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 |
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For the quarterly period ended March 31, 2019 |
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OR |
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☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to |
Commission file number 000‑23877
Heritage Commerce Corp
(Exact name of Registrant as Specified in its Charter)
California |
77‑0469558 |
150 Almaden Boulevard, San Jose, California |
95113 |
(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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: |
|
Trading Symbol: |
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Name of each exchange on which registered: |
Common Stock, No Par Value |
|
HTBK |
|
The NASDAQ Stock Market LLC |
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 43,338,253 shares of Common Stock outstanding on April 30, 2019.
HERITAGE COMMERCE CORP
QUARTERLY REPORT ON FORM 10‑Q
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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 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; |
· |
our ability to anticipate interest rate changes and manage interest rate risk; |
· |
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; |
· |
our ability to effectively compete with other banks and financial services companies and the effects of competition in the financial services industry on our business; |
· |
our ability to achieve loan growth and attract deposits; |
· |
risks associated with concentrations in real estate related loans; |
· |
the relative strength or weakness of the commercial and real estate markets where our borrowers are located; |
· |
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 Company’s allowance for loan losses and the Company’s provision for loan losses; |
· |
increased capital requirements for our continued growth or as imposed by banking regulators, which may require us to raise capital at a time when capital is not available on favorable terms if at all; |
· |
regulatory limits on Heritage Bank of Commerce’s ability to pay dividends to the holding company; |
· |
changes in our capital management policies, including those regarding business combinations, dividends, and share repurchases; |
3
· |
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 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, and results of operations; |
· |
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 future expected credit losses; |
· |
possible impairment of our goodwill and other intangible assets; |
· |
possible adjustment of the valuation of our deferred tax assets; |
· |
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 and competition for acquisition opportunities; |
· |
risks resulting from domestic terrorism; |
· |
risks of natural disasters (including earthquakes) and other events beyond our control; 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
ITEM 1—CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
HERITAGE COMMERCE CORP
CONSOLIDATED BALANCE SHEETS (Unaudited)
|
|
March 31, |
|
December 31, |
||
|
|
2019 |
|
2018 |
||
|
|
(Dollars in thousands) |
||||
Assets |
|
|
|
|
|
|
Cash and due from banks |
|
$ |
38,699 |
|
$ |
30,273 |
Other investments and interest-bearing deposits in other financial institutions |
|
|
196,278 |
|
|
134,295 |
Total cash and cash equivalents |
|
|
234,977 |
|
|
164,568 |
Securities available-for-sale, at fair value |
|
|
452,521 |
|
|
459,043 |
Securities held-to-maturity, at amortized cost (fair value of $362,581 at |
|
|
|
|
|
|
March 31, 2019 and $366,175 at December 31, 2018) |
|
|
367,023 |
|
|
377,198 |
Loans held-for-sale - SBA, at lower of cost or fair value, including deferred costs |
|
|
3,216 |
|
|
2,649 |
Loans, net of deferred fees |
|
|
1,848,318 |
|
|
1,886,405 |
Allowance for loan losses |
|
|
(27,318) |
|
|
(27,848) |
Loans, net |
|
|
1,821,000 |
|
|
1,858,557 |
Federal Home Loan Bank and Federal Reserve Bank stock and other investments, at cost |
|
|
25,221 |
|
|
25,216 |
Company-owned life insurance |
|
|
62,189 |
|
|
61,859 |
Premises and equipment, net |
|
|
6,998 |
|
|
7,137 |
Goodwill |
|
|
83,753 |
|
|
83,753 |
Other intangible assets |
|
|
11,454 |
|
|
12,007 |
Accrued interest receivable and other assets |
|
|
47,525 |
|
|
44,575 |
Total assets |
|
$ |
3,115,877 |
|
$ |
3,096,562 |
|
|
|
|
|
|
|
Liabilities and Shareholders' Equity |
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
Demand, noninterest-bearing |
|
$ |
1,016,770 |
|
$ |
1,021,582 |
Demand, interest-bearing |
|
|
704,996 |
|
|
702,000 |
Savings and money market |
|
|
759,306 |
|
|
754,277 |
Time deposits - under $250 |
|
|
56,385 |
|
|
58,661 |
Time deposits - $250 and over |
|
|
90,042 |
|
|
86,114 |
CDARS - interest-bearing demand, money market and time deposits |
|
|
12,745 |
|
|
14,898 |
Total deposits |
|
|
2,640,244 |
|
|
2,637,532 |
Subordinated debt, net of issuance costs |
|
|
39,414 |
|
|
39,369 |
Accrued interest payable and other liabilities |
|
|
57,703 |
|
|
52,195 |
Total liabilities |
|
|
2,737,361 |
|
|
2,729,096 |
|
|
|
|
|
|
|
Shareholders' equity: |
|
|
|
|
|
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Preferred stock, no par value; 10,000,000 shares authorized; none issued and outstanding |
|
|
|
|
|
|
at March 31, 2019 and December 31, 2018 |
|
|
— |
|
|
— |
Common stock, no par value; 60,000,000 shares authorized; 43,323,753 shares issued |
|
|
|
|
|
|
and outstanding at March 31, 2019 and 43,288,750 shares issued and |
|
|
|
|
|
|
outstanding at December 31, 2018 |
|
|
301,550 |
|
|
300,844 |
Retained earnings |
|
|
85,953 |
|
|
79,003 |
Accumulated other comprehensive loss |
|
|
(8,987) |
|
|
(12,381) |
Total shareholders' equity |
|
|
378,516 |
|
|
367,466 |
Total liabilities and shareholders' equity |
|
$ |
3,115,877 |
|
$ |
3,096,562 |
See notes to unaudited consolidated financial statements
5
HERITAGE COMMERCE CORP
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
|
|
Three Months Ended |
|
||||
|
|
March 31, |
|
||||
|
|
2019 |
|
2018 |
|
||
|
|
|
|
|
|
|
|
Interest income: |
|
|
|
|
|
|
|
Loans, including fees |
|
$ |
26,807 |
|
$ |
22,284 |
|
Securities, taxable |
|
|
4,509 |
|
|
3,862 |
|
Securities, exempt from Federal tax |
|
|
548 |
|
|
560 |
|
Other investments, interest-bearing deposits |
|
|
|
|
|
|
|
in other financial institutions and Federal funds sold |
|
|
1,585 |
|
|
1,171 |
|
Total interest income |
|
|
33,449 |
|
|
27,877 |
|
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
Deposits |
|
|
1,836 |
|
|
958 |
|
Subordinated debt |
|
|
571 |
|
|
571 |
|
Total interest expense |
|
|
2,407 |
|
|
1,529 |
|
|
|
|
|
|
|
|
|
Net interest income before provision for loan losses |
|
|
31,042 |
|
|
26,348 |
|
Provision (credit) for loan losses |
|
|
(1,061) |
|
|
506 |
|
Net interest income after provision for loan losses |
|
|
32,103 |
|
|
25,842 |
|
|
|
|
|
|
|
|
|
Noninterest income: |
|
|
|
|
|
|
|
Service charges and fees on deposit accounts |
|
|
1,161 |
|
|
902 |
|
Increase in cash surrender value of life insurance |
|
|
330 |
|
|
363 |
|
Servicing income |
|
|
191 |
|
|
181 |
|
Gain on sales of SBA loans |
|
|
139 |
|
|
235 |
|
Gain on sales of securities |
|
|
— |
|
|
87 |
|
Other |
|
|
647 |
|
|
427 |
|
Total noninterest income |
|
|
2,468 |
|
|
2,195 |
|
|
|
|
|
|
|
|
|
Noninterest expense: |
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
10,770 |
|
|
9,777 |
|
Occupancy and equipment |
|
|
1,506 |
|
|
1,106 |
|
Professional fees |
|
|
818 |
|
|
684 |
|
Other |
|
|
4,824 |
|
|
4,423 |
|
Total noninterest expense |
|
|
17,918 |
|
|
15,990 |
|
Income before income taxes |
|
|
16,653 |
|
|
12,047 |
|
Income tax expense |
|
|
4,507 |
|
|
3,238 |
|
Net income |
|
$ |
12,146 |
|
$ |
8,809 |
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
Basic |
|
$ |
0.28 |
|
$ |
0.23 |
|
Diluted |
|
$ |
0.28 |
|
$ |
0.23 |
|
See notes to unaudited consolidated financial statements
6
HERITAGE COMMERCE CORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
|
|
Three Months Ended |
|
||||
|
|
March 31, |
|
||||
|
|
2019 |
|
2018 |
|
||
|
|
|
|
|
|
|
|
Net income |
|
$ |
12,146 |
|
$ |
8,809 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
Change in net unrealized holding (losses) gains on available-for-sale |
|
|
|
|
|
|
|
securities and I/O strips |
|
|
4,871 |
|
|
(7,985) |
|
Deferred income taxes |
|
|
(1,467) |
|
|
2,315 |
|
Change in net unamortized unrealized gain on securities available-for- |
|
|
|
|
|
|
|
sale that were reclassified to securities held-to-maturity |
|
|
(26) |
|
|
(11) |
|
Deferred income taxes |
|
|
8 |
|
|
3 |
|
Reclassification adjustment for losses (gains) realized in income |
|
|
— |
|
|
(87) |
|
Deferred income taxes |
|
|
— |
|
|
26 |
|
Change in unrealized (losses) gains on securities and I/O strips, net of |
|
|
|
|
|
|
|
deferred income taxes |
|
|
3,386 |
|
|
(5,739) |
|
|
|
|
|
|
|
|
|
Change in net pension and other benefit plan liability adjustment |
|
|
12 |
|
|
50 |
|
Deferred income taxes |
|
|
(4) |
|
|
(15) |
|
Change in pension and other benefit plan liability, net of |
|
|
|
|
|
|
|
deferred income taxes |
|
|
8 |
|
|
35 |
|
Other comprehensive income (loss) |
|
|
3,394 |
|
|
(5,704) |
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
15,540 |
|
$ |
3,105 |
|
See notes to unaudited consolidated financial statements
7
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
|
|
Three Months Ended March 31, 2019 and 2018 |
||||||||||||
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
Total |
||
|
|
Common Stock |
|
Retained |
|
Comprehensive |
|
Shareholders’ |
||||||
|
|
Shares |
|
Amount |
|
Earnings |
|
Loss |
|
Equity |
||||
|
|
(Dollars in thousands) |
||||||||||||
Balance, January 1, 2018 |
|
38,200,883 |
|
$ |
218,355 |
|
$ |
62,136 |
|
$ |
(9,252) |
|
$ |
271,239 |
Net income |
|
— |
|
|
— |
|
|
8,809 |
|
|
— |
|
|
8,809 |
Other comprehensive loss |
|
— |
|
|
— |
|
|
— |
|
|
(5,704) |
|
|
(5,704) |
Amortization of restricted stock awards, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of forfeitures |
|
— |
|
|
228 |
|
|
— |
|
|
— |
|
|
228 |
Cash dividend declared $0.11 per share |
|
— |
|
|
— |
|
|
(4,206) |
|
|
— |
|
|
(4,206) |
Stock option expense, net of fortfeitures |
|
— |
|
|
176 |
|
|
— |
|
|
— |
|
|
176 |
Stock options exercised |
|
68,906 |
|
|
449 |
|
|
— |
|
|
— |
|
|
449 |
Balance, March 31, 2018 |
|
38,269,789 |
|
$ |
219,208 |
|
$ |
66,739 |
|
$ |
(14,956) |
|
$ |
270,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2019 |
|
43,288,750 |
|
$ |
300,844 |
|
$ |
79,003 |
|
$ |
(12,381) |
|
$ |
367,466 |
Net income |
|
— |
|
|
— |
|
|
12,146 |
|
|
— |
|
|
12,146 |
Other comprehensive income |
|
— |
|
|
— |
|
|
— |
|
|
3,394 |
|
|
3,394 |
Amortization of restricted stock awards, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of forfeitures |
|
— |
|
|
271 |
|
|
— |
|
|
— |
|
|
271 |
Cash dividend declared $0.12 per share |
|
— |
|
|
— |
|
|
(5,196) |
|
|
— |
|
|
(5,196) |
Stock option expense, net of forfeitures |
|
— |
|
|
166 |
|
|
|
|
|
|
|
|
166 |
Stock options exercised |
|
35,003 |
|
|
269 |
|
|
— |
|
|
— |
|
|
269 |
Balance, March 31, 2019 |
|
43,323,753 |
|
$ |
301,550 |
|
$ |
85,953 |
|
$ |
(8,987) |
|
$ |
378,516 |
See notes to unaudited consolidated financial statements
8
HERITAGE COMMERCE CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
|
|
Three Months Ended |
|
||||
|
|
March 31, |
|
||||
|
|
2019 |
|
2018 |
|
||
|
|
(Dollars in thousands) |
|
||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
Net income |
|
$ |
12,146 |
|
$ |
8,809 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
Amortization of discounts and premiums on securities |
|
|
516 |
|
|
1,131 |
|
(Gain) on sale of securities available-for-sale |
|
|
— |
|
|
(87) |
|
Gain on sale of SBA loans |
|
|
(139) |
|
|
(235) |
|
Proceeds from sale of SBA loans originated for sale |
|
|
1,935 |
|
|
3,041 |
|
SBA loans originated for sale |
|
|
(2,363) |
|
|
(2,246) |
|
Provision (credit) for loan losses |
|
|
(1,061) |
|
|
506 |
|
Increase in cash surrender value of life insurance |
|
|
(330) |
|
|
(363) |
|
Depreciation and amortization |
|
|
188 |
|
|
196 |
|
Amortization of other intangible assets |
|
|
553 |
|
|
241 |
|
Stock option expense, net |
|
|
166 |
|
|
176 |
|
Amortization of restricted stock awards, net |
|
|
271 |
|
|
228 |
|
Amortization of subordinated debt issuance costs |
|
|
45 |
|
|
46 |
|
Effect of changes in: |
|
|
|
|
|
|
|
Accrued interest receivable and other assets |
|
|
5,145 |
|
|
3,288 |
|
Accrued interest payable and other liabilities |
|
|
(4,062) |
|
|
(2,297) |
|
Net cash provided by operating activities |
|
|
13,010 |
|
|
12,434 |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
Purchase of securities available-for-sale |
|
|
— |
|
|
(15,193) |
|
Purchase of securities held-to-maturity |
|
|
— |
|
|
(5,022) |
|
Maturities/paydowns/calls of securities available-for-sale |
|
|
11,242 |
|
|
14,957 |
|
Maturities/paydowns/calls of securities held-to-maturity |
|
|
9,808 |
|
|
13,002 |
|
Proceeds from sales of securities available-for-sale |
|
|
— |
|
|
38,754 |
|
Net change in loans |
|
|
38,618 |
|
|
(8,559) |
|
Changes in Federal Home Loan Bank stock and other investments |
|
|
(5) |
|
|
(6) |
|
Purchase of premises and equipment |
|
|
(49) |
|
|
(46) |
|
Net cash provided by investing activities |
|
|
59,614 |
|
|
37,887 |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
Net change in deposits |
|
|
2,712 |
|
|
(60,797) |
|
Exercise of stock options |
|
|
269 |
|
|
449 |
|
Payment of cash dividends |
|
|
(5,196) |
|
|
(4,206) |
|
Net cash used in financing activities |
|
|
(2,215) |
|
|
(64,554) |
|
Net increase (decrease) in cash and cash equivalents |
|
|
70,409 |
|
|
(14,233) |
|
Cash and cash equivalents, beginning of period |
|
|
164,568 |
|
|
316,222 |
|
Cash and cash equivalents, end of period |
|
$ |
234,977 |
|
$ |
301,989 |
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
Interest paid |
|
$ |
1,724 |
|
$ |
977 |
|
Income taxes paid |
|
|
8 |
|
|
4 |
|
|
|
|
|
|
|
|
|
Supplemental schedule of non-cash activity: |
|
|
|
|
|
|
|
Due to broker for securities purchased |
|
$ |
— |
|
$ |
5,439 |
|
Recording of right to use assets in exchange for lease obligations |
|
|
9,566 |
|
|
— |
|
See notes to unaudited consolidated financial statements
9
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(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, 2018.
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 months ended March 31, 2019 are not necessarily indicative of the results expected for any subsequent period or for the entire year ending December 31, 2019.
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 February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” This update revises the model to assess how a lease should be classified and provides guidance for lessees and lessors, when presenting right-of-use assets and lease liabilities on the balance sheet. Under the new guidance, lessees will be required to recognize the following for all leases, with the exception of short-term leases, at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. This update became effective for the Company on January 1, 2019.
In July 2018, the FASB issued supplementary ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which provides for an additional transition method allowing for a modified retrospective adoption approach where the guidance would only be applied to existing leases in effect at the adoption date and new leases going forward, with a cumulative effect adjustment to retained earnings as of the adoption date and additional required disclosures regarding leasing arrangements only for those periods after adoption. This update also allows lessors to not separate non-lease components from the associated lease component if certain conditions are met. The Company has elected the practical expedients permitted by ASU 2018-11. The Company adopted the new guidance on January 1, 2019.
At the adoption date, the Company reported increase assets and liabilities of approximately $9.6 million on its consolidated balance sheet as a result of recognizing right-of-use assets and lease liabilities related to non-cancellable operating lease agreements for office space. The adoption of this guidance did not have a material impact to its Consolidated Statetements of Income or Cash Flows. See Note 17 – Leases for more information.
In March 2017, the FASB issued ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities. This update shortens the amortization period of certain callable debt securities held at a premium to the earliest call date. The amendments in this update were effective for the Company on January 1, 2019. The amendments are applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption and the Company is required to provide change in accounting principle disclosures. The Company adopted the new guidance on January 1, 2019, and there was no material impact to the financial statements and no cumulative adjustments were made.
Newly Issued, but not yet Effective Accounting Standards
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit 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 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. While early application is permitted for fiscal years beginning after December 15, 2018, the Company plans to adopt this standard on January 1, 2020. The Company has established a company-wide, cross-functional governance structure, which oversees overall strategy for implementation of CECL. We are currently evaluating various loss methodologies to determine their correlation to our various loan categories historical performance. The project plan is targeting the data and model validation completion during the second quarter of 2019, with parallel processing of our existing allowance for loan loss model with CECL prior to implementation. The Company is focused on completing data and model validation, refining assumptions and continued review of the models. The Company also continues to focus on researching and resolving interpretive
11
accounting issues in the ASU, contemplating various related accounting policies, developing processes and related controls and considering various reporting disclosures. The Company also continues to believe that the adoption of the standard will result in an overall increase in the allowance for loan losses to cover credit losses over the estimated life of the financial assets. However, the magnitude of the increase in its allowance for loan losses at the adoption date will depend upon the nature and characteristics of the portfolio at the adoption date, as well as macroeconomic conditions and forecasts at that time.
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.
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 539,000 and 275,000 stock options for the three months ended March 31, 2019 and 2018, 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 |
|
||||
|
|
March 31, |
|
||||
|
|
2019 |
|
2018 |
|
||
|
|
(Dollars in thousands, except per share amounts) |
|
||||
Net income |
|
$ |
12,146 |
|
$ |
8,809 |
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding for basic |
|
|
|
|
|
|
|
earnings per common share |
|
|
43,108,208 |
|
|
38,240,495 |
|
Dilutive potential common shares |
|
|
562,133 |
|
|
574,227 |
|
Shares used in computing diluted earnings per common share |
|
|
43,670,341 |
|
|
38,814,722 |
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.28 |
|
$ |
0.23 |
|
Diluted earnings per share |
|
$ |
0.28 |
|
$ |
0.23 |
|
12
3) Accumulated Other Comprehensive Income (Loss) (“AOCI”)
The following table reflects the changes in AOCI by component for the periods indicated:
|
|
Three Months Ended March 31, 2019 and 2018 |
||||||||||
|
|
|
|
Unamortized |
|
|
|
|
||||
|
|
|
|
Unrealized |
|
|
|
|
||||
|
|
Unrealized |
|
Gain on |
|
|
|
|
||||
|
|
Gains (Losses) on |
|
Available- |
|
|
|
|
||||
|
|
Available- |
|
for-Sale |
|
Defined |
|
|
||||
|
|
for-Sale |
|
Securities |
|
Benefit |
|
|
||||
|
|
Securities |
|
Reclassified |
|
Pension |
|
|
||||
|
|
and I/O |
|
to Held-to- |
|
Plan |
|
|
||||
|
|
Strips(1) |
|
Maturity |
|
Items |
|
Total |
||||
|
|
(Dollars in thousands) |
||||||||||
Beginning balance January 1, 2019, net of taxes |
|
$ |
(5,007) |
|
$ |
344 |
|
$ |
(7,718) |
|
$ |
(12,381) |
Other comprehensive income (loss) before reclassification, net of taxes |
|
|
3,404 |
|
|
— |
|
|
(7) |
|
|
3,397 |
Amounts reclassified from other comprehensive income (loss), net of taxes |
|
|
— |
|
|
(18) |
|
|
15 |
|
|
(3) |
Net current period other comprehensive income (loss), net of taxes |
|
|
3,404 |
|
|
(18) |
|
|
8 |
|
|
3,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance March 31, 2019, net of taxes |
|
$ |
(1,603) |
|
$ |
326 |
|
$ |
(7,710) |
|
$ |
(8,987) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance January 1, 2018, net of taxes |
|
$ |
(362) |
|
$ |
375 |
|
$ |
(9,265) |
|
$ |
(9,252) |
Other comprehensive income (loss) before reclassification, net of taxes |
|
|
(5,670) |
|
|
— |
|
|
(5) |
|
|
(5,675) |
Amounts reclassified from other comprehensive income (loss), net of taxes |
|
|
(61) |
|
|
(8) |
|
|
40 |
|
|
(29) |
Net current period other comprehensive income (loss), net of taxes |
|
|
(5,731) |
|
|
(8) |
|
|
35 |
|
|
(5,704) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance March 31, 2018, net of taxes |
|
$ |
(6,093) |
|
$ |
367 |
|
$ |
(9,230) |
|
$ |
(14,956) |
|
Amounts Reclassified from |
|
|
|
||||
|
AOCI(1) |
|
|
|
||||
|
Three Months Ended |
|
|
|
||||
|
March 31, |
|
Affected Line Item Where |
|
||||
Details About AOCI Components |
2019 |
|
2018 |
|
Net Income is Presented |
|
||
|
(Dollars in thousands) |
|
|
|
||||
Unrealized gains on available-for-sale securities |
|
|
|
|
|
|
|
|
and I/O strips |
$ |
— |
|
$ |
87 |
|
Gain on sales of securities |
|
|
|
— |
|
|
(26) |
|
Income tax expense |
|
|
|
— |
|
|
61 |
|
Net of tax |
|
Amortization of unrealized gain on securities available- |
|
|
|
|
|
|
|
|
for-sale that were reclassified to securities |
|
|
|
|
|
|
|
|
held-to-maturity |
|
26 |
|
|
11 |
|
Interest income on taxable securities |
|
|
|
(8) |
|
|
(3) |
|
Income tax expense |
|
|
|
18 |
|
|
8 |
|
Net of tax |
|
|
|
|
|
|
|
|
|
|
Amortization of defined benefit pension plan items (1) |
|
|
|
|
|
|
|
|
Prior transition obligation |
|
25 |
|
|
16 |
|
|
|
Actuarial losses |
|
(46) |
|
|
(73) |
|
|
|
|
|
(21) |
|
|
(57) |
|
Salaries and employee benefits |
|
|
|
6 |
|
|
17 |
|
Income tax benefit |
|
|
|
(15) |
|
|
(40) |
|
Net of tax |
|
Total reclassification for the year |
$ |
3 |
|
$ |
29 |
|
|
|
13
(1) |
This AOCI component is included in the computation of net periodic benefit cost (see Note 9—Benefit Plans) and includes split-dollar life insurance benefit plan. |
4) Securities
The amortized cost and estimated fair value of securities at March 31, 2019 and December 31, 2018 were as follows:
|
|
|
|
Gross |
|
Gross |
|
Estimated |
|
||||
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
|
||||
March 31, 2019 |
|
Cost |
|
Gains |
|
(Losses) |
|
Value |
|
||||
|
|
(Dollars in thousands) |
|
||||||||||
Securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
|
$ |
299,847 |
|
$ |
343 |
|
$ |
(4,612) |
|
$ |
295,578 |
|
U.S. Treasury |
|
|
148,095 |
|
|
1,387 |
|
|
— |
|
|
149,482 |
|
U.S. Government sponsored entities |
|
|
7,447 |
|
|
14 |
|
|
— |
|
|
7,461 |
|
Total |
|
$ |
455,389 |
|
$ |
1,744 |
|
$ |
(4,612) |
|
$ |
452,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held-to-maturity: |
|
|
|
|
|
|
|
|
|
|
|
|