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TABLE OF CONTENTS
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE) | ||
ý |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the quarterly period ended March 31, 2014 |
||
OR |
||
o |
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) |
77-0469558 (I.R.S. Employer Identification No.) |
|
150 Almaden Boulevard, San Jose, California (Address of Principal Executive Offices) |
95113 (Zip Code) |
(408) 947-6900
(Registrant's Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ý NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ý NO o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer ý | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO ý
The Registrant had 26,370,510 shares of Common Stock outstanding on April 18, 2014.
HERITAGE COMMERCE CORP
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
2
Cautionary Note Regarding Forward-Looking Statements
This Report on Form 10-Q contains various statements that may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These forward-looking statements often can be, but are not always, identified by the use of words such as "assume," "expect," "intend," "plan," "project," "believe," "estimate," "predict," "anticipate," "may," "might," "should," "could," "goal," "potential" and similar expressions. We base these forward-looking statements on our current expectations and projections about future events, our assumptions regarding these events and our knowledge of facts at the time the statements are made. These statements include statements relating to our projected growth, anticipated future financial performance, and management's long-term performance goals, as well as statements relating to the anticipated effects on results of operations and financial condition.
These forward-looking statements are subject to various risks and uncertainties that may be outside our control and our actual results could differ materially from our projected results. In addition, our past results of operations do not necessarily indicate our future results. The forward-looking statements could be affected by many factors, including but not limited to:
3
We are not able to predict all the factors that may affect future results. You should not place undue reliance on any forward looking statement, which speaks only as of the date of this Report on Form 10-Q. Except as required by applicable laws or regulations, we do not undertake any obligation to update or revise any forward looking statement, whether as a result of new information, future events or otherwise.
4
ITEM 1CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
HERITAGE COMMERCE CORP
CONSOLIDATED BALANCE SHEETS (Unaudited)
|
March 31, 2014 |
December 31, 2013 |
|||||
---|---|---|---|---|---|---|---|
|
(Dollars in thousands) |
||||||
Assets |
|||||||
Cash and due from banks |
$ | 30,666 | $ | 20,158 | |||
Interest-bearing deposits in other financial institutions |
54,333 | 92,447 | |||||
| | | | | | | |
Total cash and cash equivalents |
84,999 | 112,605 | |||||
Securities available-for-sale, at fair value |
262,375 | 280,100 | |||||
Securities held-to-maturity, at amortized cost (fair value of $89,840 at March 31, 2014 and $86,032 at December 31, 2013) |
95,548 | 95,921 | |||||
Loans held-for-saleSBA, at lower of cost or fair value, including deferred costs |
2,894 | 3,148 | |||||
Loans, net of deferred fees |
941,759 | 914,913 | |||||
Allowance for loan losses |
(18,817 | ) | (19,164 | ) | |||
| | | | | | | |
Loans, net |
922,942 | 895,749 | |||||
Federal Home Loan Bank and Federal Reserve Bank stock, at cost |
10,557 | 10,435 | |||||
Company owned life insurance |
50,055 | 50,012 | |||||
Premises and equipment, net |
7,186 | 7,240 | |||||
Intangible assets |
1,412 | 1,527 | |||||
Accrued interest receivable and other assets |
32,142 | 34,895 | |||||
| | | | | | | |
Total assets |
$ | 1,470,110 | $ | 1,491,632 | |||
| | | | | | | |
| | | | | | | |
Liabilities and Shareholders' Equity |
|||||||
Liabilities: |
|||||||
Deposits: |
|||||||
Demand, noninterest-bearing |
$ | 440,864 | $ | 431,085 | |||
Demand, interest-bearing |
198,141 | 195,451 | |||||
Savings and money market |
352,977 | 347,052 | |||||
Time depositsunder $100 |
20,669 | 21,646 | |||||
Time deposits$100 and over |
195,769 | 195,005 | |||||
Time depositsbrokered |
40,440 | 55,524 | |||||
CDARSmoney market and time deposits |
13,135 | 40,458 | |||||
| | | | | | | |
Total deposits |
1,261,995 | 1,286,221 | |||||
Accrued interest payable and other liabilities |
31,298 | 32,015 | |||||
| | | | | | | |
Total liabilities |
1,293,293 | 1,318,236 | |||||
Shareholders' equity: |
|||||||
Preferred stock, no par value; 10,000,000 shares authorized |
|||||||
Series C convertible perpetual preferred stock, 21,004 shares issued and outstanding at March 31, 2014 and December 31, 2013 (liquidation preference of $21,004 at March 31, 2014 and December 31, 2013) |
19,519 | 19,519 | |||||
Common stock, no par value; 60,000,000 shares authorized; 26,370,510 shares issued and outstanding at March 31, 2014 and 26,350,938 shares issued and outstanding at December 31, 2013 |
132,631 | 132,561 | |||||
Retained earnings |
27,143 | 25,345 | |||||
Accumulated other comprehensive loss |
(2,476 | ) | (4,029 | ) | |||
| | | | | | | |
Total shareholders' equity |
176,817 | 173,396 | |||||
| | | | | | | |
Total liabilities and shareholders' equity |
$ | 1,470,110 | $ | 1,491,632 | |||
| | | | | | | |
| | | | | | | |
See notes to consolidated financial statements
5
HERITAGE COMMERCE CORP
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
|
Three Months Ended March 31, | ||||||
---|---|---|---|---|---|---|---|
|
2014 | 2013 | |||||
|
(Dollars in thousands, except per share data) |
||||||
Interest income: |
|||||||
Loans, including fees |
$ | 11,139 | $ | 10,089 | |||
Securities, taxable |
2,170 | 2,462 | |||||
Securities, non-taxable |
506 | 248 | |||||
Interest-bearing deposits in other financial institutions |
40 | 68 | |||||
| | | | | | | |
Total interest income |
13,855 | 12,867 | |||||
| | | | | | | |
Interest expense: |
|||||||
Deposits |
521 | 625 | |||||
Subordinated debt |
| 88 | |||||
Short-term borrowings |
| 1 | |||||
| | | | | | | |
Total interest expense |
521 | 714 | |||||
| | | | | | | |
Net interest income before provision for loan losses |
13,334 | 12,153 | |||||
Provision (credit) for loan losses |
(10 | ) | | ||||
| | | | | | | |
Net interest income after provision for loan losses |
13,344 | 12,153 | |||||
| | | | | | | |
Noninterest income: |
|||||||
Service charges and fees on deposit accounts |
620 | 577 | |||||
Increase in cash surrender value of life insurance |
398 | 416 | |||||
Servicing income |
348 | 365 | |||||
Gain on sales of SBA loans |
157 | 136 | |||||
Gain on sales of securities |
50 | 31 | |||||
Other |
444 | 138 | |||||
| | | | | | | |
Total noninterest income |
2,017 | 1,663 | |||||
| | | | | | | |
Noninterest expense: |
|||||||
Salaries and employee benefits |
6,243 | 6,011 | |||||
Occupancy and equipment |
945 | 1,068 | |||||
Professional fees |
586 | 982 | |||||
Insurance expense |
269 | 254 | |||||
Software subscriptions |
247 | 291 | |||||
FDIC deposit insurance premiums |
234 | 259 | |||||
Data processing |
230 | 252 | |||||
Low income housing investment losses |
188 | 311 | |||||
Correspondent bank charges |
182 | 164 | |||||
Foreclosed assets, net |
(18 | ) | (155 | ) | |||
Other |
1,628 | 1,344 | |||||
| | | | | | | |
Total noninterest expense |
10,734 | 10,781 | |||||
| | | | | | | |
Income before income taxes |
4,627 | 3,035 | |||||
Income tax expense |
1,551 | 855 | |||||
| | | | | | | |
Net income |
3,076 | 2,180 | |||||
Dividends on preferred stock |
(224 | ) | | ||||
| | | | | | | |
Net income available to common shareholders |
$ | 2,852 | $ | 2,180 | |||
| | | | | | | |
| | | | | | | |
Earnings per common share: |
|||||||
Basic |
$ | 0.10 | $ | 0.07 | |||
Diluted |
$ | 0.10 | $ | 0.07 |
See notes to consolidated financial statements
6
HERITAGE COMMERCE CORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
|
For the Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2014 | 2013 | |||||
|
(Dollars in thousands) |
||||||
Net income |
$ | 3,076 | $ | 2,180 | |||
Other comprehensive income (loss): |
|||||||
Change in net unrealized holding gains (losses) on available-for-sale securities and I/O strips |
2,750 | (2,164 | ) | ||||
Deferred income taxes |
(1,155 | ) | 909 | ||||
Change in net unamortized unrealized gain on securities available-for-sale that were reclassified to securities held-to-maturity |
(14 | ) | (14 | ) | |||
Deferred income taxes |
6 | 6 | |||||
Reclassification adjustment for gains realized in income |
(50 | ) | (31 | ) | |||
Deferred income taxes |
21 | 13 | |||||
| | | | | | | |
Change in unrealized gains (losses) on securities and I/O strips, net of deferred income taxes |
1,558 | (1,281 | ) | ||||
| | | | | | | |
Change in net pension and other benefit plan liability adjustment |
(9 | ) | 29 | ||||
Deferred income taxes |
4 | (12 | ) | ||||
| | | | | | | |
Change in pension and other benefit plan liability, net of deferred income taxes |
(5 | ) | 17 | ||||
| | | | | | | |
Other comprehensive income (loss) |
1,553 | (1,264 | ) | ||||
| | | | | | | |
Total comprehensive income |
$ | 4,629 | $ | 916 | |||
| | | | | | | |
| | | | | | | |
See notes to consolidated financial statements
7
HERITAGE COMMERCE CORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
|
Three Months Ended March 31, 2014 and 2013 | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
|
|
|
Accumulated Other Comprehensive Income / (Loss) |
|
|||||||||||||||
|
Preferred Stock | Common Stock | |
|
||||||||||||||||||
|
Retained Earnings |
Total Shareholders' Equity |
||||||||||||||||||||
|
Shares | Amount | Shares | Amount | ||||||||||||||||||
|
(Dollars in thousands, except share data) |
|||||||||||||||||||||
Balance, January 1, 2013 |
21,004 | $ | 19,519 | 26,322,147 | $ | 131,820 | $ | 15,721 | $ | 2,681 | $ | 169,741 | ||||||||||
Net income |
| | | | 2,180 | | 2,180 | |||||||||||||||
Other comprehensive loss |
| | | | | (1,264 | ) | (1,264 | ) | |||||||||||||
Issuance of restricted stock awards |
| | 10,000 | | | | | |||||||||||||||
Amortization of restricted stock awards, net of forfeitures and taxes |
| | | 45 | | | 45 | |||||||||||||||
Stock option expense, net of forfeitures and taxes |
| | | 129 | | | 129 | |||||||||||||||
Stock options exercised |
| | 1,221 | 4 | | | 4 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Balance, March 31, 2013 |
21,004 | $ | 19,519 | 26,333,368 | $ | 131,998 | $ | 17,901 | $ | 1,417 | $ | 170,835 | ||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2013 |
21,004 |
$ |
19,519 |
26,350,938 |
$ |
132,561 |
$ |
25,345 |
$ |
(4,029 |
) |
$ |
173,396 |
|||||||||
Net income |
| | | | 3,076 | | 3,076 | |||||||||||||||
Other comprehensive income |
| | | | | 1,553 | 1,553 | |||||||||||||||
Issuance of restricted stock awards, net |
| | 15,000 | | | | | |||||||||||||||
Amortization of restricted stock awards, net of forfeitures and taxes |
| | | (136 | ) | | | (136 | ) | |||||||||||||
Cash dividend declared $0.04 per share |
| | | | (1,278 | ) | | (1,278 | ) | |||||||||||||
Stock option expense, net of forfeitures and taxes |
| | | 187 | | | 187 | |||||||||||||||
Stock options exercised |
| | 4,572 | 19 | | | 19 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Balance, March 31, 2014 |
21,004 | $ | 19,519 | 26,370,510 | $ | 132,631 | $ | 27,143 | $ | (2,476 | ) | $ | 176,817 | |||||||||
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
See notes to consolidated financial statements
8
HERITAGE COMMERCE CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2014 | 2013 | |||||
|
(Dollars in thousands) |
||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|||||||
Net income |
$ | 3,076 | $ | 2,180 | |||
Adjustments to reconcile net income to net cash provided by operating activities: |
|||||||
Amortization of discounts and premiums on securities |
256 | 756 | |||||
Gain on sales of securities available-for-sale |
(50 | ) | (31 | ) | |||
Gain on sales of SBA loans |
(157 | ) | (136 | ) | |||
Proceeds from sale of SBA loans originated for sale |
2,433 | 1,774 | |||||
Net change in SBA loans originated for sale |
(2,022 | ) | (2,643 | ) | |||
Provision (credit) for loan losses |
(10 | ) | | ||||
Increase in cash surrender value of life insurance |
(398 | ) | (416 | ) | |||
Depreciation and amortization |
177 | 177 | |||||
Amortization of intangible assets |
115 | 118 | |||||
Gains on sale of foreclosed assets, net |
| (198 | ) | ||||
Stock option expense, net |
187 | 129 | |||||
Amortization of restricted stock awards, net |
(136 | ) | 45 | ||||
Gain on redemption of company owned life insurance |
(51 | ) | | ||||
Effect of changes in: |
|||||||
Accrued interest receivable and other assets |
1,623 | (88 | ) | ||||
Accrued interest payable and other liabilities |
237 | 1,806 | |||||
| | | | | | | |
Net cash provided by operating activities |
5,280 | 3,473 | |||||
| | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: |
|||||||
Purchase of securities available-for-sale |
(34,775 | ) | (8,334 | ) | |||
Purchase of securities held-to-maturity |
(959 | ) | (18,433 | ) | |||
Maturities/paydowns/calls of securities available-for-sale |
5,013 | 23,056 | |||||
Maturities/paydowns/calls of securities held-to-maturity |
331 | 1,429 | |||||
Proceeds from sale of securities available-for-sale |
50,011 | 3,530 | |||||
Net change in loans |
(27,183 | ) | 10,690 | ||||
Change in Federal Home Loan Bank and Federal Reserve Bank stock |
(122 | ) | (36 | ) | |||
Purchase of premises and equipment |
(123 | ) | (340 | ) | |||
Proceeds from sale of foreclosed assets |
| 743 | |||||
Proceeds from redemption of company owned life insurance |
406 | | |||||
| | | | | | | |
Net cash (used in) provided by investing activities |
(7,401 | ) | 12,305 | ||||
| | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: |
|||||||
Net change in deposits |
(24,226 | ) | (312,478 | ) | |||
Payment of cash dividends |
(1,278 | ) | | ||||
Exercise of stock options |
19 | 4 | |||||
| | | | | | | |
Net cash used in financing activities |
(25,485 | ) | (312,474 | ) | |||
| | | | | | | |
Net decrease in cash and cash equivalents |
(27,606 | ) | (296,696 | ) | |||
Cash and cash equivalents, beginning of period |
112,605 | 373,565 | |||||
| | | | | | | |
Cash and cash equivalents, end of period |
$ | 84,999 | $ | 76,869 | |||
| | | | | | | |
| | | | | | | |
Supplemental disclosures of cash flow information: |
|||||||
Interest paid |
$ | 518 | $ | 709 | |||
Income taxes paid |
500 | 1,025 | |||||
Supplemental schedule of non-cash investing activity: |
|||||||
Due to broker for securities purchased |
$ | | $ | 3,351 | |||
Loans transferred to foreclosed assets |
| 33 | |||||
Transfer of loans held-for-sale to loan portfolio |
| 20 |
See notes to consolidated financial statements
9
HERITAGE COMMERCE CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2014
(Unaudited)
1) Basis of Presentation
The unaudited consolidated financial statements of Heritage Commerce Corp (the "Company" or "HCC") and its wholly owned subsidiary, Heritage Bank of Commerce (the "Bank" or "HBC"), have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and notes required by accounting principles generally accepted in the United States of America ("GAAP") for annual financial statements are not included herein. The interim statements should be read in conjunction with the consolidated financial statements and notes that were included in the Company's Form 10-K for the year ended December 31, 2013. The Company also established the following unconsolidated subsidiary grantor trusts: Heritage Capital Trust I; Heritage Statutory Trust I; Heritage Statutory Trust II; and Heritage Commerce Corp Statutory Trust III, which were Delaware Statutory business trusts formed for the exclusive purpose of issuing and selling trust preferred securities. During the third quarter of 2012 the Company dissolved the Heritage Statutory Trust I and the Heritage Capital Trust I. During the third quarter of 2013 the Company dissolved the Heritage Statutory Trust II and the Heritage Commerce Corp Statutory Trust III.
HBC is a commercial bank serving customers located in Santa Clara, Alameda, and Contra Costa counties of California. No customer accounts for more than 10 percent of revenue for HBC or the Company. Management evaluates the Company's performance as a whole and does not allocate resources based on the performance of different lending or transaction activities. Accordingly, the Company and its subsidiary operate as one business segment.
In management's opinion, all adjustments necessary for a fair presentation of these consolidated financial statements have been included and are of a normal and recurring nature. All intercompany transactions and balances have been eliminated.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ significantly from these estimates.
The results for the three months ended March 31, 2014 are not necessarily indicative of the results expected for any subsequent period or for the entire year ending December 31, 2014.
Reclassifications
Certain reclassifications of prior year balances have been made to conform to the current year presentation. These reclassifications had no impact on the Company's consolidated financial position, results of operations or net change in cash and cash equivalents.
Adoption of New Accounting Standards
In January 2014, the FASB amended existing guidance clarifying that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower
10
HERITAGE COMMERCE CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2014
(Unaudited)
1) Basis of Presentation (Continued)
conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. For entities other than public business entities, the amendments in this update are effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.
2) Earnings Per Share
Basic earnings per common share is computed by dividing net income, less dividends and discount accretion on preferred stock, by the weighted average common shares outstanding. The Series C Preferred Stock participates in the earnings of the Company and, therefore, the shares issued on the conversion of the Series C Preferred Stock are considered outstanding under the two class method of computing basic earnings per common share during periods of earnings. Diluted earnings per share reflect potential dilution from outstanding stock options and common stock warrants, using the treasury stock method. The common stock warrant was antidilutive for the three months ended March 31, 2013. The Company repurchased the warrant for $140,000 in the second quarter of 2013. A reconciliation of these factors used in computing basic and diluted earnings per common share is as follows:
|
For the Three Months Ended March 31, | ||||||
---|---|---|---|---|---|---|---|
|
2014 | 2013 | |||||
|
(Dollars in thousands, except per share amounts) |
||||||
Net income available to common shareholders |
$ | 2,852 | $ | 2,180 | |||
Less: undistributed earnings allocated to Series C Preferred Stock |
315 | 382 | |||||
| | | | | | | |
Distributed and undistributed earnings allocated to common shareholders |
$ | 2,537 | $ | 1,798 | |||
| | | | | | | |
| | | | | | | |
Weighted average common shares outstanding for basic earnings per common share |
26,359,825 | 26,329,343 | |||||
Dilutive effect of stock options oustanding, using the the treasury stock method |
123,263 | 49,114 | |||||
| | | | | | | |
Shares used in computing diluted earnings per common share |
26,483,088 | 26,378,457 | |||||
| | | | | | | |
| | | | | | | |
Basic earnings per share |
$ | 0.10 | $ | 0.07 | |||
Diluted earnings per share |
$ | 0.10 | $ | 0.07 |
11
HERITAGE COMMERCE CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2014
(Unaudited)
3) Accumulated Other Comprehensive Income ("AOCI")
The following table reflects the changes in AOCI by component for the periods indicated:
|
For the Three Months Ended March 31, 2014 and 2013 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Unrealized Gains (Losses) on Available- for-Sale Securities and I/O Strips(1) |
Unamortized Unrealized Gain on Available- for-Sale Securities Reclassified to Held-to- Maturity(1) |
Defined Benefit Pension Plan Items(1) |
Total(1) | |||||||||
|
(Dollars in thousands) |
||||||||||||
Beginning balance January 1, 2014, net of taxes |
$ | (430 | ) | $ | 466 | $ | (4,065 | ) | $ | (4,029 | ) | ||
Other comprehensive income (loss) before reclassification, net of taxes |
1,595 |
|
(10 |
) |
1,585 |
||||||||
Amounts reclassified from other comprehensive income (loss), net of taxes |
(29 | ) | (8 | ) | 5 | (32 | ) | ||||||
| | | | | | | | | | | | | |
Net current period other comprensive income (loss), net of taxes |
1,566 | (8 | ) | (5 | ) | 1,553 | |||||||
| | | | | | | | | | | | | |
Ending balance March 31, 2014, net of taxes |
$ | 1,136 | $ | 458 | $ | (4,070 | ) | $ | (2,476 | ) | |||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Beginning balance January 1, 2013, net of taxes |
$ |
7,887 |
$ |
497 |
$ |
(5,703 |
) |
$ |
2,681 |
||||
Other comprehensive (loss) before reclassification, net of taxes |
(1,255 |
) |
|
(11 |
) |
(1,266 |
) |
||||||
Amounts reclassified from other comprehensive income (loss), net of taxes |
(18 | ) | (8 | ) | 28 | 2 | |||||||
| | | | | | | | | | | | | |
Net current period other comprehensive income (loss), net of taxes |
(1,273 | ) | (8 | ) | 17 | (1,264 | ) | ||||||
| | | | | | | | | | | | | |
Ending balance March 31, 2013, net of taxes |
$ | 6,614 | $ | 489 | $ | (5,686 | ) | $ | 1,417 | ||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
12
HERITAGE COMMERCE CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2014
(Unaudited)
3) Accumulated Other Comprehensive Income ("AOCI") (Continued)
|
Amounts Reclassified from AOCI(1) For the Three Months Ended March 31, |
|
||||||
---|---|---|---|---|---|---|---|---|
|
Affected Line Item Where Net Income is Presented |
|||||||
Details About AOCI Components
|
2014 | 2013 | ||||||
|
(Dollars in thousands) |
|
||||||
Unrealized gains on available-for-sale securities and I/O strips |
$ | 50 | $ | 31 | Realized gains on sale of securities | |||
|
(21 | ) | (13 | ) | Income tax expense | |||
| | | | | | | | |
|
29 | 18 | Net of tax | |||||
| | | | | | | | |
Amortization of unrealized gain on securities available-for-sale that were reclassified to securities held-to-maturity |
14 | 14 | Interest income on taxable securities | |||||
|
(6 | ) | (6 | ) | Income tax expense | |||
| | | | | | | | |
|
8 | 8 | Net of tax | |||||
| | | | | | | | |
Amortization of defined benefit pension plan items(2) |
||||||||
Prior transition obligation |
26 | 22 | ||||||
Actuarial losses |
(35 | ) | (71 | ) | ||||
| | | | | | | | |
|
(9 | ) | (49 | ) | Income before income tax | |||
|
4 | 21 | Income tax expense | |||||
| | | | | | | | |
|
(5 | ) | (28 | ) | Net of tax | |||
| | | | | | | | |
Total reclassification for the period |
$ | 32 | $ | (2 | ) | |||
| | | | | | | | |
| | | | | | | | |
13
HERITAGE COMMERCE CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2014
(Unaudited)
4) Securities
The amortized cost and estimated fair value of securities at March 31, 2014 and December 31, 2013 were as follows:
March 31, 2014
|
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(Dollars in thousands) |
||||||||||||
Securities available-for-sale: |
|||||||||||||
Agency mortgage-backed securities |
$ | 160,905 | $ | 2,254 | $ | (1,927 | ) | $ | 161,232 | ||||
Asset-backed securities |
27,355 | 40 | (112 | ) | 27,283 | ||||||||
Corporate bonds |
52,952 | 552 | (470 | ) | 53,034 | ||||||||
Trust preferred securities |
20,869 | | (43 | ) | 20,826 | ||||||||
| | | | | | | | | | | | | |
Total |
$ | 262,081 | $ | 2,846 | $ | (2,552 | ) | $ | 262,375 | ||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Securities held-to-maturity: |
|||||||||||||
Agency mortgage-backed securities |
$ | 15,586 | $ | | $ | (345 | ) | $ | 15,241 | ||||
Municipalstax exempt |
79,962 | 343 | (5,706 | ) | 74,599 | ||||||||
| | | | | | | | | | | | | |
Total |
$ | 95,548 | $ | 343 | $ | (6,051 | ) | $ | 89,840 | ||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
December 31, 2013
|
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(Dollars in thousands) |
||||||||||||
Securities available-for-sale: |
|||||||||||||
Agency mortgage-backed securities |
$ | 208,644 | $ | 2,465 | $ | (3,465 | ) | $ | 207,644 | ||||
Corporate bonds |
53,002 | 527 | (1,483 | ) | 52,046 | ||||||||
Trust preferred securities |
20,849 | | (439 | ) | 20,410 | ||||||||
| | | | | | | | | | | | | |
Total |
$ | 282,495 | $ | 2,992 | $ | (5,387 | ) | $ | 280,100 | ||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Securities held-to-maturity: |
|||||||||||||
Agency mortgage-backed securities |
$ | 15,932 | $ | | $ | (470 | ) | $ | 15,462 | ||||
Municipalstax exempt |
79,989 | 54 | (9,473 | ) | 70,570 | ||||||||
| | | | | | | | | | | | | |
Total |
$ | 95,921 | $ | 54 | $ | (9,943 | ) | $ | 86,032 | ||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
14
HERITAGE COMMERCE CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2014
(Unaudited)
4) Securities (Continued)
Securities with unrealized losses at March 31, 2014 and December 31, 2013, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are as follows:
|
Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
March 31, 2014
|
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
|||||||||||||
|
(Dollars in thousands) |
||||||||||||||||||
Securities available-for-sale: |
|||||||||||||||||||
Agency mortgage-backed securities |
$ | 66,006 | $ | (1,783 | ) | $ | 2,632 | $ | (144 | ) | $ | 68,638 | $ | (1,927 | ) | ||||
Asset-backed securities |
17,525 | (112 | ) | | | 17,525 | (112 | ) | |||||||||||
Corporate bonds |
34,974 | (372 | ) | 1,922 | (98 | ) | 36,896 | (470 | ) | ||||||||||
Trust preferred securities |
5,826 | (43 | ) | | | 5,826 | (43 | ) | |||||||||||
| | | | | | | | | | | | | | | | | | | |
Total |
$ | 124,331 | $ | (2,310 | ) | $ | 4,554 | $ | (242 | ) | $ | 128,885 | $ | (2,552 | ) | ||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Securities held-to-maturity: |
|||||||||||||||||||
Agency mortgage-backed securities |
$ | 5,539 | $ | (43 | ) | $ | 9,326 | $ | (302 | ) | $ | 14,865 | $ | (345 | ) | ||||
MunicipalsTax Exempt |
21,562 | (1,297 | ) | 39,602 | (4,409 | ) | 61,164 | (5,706 | ) | ||||||||||
| | | | | | | | | | | | | | | | | | | |
Total |
$ | 27,101 | $ | (1,340 | ) | $ | 48,928 | $ | (4,711 | ) | $ | 76,029 | $ | (6,051 | ) | ||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
|
Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
December 31, 2013
|
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
|||||||||||||
|
(Dollars in thousands) |
||||||||||||||||||
Securities available-for-sale: |
|||||||||||||||||||
Agency mortgage-backed securities |
$ | 87,798 | $ | (2,869 | ) | $ | 8,920 | $ | (596 | ) | $ | 96,718 | $ | (3,465 | ) | ||||
Corporate bonds |
38,092 | (1,322 | ) | 1,860 | (161 | ) | 39,952 | (1,483 | ) | ||||||||||
Trust preferred securities |
20,410 | (439 | ) | | | 20,410 | (439 | ) | |||||||||||
| | | | | | | | | | | | | | | | | | | |
Total |
$ | 146,300 | $ | (4,630 | ) | $ | 10,780 | $ | (757 | ) | $ | 157,080 | $ | (5,387 | ) | ||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Securities held-to-maturity: |
|||||||||||||||||||
Agency mortgage-backed securities |
$ | 5,978 | $ | (101 | ) | $ | 9,134 | $ | (369 | ) | $ | 15,112 | $ | (470 | ) | ||||
MunicipalsTax Exempt |
38,177 | (4,421 | ) | 25,520 | (5,052 | ) | 63,697 | (9,473 | ) | ||||||||||
| | | | | | | | | | | | | | | | | | | |
Total |
$ | 44,155 | $ | (4,522 | ) | $ | 34,654 | $ | (5,421 | ) | $ | 78,809 | $ | (9,943 | ) | ||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
There were no holdings of securities of any one issuer, other than the U.S. Government and its sponsored entities, in an amount greater than 10% of shareholders' equity. At March 31, 2014, the Company held 370 securities (141 available for sale and 229 held-to-maturity), of which 235 had fair values below amortized cost. At March 31, 2014, there were $2,632,000 of agency mortgage-backed securities available-for-sale, $1,922,000 of corporate bonds available-for-sale, $9,326,000 of agency mortgage-backed securities held-to-maturity and $39,602,000 of municipals bonds held-to-maturity carried with an unrealized loss for over 12 months. The total unrealized loss for securities over 12 months was $4,953,000 at March 31, 2014. The unrealized losses were due to higher interest rates.
15
HERITAGE COMMERCE CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2014
(Unaudited)
4) Securities (Continued)
The issuers are of high credit quality and all principal amounts are expected to be paid when securities mature. The fair value is expected to recover as the securities approach their maturity date and/or market rates decline. The Company does not believe that it is more likely than not that the Company will be required to sell a security in an unrealized loss position prior to recovery in value. The Company does not consider these securities to be other than temporarily impaired at March 31, 2014.
At December 31, 2013, the Company held 392 securities (163 available-for-sale and 229 held to maturity), of which 275 had fair values below amortized cost. At December 31, 2013, there were $8,920,000 of agency mortgage-backed securities available-for-sale, $1,860,000 of corporate bonds available-for-sale, $9,134,000 of agency mortgage-backed securities held-to-maturity, and $25,520,000 of municipal bonds held-to-maturity carried with an unrealized loss for over 12 months. The total unrealized loss for securities over 12 months was $6,178,000 at December 31, 2013. The unrealized losses were due to higher interest rates. The issuers were of high credit quality and all principal amounts were expected to be paid when securities mature. The fair value was expected to recover as the securities approach their maturity date and/or market rates decline. The Company did not believe that it is more likely than not that the Company would be required to sell a security in an unrealized loss position prior to recovery in value. The Company did not consider these securities to be other than temporarily impaired at December 31, 2013.
The proceeds from sales of securities and the resulting gains and losses are listed below:
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2014 | 2013 | |||||
|
(Dollars in thousands) |
||||||
Proceeds |
$ | 50,011 | $ | 3,530 | |||
Gross gains |
$ | 720 | $ | 31 | |||
Gross losses |
$ | (670 | ) | |
The amortized cost and estimated fair values of securities as of March 31, 2014, are shown by contractual maturity below. The expected maturities will differ from contractual maturities if borrowers have the right to call or pre-pay obligations with or without call or pre-payment penalties. Securities not due at a single maturity date are shown separately.
|
Available-for-sale | ||||||
---|---|---|---|---|---|---|---|
|
Amortized Cost | Estimated Fair Value | |||||
|
(Dollars in thousands) |
||||||
Due after one through five years |
$ | 6,276 | $ | 6,630 | |||
Due after five through ten years |
46,676 | 46,404 | |||||
Due after ten years |
20,869 | 20,826 | |||||
Asset-backed securities and agency mortgage-backed securities |
188,260 | 188,515 | |||||
| | | | | | | |
Total |
$ | 262,081 | $ | 262,375 | |||
| | | | | | | |
| | | | | | | |
16
HERITAGE COMMERCE CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2014
(Unaudited)
4) Securities (Continued)
|
Held-to-maturity | ||||||
---|---|---|---|---|---|---|---|
|
Amortized Cost | Estimated Fair Value | |||||
|
(Dollars in thousands) |
||||||
Due after five through ten years |
$ | 3,643 | $ | 3,610 | |||
Due after ten years |
76,319 | 70,989 | |||||
Agency mortgage-backed securities |
15,586 | 15,241 | |||||
| | | | | | | |
Total |
$ | 95,548 | $ | 89,840 | |||
| | | | | | | |
| | | | | | | |
5) Loans
Loans were as follows:
|
March 31, 2014 |
December 31, 2013 |
|||||
---|---|---|---|---|---|---|---|
|
(Dollars in thousands) |
||||||
Loans held-for-investment: |
|||||||
Commercial |
$ | 390,650 | $ | 393,074 | |||
Real estate: |
|||||||
Commercial and residential |
436,562 | 423,288 | |||||
Land and construction |
42,889 | 31,443 | |||||
Home equity |
56,289 | 51,815 | |||||
Consumer |
15,829 | 15,677 | |||||
| | | | | | | |
Loans |
942,219 | 915,297 | |||||
Deferred loan origination fees, net |
(460 | ) | (384 | ) | |||
| | | | | | | |
Loans, net of deferred fees |
941,759 | 914,913 | |||||
Allowance for loan losses |
(18,817 | ) | (19,164 | ) | |||
| | | | | | | |
Loans, net |
$ | 922,942 | $ | 895,749 | |||
| | | | | | | |
| | | | | | | |
Changes in the allowance for loan losses were as follows for the periods indicated:
|
Three Months Ended March 31, 2014 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Commercial | Real Estate | Consumer | Total | |||||||||
|
(Dollars in thousands) |
||||||||||||
Balance, beginning of period |
$ | 12,533 | $ | 6,548 | $ | 83 | $ | 19,164 | |||||
Charge-offs |
(408 | ) | | | (408 | ) | |||||||
Recoveries |
44 | 27 | | 71 | |||||||||
| | | | | | | | | | | | | |
Net (charge-offs) recoveries |
(364 | ) | 27 | | (337 | ) | |||||||
Provision (credit) for loan losses |
(323 | ) | 319 | (6 | ) | (10 | ) | ||||||
| | | | | | | | | | | | | |
Balance, end of period |
$ | 11,846 | $ | 6,894 | $ | 77 | $ | 18,817 | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
17
HERITAGE COMMERCE CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2014
(Unaudited)
5) Loans (Continued)
|
Three Months Ended March 31, 2013 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Commercial | Real Estate | Consumer | Total | |||||||||
|
(Dollars in thousands) |
||||||||||||
Balance, beginning of period |
$ | 12,866 | $ | 6,034 | $ | 127 | $ | 19,027 | |||||
Charge-offs |
(840 | ) | | | (840 | ) | |||||||
Recoveries |
1,150 | 5 | | 1,155 | |||||||||
| | | | | | | | | | | | | |
Net recoveries |
310 | 5 | | 315 | |||||||||
Provision (credit) for loan losses |
(721 | ) | 731 | (10 | ) | | |||||||
| | | | | | | | | | | | | |
Balance, end of period |
$ | 12,455 | $ | 6,770 | $ | 117 | $ | 19,342 | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment, based on the impairment method at the following period-ends:
|
March 31, 2014 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Commercial | Real Estate | Consumer | Total | |||||||||
|
(Dollars in thousands) |
||||||||||||
Allowance for loan losses: |
|||||||||||||
Ending allowance balance attributable to loans: |
|||||||||||||
Individually evaluated for impairment |
$ | 1,694 | $ | 667 | $ | 18 | $ | 2,379 | |||||
Collectively evaluated for impairment |
10,152 | 6,227 | 59 | 16,438 | |||||||||
| | | | | | | | | | | | | |
Total allowance balance |
$ | 11,846 | $ | 6,894 | $ | 77 | $ | 18,817 | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Loans: |
|||||||||||||
Individually evaluated for impairment |
$ | 5,157 | $ | 5,552 | $ | 115 | $ | 10,824 | |||||
Collectively evaluated for impairment |
385,493 | 530,188 | 15,714 | 931,395 | |||||||||
| | | | | | | | | | | | | |
Total loan balance |
$ | 390,650 | $ | 535,740 | $ | 15,829 | $ | 942,219 | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
|
December 31, 2013 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Commercial | Real Estate | Consumer | Total | |||||||||
|
(Dollars in thousands) |
||||||||||||
Allowance for loan losses: |
|||||||||||||
Ending allowance balance attributable to loans: |
|||||||||||||
Individually evaluated for impairment |
$ | 1,694 | $ | 741 | $ | 21 | $ | 2,456 | |||||
Collectively evaluated for impairment |
10,839 | 5,807 | 62 | 16,708 | |||||||||
| | | | | | | | | | | | | |
Total allowance balance |
$ | 12,533 | $ | 6,548 | $ | 83 | $ | 19,164 | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Loans: |
|||||||||||||
Individually evaluated for impairment |
$ | 4,906 | $ | 6,790 | $ | 122 | $ | 11,818 | |||||
Collectively evaluated for impairment |
388,168 | 499,756 | 15,555 | 903,479 | |||||||||
| | | | | | | | | | | | | |
Total loan balance |
$ | 393,074 | $ | 506,546 | $ | 15,677 | $ | 915,297 | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
18
HERITAGE COMMERCE CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2014
(Unaudited)
5) Loans (Continued)
The following table presents loans held-for-investment individually evaluated for impairment by class of loans as of March 31, 2014 and December 31, 2013. The recorded investment included in the following table represents loan principal net of any partial charge-offs recognized on the loans. The unpaid principal balance represents the recorded balance prior to any partial charge-offs.
|
March 31, 2014 | December 31, 2013 | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Unpaid Principal Balance |
Recorded Investment |
Allowance for Loan Losses Allocated |
Unpaid Principal Balance |
Recorded Investment |
Allowance for Loan Losses Allocated |
|||||||||||||
|
(Dollars in thousands) |
||||||||||||||||||
With no related allowance recorded: |
|||||||||||||||||||
Commercial |
$ | 2,821 | $ | 2,556 | $ | | $ | 1,999 | $ | 1,915 | $ | | |||||||
Real estate: |
|||||||||||||||||||
Commercial and residential |
1,714 | 1,714 | | 2,831 | 2,831 | | |||||||||||||
Land and construction |
1,718 | 1,718 | | 1,761 | 1,761 | | |||||||||||||
Home Equity |
373 | 373 | | 377 | 377 | | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
Total with no related allowance recorded |
6,626 | 6,361 | | 6,968 | 6,884 | | |||||||||||||
With an allowance recorded: |
|||||||||||||||||||
Commercial |
2,601 | 2,601 | 1,694 | 3,225 | 2,991 | 1,694 | |||||||||||||
Real estate: |
|||||||||||||||||||
Commercial and residential |
1,513 | 1,513 | 433 | 1,531 | 1,531 | 451 | |||||||||||||
Home Equity |
234 | 234 | 234 | 290 | 290 | 290 | |||||||||||||
Consumer |
115 | 115 | 18 | 122 | 122 | 21 | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
Total with an allowance recorded |
4,463 | 4,463 | 2,379 | 5,168 | 4,934 | 2,456 | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
Total |
$ | 11,089 | $ | 10,824 | $ | 2,379 | $ | 12,136 | $ | 11,818 | $ | 2,456 | |||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
The following tables present interest recognized and cash-basis interest earned on impaired loans for the periods indicated:
|
Three Months Ended March 31, 2014 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
Real Estate | |
|
|||||||||||||||
|
Commercial | Commercial and Residential |
Land and Construction |
Home Equity |
Consumer | Total | |||||||||||||
|
(Dollars in thousands) |
||||||||||||||||||
Average of impaired loans during the period |
$ | 5,032 | $ | 3,795 | $ | 1,739 | $ | 637 | $ | 118 | $ | 11,321 | |||||||
Interest income during impairment |
$ | 10 | $ | | $ | | $ | | $ | | $ | 10 | |||||||
Cash-basis interest earned |
$ | | $ | | $ | | $ | | $ | | $ | |
19
HERITAGE COMMERCE CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2014
(Unaudited)
5) Loans (Continued)
|
Three Months Ended March 31, 2013 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
Real Estate | |
|
|||||||||||||||
|
Commercial | Commercial and Residential |
Land and Construction |
Home Equity |
Consumer | Total | |||||||||||||
|
(Dollars in thousands) |
||||||||||||||||||
Average of impaired loans during the period |
$ | 9,145 | $ | 5,090 | $ | 2,200 | $ | 2,434 | $ | 144 | $ | 19,013 | |||||||
Interest income during impairment |
$ | | $ | | $ | | $ | | $ | | $ | | |||||||
Cash-basis interest earned |
$ | | $ | | $ | | $ | | $ | | $ | |
Nonperforming loans include both smaller dollar balance homogenous loans that are collectively evaluated for impairment and individually classified loans. Nonperforming loans were as follows at period-end:
|
March 31, | |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
December 31, 2013 |
|||||||||
|
2014 | 2013 | ||||||||
|
(Dollars in thousands) |
|||||||||
Nonaccrual loansheld-for-investment |
$ | 9,546 | $ | 16,115 | $ | 11,326 | ||||
Restructured and loans over 90 days past due and still accruing |
1,278 | 549 | 492 | |||||||
| | | | | | | | | | |
Total nonperforming loans |
$ | 10,824 | $ | 16,664 | $ | 11,818 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
Other restructured loans |
$ | | $ | 1,717 | $ | | ||||
Impaired loans, excluding loans held-for-sale |
$ | 10,824 | $ | 18,381 | $ | 11,818 |
The following table presents the nonperforming loans by class for the periods indicated:
|
March 31, 2014 | December 31, 2013 | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Nonaccrual | Restructured and Loans Over 90 Days Past Due and Still Accruing |
Total | Nonaccrual | Restructured and Loans Over 90 Days Past Due and Still Accruing |
Total | |||||||||||||
|
(Dollars in thousands) |
||||||||||||||||||
Commercial |
$ | 3,879 | $ | 1,278 | $ | 5,157 | $ | 4,414 | $ | 492 | $ | 4,906 | |||||||
Real estate: |
|||||||||||||||||||
Commercial and residential |
3,227 | | 3,227 | 4,363 | | 4,363 | |||||||||||||
Land and construction |
1,718 | | 1,718 | 1,761 | | 1,761 | |||||||||||||
Home equity |
607 | | 607 | 666 | | 666 | |||||||||||||
Consumer |
115 | | 115 | 122 | | 122 | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
Total |
$ | 9,546 | $ | 1,278 | $ | 10,824 | $ | 11,326 | $ | 492 | $ | 11,818 | |||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
20
HERITAGE COMMERCE CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2014
(Unaudited)
5) Loans (Continued)
The following tables present the aging of past due loans by class for the periods indicated:
|
March 31, 2014 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
30 - 59 Days Past Due |
60 - 89 Days Past Due |
90 Days or Greater Past Due |
Total Past Due |
Loans Not Past Due |
Total | |||||||||||||
|
(Dollars in thousands) |
||||||||||||||||||
Commercial |
$ | 890 | $ | 1,153 | $ | 2,451 | $ | 4,494 | $ | 386,156 | $ | 390,650 | |||||||
Real estate: |
|||||||||||||||||||
Commercial and residential |
873 | | 1,065 | 1,938 | 434,624 | 436,562 | |||||||||||||
Land and construction |
| | | | 42,889 | 42,889 | |||||||||||||
Home equity |
| | 234 | 234 | 56,055 | 56,289 | |||||||||||||
Consumer |
14 | 25 | 83 | 122 | 15,707 | 15,829 | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
Total |
$ | 1,777 | $ | 1,178 | $ | 3,833 | $ | 6,788 | $ | 935,431 | $ | 942,219 | |||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
|
December 31, 2013 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
30 - 59 Days Past Due |
60 - 89 Days Past Due |
90 Days or Greater Past Due |
Total Past Due |
Loans Not Past Due |
Total | |||||||||||||
|
(Dollars in thousands) |
||||||||||||||||||
Commercial |
$ | 3,314 | $ | 428 | $ | 2,865 | $ | 6,607 | $ | 386,467 | $ | 393,074 | |||||||
Real estate: |
|||||||||||||||||||
Commercial and residential |
1,559 | | 1,065 | 2,624 | 420,664 | 423,288 | |||||||||||||
Land and construction |
| | | | 31,443 | 31,443 | |||||||||||||
Home equity |
28 | | 290 | 318 | 51,497 | 51,815 | |||||||||||||
Consumer |
| | 89 | 89 | 15,588 | 15,677 | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
Total |
$ | 4,901 | $ | 428 | $ | 4,309 | $ | 9,638 | $ | 905,659 | $ | 915,297 | |||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Past due loans 30 days or greater totaled $6,788,000 and $9,638,000 at March 31, 2014 and December 31, 2013, respectively, of which $3,050,000 and $5,900,000 were on nonaccrual. At March 31, 2014, there were also $6,496,000 loans less than 30 days past due included in nonaccrual loans held-for-investment. At December 31, 2013, there were also $5,426,000 loans less than 30 days past due included in nonaccrual loans held-for-investment. Management's classification of a loan as "nonaccrual" is an indication that there is reasonable doubt as to the full recovery of principal or interest on the loan. At that point, the Company stops accruing interest income, and reverses any uncollected interest that had been accrued as income. The Company begins recognizing interest income only as cash interest payments are received and it has been determined the collection of all outstanding principal is not in doubt. The loans may or may not be collateralized, and collection efforts are pursued.
Credit Quality Indicators
Concentrations of credit risk arise when a number of customers are engaged in similar business activities, or activities in the same geographic region, or have similar features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. The
21
HERITAGE COMMERCE CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2014
(Unaudited)
5) Loans (Continued)
Company's loan portfolio is concentrated in commercial (primarily manufacturing, wholesale, and service) and real estate lending, with the balance in consumer loans. While no specific industry concentration is considered significant, the Company's lending operations are located in the Company's market areas that are dependent on the technology and real estate industries and their supporting companies. Thus, the Company's borrowers could be adversely impacted by a downturn in these sectors of the economy which could reduce the demand for loans and adversely impact the borrowers' ability to repay their loans.
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a quarterly basis. Nonclassified loans generally include those loans that are expected to be repaid in accordance with contractual loans terms. Classified loans are those loans that are assigned a substandard, substandard-nonaccrual, or doubtful risk rating using the following definitions:
Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Substandard-Nonaccrual. Loans classified as substandard-nonaccrual are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any, and it is probable that the Company will not receive payment of the full contractual principal and interest. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. In addition, the Company no longer accrues interest on the loan because of the underlying weaknesses.
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loss. Loans classified as loss are considered uncollectable or of so little value that their continuance as assets is not warranted. This classification does not necessarily mean that a loan has no recovery or salvage value; but rather, there is much doubt about whether, how much, or when the recovery would occur. Loans classified as loss are immediately charged off against the allowance for loan losses. Therefore, there is no balance to report at March 31, 2014 or December 31, 2013.
22
HERITAGE COMMERCE CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2014
(Unaudited)
5) Loans (Continued)
The following table provides a summary of the loan portfolio by loan type and credit quality classification at period end:
|
March 31, 2014 | December 31, 2013 | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Nonclassified | Classified* | Total | Nonclassified | Classified* | Total | |||||||||||||
|
(Dollars in thousands) |
||||||||||||||||||
Commercial |
$ | 379,566 | $ | 11,084 | $ | 390,650 | $ | 380,806 | $ | 12,268 | $ | 393,074 | |||||||
Real estate: |
|||||||||||||||||||
Commercial and residential |
432,370 | 4,192 | 436,562 | 416,992 | 6,296 | 423,288 | |||||||||||||
Land and construction |
41,171 | 1,718 | 42,889 | 29,682 | 1,761 | 31,443 | |||||||||||||
Home equity |
53,367 | 2,922 | 56,289 | 48,818 | 2,997 | 51,815 | |||||||||||||
Consumer |
15,499 | 330 | 15,829 | 15,336 | 341 | 15,677 | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
Total |
$ | 921,973 | $ | 20,246 | $ | 942,219 | $ | 891,634 | $ | 23,663 | $ | 915,297 | |||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company's underwriting policy.
The recorded investment of troubled debt restructurings at March 31, 2014 was $3,593,000, which included $3,135,000 of nonaccrual loans and $458,000 of accruing loans. The book balance of troubled debt restructurings at December 31, 2013 was $3,722,000, which included $3,230,000 of nonaccrual loans and $492,000 of accruing loans. Approximately $1,092,000 and $1,186,000 in specific reserves were established with respect to these loans as of March 31, 2014 and December 31, 2013, respectively. As of March 31, 2014 and December 31, 2013, the Company had no additional amounts committed on any loan classified as a troubled debt restructuring.
There were no new loans modified as troubled debt restructurings during the three month periods ended March 31, 2014 and March 31, 2013.
A loan is considered to be in payment default when it is 30 days contractually past due under the modified terms. There were no defaults on troubled debt restructurings, within twelve months following the modification, during the three month periods ended March 31, 2014 and 2013.
A loan that is a troubled debt restructuring on nonaccrual status may return to accruing status after a period of at least six months of consecutive payments in accordance with the modified terms.
6) Income Taxes
Some items of income and expense are recognized in different years for tax purposes than when applying generally accepted accounting principles, leading to timing differences between the Company's actual tax liability and the amount accrued for this liability based on book income. These temporary differences comprise the "deferred" portion of the Company's tax expense or benefit, which is
23
HERITAGE COMMERCE CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2014
(Unaudited)
6) Income Taxes (Continued)
accumulated on the Company's books as a deferred tax asset or deferred tax liability until such time as they reverse.
Realization of the Company's deferred tax assets is primarily dependent upon the Company generating sufficient taxable income to obtain benefit from the reversal of net deductible temporary differences and utilization of tax credit carryforwards and the net operating loss carryforwards for Federal and California state income tax purposes. The amount of deferred tax assets considered realizable is subject to adjustment in future periods based on estimates of future taxable income. Under generally accepted accounting principles, a valuation allowance is required to be recognized if it is "more likely than not" that a deferred tax asset will not be realized. The determination of the realizability of the deferred tax assets is highly subjective and dependent upon judgment concerning management's evaluation of both positive and negative evidence, including forecasts of future income, cumulative losses, applicable tax planning strategies, and assessments of current and future economic and business conditions.
The Company had net deferred tax assets of $21,403,000, and $23,326,000, at March 31, 2014, and December 31, 2013, respectively. After consideration of the matters in the preceding paragraph, the Company determined that it is more likely than not that the net deferred tax asset at March 31, 2014 and December 31, 2013 will be fully realized in future years.
7) Benefit Plans
Supplemental Retirement Plan
The Company has a supplemental retirement plan (the "Plan") covering current and former key executives and directors. The Plan is a nonqualified defined benefit plan. Benefits are unsecured as there are no Plan assets. The following table presents the amount of periodic cost recognized for the periods indicated:
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2014 | 2013 | |||||
|
(Dollars in thousands) |
||||||
Components of net periodic benefit cost: |
|||||||
Service cost |
$ | 179 | $ | 304 | |||
Interest cost |
228 | 196 | |||||
Amortization of net actuarial loss |
35 | 71 | |||||
| | | | | | | |
Net periodic benefit cost |
$ | 442 | $ | 571 | |||
| | | | | | | |
| | | | | | | |
24
HERITAGE COMMERCE CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2014
(Unaudited)
7) Benefit Plans (Continued)
Split-Dollar Life Insurance Benefit Plan
The Company maintains life insurance policies for current and former directors and officers that are subject to split-dollar life insurance agreements. The following table sets forth the funded status of the split-dollar life insurance benefits for the periods indicated:
|
March 31, 2014 | December 31, 2013 | |||||
---|---|---|---|---|---|---|---|
|
(Dollars in thousands) |
||||||
Change in projected benefit obligation |
|||||||
Projected benefit obligation at beginning of year |
$ | 4,353 | $ | 4,717 | |||
Interest cost |
49 | 177 | |||||
Actuarial gain |
| (541 | ) | ||||
| | | | | | | |
Projected benefit obligation at end of period |
$ | 4,402 | $ | 4,353 | |||
| | | | | | | |
| | | | | | | |
|
March 31, 2014 | December 31, 2013 | |||||
---|---|---|---|---|---|---|---|
|
(Dollars in thousands) |
||||||
Net actuarial loss |
$ | 304 | $ | 256 | |||
Prior transition obligation |
1,575 | 1,597 | |||||
| | | | | | | |
Accumulated other comprehensive loss |
$ | 1,879 | $ | 1,853 | |||
| | | | | | | |
| | | | | | | |
|
March 31, 2014 | March 31, 2013 | |||||
---|---|---|---|---|---|---|---|
|
(Dollars in thousands) |
||||||
Amortization of prior transition obligation |
$ | (26 | ) | $ | (22 | ) | |
Interest cost |
49 | 44 | |||||
| | | | | | | |
Net periodic benefit cost |
$ | 23 | $ | 22 | |||
| | | | | | | |
| | | | | | | |
8) Equity
Common Stock Warrant
The common stock warrant issued to the U.S. Treasury as part of the Company's participation in the U.S. Treasury Capital Purchase Program was repurchased by the Company in the second quarter of 2013.
Series C Preferred Stock
On June 21, 2010, the Company issued to various institutional investors 21,004 shares of Series C Convertible Perpetual Preferred Stock ("Series C Preferred Stock"). The Series C Preferred Stock is mandatorily convertible into common stock at a conversion price of $3.75 per share upon a subsequent transfer of the Series C Preferred Stock to third parties not affiliated with the holder in a widely dispersed offering. The 21,004 shares of Series C Preferred Stock are convertible into 5,601,000 shares of common stock. The Series C Preferred Stock is non-voting except in the case of certain transactions that would affect the rights of the holders of the Series C Preferred Stock or applicable law. The
25
HERITAGE COMMERCE CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2014
(Unaudited)
8) Equity (Continued)
holders of Series C Preferred Stock receive dividends on an as converted basis when dividends are also declared for holders of common stock. The Series C Preferred Stock is not redeemable by the Company or by the holders and has a liquidation preference of $1,000 per share. The Series C Preferred Stock ranks senior to the Company's common stock.
9) Fair Value
Accounting guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data (for example, interest rates and yield curves observable at commonly quoted intervals, prepayment speeds, credit risks, and default rates).
Level 3: Significant unobservable inputs that reflect a reporting entity's own assumptions about the assumptions that market participants would use in pricing an asset or liability.
Financial Assets and Liabilities Measured on a Recurring Basis
The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2 inputs).
26
HERITAGE COMMERCE CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2014
(Unaudited)
9) Fair Value (Continued)
The fair value of interest-only ("I/O") strip receivable assets is based on a valuation model used by a third party. The Company is able to compare the valuation model inputs and results to widely available published industry data for reasonableness (Level 2 inputs).
|
|
Fair Value Measurements Using | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Balance | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||
|
(Dollars in thousands) |
||||||||||||
Assets at March 31, 2014: |
|||||||||||||
Available-for-sale securities: |
|||||||||||||
Agency mortgage-backed securities |
$ | 161,232 | | $ | 161,232 | | |||||||
Asset-backed securities |
$ | 27,283 | $ | 27,283 | |||||||||
Corporate bonds |
$ | 53,034 | | $ | 53,034 | | |||||||
Trust preferred securities |
$ | 20,826 | | $ | 20,826 | | |||||||
I/O strip receivables |
$ | 1,664 | | $ | 1,664 | | |||||||
Assets at December 31, 2013: |
|||||||||||||
Available-for-sale securities: |
|||||||||||||
Agency mortgage-backed securities |
$ | 207,644 | | $ | 207,644 | | |||||||
Corporate bonds |
$ | 52,046 | | $ | 52,046 | | |||||||
Trust preferred securities |
$ | 20,410 | | $ | 20,410 | | |||||||
I/O strip receivables |
$ | 1,647 | | $ | 1,647 | |
There were no transfers between Level 1 and Level 2 during the period for assets measured at fair value on a recurring basis.
Assets and Liabilities Measured on a Non-Recurring Basis
The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. The appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.
Foreclosed assets are valued at the time the loan is foreclosed upon and the asset is transferred to foreclosed assets. The fair value is based primarily on third party appraisals, less costs to sell. The appraisals may utilize a single valuation approach or a combination of approaches including the comparable sales and income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such
27
HERITAGE COMMERCE CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2014
(Unaudited)
9) Fair Value (Continued)
adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.
|
|
Fair Value Measurements Using | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Balance | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||
|
(Dollars in thousands) |
||||||||||||
Assets at March 31, 2014: |
|||||||||||||
Impaired loansheld-for-investment: |
|||||||||||||
Commercial |
$ | 1,918 | | | $ | 1,918 | |||||||
Real estate: |
|||||||||||||
Commercial and residential |
1,729 | | | 1,729 | |||||||||
Land and construction |
1,255 | | | 1,255 | |||||||||
Consumer |
97 | | | 97 | |||||||||
| | | | | | | | | | | | | |
|
$ | 4,999 | | | $ | 4,999 | |||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Assets at December 31, 2013: |
|||||||||||||
Impaired loansheld-for-investment: |
|||||||||||||
Impaired loansheld-for-investment: |
|||||||||||||
Commercial |
$ | 1,780 | | | $ | 1,780 | |||||||
Real estate: |
|||||||||||||
Commercial and residential |
2,846 | | | 2,846 | |||||||||
Land and construction |
1,290 | | | 1,290 | |||||||||
Consumer |
100 | | | 100 | |||||||||
| | | | | | | | | | | | | |
|
$ | 6,016 | | | $ | 6,016 | |||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Foreclosed assets: |
|||||||||||||
Land and construction |
$ | 575 | | | $ | 575 | |||||||
| | | | | | | | | | | | | |
|
$ | 575 | $ | 575 | |||||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
28
HERITAGE COMMERCE CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2014
(Unaudited)
9) Fair Value (Continued)
The following table shows the detail of the impaired loans held-for- investment and the impaired loans held-for-investment carried at fair value for the periods indicated:
|
March 31, 2014 | December 31, 2013 | |||||
---|---|---|---|---|---|---|---|
|
(Dollars in thousands) |
||||||
Impaired loans held-for-investment: |
|||||||
Book value of impaired loans held-for-investment carried at fair value |
$ | 7,378 | $ | 8,472 | |||
Book value of impaired loans held-for-investment carried at cost |
3,446 | 3,346 | |||||
| | | | | |