Equity Plan

12 Months Ended

Dec. 31, 2023

Equity Plan

Equity Plan

12) Equity Plan

The Company maintained an Amended and Restated 2004 Equity Plan (the “2004 Plan”) for directors, officers, and key employees. The 2004 Plan was terminated on May 23, 2013. On May 23, 2013, the Company’s shareholders approved the 2013 Equity Incentive Plan (the “2013 Plan”). On May 21, 2020, the shareholders approved an amendment to the Heritage Commerce Corp 2013 Equity Incentive Plan to increase the number of shares available from 3,000,000 to 5,000,000 shares. The 2013 Plan was terminated on May 25, 2023. The shareholders approved the 2023 Equity Incentive Plan (the “2023 Plan”) on May 25, 2023, which increased the number of shares available by 600,000 shares. These plans are collectively referred to as “Equity Plans.” The Equity Plans provide for the grant of incentive and nonqualified stock options, restricted stock, RSUs and PRSUs. The Equity Plans provide that the option price for both incentive and nonqualified stock options will be determined by the Board at no less than the fair value at the date of grant. Options granted vest on a schedule determined by the Board at the time of grant. Generally, options vest over four years. All options expire no later than ten years from the date of grant. Restricted stock is subject to time vesting. To date, each RSU will vest ratably over three years and PRSUs are subject to cliff vesting after a three year performance period commencing in the initial year of grant. The earned PRSUs, if any, shall vest on the date on which the Board certifies whether and to what extent the performance goal has been achieved following the end of the performance period. In 2023, the Company granted 397,000 shares of nonqualified stock options, 119,362 shares of RSUs, 119,358 shares of PRSUs, and 73,446 shares of restricted stock subject to time vesting requirements. There were 1,393,531 shares available for the issuance of equity awards under the 2023 Plan as of December 31, 2023.

Stock option activity under the equity plans is as follows:

				Weighted
		Weighted		Average
		Average		Remaining	Aggregate
	Number	Exercise		Contractual	Intrinsic
Total Stock Options	of Shares	Price		Life (Years)	Value
Outstanding at January 1, 2023	2,527,173	$	10.44
Granted	397,000	$	7.45
Exercised	(220,666)	$	5.53
Forfeited or expired	(66,151)	$	10.26
Outstanding at December 31, 2023	2,637,356	$	10.40	5.59	$	2,664,557
Vested or expected to vest	2,479,115			5.59	$	2,504,684
Exercisable at December 31, 2023	1,947,357			4.51	$	1,811,470

Information related to the equity plans for each of the last three years:

	December 31,
	2023		2022		2021
Intrinsic value of options exercised	$	805,334	$	1,674,072	$	1,543,711
Cash received from option exercise	$	1,219,286	$	2,049,587	$	1,469,255
Tax benefit realized from option exercises	$	20,527	$	180,414	$	153,745
Weighted average fair value of options granted	$	1.34	$	2.22	$	2.31

As of December 31, 2023, there was $1,203,000 of total unrecognized compensation cost related to nonvested stock options granted under the equity plans. That cost is expected to be recognized over a weighted-average period of approximately 2.64 years.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions noted in the following table, including the weighted average assumptions for the option grants in each year.

	December 31,
	2023		2022		2021
Expected life in months(1)	72		72		72
Volatility(1)	35	%	31	%	33	%
Weighted average risk-free interest rate(2)	3.52	%	2.89	%	1.10	%
Expected dividends(3)	6.98	%	4.68	%	4.32	%

(1) The expected life of employee stock options represents the weighted average period the stock options are expected to remain outstanding based on historical experience. Volatility is based on the historical volatility of the stock price over the same period of the expected life of the option.

(2) Based on the U.S. Treasury constant maturity interest rate with a term consistent with the expected life of the option granted.

(3) Each grant’s dividend yield is calculated by annualizing the most recent quarterly cash dividend and dividing that amount by the market price of the Company’s common stock as of the grant date

The Company estimates the impact of forfeitures based on historical experience. Should the Company’s current estimate change, additional expense could be recognized or reversed in future periods. The Company issues authorized shares of common stock to satisfy stock option exercises.

Restricted stock activity under the equity plans is as follows:

		Weighted
		Average Grant
	Number	Date Fair
Total Restricted Stock Award	of Shares	Value
Nonvested shares at January 1, 2023	253,491	$	11.05
Granted	73,446	$	7.53
Vested	(141,524)	$	7.82
Nonvested shares at December 31, 2023	185,413	$	10.87

As of December 31, 2023, there was $­­1,030,000 of total unrecognized compensation cost related to nonvested restricted stock awards granted under the 2013 Plan and 2023 Plan. The cost is expected to be recognized over a weighted-average period of approximately 1.22 years.

Total compensation cost for the 2004 Plan, 2013 Plan and 2023 Plan charged against income was $2,396,000,

$3,178,000, $2,519,000, for 2023, 2022, and 2021, respectively. The total income tax (benefit) expense was $54,000, ($94,000), and ($155,000) for the years ended December 31, 2023, and 2022, and 2021, respectively.

RSU activity under the Equity Plans is as follows:

		Weighted
		Average Grant
	Number	Date Fair
Total RSUs	of Shares	Value
Nonvested shares at January 1, 2023	—	$	—
Granted	119,362	$	7.41
Nonvested shares at December 31, 2023	119,362	$	7.41

As of December 31, 2023, there were $582,000 of total unrecognized compensation cost related to unvested RSUs granted under the Equity Plans. The cost is expected to be recognized over a weighted average period of 2.33 years.

PRSU activity under the Equity Plans is as follows:

		Weighted
		Average Grant
	Number	Date Fair
Total PRSUs	of Shares	Value
Nonvested shares at January 1, 2023	—	$	—
Granted	119,358	$	7.41
Nonvested shares at December 31, 2023	119,358	$	7.41

As of December 31, 2023, there were $582,000 of total unrecognized compensation cost related to unvested PRSUs granted under the Equity Plans. The cost is expected to be recognized over a weighted average period of 2.33 years.