htbk_Current_Folio

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, 2019
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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:		Trading Symbol:		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 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 59,200,262 shares of Common Stock outstanding on October 28, 2019.

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 commercial and 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;

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 fires and earthquakes) and other events (including pervasive power outages) beyond our control;

the expected cost savings, synergies and other financial benefits from the Presidio Bank acquisition completed on October 11, 2019 might not be realized within the expected time frames or at all; the actual merger-related costs for the transaction may be higher than estimated; 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.

Part I—FINANCIAL INFORMATION

ITEM 1—CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

HERITAGE COMMERCE CORP

CONSOLIDATED BALANCE SHEETS (Unaudited)


	September 30,		December 31,
	2019		2018
	(Dollars in thousands)
Assets
Cash and due from banks	$	48,121	$	30,273
Other investments and interest-bearing deposits in other financial institutions		367,662		134,295
Total cash and cash equivalents		415,783		164,568
Securities available-for-sale, at fair value		333,101		459,043
Securities held-to-maturity, at amortized cost (fair value of $343,129 at
September 30, 2019 and $366,175 at December 31, 2018)		342,033		377,198
Loans held-for-sale - SBA, at lower of cost or fair value, including deferred costs		3,571		2,649
Loans, net of deferred fees		1,875,387		1,886,405
Allowance for loan losses		(25,895)		(27,848)
Loans, net		1,849,492		1,858,557
Federal Home Loan Bank and Federal Reserve Bank stock and other investments, at cost		25,231		25,216
Company-owned life insurance		62,858		61,859
Premises and equipment, net		6,849		7,137
Goodwill		83,753		83,753
Other intangible assets		10,346		12,007
Accrued interest receivable and other assets		49,454		44,575
Total assets	$	3,182,471	$	3,096,562

Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Demand, noninterest-bearing	$	1,094,953	$	1,021,582
Demand, interest-bearing		666,054		702,000
Savings and money market		761,471		754,277
Time deposits - under $250		53,560		58,661
Time deposits - $250 and over		95,543		86,114
CDARS - interest-bearing demand, money market and time deposits		17,409		14,898
Total deposits		2,688,990		2,637,532
Subordinated debt, net of issuance costs		39,507		39,369
Accrued interest payable and other liabilities		58,628		52,195
Total liabilities		2,787,125		2,729,096

Shareholders' equity:
Preferred stock, no par value; 10,000,000 shares authorized; none issued and outstanding
at September 30, 2019 and December 31, 2018		—		—
Common stock, no par value; 100,000,000 shares authorized at September 30, 2019 and
60,000,000 shares authorized at December 31, 2018; 43,509,406 shares issued
and outstanding at September 30, 2019 and 43,288,750 shares issued and
outstanding at December 31, 2018		302,983		300,844
Retained earnings		98,161		79,003
Accumulated other comprehensive loss		(5,798)		(12,381)
Total shareholders' equity		395,346		367,466
Total liabilities and shareholders' equity	$	3,182,471	$	3,096,562

See notes to unaudited consolidated financial statements

HERITAGE COMMERCE CORP

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
	(Dollars in thousands, except per share amounts)
Interest income:
Loans, including fees	$	27,264	$	28,632	$	81,321	$	77,271
Securities, taxable		3,504		3,483		12,149		11,112
Securities, exempt from Federal tax		530		555		1,624		1,675
Other investments, interest-bearing deposits
in other financial institutions and Federal funds sold		1,952		1,940		5,094		4,409
Total interest income		33,250		34,610		100,188		94,467

Interest expense:
Deposits		2,042		1,575		5,873		3,772
Subordinated debt		583		583		1,731		1,731
Other borrowings		—		1		1		1
Total interest expense		2,625		2,159		7,605		5,504

Net interest income before provision for loan losses		30,625		32,451		92,583		88,963
Provision (credit) for loan losses		(576)		(425)		(2,377)		7,279
Net interest income after provision for loan losses		31,201		32,876		94,960		81,684

Noninterest income:
Service charges and fees on deposit accounts		1,032		1,107		3,370		2,981
Increase in cash surrender value of life insurance		336		216		999		816
Gain on sales of securities		330		—		878		266
Gain on sales of SBA loans		156		236		331		551
Servicing income		139		163		480		533
Other		625		484		1,793		2,034
Total noninterest income		2,618		2,206		7,851		7,181

Noninterest expense:
Salaries and employee benefits		10,467		10,719		31,935		35,302
Occupancy and equipment		1,550		1,559		4,634		3,927
Professional fees		789		721		2,360		1,116
Other		5,103		4,729		15,343		18,235
Total noninterest expense		17,909		17,728		54,272		58,580
Income before income taxes		15,910		17,354		48,539		30,285
Income tax expense		4,633		4,979		13,763		8,186
Net income	$	11,277	$	12,375	$	34,776	$	22,099

Earnings per common share:
Basic	$	0.26	$	0.29	$	0.81	$	0.54
Diluted	$	0.26	$	0.28	$	0.80	$	0.53

See notes to unaudited consolidated financial statements

HERITAGE COMMERCE CORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
		(Dollars in thousands)
Net income	$	11,277	$	12,375	$	34,776	$	22,099
Other comprehensive income:
Change in net unrealized holding (losses) gains on available-for-sale
securities and I/O strips		1,041		(1,880)		10,245		(11,009)
Deferred income taxes		(304)		545		(3,032)		3,192
Change in net unamortized unrealized gain on securities available-for-
sale that were reclassified to securities held-to-maturity		(13)		(11)		(52)		(33)
Deferred income taxes		4		3		16		9
Reclassification adjustment for gains realized in income		(330)		—		(878)		(266)
Deferred income taxes		98		—		260		79
Change in unrealized (losses) gains on securities and I/O strips, net of
deferred income taxes		496		(1,343)		6,559		(8,028)

Change in net pension and other benefit plan liability adjustment		11		51		34		152
Deferred income taxes		(3)		(15)		(10)		(45)
Change in pension and other benefit plan liability, net of
deferred income taxes		8		36		24		107
Other comprehensive income (loss)		504		(1,307)		6,583		(7,921)

Total comprehensive income	$	11,781	$	11,068	$	41,359	$	14,178

See notes to unaudited consolidated financial statements

HERITAGE COMMERCE CORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)



						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 and taxes	—		228		—		—		228
Cash dividend declared $0.11 per share	—		—		(4,206)		—		(4,206)
Stock option expense, net of forfeitures and taxes	—		176		—		—		176
Stock options exercised	68,906		449		—		—		449
Balance, March 31, 2018	38,269,789		219,208		66,739		(14,956)		270,991

Net income	—		—		915		—		915
Other comprehensive loss	—		—		—		(910)		(910)
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	97,818		—		—		—		—
Amortization of restricted stock awards,
net of forfeitures	—		283		—		—		283
Cash dividend declared $0.11 per share	—		—		(4,743)		—		(4,743)
Stock option expense, net of forfeitures and taxes	—		175		—		—		175
Stock options exercised	138,932		1,553		—		—		1,553
Balance, June 30, 2018	43,222,184		299,224		62,911		(15,866)		346,269

Net income	—		—		12,375		—		12,375
Other comprehensive loss	—		—		—		(1,307)		(1,307)
Forfeiture of restricted stock awards, net	(2,440)		—		—		—		—
Amortization of restricted stock awards,
net of forfeitures and taxes	—		303		—		—		303
Cash dividend declared $0.11 per share	—		—		(4,755)		—		(4,755)
Stock option expense, net of forfeitures and taxes	—		184		—		—		184
Stock options exercised	51,932		497		—		—		497
Balance, September 30, 2018	43,271,676	$	300,208	$	70,531	$	(17,173)	$	353,566


						Accumulated
						Other		Total
	Common Stock			Retained		Comprehensive		Shareholders’
	Shares	Amount		Earnings		Loss		Equity
	(Dollars in thousands)
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 and taxes	—		271		—		—		271
Cash dividend declared $0.12 per share	—		—		(5,196)		—		(5,196)
Stock option expense, net of forfeitures and taxes	—		166		—		—		166
Stock options exercised	35,003		269		—		—		269
Balance, March 31, 2019	43,323,753		301,550		85,953		(8,987)		378,516

Net income	—		—		11,353		—		11,353
Other comprehensive income	—		—		—		2,685		2,685
Issuance of restricted stock awards, net	134,653		—		—		—		—
Amortization of restricted stock awards,
net of forfeitures and taxes	—		303		—		—		303
Cash dividend declared $0.12 per share	—		—		(5,201)		—		(5,201)
Stock option expense, net of forfeitures and taxes	—		155		—		—		155
Stock options exercised	40,000		297		—		—		297
Balance, June 30, 2019	43,498,406		302,305		92,105	$	(6,302)		388,108

Net income	—		—		11,277		—		11,277
Other comprehensive income	—		—		—		504		504
Forfeiture of restricted stock awards, net	(6,000)		—		—		—		—
Amortization of restricted stock awards,
net of forfeitures and taxes	—		358		—		—		358
Cash dividend declared $0.12 per share	—		—		(5,221)		—		(5,221)
Stock option expense, net of forfeitures and taxes	—		163		—		—		163
Stock options exercised	17,000		157		—		—		157
Balance, September 30, 2019	43,509,406	$	302,983	$	98,161	$	(5,798)	$	395,346

See notes to unaudited consolidated financial statements

		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	10

	Notes to Unaudited Consolidated Financial Statements	11

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	43

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	79

Item 4.	Controls and Procedures	80

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	80

Item 1A.	Risk Factors	80

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	80

Item 3.	Defaults Upon Senior Securities	80

Item 4.	Mine Safety Disclosures	80

Item 5.	Other Information	80

Item 6.	Exhibits	81

SIGNATURES		81