0001558370-18-008587.txt : 20181106 0001558370-18-008587.hdr.sgml : 20181106 20181106114306 ACCESSION NUMBER: 0001558370-18-008587 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 124 CONFORMED PERIOD OF REPORT: 20180930 FILED AS OF DATE: 20181106 DATE AS OF CHANGE: 20181106 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HERITAGE COMMERCE CORP CENTRAL INDEX KEY: 0001053352 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 770469558 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-23877 FILM NUMBER: 181162098 BUSINESS ADDRESS: STREET 1: 150 ALMADEN BOULEVARD CITY: SAN JOSE STATE: CA ZIP: 95113 BUSINESS PHONE: 4089476900 MAIL ADDRESS: STREET 1: 150 ALMADEN BOULEVARD CITY: SAN JOSE STATE: CA ZIP: 95113 10-Q 1 htbk-20180930x10q.htm 10-Q htbk_Current_Folio_10Q

 

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, 2018

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 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 ☒  NO ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 ☒  NO ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐

Accelerated filer ☒    

Non‑accelerated filer ☐

Smaller reporting company ☐

 

 

 

Emerging growth company ☐

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act).  YES ☐  NO ☒

 

The Registrant had 43,279,185 shares of Common Stock outstanding on October 30, 2018.

 

 

 

 


 

HERITAGE COMMERCE CORP

QUARTERLY REPORT ON FORM 10‑Q

TABLE OF CONTENTS

 

 

    

Page No.

Cautionary Note on Forward‑Looking Statements 

 

3

 

 

 

Part I. FINANCIAL INFORMATION 

 

 

 

 

 

Item 1. 

Consolidated Financial Statements (unaudited)

 

5

 

 

 

 

 

Consolidated Balance Sheets

 

5

 

 

 

 

 

Consolidated Statements of Income

 

6

 

 

 

 

 

Consolidated Statements of Comprehensive Income

 

7

 

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity

 

8

 

 

 

 

 

Consolidated Statements of Cash Flows

 

9

 

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

 

10

 

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

44

 

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

 

82

 

 

 

 

Item 4. 

Controls and Procedures

 

82

 

 

 

 

PART II. OTHER INFORMATION 

 

 

 

 

 

Item 1. 

Legal Proceedings

 

82

 

 

 

 

Item 1A. 

Risk Factors

 

82

 

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

 

82

 

 

 

 

Item 3. 

Defaults Upon Senior Securities

 

82

 

 

 

 

Item 4. 

Mine Safety Disclosures

 

82

 

 

 

 

Item 5. 

Other Information

 

82

 

 

 

 

Item 6. 

Exhibits

 

83

 

 

 

 

SIGNATURES 

 

84

 

 

 

 

 

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, Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended, Rule 3b‑6 promulgated thereunder 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:

 

 

·

current and future economic and market conditions in the United States generally or in the communities we serve, including the effects of declines in property values, high unemployment rates and overall slowdowns in economic growth should these events occur;

effects of and changes in trade, monetary and fiscal policies and laws, including the interest rate policies of the Federal Open Market Committee of the Federal Reserve Board;

changes in inflation, interest rates, and market liquidity which may impact interest margins and impact funding sources;

volatility in credit and equity markets and its effect on the global economy;

changes in the competitive environment among financial or bank holding companies and other financial service providers;

changes in consumer and business spending and saving habits and the related effect on our ability to increase assets and to attract deposits;

our ability to develop and promote customer acceptance of new products and services in a timely manner;

risks associated with concentrations in real estate related loans;

other than temporary impairment charges to our securities portfolio;

changes in the level of nonperforming assets and charge offs and other credit quality measures, and their impact on the adequacy of the Heritage Commerce Corp’s (the “Company”) allowance for loan losses and the Company’s provision for loan losses;

·

increased capital requirements  for our continual growth or as imposed by banking regulators, which may require us to raise capital at a time when capital is not available or favorable terms or at all;

regulatory limits on Heritage Bank of Commerce’s ability to pay dividends to the Company;

changes in our capital management policies, including those regarding business combinations, dividends, and share repurchases, among others;

3


 

·

our inability to attract, recruit,  and retain qualified officers and other personnel could harm our ability to implement our strategic plan, impair our relationships with customers and adversely affect our business, results of operations and growth prospects;

·

the potential increase in reserves and allowance for loan loss as a result of the transition to the current expected credit loss standard (“CECL”) established by the Financial Accounting Standards Board to account for expected credit losses;

 

operational issues stemming from, and/or capital spending necessitated by, the potential need to adapt to industry changes in information technology systems, on which we are highly dependent;

our ability to keep pace with technological changes, including our ability to identify and address cyber-security risks such as data security breaches, “denial of service” attacks, “hacking” and identity theft;

inability of our framework to manage risks associated with our business, including operational risk and credit risk;

risks of loss of funding of Small Business Administration or SBA loan programs, or changes in those programs;

compliance with governmental and regulatory requirements, including the Dodd-Frank Act and others relating to banking, consumer protection, securities , accounting and tax matters;

significant changes in applicable laws and regulations, including those concerning taxes, banking and securities;

effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters;

costs and effects of legal and regulatory developments, including resolution of legal proceedings or regulatory or other governmental inquiries, and the results of regulatory examinations or reviews;

availability of and competition for acquisition opportunities;

risks resulting from domestic terrorism;

risks of natural disasters (including earthquakes) and other events beyond our control;

·

fully realizing cost savings and other benefits, and/or business disruption following the mergers of Tri-Valley Bank and United American Bank; and

our success in managing the risks involved in the foregoing factors.

Forward-looking statements speak only as of the date they are made. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events. You should consider any forward looking statements in light of this explanation, and we caution you about relying on forward-looking statements.

 

4


 

Part I—FINANCIAL INFORMATION

 

ITEM 1—CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

HERITAGE COMMERCE CORP

 

CONSOLIDATED BALANCE SHEETS (Unaudited)

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2018

    

2017

 

 

(Dollars in thousands)

Assets

 

 

 

 

 

 

Cash and due from banks

 

$

40,831

 

$

31,681

Other investments and interest-bearing deposits in other financial institutions

 

 

340,198

 

 

284,541

Total cash and cash equivalents

 

 

381,029

 

 

316,222

Securities available-for-sale, at fair value

 

 

319,071

 

 

391,852

Securities held-to-maturity, at amortized cost (fair value of $359,698 at

 

 

 

 

 

 

   September 30, 2018 and $394,292 at December 31, 2017)

 

 

375,732

 

 

398,341

Loans held-for-sale - SBA, at lower of cost or fair value, including deferred costs

 

 

6,344

 

 

3,419

Loans, net of deferred fees

 

 

1,899,387

 

 

1,582,667

Allowance for loan losses

 

 

(27,426)

 

 

(19,658)

Loans, net

 

 

1,871,961

 

 

1,563,009

Federal Home Loan Bank and Federal Reserve Bank stock and other investments, at cost

 

 

25,210

 

 

17,911

Company-owned life insurance

 

 

61,630

 

 

60,814

Premises and equipment, net

 

 

7,246

 

 

7,353

Goodwill

 

 

83,752

 

 

45,664

Other intangible assets

 

 

12,614

 

 

5,589

Accrued interest receivable and other assets

 

 

48,321

 

 

33,278

Total assets

 

$

3,192,910

 

$

2,843,452

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Demand, noninterest-bearing

 

$

1,081,846

 

$

989,753

Demand, interest-bearing

 

 

670,624

 

 

601,929

Savings and money market

 

 

828,297

 

 

684,131

Time deposits - under $250

 

 

68,194

 

 

51,710

Time deposits - $250 and over

 

 

84,763

 

 

138,634

CDARS - interest-bearing demand, money market and time deposits

 

 

11,575

 

 

16,832

Total deposits

 

 

2,745,299

 

 

2,482,989

Subordinated debt, net of issuance costs

 

 

39,322

 

 

39,183

Accrued interest payable and other liabilities

 

 

54,723

 

 

50,041

Total liabilities

 

 

2,839,344

 

 

2,572,213

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

Preferred stock, no par value; 10,000,000 shares authorized; none issued and outstanding

 

 

 

 

 

 

  at September 30, 2018 and December 31, 2017

 

 

 —

 

 

 —

Common stock, no par value; 60,000,000 shares authorized; 43,271,676 shares issued

 

 

 

 

 

 

   and outstanding at September 30, 2018 and 38,200,883 shares issued and

 

 

 

 

 

 

   outstanding at December 31, 2017

 

 

300,208

 

 

218,355

Retained earnings

 

 

70,531

 

 

62,136

Accumulated other comprehensive loss

 

 

(17,173)

 

 

(9,252)

    Total shareholders' equity

 

 

353,566

 

 

271,239

Total liabilities and shareholders' equity

 

$

3,192,910

 

$

2,843,452

 

See notes to unaudited consolidated financial statements

5


 

HERITAGE COMMERCE CORP

 

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2018

    

2017

 

2018

    

2017

 

 

 

(Dollars in thousands, except per share amounts)

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

28,632

 

$

22,507

 

$

77,271

 

$

64,112

 

Securities, taxable

 

 

3,483

 

 

3,596

 

 

11,112

 

 

9,916

 

Securities, exempt from Federal tax

 

 

555

 

 

563

 

 

1,675

 

 

1,694

 

Other investments, interest-bearing deposits

 

 

 

 

 

 

 

 

 

 

 

 

 

 in other financial institutions and Federal funds sold

 

 

1,940

 

 

1,289

 

 

4,409

 

 

3,037

 

 Total interest income

 

 

34,610

 

 

27,955

 

 

94,467

 

 

78,759

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

1,575

 

 

1,051

 

 

3,772

 

 

2,867

 

Subordinated debt

 

 

583

 

 

583

 

 

1,731

 

 

811

 

Short-term borrowings

 

 

 1

 

 

 —

 

 

 1

 

 

 1

 

 Total interest expense

 

 

2,159

 

 

1,634

 

 

5,504

 

 

3,679

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income before provision for loan losses

 

 

32,451

 

 

26,321

 

 

88,963

 

 

75,080

 

Provision (credit) for loan losses

 

 

(425)

 

 

115

 

 

7,279

 

 

390

 

Net interest income after provision for loan losses

 

 

32,876

 

 

26,206

 

 

81,684

 

 

74,690

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges and fees on deposit accounts

 

 

1,107

 

 

869

 

 

2,981

 

 

2,410

 

Gain on sales of SBA loans

 

 

236

 

 

147

 

 

551

 

 

635

 

Increase in cash surrender value of life insurance

 

 

216

 

 

417

 

 

816

 

 

1,259

 

Servicing income

 

 

163

 

 

246

 

 

533

 

 

736

 

Gain (loss) on sales of securities

 

 

 —

 

 

 —

 

 

266

 

 

(6)

 

Other

 

 

484

 

 

781

 

 

2,034

 

 

2,014

 

 Total noninterest income

 

 

2,206

 

 

2,460

 

 

7,181

 

 

7,048

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

10,719

 

 

9,071

 

 

35,302

 

 

27,766

 

Occupancy and equipment

 

 

1,559

 

 

1,142

 

 

3,927

 

 

3,426

 

Professional fees

 

 

721

 

 

695

 

 

1,116

 

 

2,439

 

Other

 

 

4,729

 

 

3,926

 

 

18,235

 

 

11,785

 

Total noninterest expense

 

 

17,728

 

 

14,834

 

 

58,580

 

 

45,416

 

Income before income taxes

 

 

17,354

 

 

13,832

 

 

30,285

 

 

36,322

 

Income tax expense

 

 

4,979

 

 

5,249

 

 

8,186

 

 

13,752

 

Net income

 

$

12,375

 

$

8,583

 

$

22,099

 

$

22,570

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.29

 

$

0.22

 

$

0.54

 

$

0.59

 

Diluted

 

$

0.28

 

$

0.22

 

$

0.53

 

$

0.59

 

 

See notes to unaudited consolidated financial statements

 

 

 

 

 

 

 

 

6


 

 

HERITAGE COMMERCE CORP

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2018

    

2017

    

2018

    

2017

 

 

 

 

(Dollars in thousands)

 

Net income

 

$

12,375

 

$

8,583

 

$

22,099

 

$

22,570

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in net unrealized holding (losses) gains on available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

  securities and I/O strips

 

 

(1,880)

 

 

539

 

 

(11,009)

 

 

2,975

 

Deferred income taxes

 

 

545

 

 

(227)

 

 

3,192

 

 

(1,250)

 

Change in net unamortized unrealized gain on securities available-for-

 

 

 

 

 

 

 

 

 

 

 

 

 

  sale that were reclassified to securities held-to-maturity

 

 

(11)

 

 

(12)

 

 

(33)

 

 

(38)

 

Deferred income taxes

 

 

 3

 

 

 5

 

 

 9

 

 

16

 

Reclassification adjustment for losses (gains) realized in income

 

 

 —

 

 

 —

 

 

(266)

 

 

 6

 

Deferred income taxes

 

 

 —

 

 

 —

 

 

79

 

 

(2)

 

Change in unrealized (losses) gains on securities and I/O strips, net of

 

 

 

 

 

 

 

 

 

 

 

 

 

 deferred income taxes

 

 

(1,343)

 

 

305

 

 

(8,028)

 

 

1,707

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in net pension and other benefit plan liability adjustment

 

 

51

 

 

39

 

 

152

 

 

116

 

Deferred income taxes

 

 

(15)

 

 

(17)

 

 

(45)

 

 

(49)

 

Change in pension and other benefit plan liability, net of

 

 

 

 

 

 

 

 

 

 

 

 

 

 deferred income taxes

 

 

36

 

 

22

 

 

107

 

 

67

 

Other comprehensive (loss) income

 

 

(1,307)

 

 

327

 

 

(7,921)

 

 

1,774

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

$

11,068

 

$

8,910

 

$

14,178

 

$

24,344

 

 

See notes to unaudited consolidated financial statements

 

 

7


 

HERITAGE COMMERCE CORP

 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018 and 2017

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

Total

 

 

Common Stock

 

Retained

 

Comprehensive

 

Shareholders’

 

 

Shares

    

Amount

    

Earnings

    

Loss

    

Equity

 

 

(Dollars in thousands)

Balance, January 1, 2017

 

37,941,007

 

$

215,237

 

$

52,527

 

$

(7,914)

 

$

259,850

Net income

 

 —

 

 

 —

 

 

22,570

 

 

 —

 

 

22,570

Other comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

1,774

 

 

1,774

Issuance of restricted stock awards, net

 

64,136

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Amortization of restricted stock awards,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   net of forfeitures and taxes

 

 —

 

 

678

 

 

 —

 

 

 —

 

 

678

Cash dividend declared $0.30 per share

 

 —

 

 

 —

 

 

(11,418)

 

 

 —

 

 

(11,418)

Stock option expense, net of forfeitures and taxes

 

 —

 

 

639

 

 

 —

 

 

 —

 

 

639

Stock options exercised

 

193,863

 

 

1,352

 

 

 —

 

 

 —

 

 

1,352

Balance, September 30, 2017

 

38,199,006

 

$

217,906

 

$

63,679

 

$

(6,140)

 

$

275,445

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2018

 

38,200,883

 

$

218,355

 

$

62,136

 

$

(9,252)

 

$

271,239

Net income

 

 —

 

 

 —

 

 

22,099

 

 

 —

 

 

22,099

Other comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

(7,921)

 

 

(7,921)

Issuance of common shares to acquire

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Tri-Valley Bank

 

1,889,613

 

 

30,725

 

 

 —

 

 

 —

 

 

30,725

Issuance of common shares to acquire

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   United American Bank

 

2,826,032

 

 

47,280

 

 

 —

 

 

 —

 

 

47,280

Issuance of restricted stock awards, net

 

95,378

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Amortization of restricted stock awards,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   net of forfeitures and taxes

 

 —

 

 

814

 

 

 —

 

 

 —

 

 

814

Cash dividend declared $0.33 per share

 

 —

 

 

 —

 

 

(13,704)

 

 

 —

 

 

(13,704)

Stock option expense, net of forfeitures and taxes

 

 —

 

 

535

 

 

 —

 

 

 —

 

 

535

Stock options exercised

 

259,770

 

 

2,499

 

 

 —

 

 

 —

 

 

2,499

Balance, September 30, 2018

 

43,271,676

 

$

300,208

 

$

70,531

 

$

(17,173)

 

$

353,566

 

See notes to unaudited consolidated financial statements

 

 

 

 

 

 

 

 

8


 

HERITAGE COMMERCE CORP

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30, 

 

 

    

2018

    

2017

 

 

 

(Dollars in thousands)

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net income

 

$

22,099

 

$

22,570

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Amortization of discounts and premiums on securities

 

 

3,093

 

 

3,218

 

(Gain) loss on sale of securities available-for-sale

 

 

(266)

 

 

 6

 

Gain on sale of SBA loans

 

 

(551)

 

 

(635)

 

Proceeds from sale of SBA loans originated for sale

 

 

9,315

 

 

8,304

 

SBA loans originated for sale

 

 

(11,689)

 

 

(8,957)

 

Provision for loan losses

 

 

7,279

 

 

390

 

Increase in cash surrender value of life insurance

 

 

(816)

 

 

(1,259)

 

Depreciation and amortization

 

 

566

 

 

586

 

Amortization of other intangible assets

 

 

1,336

 

 

1,083

 

Stock option expense, net

 

 

535

 

 

639

 

Amortization of restricted stock awards, net

 

 

814

 

 

678

 

Amortization of subordinated debt issuance costs

 

 

139

 

 

64

 

Effect of changes in:

 

 

 

 

 

 

 

Accrued interest receivable and other assets

 

 

(19)

 

 

2,428

 

Accrued interest payable and other liabilities

 

 

1,723

 

 

(12)

 

Net cash provided by operating activities

 

 

33,558

 

 

29,103

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Purchase of securities available-for-sale

 

 

(15,193)

 

 

(123,561)

 

Purchase of securities held-to-maturity

 

 

(16,906)

 

 

(89,470)

 

Maturities/paydowns/calls of securities available-for-sale

 

 

44,832

 

 

41,463

 

Maturities/paydowns/calls of securities held-to-maturity

 

 

38,091

 

 

32,502

 

Proceeds from sales of securities available-for-sale

 

 

94,291

 

 

6,536

 

Net change in loans

 

 

20,215

 

 

(60,683)

 

Changes in Federal Home Loan Bank stock and other investments

 

 

(4,478)

 

 

(2,709)

 

Purchase of premises and equipment

 

 

(108)

 

 

(635)

 

Cash received in bank acquisition, net of cash paid

 

 

36,028

 

 

 —

 

Net cash provided (used in) by investing activities

 

 

196,772

 

 

(196,557)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Net change in deposits

 

 

(154,318)

 

 

218,464

 

Issuance of subordinated debt, net of issuance costs

 

 

 —

 

 

39,073

 

Exercise of stock options

 

 

2,499

 

 

1,352

 

Payment of cash dividends

 

 

(13,704)

 

 

(11,418)

 

Net cash (used in) provided by financing activities

 

 

(165,523)

 

 

247,471

 

Net increase in cash and cash equivalents

 

 

64,807

 

 

80,017

 

Cash and cash equivalents, beginning of period

 

 

316,222

 

 

266,103

 

Cash and cash equivalents, end of period

 

$

381,029

 

$

346,120

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Interest paid

 

$

4,728

 

$

2,912

 

Income taxes paid

 

 

8,671

 

 

11,731

 

 

 

 

 

 

 

 

 

Supplemental schedule of non-cash investing activity:

 

 

 

 

 

 

 

Transfer of loans held-for-sale to loan portfolio

 

 

 —

 

 

2,391

 

Summary of assets acquired and liabilities assumed through acquisitions:

 

 

 

 

 

 

 

Cash and cash equivalents, net of cash paid

 

$

36,028

 

$

 —

 

Securities avaiable-for-sale

 

 

63,723

 

 

 —

 

Net loans

 

 

336,446

 

 

 —

 

Premises and equipment, net

 

 

350

 

 

 —

 

Goodwill

 

 

38,088

 

 

 —

 

Other intangible assets

 

 

8,361

 

 

 

 

Other assets, net

 

 

14,736

 

 

 —

 

Deposits

 

 

(416,628)

 

 

 —

 

Other borrowings

 

 

(62)

 

 

 —

 

Other liabilities

 

 

(3,037)

 

 

 —

 

Common stock issued to acquire Tri-Valley and United American Bank

 

 

78,005

 

 

 —

 

 

See notes to unaudited consolidated financial statements

 

 

9


 

HERITAGE COMMERCE CORP

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

September 30, 2018

 

(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 (“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, 2017.

 

HBC is a commercial bank serving customers primarily located in Santa Clara, Alameda, Contra Costa, San Benito, and San Mateo counties of California. CSNK Working Capital Finance Corp. a California corporation, dba Bay View Funding (“Bay View Funding”) is a wholly owned subsidiary of HBC, and provides business-essential working capital factoring financing to various industries throughout the United States. No customer accounts for more than 10% of revenue for HBC or the Company. The Company reports its results for two segments: banking and factoring. The Company’s management uses segment results in its operating and strategic planning.

 

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 and nine months ended September 30, 2018 are not necessarily indicative of the results expected for any subsequent period or for the entire year ending December 31, 2018.

 

Business Combinations

The Company accounts for acquisitions of businesses using the acquisition method of accounting. Under the acquisition method, assets acquired and liabilities assumed are recorded at their estimated fair values at the date of acquisition. Management utilizes various valuation techniques including discounted cash flow analyses to determine these fair values. Any excess of the purchase price over amounts allocated to the acquired assets, including identifiable intangible assets, and liabilities assumed is recorded as goodwill.

Goodwill and Other Intangible Assets

Goodwill resulted from the acquisition of Tri-Valley Bank (“Tri-Valley”) on April 6, 2018 and United American Bank (“United American”) on May 4, 2018, and from acquisitions in prior years. Goodwill represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment is recognized in the period identified.

Other intangible assets consist of core deposit intangible assets and a below market value lease intangible asset, arising from the United American and Tri-Valley acquisitions. They are initially measured at fair value and then are amortized over their estimated useful lives. The core deposit intangible assets from the acquisitions of United American and Tri-Valley are being amortized on an accelerated method over ten years. The below market value lease intangible assets are being amortized on the straight line method over three years for United American and eleven years for Tri-Valley. 

10


 

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 May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers”, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The standard replaces most existing revenue recognition guidance in GAAP. The new standard was effective for the Company on January 1, 2018. Adoption of the standard did not have a material impact on the Company’s consolidated financial statements and related disclosures as the Company’s primary sources of revenues are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of the standard. The Company’s revenue recognition pattern for revenue streams within the scope of the standard, including but not limited to service charges on deposit accounts and gains/losses on the sale of other real estate owned (“OREO”), did not change significantly from current practice. The standard permits the use of either the full retrospective or modified retrospective transition method. The Company elected to use the modified retrospective transition method which requires application of the standard to uncompleted contracts at the date of adoption however, periods prior to the date of adoption were not retrospectively revised as the impact of the standard on uncompleted contracts at the date of adoption was not material. See Note 15 – Revenue Recognition for more information.

 

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities.” The guidance affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements of financial instruments. The standard was effective for the Company on January 1, 2018 and resulted in the use of an exit price rather than an entrance price to determine the fair value of financial instruments not measured at fair value on a non-recurring basis in the consolidated balance sheets. See Note 10 – Fair Value regarding the valuation of the loan portfolio.

 

In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The standard amended existing guidance to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. The amendments require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit costs are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. The amendments allow only the service cost component to be eligible for capitalization. The Company adopted the new guidance on January 1, 2018, and there was no material impact to the financial statements.

 

Newly Issued, but not yet Effective Accounting Standards

 

In February 2016, the FASB issued ASU No. 2016-02, Leases. The standard requires a lessee to recognize assets and liabilities on the balance sheet for leases with lease terms greater than 12 months. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right of use asset representing its right to use the underlying asset for the lease term. When measuring assets and liabilities arising from a lease, a lessee (and a lessor) should include payments to be made in optional periods only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease. Similarly, optional payments to purchase the underlying asset should be included in the measurement of lease assets and lease liabilities only if the lessee is reasonably certain to exercise that purchase option. Reasonably certain is a high threshold that is consistent with and intended to be applied in the same way as the reasonably assured threshold in the previous leases guidance. In addition, also consistent with the previous leases guidance, a lessee (and a lessor) should exclude most variable lease payments in measuring lease assets and lease liabilities, other than those that depend on an index or a rate or are in substance fixed payments. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight line basis over the lease term. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted. We are

11


 

currently evaluating the provisions of this ASU and have determined that the provisions of ASU No. 2016-02 will result in an increase in assets to recognize the present value of the lease obligations with a corresponding increase in liabilities; however, we do not expect this to have a material impact to the Company’s results of operations or cash flows.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial InstrumentsCredit Losses: Measurement of Credit Losses on Financial Instruments. The standard is the final guidance on the new current expected credit loss (“CECL”) model. The amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to estimate future credit loss estimates. As CECL encompasses all financial assets carried at amortized cost, the requirement that reserves be established based on an organization’s reasonable and supportable estimate of expected credit losses extends to held-to-maturity debt securities. The update amends the accounting for credit losses on available for sale securities, whereby credit losses will be presented as an allowance as opposed to a write down. In addition, CECL will modify the accounting for purchased loans with credit deterioration since origination, so that reserves are established at the date of acquisition for purchased loans. Lastly, the amendment requires enhanced disclosures on the significant estimates and judgments used to estimate credit losses, as well as on the credit quality and underwriting standards of an organization’s portfolio. These disclosures require organizations to present the currently required credit quality disclosures disaggregated by the year of origination or vintage. The guidance allows for a modified retrospective approach with a cumulative effect adjustment to the balance sheet upon adoption (charge to retained earnings instead of the income statement). The new guidance is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2019, and early adoption is permitted. We have formed a committee that has assessed our data needs and is in the process of implementing a system to comply with the new guidance. The committee has also selected a vendor to assist in generating loan level cash flows and disclosures.  We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses and a charge to equity as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

 

In January 2017, the FASB issued accounting standards ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. The provisions of the update eliminate the existing second step of the goodwill impairment test which provides for the allocation of reporting unit fair value among existing assets and liabilities, with the net remaining amount representing the implied fair value of goodwill. In replacement of the existing goodwill impairment rule, the update will provide that impairment should be recognized as the excess of any of the reporting unit’s goodwill over the fair value of the reporting unit. Under the provisions of this update, the amount of the impairment is limited to the carrying value of the reporting unit’s goodwill. For public business entities that are SEC filers, the amendments of the update will become effective in fiscal years beginning after December 15, 2019. Management does not expect the requirements of this update to have a material impact on the Company’s financial position, results of operations or cash flows.

 

 

 

12


 

2) Shareholders’ Equity and Earnings Per Share 

 

Basic earnings per common share is computed by dividing net income by the weighted average common shares outstanding. Diluted earnings per share reflect potential dilution from outstanding stock options using the treasury stock method. There were 512,261 and 227,409 stock options for the three months ended September 30, 2018 and 2017, and   505,686 and 140,659 for the nine months ended September 30, 2018 and 2017, respectively, considered to be antidilutive and excluded from the computation of diluted earnings per share. A reconciliation of these factors used in computing basic and diluted earnings per common share is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

 

2018

    

2017

    

2018

    

2017

    

 

 

 

(Dollars in thousands, except per share amounts)

 

Net income

 

$

12,375

 

$

8,583

 

$

22,099

 

$

22,570

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding for basic

 

 

 

 

 

 

 

 

 

 

 

 

 

   earnings per common share

 

 

43,230,016

 

 

38,152,633

 

 

41,132,043

 

 

38,060,224

 

Dilutive effect of stock options outstanding, using

 

 

 

 

 

 

 

 

 

 

 

 

 

   the treasury stock method

 

 

501,354

 

 

428,665

 

 

551,001

 

 

504,910

 

Shares used in computing diluted earnings per common share

 

 

43,731,370

 

 

38,581,298

 

 

41,683,044

 

 

38,565,134

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.29

 

$

0.22

 

$

0.54

 

$

0.59

 

Diluted earnings per share

 

$

0.28

 

$

0.22

 

$

0.53

 

$

0.59

 

 

 

 

3) Accumulated Other Comprehensive Income (Loss) (“AOCI”)

 

The following table reflects the changes in AOCI by component for the periods indicated: