UNITED STATES SECURITIES AND EXCHANGE COMMISSION Table of Contents 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 March 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 ...

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 or the fiscal year ended December 31, 2021 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 Juris ...

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, 2021 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 O ...

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, 2021 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 ...

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 March 31, 2021 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 ...

Part I [Business](index=8&type=section&id=Item%201.%20Business) Heritage Commerce Corp provides commercial banking services in the San Francisco Bay Area, with **$4.63 billion** in consolidated assets as of December 31, 2020, expanding through strategic mergers - Heritage Commerce Corp is a bank holding company providing commercial banking services through its subsidiary, Heritage Bank of Commerce, primarily serving the San Francisco Bay Area[20](index=20&type=chunk)[21](index=21&type=chunk) Key Financial Metrics (as of December 31, 2020) | Metric | Value (in billions) | | :--- | :--- | | Consolidated Assets | $4.63 | | Deposits | $3.91 | | Shareholders' Equity | $0.578 | - The company has expanded through strategic mergers, including **Presidio Bank in 2019**, and **Tri-Valley Bank** and **United American Bank in 2018**[26](index=26&type=chunk)[29](index=29&type=chunk)[30](index=30&type=chunk) [Lending and Deposit Activities](index=11&type=section&id=Item%201.%20Business%20-%20Lending%20and%20Deposit%20Activities) The company's diversified loan portfolio is heavily weighted towards real estate, with **48%** in CRE and **32%** in C&I loans, while deposit generation focuses on relationship-based accounts Loan Portfolio Composition (as of December 31, 2020) | Loan Category | Percentage of Total Loans | | :--- | :--- | | Commercial and Industrial (C&I) | 32% | | Commercial Real Estate (CRE) | 48% | | Land and Construction | 6% | | Residential Mortgage | 3% | | Consumer and Other | 11% | - The C&I loan portfolio includes operating loans, term loans, and **$290.7 million** in Paycheck Protection Program (PPP) loans at year-end 2020[35](index=35&type=chunk) - The company offers the Certificate of Deposit Account Registry Service (CDARS) to provide customers with FDIC insurance on deposits exceeding the standard **$250,000** limit[49](index=49&type=chunk) [Competition and Human Capital](index=19&type=section&id=Item%201.%20Business%20-%20Competition%20and%20Human%20Capital) Operating in a highly competitive market, the company focuses on personalized service and local relationships, holding a **0.57%** deposit market share as of June 30, 2020 - The company faces intense competition in the San Francisco Bay Area, where the top three institutions control nearly **60%** of the deposit market share[61](index=61&type=chunk) - Heritage Bank of Commerce held the **16th position** in deposit market share in its operating region at **0.57%** as of June 30, 2020[61](index=61&type=chunk) - The company's employee count decreased from **357** full-time equivalent employees at the end of 2019 to **331** at the end of 2020[67](index=67&type=chunk) [Supervision and Regulation](index=22&type=section&id=Item%201.%20Business%20-%20Supervision%20and%20Regulation) Extensively regulated by federal and state agencies, the company and its bank subsidiary exceeded 'well capitalized' requirements as of December 31, 2020, with CRE loan concentration at **245%** of total risk-based capital - The company and its bank subsidiary are subject to the Basel III Capital Rules and must maintain minimum capital ratios, including a **CET1 ratio of at least 7.0%** (including the capital conservation buffer)[82](index=82&type=chunk)[84](index=84&type=chunk) - As of December 31, 2020, the company and its bank subsidiary met the requirements to be considered 'well-capitalized' under Prompt Corrective Action (PCA) regulations[92](index=92&type=chunk) - The company's Commercial Real Estate (CRE) loan concentration was **245%** of total risk-based capital as of December 31, 2020, a decrease from **282%** in the prior year and below the **300%** regulatory guidance threshold[146](index=146&type=chunk) - The company is subject to numerous consumer protection laws, including the Community Reinvestment Act (CRA), under which it holds a 'satisfactory' rating from its most recent examination[141](index=141&type=chunk)[148](index=148&type=chunk) [Risk Factors](index=48&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks from the COVID-19 pandemic, credit concentration in real estate loans (**67%**), operational vulnerabilities, interest rate fluctuations, and an evolving regulatory landscape - The COVID-19 pandemic poses a material risk, potentially leading to decreased loan demand, increased delinquencies, and declines in collateral value[189](index=189&type=chunk)[193](index=193&type=chunk) - Participation in the SBA Paycheck Protection Program (PPP) exposes the company to litigation risk and the risk that the SBA may not honor its loan guarantees if origination deficiencies are found[197](index=197&type=chunk)[199](index=199&type=chunk) - A significant portion of the loan portfolio (**67%** at year-end 2020) consists of real estate loans, concentrating risk in the California real estate market[218](index=218&type=chunk) - The company is exposed to risks from its SBA lending program, which is dependent on the federal government. The non-guaranteed portion of these loans, which the company retains, carries higher credit risk[228](index=228&type=chunk)[234](index=234&type=chunk) - The company faces extensive government regulation, and changes to laws (like the Dodd-Frank Act) or capital requirements (Basel III) could increase costs and restrict activities[303](index=303&type=chunk)[304](index=304&type=chunk) [Unresolved Staff Comments](index=106&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports no unresolved staff comments from the Securities and Exchange Commission - There are no unresolved staff comments[342](index=342&type=chunk) [Properties](index=106&type=section&id=Item%202.%20Properties) The company's main executive offices are leased in San Jose, California, with most branch offices also leased, and one owned commercial building in Danville - The main office is located at **224 Airport Parkway, San Jose, CA**, in a leased space of approximately **54,910 square feet** with a lease expiring **July 31, 2030**[343](index=343&type=chunk)[346](index=346&type=chunk) - The company owns one property, an **8,285 square foot** office building in Danville, CA, acquired through the Diablo Valley Bank merger[347](index=347&type=chunk) - The company leases all other branch and administrative offices, with lease agreements detailed for locations across the Bay Area, including Fremont, Morgan Hill, Los Altos, and San Francisco[348](index=348&type=chunk)[349](index=349&type=chunk)[350](index=350&type=chunk)[359](index=359&type=chunk) [Legal Proceedings](index=112&type=section&id=Item%203.%20Legal%20Proceedings) The company is involved in various legal claims and lawsuits arising in the ordinary course of business, with details referenced in Note 16 of the financial statements - The company is subject to various legal proceedings. For detailed information, refer to Note 16, "Commitments and Contingencies"[368](index=368&type=chunk)[369](index=369&type=chunk) [Mine Safety Disclosures](index=112&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not Applicable[370](index=370&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=112&type=section&id=Item%205.%20Market%20for%20the%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common stock trades on NASDAQ under 'HTBK', with a **$0.13** quarterly dividend per share in 2020, subject to board and regulatory discretion 2020 Quarterly Stock Price and Dividends (USD) | Quarter | High Price | Low Price | Dividend Per Share | | :--- | :--- | :--- | :--- | | Q1 2020 | $12.80 | $6.45 | $0.13 | | Q2 2020 | $9.36 | $6.74 | $0.13 | | Q3 2020 | $7.69 | $6.20 | $0.13 | | Q4 2020 | $9.33 | $6.67 | $0.13 | - As of February 10, 2021, there were approximately **839** holders of record of the company's common stock[374](index=374&type=chunk) - Future dividend payments are determined by the board of directors and are subject to the company's earnings, financial condition, and regulatory policies, including those from the Federal Reserve[375](index=375&type=chunk) [Selected Financial Data](index=116&type=section&id=Item%206.%20Selected%20Financial%20Data) This section summarizes five-year key financial data, showing **$35.3 million** net income, **$4.63 billion** total assets, and a **3.50%** net interest margin for 2020 Selected Financial Data (2018-2020) | (In thousands, except per share data) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | **Income Statement Data** | | | | | Net interest income | $141,890 | $131,812 | $122,023 | | Provision for credit losses on loans | $13,233 | $846 | $7,421 | | Net income | $35,299 | $40,461 | $35,331 | | **Per Common Share Data** | | | | | Diluted net income | $0.59 | $0.84 | $0.84 | | Book value per common share | $9.64 | $9.71 | $8.49 | | **Balance Sheet Data** | | | | | Total assets | $4,634,114 | $4,109,463 | $3,096,562 | | Net loans | $2,574,861 | $2,510,559 | $1,858,557 | | Total deposits | $3,914,486 | $3,414,768 | $2,637,532 | | **Performance Ratios** | | | | | Return on average assets | 0.80% | 1.21% | 1.16% | | Net interest margin (FTE) | 3.50% | 4.28% | 4.31% | | Efficiency ratio | 58.96% | 59.76% | 57.39% | [Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)](index=118&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Net income decreased to **$35.3 million** in 2020 due to a **$13.2 million** provision for credit losses, despite asset growth to **$4.63 billion** and strong capital levels - Net income for 2020 was **$35.3 million**, or **$0.59** per diluted share, compared to **$40.5 million**, or **$0.84** per diluted share, in 2019[400](index=400&type=chunk) - The decrease in earnings was primarily driven by a **$13.3 million** pre-tax provision for credit losses related to the adoption of CECL and the economic effects of the COVID-19 pandemic[401](index=401&type=chunk)[408](index=408&type=chunk) - The company adopted the Current Expected Credit Loss (CECL) accounting standard on **January 1, 2020**, which requires estimating credit losses over the life of a loan[394](index=394&type=chunk) - The bank funded **1,105 PPP loans** totaling **$333.4 million**, with an outstanding balance of **$290.7 million** at year-end[402](index=402&type=chunk) [Results of Operations](index=129&type=section&id=Item%207.%20MD%26A%20-%20Results%20of%20Operations) Net interest income increased **8%** to **$141.9 million** in 2020, despite a **78 basis point** drop in net interest margin, while provision for credit losses surged to **$13.2 million** Net Interest Income and Margin (in millions) | Metric | 2020 | 2019 | Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $141.9M | $131.8M | +8% | | Net Interest Margin (FTE) | 3.50% | 4.28% | -78 bps | - The provision for credit losses was **$13.2 million** in 2020, a significant increase from **$846,000** in 2019, primarily due to a deteriorated economic outlook from the COVID-19 pandemic[439](index=439&type=chunk) - Noninterest income was **$9.9 million** in 2020, a slight decrease from **$10.2 million** in 2019, due to lower service charges on deposits[443](index=443&type=chunk) - Noninterest expense increased **5%** to **$89.5 million** in 2020, reflecting higher operating costs from the Presidio merger, although specific merger-related costs decreased from **$11.1 million** in 2019 to **$2.6 million** in 2020[410](index=410&type=chunk)[452](index=452&type=chunk) [Financial Condition](index=142&type=section&id=Item%207.%20MD%26A%20-%20Financial%20Condition) Total assets grew **13%** to **$4.63 billion** and deposits increased **15%** to **$3.91 billion** in 2020, while asset quality improved with NPAs declining to **$7.9 million** Balance Sheet Highlights (Year-End, in billions) | Metric | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Total Assets | $4.63B | $4.11B | +13% | | Total Loans (net) | $2.57B | $2.51B | +3% | | Total Deposits | $3.91B | $3.41B | +15% | Asset Quality Metrics (Year-End) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Nonperforming Assets (NPAs) (in millions) | $7.9M | $9.8M | | NPAs / Total Assets | 0.17% | 0.24% | | ACLL / Total Loans | 1.70% | 0.92% | | ACLL / Nonperforming Loans | 564.24% | 236.93% | - The loan portfolio's largest segments are **CRE non-owner occupied (27%)**, **CRE owner-occupied (21%)**, and **commercial (21%, excluding PPP loans)**[473](index=473&type=chunk) - The adoption of CECL on **Jan 1, 2020** resulted in an **$8.6 million** increase to the allowance for credit losses on loans[505](index=505&type=chunk) [Liquidity and Capital Resources](index=165&type=section&id=Item%207.%20MD%26A%20-%20Liquidity%20and%20Capital%20Resources) The company maintains strong liquidity with a **66.91%** loan-to-deposit ratio and robust capital resources, exceeding 'well-capitalized' standards with a **16.5%** total risk-based capital ratio - The loan-to-deposit ratio improved to **66.91%** at year-end 2020 from **74.20%** at year-end 2019, indicating a strong liquidity position[544](index=544&type=chunk) - The company has significant off-balance sheet liquidity, including a **$160.5 million** line of credit from the FHLB and a **$528.1 million** line from the FRB[545](index=545&type=chunk)[546](index=546&type=chunk) Consolidated Capital Ratios (as of December 31, 2020) | Capital Ratio | Actual | Minimum Requirement (w/ buffer) | | :--- | :--- | :--- | | Total Risk-Based | 16.5% | 10.5% | | Tier 1 Risk-Based | 14.0% | 8.5% | | Common Equity Tier 1 | 14.0% | 7.0% | | Leverage | 9.1% | 4.0% | - The company elected the option to delay the regulatory capital impact of CECL adoption, phasing it in over a **five-year period** ending **December 31, 2024**[839](index=839&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=172&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk is interest rate volatility, managed through asset/liability strategies, with a **100 basis point** rate increase projected to boost net interest income by **12.8%** - The company's principal market risk is interest rate risk, which it manages through its Asset/Liability Committee without the use of derivatives[563](index=563&type=chunk)[564](index=564&type=chunk) Net Interest Income Sensitivity Analysis (as of December 31, 2020) | Change in Interest Rates (bps) | Estimated Change in NII ($ thousands) | Estimated Change in NII (%) | | :--- | :--- | :--- | | +400 | $59,450 | 50.0% | | +300 | $44,796 | 37.7% | | +200 | $30,037 | 25.3% | | +100 | $15,231 | 12.8% | | -100 | $(11,927) | (10.0)% | | -200 | $(22,135) | (18.6)% | [Financial Statements and Supplementary Data](index=174&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents the consolidated financial statements for 2020 and Crowe LLP's unqualified audit report, highlighting CECL adoption as a critical audit matter - The financial statements were audited by Crowe LLP, which issued an unqualified opinion on the financial statements and internal control over financial reporting as of **December 31, 2020**[611](index=611&type=chunk)[612](index=612&type=chunk) - The auditor identified the adoption of the CECL standard (ASC 326) and the related modeling techniques and qualitative factors for the Allowance for Credit Losses on Loans (ACLL) as a critical audit matter[613](index=613&type=chunk)[623](index=623&type=chunk) [Note 4: Loans and Allowance for Credit Losses on Loans](index=219&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data%20-%20Note%204%3A%20Loans%20and%20Allowance%20for%20Credit%20Losses%20on%20Loans) This note details the **$2.62 billion** loan portfolio and **$44.4 million** ACLL, which increased due to CECL adoption and pandemic-related economic forecasts, with past due loans decreasing Allowance for Credit Losses on Loans Roll-Forward (2020, in thousands) | Description | Amount | | :--- | :--- | | Beginning Balance (ALLL at 12/31/2019) | $23,285 | | Adoption of Topic 326 (CECL) | $8,570 | | Balance at Adoption (ACLL at 1/1/2020) | $31,855 | | Net Charge-offs | ($688) | | Provision for Credit Losses | $13,233 | | **Ending Balance (ACLL at 12/31/2020)** | **$44,400** | - The increase in the ACLL during 2020 was primarily attributable to the change in projected economic conditions resulting from the COVID-19 pandemic, with elevated unemployment being a significant factor[730](index=730&type=chunk) - As of December 31, 2020, the company had **$2.6 million** in loans under short-term payment deferrals granted in response to the COVID-19 pandemic, which are not classified as TDRs under regulatory relief guidance[753](index=753&type=chunk) [Note 8: Business Combinations](index=233&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data%20-%20Note%208%3A%20Business%20Combinations) This note details recent acquisitions, including the **$185.6 million Presidio Bank** merger in 2019, which resulted in **$83.9 million** in goodwill - The merger with Presidio Bank was completed on **October 11, 2019**, for a total consideration of **$185.6 million**, resulting in **$83.9 million** of goodwill[768](index=768&type=chunk)[769](index=769&type=chunk) Merger-Related Costs (Pre-tax, in thousands) | Year | Presidio Merger | Tri-Valley & United American Mergers | | :--- | :--- | :--- | | 2020 | $2,601 | N/A | | 2019 | $11,080 | N/A | | 2018 | N/A | $9,167 | [Note 16: Commitments and Contingencies](index=256&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data%20-%20Note%2016%3A%20Commitments%20and%20Contingencies) The company discloses outstanding legal matters, including lawsuits related to D.C. Solar and a class-action, and **$1.11 billion** in off-balance sheet commitments to extend credit - The company is defending lawsuits related to its former deposit relationship with D.C. Solar, a former customer that allegedly perpetrated a Ponzi scheme[830](index=830&type=chunk) - A class-action lawsuit has been filed by employees alleging violations of the California Labor Code, with the company intending to defend the action vigorously[830](index=830&type=chunk)[831](index=831&type=chunk) - As of December 31, 2020, the company had **$1.11 billion** in off-balance sheet commitments to extend credit, including unused lines of credit and standby letters of credit[834](index=834&type=chunk)[835](index=835&type=chunk) [Changes in and Disagreements with Accountants on Accounting and Financial Disclosures](index=174&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosures) The company reports no disagreements with its accountants on accounting principles, financial disclosure, or auditing scope - None[576](index=576&type=chunk) [Controls and Procedures](index=174&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2020, with no material changes reported - Management concluded that the company's disclosure controls and procedures were effective as of **December 31, 2020**[577](index=577&type=chunk) - Management's assessment, based on the **2013 COSO framework**, concluded that internal control over financial reporting was effective as of **December 31, 2020**[582](index=582&type=chunk)[583](index=583&type=chunk) - There were no changes in internal control over financial reporting during the year that materially affected, or are reasonably likely to materially affect, these controls[586](index=586&type=chunk) [Other Information](index=176&type=section&id=Item%209B.%20Other%20Information) The company reports no other information for this item - None[587](index=587&type=chunk) Part III [Directors, Executive Officers and Corporate Governance](index=176&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information on directors, executive officers, and corporate governance is incorporated by reference from the 2021 proxy statement, with a code of ethics available online - Required information is incorporated by reference from the definitive proxy statement for the **2021 Annual Meeting of Shareholders**[589](index=589&type=chunk) - The company has adopted a code of ethics for its principal financial officers, available on its website[590](index=590&type=chunk) [Executive Compensation](index=178&type=section&id=Item%2011.%20Executive%20Compensation) Information regarding executive compensation is incorporated by reference from the 2021 Annual Meeting of Shareholders proxy statement - Required information is incorporated by reference from the definitive proxy statement for the **2021 Annual Meeting of Shareholders**[592](index=592&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=178&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information on security ownership and related stockholder matters is incorporated by reference from the 2021 Annual Meeting of Shareholders proxy statement - Required information is incorporated by reference from the definitive proxy statement for the **2021 Annual Meeting of Shareholders**[593](index=593&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=178&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2021 Annual Meeting of Shareholders proxy statement - Required information is incorporated by reference from the definitive proxy statement for the **2021 Annual Meeting of Shareholders**[594](index=594&type=chunk) [Principal Accountant Fees and Services](index=178&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) Information regarding principal accountant fees and services is incorporated by reference from the 2021 Annual Meeting of Shareholders proxy statement - Required information is incorporated by reference from the definitive proxy statement for the **2021 Annual Meeting of Shareholders**[595](index=595&type=chunk) Part IV [Exhibits and Financial Statement Schedules](index=178&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists exhibits filed with the Form 10-K, including financial statements and the independent auditor's report, with all schedules either omitted or included elsewhere - The financial statements of the company and the Report of Independent Registered Public Accounting Firm are included starting on **page 104** of the original document[597](index=597&type=chunk) - All financial statement schedules are omitted as they are not required or the information is included elsewhere[598](index=598&type=chunk) - A comprehensive list of exhibits filed with the report is provided, including governance documents, material contracts, and certifications[599](index=599&type=chunk)[600](index=600&type=chunk)[602](index=602&type=chunk) [Form 10-K Summary](index=182&type=section&id=Item%2016.%20Form%2010-K%20Summary) This item is not applicable to the company's filing - Not applicable[605](index=605&type=chunk)

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, 2020 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 000-23877 Heritage Commerce Corp (Exact name of Registrant as Specified in its Charter) California (State or O ...

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, 2020 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 000-23877 Heritage Commerce Corp (Exact name of Registrant as Specified in its Charter) California (State or Other ...

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 March 31, 2020 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 000‑23877 Heritage Commerce Corp (Exact name of Registrant as Specified in its Charter) California 77‑0469558 (I.R ...

```markdown PART I [Business](index=6&type=section&id=Item%201.%20Business) Heritage Commerce Corp is a bank holding company operating through its subsidiary, Heritage Bank of Commerce, primarily serving small to medium-sized businesses in the San Francisco Bay Area [General Overview and Recent Mergers](index=6&type=section&id=General%20Overview%20and%20Recent%20Mergers) The company is a bank holding company operating through Heritage Bank of Commerce, focusing on commercial banking in the San Francisco Bay Area, and has expanded through recent mergers including Presidio Bank - **Heritage Commerce Corp** is a bank holding company providing commercial banking services through its subsidiary, **Heritage Bank of Commerce**, primarily in the **San Francisco Bay Area**. Its market includes the technology-focused **Silicon Valley**[16](index=16&type=chunk)[17](index=17&type=chunk) Key Financials as of December 31, 2019 | Metric | Amount (USD) | | :--- | :--- | | Consolidated Assets | $4.11 billion | | Deposits | $3.41 billion | | Shareholders' Equity | $576.7 million | - The company completed its merger with **Presidio Bank** on **October 11, 2019**. At the time of the merger, **Presidio** had approximately **$904.5 million** in assets and **$774.3 million** in deposits. Merger-related costs totaled **$11.1 million** for **2019**[22](index=22&type=chunk)[25](index=25&type=chunk) - In **2018**, the company completed mergers with **Tri-Valley Bank** (**April 6, 2018**) and **United American Bank** (**May 4, 2018**). Merger-related costs for these two transactions totaled **$9.2 million** for the year ended **December 31, 2018**[26](index=26&type=chunk)[27](index=27&type=chunk)[28](index=28&type=chunk) [Lending Activities](index=9&type=section&id=Lending%20Activities) The company's loan portfolio is diversified across commercial real estate, commercial and industrial, construction, SBA, and consumer loans Loan Portfolio Composition as of December 31, 2019 | Loan Category | Percentage of Total Loans | | :--- | :--- | | Commercial Real Estate | 59% | | Commercial and Industrial | 25% | | Consumer (including home equity) | 8% | | Land and Construction | 6% | | Residential Mortgage | 2% | - The company's lending activities are diversified across several key areas: - **Commercial and Industrial Loans:** Includes operating loans for working capital and equipment, with terms from **30 days to five years** - **Commercial Real Estate (CRE) Loans:** Generally restricted to **75% loan-to-value** with maturities of **five to ten years** - **Construction Loans:** For commercial and residential properties, typically interest-only for **up to 18 months** - **SBA Loans:** As an **SBA Preferred Lender**, the company originates **7a, 504, and Express loans** - **Home Equity and Consumer Loans:** Offers HELOCs and other consumer loans, primarily to existing clients[31](index=31&type=chunk)[33](index=33&type=chunk)[36](index=36&type=chunk) [Deposit Products and Other Banking Services](index=13&type=section&id=Deposit%20Products%20and%20Other%20Banking%20Services) The company focuses on relationship-based deposits and offers electronic banking services to compete with larger institutions - The company focuses on generating relationship-based deposits, including non-interest bearing demand, interest-bearing demand, and money market accounts. It often requires borrowers to maintain deposit balances[44](index=44&type=chunk) - To provide full **FDIC** insurance for deposits over **$250,000**, the company offers the **Certificate of Deposit Account Registry Service (CDARS)** program[45](index=45&type=chunk) - Electronic banking services are a key part of the company's strategy to compete with larger banks, offering online banking, remote deposit capture, wire transfers, and **ACH** transactions for commercial customers[46](index=46&type=chunk)[47](index=47&type=chunk)[48](index=48&type=chunk) [Competition](index=16&type=section&id=Competition) The company operates in a highly competitive banking market dominated by major banks, differentiating itself through personalized service and local relationships - The banking business in the company's market is highly competitive and dominated by a few major banks. In the seven counties where the company operates, the top three institutions control a combined **56.44%** of the deposit market share[56](index=56&type=chunk)[57](index=57&type=chunk) - As of **June 30, 2019**, **Heritage Bank of Commerce (HBC)** ranked sixteenth in its market with a **0.63%** share of total deposits[57](index=57&type=chunk) - Competitors include large regional banks, community banks, savings institutions, credit unions, and non-bank entities like securities firms and internet-based companies[58](index=58&type=chunk) - The company competes by relying on community-oriented, personalized service, local relationships, and specialized services like its 'preferred lender' status with the **SBA**[60](index=60&type=chunk) [Supervision and Regulation](index=18&type=section&id=Supervision%20and%20Regulation) The company is extensively regulated by federal and state agencies, with ongoing impacts from the Dodd-Frank Act and capital requirements - The company and its subsidiaries are extensively regulated by federal and state agencies, including the **Department of Business Oversight – Division of Financial Institutions (DBO)**, the **Federal Reserve**, the **FDIC**, and the **Consumer Financial Protection Bureau (CFPB)**[63](index=63&type=chunk) - The **Dodd-Frank Act** continues to affect operations through changes in **FDIC** assessments, enhanced compliance requirements, and new capital rules[67](index=67&type=chunk)[68](index=68&type=chunk) Fully Phased-In Minimum Capital Ratios (as of Jan 1, 2019) | Capital Ratio | Minimum Requirement | | :--- | :--- | | Tier 1 Leverage | 4.0% | | CET1 to risk-weighted assets | 7.0% (including buffer) | | Tier 1 capital to risk-weighted assets | 8.5% (including buffer) | | Total capital to risk-weighted assets | 10.5% (including buffer) | - As of **December 31, 2019**, the company met the requirements to be classified as "well-capitalized" under the **Prompt Corrective Action (PCA)** regulations[82](index=82&type=chunk) [Risk Factors](index=44&type=page&id=Item%201A.%20Risk%20Factors) The company faces a wide range of risks that could materially affect its business. These include economic and market risks such as downturns and interest rate fluctuations; credit risks associated with its loan portfolio, particularly in real estate and commercial lending; operational risks like system failures, cybersecurity threats, and reliance on third-party vendors; strategic risks related to acquisitions and growth; and extensive legislative and regulatory risks that could increase costs and restrict activities. The company's stock price is also subject to market volatility and changes in dividend policy [Risks Relating to Our Business](index=44&type=section&id=Risks%20Relating%20to%20Our%20Business) The company faces risks from economic downturns, interest rate fluctuations, potential securities portfolio losses, and liquidity challenges - The business is sensitive to unfavorable economic conditions, particularly in **California**, which could lead to credit quality concerns and reduced demand for products and services[156](index=156&type=chunk) - Fluctuations in interest rates can reduce net interest income, as the rates earned on assets and paid on liabilities change at different speeds. Rising rates can increase borrower defaults, while falling rates can lead to loan prepayments[162](index=162&type=chunk)[163](index=163&type=chunk) - The company could recognize losses on its securities portfolio, particularly if interest rates rise or economic conditions deteriorate, which would decrease the market value of fixed-rate securities[170](index=170&type=chunk) - An inability to raise funds through deposits, borrowings, or asset sales could negatively affect liquidity and the ability to fund operations and meet obligations[171](index=171&type=chunk) [Risks Related to Our Loans](index=52&type=section&id=Risks%20Related%20to%20Our%20Loans) The company's loan portfolio is exposed to risks from real estate market changes, construction project dependencies, and the financial health of small to medium-sized commercial borrowers - A significant portion of the loan portfolio (**72%** at year-end **2019**) is comprised of real estate loans concentrated in **California**. Negative changes in real estate values could impair collateral and result in losses[182](index=182&type=chunk) - Construction and land development loans (**6%** of the portfolio) carry additional risks, as repayment depends on the successful and timely completion of projects, which can be affected by cost overruns and market deterioration[184](index=184&type=chunk)[185](index=185&type=chunk) - Commercial loans (**25%** of the portfolio) are often dependent on the successful operation of the borrower's business, making them sensitive to downturns in the general economy[190](index=190&type=chunk) - The company's focus on small and medium-sized businesses presents a risk, as these borrowers may have fewer resources to withstand adverse economic conditions, potentially impairing their ability to repay loans[192](index=192&type=chunk) [Risks Related to our SBA Loan Program](index=56&type=section&id=Risks%20Related%20to%20our%20SBA%20Loan%20Program) The SBA loan program carries risks related to government changes, loss of preferred lender status, and potential repurchase obligations for sold guaranteed portions - The **SBA** lending program is dependent on the **U.S. federal government**. Changes to the program, loss of 'Preferred Lender' status, or a government shutdown could adversely affect the business[194](index=194&type=chunk) - The company incurs credit risk on the non-guaranteed portion of **SBA** loans. If the **SBA** determines a loss was due to deficiencies in origination or servicing, it may seek recovery of the principal loss from the company[195](index=195&type=chunk) - When selling the guaranteed portion of **SBA** loans, the company makes representations and warranties. A breach could require the company to repurchase the loan, potentially at a loss[201](index=201&type=chunk) [Risks Related to our Credit Quality](index=58&type=section&id=Risks%20Related%20to%20our%20Credit%20Quality) Credit quality risks include nonperforming assets, potential insufficiency of the allowance for loan losses, and uncertainties from the LIBOR transition - **Nonperforming assets (NPAs)** adversely affect net income by halting interest income while still incurring funding costs. As of **December 31, 2019**, **NPAs** totaled **$9.8 million**, or **0.24%** of total assets[202](index=202&type=chunk)[203](index=203&type=chunk) - The allowance for loan losses (**$23.3 million**, or **0.92%** of loans, at year-end **2019**) is an estimate and may prove insufficient to cover actual losses, which could require additional provisions and adversely affect earnings[206](index=206&type=chunk)[207](index=207&type=chunk)[208](index=208&type=chunk) - The adoption of the new **Current Expected Credit Loss (CECL)** accounting standard, effective **January 1, 2020**, is expected to increase the allowance for credit losses by up to **$12.0 million**[214](index=214&type=chunk) - The potential phasing out of **LIBOR** after **2021** creates uncertainty for **LIBOR**-based loans and securities in the company's portfolio, which could lead to significant transition expenses and potential disputes with customers[215](index=215&type=chunk) [Risks Related to Legislative and Regulatory Developments](index=82&type=section&id=Risks%20Related%20to%20Legislative%20and%20Regulatory%20Developments) Extensive legislative and regulatory changes, including the Dodd-Frank Act and capital requirements, pose significant compliance and operational risks - The company operates in a highly regulated environment, and changes in laws or regulations from agencies like the **Federal Reserve**, **FDIC**, and **DBO** could increase compliance costs and restrict activities[279](index=279&type=chunk)[281](index=281&type=chunk) - The **Dodd-Frank Act** has significantly changed financial industry regulation, imposing new capital requirements, changing **FDIC** assessment bases, and creating the **Consumer Financial Protection Bureau (CFPB)**, leading to increased operating and compliance costs[283](index=283&type=chunk)[284](index=284&type=chunk) - The **Federal Reserve's** "source of strength" doctrine requires the company to act as a source of financial strength for its subsidiary bank, **HBC**, which may require capital injections at times when resources are not readily available[294](index=294&type=chunk)[296](index=296&type=chunk) - Failure to comply with consumer protection laws like the **Community Reinvestment Act (CRA)** and fair lending laws could result in sanctions, fines, and restrictions on mergers or expansion[297](index=297&type=chunk) [Unresolved Staff Comments](index=95&type=page&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports that it has no unresolved staff comments from the Securities and Exchange Commission - None[322](index=322&type=chunk) [Properties](index=95&type=page&id=Item%202.%20Properties) The company's main executive offices are located at 150 Almaden Boulevard in San Jose, California. It operates numerous branch offices throughout the Bay Area, most of which are leased. In 2020, the company plans to move its San Jose branch, administrative offices, and Bay View Funding office to a new, larger leased location at 224 Airport Parkway in San Jose - The main and executive offices of **HCC** and **HBC** are located at **150 Almaden Boulevard, San Jose, California**[323](index=323&type=chunk) - The company leases the majority of its branch and administrative office locations. One property in **Danville, California** is owned[326](index=326&type=chunk)[329](index=329&type=chunk) - A new lease agreement for **54,910 square feet** at **224 Airport Parkway in San Jose** commences on **February 1, 2020**. The company intends to move its San Jose branch, administrative offices, and **Bay View Funding** office to this new location in the first half of **2020**[328](index=328&type=chunk) [Legal Proceedings](index=101&type=page&id=Item%203.%20Legal%20Proceedings) The company is involved in certain legal actions arising from its normal business activities. Management does not believe the ultimate resolution of these pending actions will have a material effect on the company's financial statements - The Company is involved in certain legal actions arising from normal business activities, but management believes the ultimate resolution will not have a material effect on the financial statements[351](index=351&type=chunk) [Mine Safety Disclosures](index=101&type=page&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not Applicable[352](index=352&type=chunk) PART II [Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=101&type=page&id=Item%205.%20Market%20for%20the%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common stock trades on the **NASDAQ Global Select Market** under the symbol '**HTBK**'. This section provides details on the stock's quarterly price ranges and dividends paid for **2019** and **2018**. It also outlines the company's dividend policy, which is subject to board discretion and regulatory oversight, and presents information on securities authorized for issuance under its equity compensation plans Quarterly Common Stock Price and Dividends (2019-2018) | Quarter | 2019 High ($) | 2019 Low ($) | 2019 Dividend/Share ($) | 2018 High ($) | 2018 Low ($) | 2018 Dividend/Share ($) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | First | 14.43 | 11.57 | 0.12 | 17.13 | 15.27 | 0.11 | | Second | 12.84 | 11.80 | 0.12 | 18.05 | 16.21 | 0.11 | | Third | 12.43 | 11.16 | 0.12 | 17.41 | 14.71 | 0.11 | | Fourth | 13.05 | 11.14 | 0.12 | 15.63 | 11.01 | 0.11 | - As of **February 14, 2020**, there were approximately **859** holders of record of the company's common stock[356](index=356&type=chunk) - The company's ability to pay dividends is influenced by its earnings, financial condition, capital requirements, and regulatory policies from the **Federal Reserve**, which expects bank holding companies to act as a source of strength for their banking subsidiaries[357](index=357&type=chunk)[358](index=358&type=chunk) Equity Compensation Plan Information (as of Dec 31, 2019) | Category | Number of securities to be issued upon exercise | Weighted-average exercise price ($) | Number of securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Plans approved by security holders | 2,712,846 | $8.80 | 796,957 | [Selected Financial Data](index=107&type=page&id=Item%206.%20Selected%20Financial%20Data) This section presents a five-year summary of the company's key financial data. For **2019**, the company reported net income of **$40.5 million**, total assets of **$4.11 billion**, and net loans of **$2.51 billion**. Key performance ratios included a return on average assets of **1.21%** and a return on average equity of **9.51%**. The data reflects significant growth in the balance sheet, particularly in **2019**, due to recent acquisitions Selected Financial Data (2017-2019) | Metric (in thousands, except per share data) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | **Income Statement Data** | | | | | Net Interest Income | $131,812 | $122,023 | $101,524 | | Net Income | $40,461 | $35,331 | $23,828 | | Diluted Net Income per Share | $0.84 | $0.84 | $0.62 | | **Balance Sheet Data** | | | | | Total Assets | $4,109,463 | $3,096,562 | $2,843,452 | | Net Loans | $2,510,559 | $1,858,557 | $1,563,009 | | Total Deposits | $3,414,768 | $2,637,532 | $2,482,989 | | Total Shareholders' Equity | $576,708 | $367,466 | $353,566 | | **Performance Ratios** | | | | | Return on Average Assets | 1.21% | 1.16% | 0.86% | | Return on Average Equity | 9.51% | 10.79% | 8.86% | | Net Interest Margin (FTE) | 4.28% | 4.31% | 3.99% | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=109&type=page&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management's discussion provides an in-depth analysis of the company's financial performance and condition for **2019** compared to prior years. Net income increased to **$40.5 million** in **2019**, despite **$11.1 million** in merger costs from the **Presidio** acquisition. The merger significantly grew the balance sheet, with total assets reaching **$4.11 billion**. The discussion covers key performance drivers including net interest income, which grew **8%**, a lower provision for loan losses, and trends in credit quality, where nonperforming assets declined. The company maintained a strong capital position, exceeding all regulatory requirements for a 'well-capitalized' institution [Executive Summary and Performance Overview](index=109&type=section&id=Executive%20Summary%20and%20Performance%20Overview) The company's financial performance in **2019** was marked by increased net income despite merger costs, significant balance sheet growth from acquisitions, and improved credit quality Performance Overview (2017-2019) | Metric | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net Income | $40.5 million | $35.3 million | $23.8 million | | Diluted EPS | $0.84 | $0.84 | $0.62 | | Return on Average Tangible Assets | 1.25% | 1.19% | 0.88% | | Return on Average Tangible Equity | 13.09% | 14.41% | 10.98% | - Earnings for **2019** were reduced by **$11.1 million** in pre-tax merger-related costs for the **Presidio** merger. This compares to **$9.2 million** in merger costs in **2018** for the **Tri-Valley** and **United American** mergers[380](index=380&type=chunk) - The company's balance sheet grew significantly due to the **Presidio** merger, with loans increasing **34%** to **$2.53 billion** and deposits increasing **29%** to **$3.41 billion** at year-end **2019**[388](index=388&type=chunk) - Credit quality improved, with **nonperforming assets (NPAs)** decreasing to **$9.8 million** (**0.24%** of total assets) at year-end **2019** from **$14.9 million** (**0.48%** of total assets) at year-end **2018**[388](index=388&type=chunk) [Results of Operations](index=120&type=section&id=Results%20of%20Operations) Net interest income increased due to acquisitions, while the net interest margin slightly contracted, and noninterest expenses rose due to merger costs - **Net interest income** before provision for loan losses increased **8%** to **$131.8 million** in **2019** from **$122.0 million** in **2018**, primarily due to growth from acquisitions[422](index=422&type=chunk) - The fully tax-equivalent net interest margin contracted slightly by **3 basis points** to **4.28%** in **2019**, due to a higher cost of deposits and a shift in loan mix, partially offset by accretion of loan purchase discounts[416](index=416&type=chunk) - The provision for loan losses was **$0.85 million** in **2019**, a significant decrease from **$7.4 million** in **2018**. The **2018** provision included a **$7.0 million** specific reserve for a single lending relationship[424](index=424&type=chunk) - Noninterest expense increased **12%** to **$84.9 million** in **2019**, driven by **$11.1 million** in merger-related costs and the operating costs of acquired banks[434](index=434&type=chunk) - The effective tax rate was **28.1%** in **2019**, compared to **27.4%** in **2018** and **52.6%** in **2017**. The high **2017** rate was due to a one-time, **$7.1 million** non-cash expense from the re-measurement of deferred tax assets following the **2017** Tax Act[439](index=439&type=chunk)[441](index=441&type=chunk) [Financial Condition](index=133&type=section&id=Financial%20Condition) Total assets and deposits significantly increased in **2019** due to the **Presidio** merger, with a substantial portion of deposits being noninterest-bearing - **Total assets** increased **33%** to **$4.11 billion** at **December 31, 2019**, from **$3.10 billion** at **December 31, 2018**, primarily due to the **Presidio** merger[453](index=453&type=chunk) Loan Portfolio Distribution (Dec 31, 2019) | Loan Type | Amount (in millions) | % of Total | | :--- | :--- | :--- | | Commercial Real Estate (CRE) | $1,510.6 | 59% | | Commercial | $631.5 | 25% | | Home Equity | $175.3 | 7% | | Land and Construction | $150.6 | 6% | | Residential Mortgages | $46.3 | 2% | | Consumer | $19.9 | 1% | | **Total Loans** | **$2,534.2** | **100%** | - Total deposits increased **29%** to **$3.41 billion** at year-end **2019**. Noninterest-bearing demand deposits constituted **42%** of total deposits, providing a stable, low-cost funding source[526](index=526&type=chunk)[527](index=527&type=chunk) - The allowance for loan losses (**ALLL**) was **$23.3 million**, or **0.92%** of total loans, at **December 31, 2019**. The ratio of **ALLL** to total loans decreased from **1.48%** in **2018** due to the addition of **Presidio's** loans recorded at fair value without an associated allowance[426](index=426&type=chunk)[512](index=512&type=chunk) [Liquidity and Capital Resources](index=157&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains strong liquidity and capital positions, exceeding all regulatory requirements for a well-capitalized institution - The company maintains a strong liquidity position with **$457.4 million** in cash and cash equivalents and approximately **$721.5 million** in available borrowing capacity from sources like the **FHLB** and **FRB** at year-end **2019**[393](index=393&type=chunk) - The loan-to-deposit ratio was **74.20%** at **December 31, 2019**, up from **71.52%** at the end of **2018**[536](index=536&type=chunk) Consolidated Capital Ratios (as of Dec 31, 2019) | Capital Ratio | Actual Ratio | Minimum for Well-Capitalized Status | | :--- | :--- | :--- | | Total Risk-Based Capital | 14.6% | 10.0% | | Tier 1 Risk-Based Capital | 12.5% | 8.0% | | Common Equity Tier 1 Capital | 12.5% | 6.5% | | Leverage Ratio | 9.7% | 5.0% | - Total shareholders' equity increased to **$576.7 million** at year-end **2019** from **$367.5 million** in **2018**, primarily due to the issuance of **15.7 million** shares of common stock for the **Presidio** acquisition[550](index=550&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=163&type=page&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk is interest rate volatility. Management uses **GAP** analysis and interest rate shock simulation models to monitor and manage this risk. The simulation as of **December 31, 2019**, indicates that the company is asset-sensitive; a hypothetical instantaneous **100 basis point** increase in rates would increase net interest income by an estimated **5.8%**, while a **100 basis point** decrease would reduce it by an estimated **8.2%** - The company's primary market risk is interest rate risk. It uses **GAP** analysis and an interest rate shock simulation model to manage this exposure[553](index=553&type=chunk)[554](index=554&type=chunk) Estimated Change in Net Interest Income from Instantaneous Rate Shock (as of Dec 31, 2019) | Change in Interest Rates (bps) | Change in NII (%) | | :--- | :--- | | +400 | +23.3% | | +200 | +11.7% | | +100 | +5.8% | | -100 | -8.2% | | -200 | -16.6% | [Financial Statements and Supplementary Data](index=165&type=page&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section contains the company's audited consolidated financial statements for the fiscal year ended **December 31, 2019**, including the **Report of Independent Registered Public Accounting Firm**, **Consolidated Balance Sheets**, **Statements of Income**, **Statements of Comprehensive Income**, **Statements of Changes in Shareholders' Equity**, **Statements of Cash Flows**, and the accompanying **Notes to Consolidated Financial Statements** [Report of Independent Registered Public Accounting Firm](index=179&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) **Crowe LLP** issued an unqualified opinion on the consolidated financial statements and confirmed effective internal control over financial reporting, excluding the recently acquired **Presidio Bank** - **Crowe LLP** issued an unqualified opinion, stating that the consolidated financial statements present fairly, in all material respects, the financial position of **Heritage Commerce Corp** as of **December 31, 2019** and **2018**, and the results of its operations and its cash flows for the three-year period ended **December 31, 2019**[604](index=604&type=chunk) - The firm also issued an opinion that the Company maintained effective internal control over financial reporting as of **December 31, 2019**. The audit of internal controls excluded the operations of **Presidio Bank**, which was acquired during **2019**, as permitted[604](index=604&type=chunk)[607](index=607&type=chunk) [Consolidated Financial Statements](index=182&type=section&id=Consolidated%20Financial%20Statements) This section presents the company's key consolidated financial statements, including balance sheets and income statements, highlighting significant asset and deposit growth in **2019** Consolidated Balance Sheet Highlights (as of Dec 31) | (in thousands) | 2019 | 2018 | | :--- | :--- | :--- | | **Assets** | | | | Total Cash and Cash Equivalents | $457,370 | $164,568 | | Net Loans | $2,510,559 | $1,858,557 | | Goodwill | $167,420 | $83,753 | | **Total Assets** | **$4,109,463** | **$3,096,562** | | **Liabilities & Equity** | | | | Total Deposits | $3,414,768 | $2,637,532 | | Subordinated Debt | $39,554 | $39,369 | | Total Shareholders' Equity | $576,708 | $367,466 | | **Total Liabilities & Equity** | **$4,109,463** | **$3,096,562** | Consolidated Income Statement Highlights (Year Ended Dec 31) | (in thousands) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net Interest Income | $131,812 | $122,023 | $101,524 | | Provision for Loan Losses | $846 | $7,421 | $99 | | Noninterest Income | $10,244 | $9,574 | $9,612 | | Noninterest Expense | $84,898 | $75,521 | $60,738 | | **Net Income** | **$40,461** | **$35,331** | **$23,828** | [Notes to Consolidated Financial Statements](index=187&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes provide detailed information on business combinations, goodwill, capital requirements, and the adoption of new accounting standards like lease accounting - **Business Combinations (Note 8):** Details the acquisitions of **Presidio Bank** (**2019**), **Tri-Valley Bank** (**2018**), and **United American Bank** (**2018**), including purchase consideration and fair value of assets acquired and liabilities assumed[723](index=723&type=chunk)[724](index=724&type=chunk)[725](index=725&type=chunk) - **Goodwill and Other Intangibles (Note 9):** Goodwill increased to **$167.4 million** from **$83.8 million** due to the **Presidio** merger. The annual impairment test concluded that no impairment existed[736](index=736&type=chunk)[737](index=737&type=chunk) - **Capital Requirements (Note 18):** Both the company and its bank subsidiary met all capital adequacy guidelines to be considered 'well-capitalized' under **Basel III** regulations as of **December 31, 2019**[811](index=811&type=chunk) - **Leases (Note 7):** The company adopted the new lease accounting standard (**ASU 2016-02**) on **January 1, 2019**, resulting in the recognition of right-of-use assets of **$12.2 million** and lease liabilities of **$13.0 million**[719](index=719&type=chunk) [Changes in and Disagreements with Accountants on Accounting and Financial Disclosures](index=165&type=page&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosures) The company reports that there have been no changes in or disagreements with its accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure - None[565](index=565&type=chunk) [Controls and Procedures](index=167&type=page&id=Item%209A.%20Controls%20and%20Procedures) Management, including the **CEO** and **CFO**, evaluated the company's disclosure controls and procedures and concluded they were effective as of **December 31, 2019**. Management's annual report on internal control over financial reporting also concluded that these controls were effective. As permitted by **SEC** guidance, the assessment of internal controls excluded the recently acquired **Presidio Bank** - The company's **CEO** and **CFO** concluded that disclosure controls and procedures were effective as of **December 31, 2019**[566](index=566&type=chunk) - Management concluded that the company's internal control over financial reporting was effective as of **December 31, 2019**, based on the **COSO 2013 framework**[569](index=569&type=chunk)[573](index=573&type=chunk) - The evaluation of internal control over financial reporting excluded the internal controls of **Presidio**, which was acquired on **October 11, 2019**, as permitted by **SEC** guidance[570](index=570&type=chunk) [Other Information](index=169&type=page&id=Item%209B.%20Other%20Information) The company reports no other information for this item - None[577](index=577&type=chunk) PART III [Directors, Executive Officers and Corporate Governance](index=169&type=page&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information required for this item, including details on directors, executive officers, and corporate governance matters, is incorporated by reference from the company's **Definitive Proxy Statement** for its **2020 Annual Meeting of Shareholders** - Information required by this item will be contained in the **Definitive Proxy Statement** for the **2020 Annual Meeting of Shareholders** and is incorporated by reference[579](index=579&type=chunk) [Executive Compensation](index=169&type=page&id=Item%2011.%20Executive%20Compensation) Information regarding executive compensation is incorporated by reference from the company's **Definitive Proxy Statement** for its **2020 Annual Meeting of Shareholders** - Information required by this item will be contained in the **Definitive Proxy Statement** for the **2020 Annual Meeting of Shareholders** and is incorporated by reference[581](index=581&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=171&type=page&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Information regarding security ownership of certain beneficial owners, management, and related stockholder matters is incorporated by reference from the company's **Definitive Proxy Statement** for its **2020 Annual Meeting of Shareholders** - Information required by this item will be contained in the **Definitive Proxy Statement** for the **2020 Annual Meeting of Shareholders** and is incorporated by reference[582](index=582&type=chunk) [Certain Relationships and Related Transactions and Director Independence](index=171&type=page&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%20and%20Director%20Independence) Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's **Definitive Proxy Statement** for its **2020 Annual Meeting of Shareholders** - Information required by this item will be contained in the **Definitive Proxy Statement** for the **2020 Annual Meeting of Shareholders** and is incorporated by reference[583](index=583&type=chunk) [Principal Accountant Fees and Services](index=171&type=page&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) Information regarding principal accountant fees and services is incorporated by reference from the company's **Definitive Proxy Statement** for its **2020 Annual Meeting of Shareholders** - Information required by this item will be contained in the **Definitive Proxy Statement** for the **2020 Annual Meeting of Shareholders** and is incorporated by reference[584](index=584&type=chunk) PART IV [Exhibits and Financial Statement Schedules](index=171&type=page&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists the financial statements, financial statement schedules, and exhibits that are filed as part of the **Form 10-K** report. The financial statements of the company and the **Report of the Independent Registered Public Accounting Firm** are included, while all financial statement schedules are omitted as they are not applicable or the required information is included elsewhere - The Financial Statements of the Company and the **Report of Independent Registered Public Accounting Firm** are set forth on pages **102** through **154**[586](index=586&type=chunk) - All financial statement schedules are omitted because the conditions requiring them are absent or the information is included in the Financial Statements or accompanying notes[587](index=587&type=chunk) [Form 10-K Summary](index=175&type=page&id=Item%2016.%20Form%2010-K%20Summary) This item is not applicable to the company's filing - Not applicable[594](index=594&type=chunk) ```