularly interest rate risk, and its management strategies [Interest Rate Management](index=101&type=section&id=Interest%20Rate%20Management) This subsection details the company's approach to managing interest rate risk, including analytical tools and assumptions used - The Company's primary market risk exposure is interest rate risk, managed through policies and procedures to monitor and limit earnings and balance sheet exposure. It does not engage in trading financial instruments or have currency exchange rate exposure[299](index=299&type=chunk) - Management uses GAP analysis and interest rate shock simulation models to assess the effects of potential interest rate changes on net interest margin and fair values. Critical assumptions, such as deposit beta, are regularly reviewed and updated[300](index=300&type=chunk)[304](index=304&type=chunk) Estimated Change in Annual Net Interest Income from Instantaneous Rate Shift (March 31, 2023, Dollars in thousands) | Change in Interest Rates (basis points) | Estimated Net Interest Income (Amount) | Estimated Net Interest Income (Percent) | | :------------------------------------- | :------------------------------------- | :-------------------------------------- | | +400 | $14,603 | 7.1% | | +300 | $10,917 | 5.3% | | +200 | $7,254 | 3.5% | | +100 | $3,618 | 1.8% | | -100 | ($6,667) | (3.2)% | | -200 | ($19,823) | (9.6)% | | -300 | ($35,220) | (17.1)% | | -400 | ($50,409) | (24.4)% | - The simulation model indicates that a **+100 basis point** instantaneous shift in interest rates would increase estimated annual net interest income by **1.8%**, while a **-100 basis point** shift would decrease it by **3.2%**[305](index=305&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=105&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section refers to the market risk disclosures provided within Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, specifically under the 'Market Risk' and 'Interest Rate Management' subsections - The quantitative and qualitative disclosures about market risk are integrated into Item 2 of this report, specifically within the 'Market Risk' and 'Interest Rate Management' sections[306](index=306&type=chunk) [Item 4. Controls and Procedures](index=105&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including the CEO and CFO, evaluated the effectiveness of the Company's disclosure controls and procedures as of March 31, 2023, concluding they were effective. No material changes in internal controls over financial reporting occurred during the quarter - The Company's disclosure controls and procedures were evaluated and deemed effective as of March 31, 2023, ensuring timely and accurate reporting of required information[307](index=307&type=chunk) - There were no material changes in the Company's internal controls over financial reporting during the three months ended March 31, 2023[308](index=308&type=chunk) PART II. OTHER INFORMATION [Item 1. Legal Proceeding

Table of Contents 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 For the fiscal year ended December 31, 2022 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 Juri ...

Part I. FINANCIAL INFORMATION [Item 1. Consolidated Financial Statements (unaudited)](index=5&type=section&id=Item%201.%20Consolidated%20Financial%20Statements%20(unaudited)) Presents Heritage Commerce Corp's unaudited consolidated financial statements, including balance sheets, income statements, and cash flows, with detailed accounting notes [Consolidated Balance Sheets](index=5&type=section&id=Consolidated%20Balance%20Sheets) Total assets decreased to **$5.36 billion** at June 30, 2022, from **$5.50 billion** at December 31, 2021, driven by lower cash and deposits, while shareholders' equity slightly increased Consolidated Balance Sheet Highlights (Unaudited) | Balance Sheet Item | June 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :--- | :--- | :--- | | Total Cash and Cash Equivalents | $876,585 | $1,306,216 | | Total Securities (AFS & HTM) | $1,055,845 | $760,649 | | Loans, net | $3,036,962 | $3,044,036 | | Goodwill | $167,631 | $167,631 | | **Total Assets** | **$5,356,841** | **$5,499,409** | | Total Deposits | $4,613,644 | $4,759,412 | | **Total Liabilities** | **$4,749,617** | **$4,901,381** | | **Total Shareholders' Equity** | **$607,224** | **$598,028** | [Consolidated Statements of Income](index=6&type=section&id=Consolidated%20Statements%20of%20Income) Net income for Q2 2022 significantly increased to **$14.8 million** from **$8.8 million** in Q2 2021, driven by higher net interest income, with diluted EPS rising to **$0.24** Consolidated Income Statement Highlights (Unaudited) | Metric (in thousands, except EPS) | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $41,879 | $34,876 | $80,100 | $69,834 | | Provision for (recapture of) credit losses | ($181) | ($493) | ($748) | ($2,005) | | Noninterest Income | $2,098 | $2,169 | $4,558 | $4,470 | | Noninterest Expense | $23,190 | $25,775 | $46,442 | $49,019 | | **Net Income** | **$14,821** | **$8,813** | **$27,687** | **$20,017** | | **Diluted EPS** | **$0.24** | **$0.15** | **$0.45** | **$0.33** | [Notes to Unaudited Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Unaudited%20Consolidated%20Financial%20Statements) Provides detailed explanations of accounting policies and financial data, covering areas such as securities, loans, CECL, goodwill, income taxes, fair value, subordinated debt, capital, legal contingencies, and business segments - The Company operates through two segments: Banking and Factoring. The banking segment serves customers primarily in several California counties, while the factoring segment (Bay View Funding) provides working capital financing throughout the U.S[25](index=25&type=chunk) - The company adopted the Current Expected Credit Loss (CECL) model on January 1, 2020. The allowance for credit losses is estimated using a discounted cash flow model based on historical loss correlations with economic factors like California unemployment rate, GDP, and real estate indices[51](index=51&type=chunk)[52](index=52&type=chunk) - On May 11, 2022, the Company issued **$40 million** in new **5.00%** subordinated notes due 2032 and used the proceeds to redeem its existing **$40 million** of **5.25%** subordinated notes due 2027 on June 1, 2022[117](index=117&type=chunk)[119](index=119&type=chunk) - The Company is involved in several legal proceedings, including matters related to a former customer, DC Solar, and employee-related class action lawsuits concerning California labor code[132](index=132&type=chunk)[133](index=133&type=chunk)[134](index=134&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=43&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's financial performance and condition, highlighting increased net income driven by higher net interest income, expanded net interest margin, and lower noninterest expenses, alongside improved credit quality and strong capital ratios [Executive Summary](index=43&type=section&id=Executive%20Summary) Net income significantly increased in Q2 2022 to **$14.8 million** with diluted EPS of **$0.24**, driven by a 20% rise in net interest income and an expanded net interest margin, alongside improved credit quality Key Performance Metrics | Metric | Q2 2022 | Q2 2021 | | :--- | :--- | :--- | | Net Income | $14.8 million | $8.8 million | | Diluted EPS | $0.24 | $0.15 | | Net Interest Income | $41.9 million | $34.9 million | | FTE Net Interest Margin | 3.38% | 3.00% | | Nonperforming Assets / Total Assets | 0.05% | 0.12% | - The bank had **$8.2 million** in outstanding Paycheck Protection Program (PPP) loan balances at June 30, 2022, down significantly from **$286.5 million** a year prior, as loans were forgiven[162](index=162&type=chunk)[164](index=164&type=chunk) - Loans, excluding PPP and residential mortgages, grew **12%** year-over-year to **$2.626 billion** at June 30, 2022[169](index=169&type=chunk) [Results of Operations](index=47&type=section&id=Results%20of%20Operations) Results were driven by a 20% increase in net interest income to **$41.9 million** and an expanded FTE net interest margin of **3.38%** in Q2 2022, alongside a 10% decrease in noninterest expense due to a non-recurring legal reserve Net Interest Income and Margin (FTE) | Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $41.9M | $34.9M | $80.1M | $69.8M | | Net Interest Margin | 3.38% | 3.00% | 3.21% | 3.10% | - Noninterest expense decreased by **10%** in Q2 2022 compared to Q2 2021, primarily due to a **$4.0 million** reserve for litigation recorded in Q2 2021 that did not recur[201](index=201&type=chunk) - The effective income tax rate for Q2 2022 was **29.3%**, up from **25.1%** in Q2 2021. For H1 2022, the rate was **28.9%** compared to **26.7%** in H1 2021[205](index=205&type=chunk) [Financial Condition](index=57&type=section&id=Financial%20Condition) Total assets were **$5.36 billion** at June 30, 2022, with significant growth in the securities portfolio and total loans increasing to **$3.08 billion**, while credit quality improved with nonperforming assets at **0.05%** of total assets Loan Portfolio Composition (in millions) | Loan Category | June 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Commercial (ex-PPP) | $523.3 | $594.1 | | PPP loans | $8.2 | $88.7 | | CRE - owner occupied | $597.5 | $595.9 | | CRE - non-owner occupied | $993.6 | $902.3 | | Residential mortgages | $449.0 | $416.7 | | **Total Loans** | **$3,083.8** | **$3,090.8** | Credit Quality Indicators | Metric | June 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Nonperforming Assets (NPAs) | $2.7M | $3.7M | | NPAs as % of Total Assets | 0.05% | 0.07% | | Allowance for Credit Losses (ACLL) | $45.5M | $43.3M | | ACLL as % of Total Loans | 1.48% | 1.40% | - Total deposits decreased by **$145.8 million** (**3%**) from year-end 2021, primarily due to a **$153.9 million** decline in temporary deposits from two specific customers[214](index=214&type=chunk)[288](index=288&type=chunk) [Liquidity and Capital Resources](index=69&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains strong liquidity with over **$900 million** in FHLB and FRB borrowing lines, and capital ratios significantly exceed 'well-capitalized' minimums, including a **12.5%** Common Equity Tier 1 ratio for the company - The company has substantial available liquidity, including a **$175.7 million** line with the FHLB and a **$725.0 million** line with the FRB as of June 30, 2022[297](index=297&type=chunk)[298](index=298&type=chunk) Capital Ratios as of June 30, 2022 | Capital Ratio | Heritage Commerce Corp | Heritage Bank of Commerce | Well-Capitalized Guideline | | :--- | :--- | :--- | :--- | | Common Equity Tier 1 | 12.5% | 13.0% | 6.5% | | Tier 1 Capital | 12.5% | 13.0% | 8.0% | | Total Capital | 14.6% | 14.1% | 10.0% | | Tier 1 Leverage | 8.7% | 9.0% | 5.0% | - Tangible book value per share increased to **$7.04** at June 30, 2022, from **$6.91** at December 31, 2021[307](index=307&type=chunk) [Market Risk](index=72&type=section&id=Market%20Risk) The company manages interest rate risk through asset/liability strategies, with a **+100 basis point** rate shock estimated to increase net interest income by **5.7%** and a **-100 basis point** shock to decrease it by **11.0%** Net Interest Income Sensitivity Analysis (as of June 30, 2022) | Change in Interest Rates (bps) | Estimated Change in NII (Amount) | Estimated Change in NII (%) | | :--- | :--- | :--- | | +400 | $40,591,000 | 22.7% | | +200 | $20,241,000 | 11.3% | | +100 | $10,153,000 | 5.7% | | -100 | ($19,568,000) | (11.0)% | [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=74&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) Quantitative and qualitative disclosures regarding market risk are incorporated within Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations - Information regarding market risk is provided in the Management's Discussion and Analysis (MD&A) section of this report[319](index=319&type=chunk) [Item 4. Controls and Procedures](index=74&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2022, with no material changes to internal controls over financial reporting during the quarter - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of June 30, 2022[320](index=320&type=chunk) - There were no material changes to internal controls over financial reporting during the second quarter of 2022[322](index=322&type=chunk) Part II. OTHER INFORMATION [Item 1. Legal Proceedings](index=75&type=section&id=Item%201.%20Legal%20Proceedings) Detailed information regarding ongoing legal proceedings is provided in Note 13 of the consolidated financial statements - For details on legal proceedings, refer to Note 13, "Commitments and Loss Contingencies," in the financial statements[325](index=325&type=chunk) [Item 1A. Risk Factors](index=75&type=section&id=Item%201A.%20Risk%20Factors) A comprehensive discussion of risk factors affecting the company's business and financial results is available in the 2021 Annual Report on Form 10-K - A full discussion of risk factors is available in the company's 2021 Annual Report on Form 10-K[326](index=326&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=75&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) No unregistered sales of equity securities or use of proceeds were reported during the period - None reported[327](index=327&type=chunk) [Item 6. Exhibits](index=76&type=section&id=Item%206.%20Exhibits) Lists exhibits filed with the Form 10-Q, including corporate governance documents, CEO/CFO certifications, and XBRL data files - Exhibits filed include CEO/CFO certifications (31.1, 31.2, 32.1, 32.2) and XBRL interactive data files (101, 104)[328](index=328&type=chunk)