Equity Plan

6 Months Ended

Jun. 30, 2021

Equity Plan

Equity Plan

10) 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 equity plans provide for the grant of incentive and nonqualified stock options and restricted stock. The equity plans provide that the option price for both incentive and nonqualified stock options will be determined by the Board of Directors at no less than the fair value at the date of grant. Options granted vest on a schedule determined by the Board of Directors at the time of grant. Generally, options vest over four years. All options expire no later than ten years from the date of grant. Restricted stock is subject to time vesting. For the six months ended June 30, 2021, the Company granted 350,750 shares of nonqualified stock options and 187,325 shares of restricted stock. The fair value of restricted stock awards that vested was $1,749,000 as of June 30, 2021. There were 1,940,811 shares available for the issuance of equity awards under the 2013 Plan as of June 30, 2021.

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, 2021	2,546,821	$	9.30
Granted	350,750	$	12.08
Exercised	(132,342)	$	5.93
Forfeited or expired	(36,766)	$	12.89
Outstanding at June 30, 2021	2,728,463	$	9.77	5.71	$	6,286,272
Vested or expected to vest	2,564,755			5.71	$	5,909,096
Exercisable at June 30, 2021	1,996,727			4.51	$	5,826,621

Information related to the equity plans for the periods indicated:

	Six Months Ended
	June 30,
	2021		2020
Intrinsic value of options exercised	$	679,403	$	2,057,914
Cash received from option exercise	$	784,264	$	1,489,991
Tax benefit (expense) realized from option exercises	$	57,215	$	33,783
Weighted average fair value of options granted	$	2.33	$	1.15

As of June 30, 2021, there was $1,410,000 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 2.96 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 for the periods indicated:

	Six Months Ended
	June 30,
	2021		2020
Expected life in months(1)	72		72
Volatility(1)	33	%	29	%
Weighted average risk-free interest rate(2)	1.10	%	0.53	%
Expected dividends(3)	4.30	%	5.71	%

(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.

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, 2021	298,700	$	10.83
Granted	187,325	$	12.01
Vested	(153,101)	$	11.42
Forfeited or expired	(34,358)	$	10.23
Nonvested shares at June 30, 2021	298,566	$	11.03

As of June 30, 2021, there was $3,201,000 of total unrecognized compensation cost related to nonvested restricted stock awards granted under the equity plans. The cost is expected to be recognized over a weighted-average period of approximately 2.03 years.