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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 June 30, 2021

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.)

224 Airport Parkway, San Jose, California
(Address of Principal Executive Offices)

95110
(Zip Code)

(408947-6900

(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 60,206,566 shares of Common Stock outstanding on July 30, 2021

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)

6

Consolidated Balance Sheets

6

Consolidated Statements of Income

7

Consolidated Statements of Comprehensive Income

8

Consolidated Statements of Changes in Shareholders’ Equity

9

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

45

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

78

Item 4.

Controls and Procedures

79

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

79

Item 1A.

Risk Factors

79

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

79

Item 3.

Defaults Upon Senior Securities

79

Item 4.

Mine Safety Disclosures

79

Item 5.

Other Information

79

Item 6.

Exhibits

80

SIGNATURES

81

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. Risks and uncertainties that could cause our financial performance to differ materially from our goals, plans, expectations and projections expressed in forward-looking statements include those set forth in our filings with the Securities and Exchange Commission (“SEC”), Item 1A of the Heritage Commerce Corp’s (“the Company”) Annual Report on Form 10-K for the year ended December 31, 2020, and including, but not limited to the following:

the effect of the COVID-19 pandemic, and other infectious illness outbreaks that may arise in the future, on our customers, employees, businesses, liquidity, financial results and overall condition and which has created significant uncertainties in U.S. and global markets, including our customers' ability to make timely payments on obligations, and operating expense due to alternative approaches to doing business;
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, including related asset and market prices;
credit related 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 our allowance for credit losses and our provision for credit losses;

3

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 on 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;
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, results of operations and growth prospects;
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 (“SBA”) 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 regulatory or other governmental inquiries, and the results of regulatory examinations or reviews;
the expense and uncertain resolution of litigation matters whether occurring in the ordinary course of business or otherwise;
availability of and competition for acquisition opportunities;
risks resulting from domestic terrorism;
risks resulting from social unrest and protests;
risks of natural disasters (including earthquakes) and other events beyond our control;
our participation as a lender in the SBA Paycheck Protection Program (“PPP”) and similar programs and its effect on our liquidity, financial results, businesses and customers, including the availability of program funds and the ability of customers to comply with requirements and otherwise perform with respect to loans obtained under such programs;
our success in managing the risks involved in the foregoing factors.

4

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.

5

Part I—FINANCIAL INFORMATION

ITEM 1—CONSOLIDATED FINANCIAL STATEMENTS

HERITAGE COMMERCE CORP

CONSOLIDATED BALANCE SHEETS

(Unaudited)

June 30, 

December 31, 

    

2021

    

2020

(Dollars in thousands)

Assets

Cash and due from banks

$

41,904

$

30,598

Other investments and interest-bearing deposits in other financial institutions

 

1,286,418

 

1,100,475

Total cash and cash equivalents

 

1,328,322

 

1,131,073

Securities available-for-sale, at fair value

 

145,955

 

235,774

Securities held-to-maturity, at amortized cost, net of allowance for credit losses of $51 at June 30, 2021

and $54 at December 31, 2020 (fair value of $426,755 at June 30, 2021 and $304,927 at December 31, 2020)

421,286

 

297,389

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

 

4,344

 

1,699

Loans, net of deferred fees

 

2,824,796

 

2,619,261

Allowance for credit losses on loans

 

(43,956)

 

(44,400)

Loans, net

 

2,780,840

 

2,574,861

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

 

32,495

 

33,522

Company-owned life insurance

 

77,393

 

77,523

Premises and equipment, net

 

10,040

 

10,459

Goodwill

167,631

167,631

Other intangible assets

 

15,177

 

16,664

Accrued interest receivable and other assets

 

89,392

 

87,519

Total assets

$

5,072,875

$

4,634,114

Liabilities and Shareholders' Equity

Liabilities:

Deposits:

Demand, noninterest-bearing

$

1,840,516

$

1,661,655

Demand, interest-bearing

 

1,140,867

 

960,179

Savings and money market

 

1,174,587

 

1,119,968

Time deposits - under $250

 

42,118

 

45,027

Time deposits - $250 and over

 

110,111

 

103,746

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

 

36,273

 

23,911

Total deposits

 

4,344,472

 

3,914,486

Subordinated debt, net of issuance costs

39,832

39,740

Accrued interest payable and other liabilities

 

105,127

 

101,999

Total liabilities

 

4,489,431

 

4,056,225

Shareholders' equity:

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

at June 30, 2021 and December 31, 2020

Common stock, no par value; 100,000,000 shares authorized;

60,202,766 shares issued and outstanding at June 30, 2021 and

59,917,457 shares issued and outstanding at December 31, 2020

 

495,665

 

493,707

Retained earnings

 

99,311

 

94,899

Accumulated other comprehensive loss

 

(11,532)

 

(10,717)

Total shareholders' equity

 

583,444

 

577,889

Total liabilities and shareholders' equity

$

5,072,875

$

4,634,114

See notes to consolidated financial statements (unaudited).

6

HERITAGE COMMERCE CORP

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2021

    

2020

2021

    

2020

(Dollars in thousands, except per share amounts)

Interest income:

Loans, including fees

$

33,439

$

32,845

$

67,275

$

67,627

Securities, taxable

 

1,944

 

3,155

 

3,672

 

7,103

Securities, exempt from Federal tax

 

404

 

484

 

833

 

995

Other investments, interest-bearing deposits

in other financial institutions and Federal funds sold

 

845

 

648

 

1,613

 

2,349

Total interest income

 

36,632

 

37,132

 

73,393

 

78,074

Interest expense:

Deposits

 

1,179

 

1,615

 

2,411

 

3,400

Subordinated debt

 

577

 

577

 

1,148

 

1,154

Total interest expense

 

1,756

 

2,192

 

3,559

 

4,554

Net interest income before provision for credit losses on loans

 

34,876

 

34,940

 

69,834

 

73,520

Provision for (recapture of) credit losses on loans

 

(493)

 

1,114

 

(2,005)

 

14,384

Net interest income after provision for credit losses on loans

 

35,369

 

33,826

 

71,839

 

59,136

Noninterest income:

Service charges and fees on deposit accounts

 

659

 

650

1,260

 

1,619

Increase in cash surrender value of life insurance

 

458

 

458

 

914

 

916

Gain on proceeds from company owned life insurance

396

462

Servicing income

 

104

 

205

 

286

 

388

Gain on sales of SBA loans

 

83

 

 

633

 

67

Gain on sales of securities

 

 

170

 

 

270

Gain on the disposition of foreclosed assets

791

Other

 

469

 

595

 

915

 

1,220

Total noninterest income

 

2,169

 

2,078

 

4,470

 

5,271

Noninterest expense:

Salaries and employee benefits

 

12,572

 

12,300

 

26,530

 

26,503

Occupancy and equipment

 

2,247

 

1,766

 

4,521

 

3,538

Professional fees

 

1,771

 

1,155

 

3,490

 

2,590

Other

 

9,185

 

5,791

 

14,478

 

14,155

Total noninterest expense

 

25,775

 

21,012

 

49,019

 

46,786

Income before income taxes

 

11,763

 

14,892

 

27,290

 

17,621

Income tax expense

 

2,950

 

4,274

 

7,273

 

5,142

Net income

$

8,813

$

10,618

$

20,017

$

12,479

Earnings per common share:

Basic

$

0.15

$

0.18

$

0.33

$

0.21

Diluted

$

0.15

$

0.18

$

0.33

$

0.21

See notes to consolidated financial statements (unaudited).

7

HERITAGE COMMERCE CORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2021

    

2020

    

2021

    

2020

 

(Dollars in thousands)

Net income

$

8,813

$

10,618

$

20,017

$

12,479

Other comprehensive income (loss):

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

securities and I/O strips

 

(640)

 

(556)

 

(1,489)

 

6,621

Deferred income taxes

 

186

 

161

 

433

 

(1,920)

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

sale that were reclassified to securities held-to-maturity

 

(13)

 

(13)

 

(26)

 

(26)

Deferred income taxes

 

4

 

4

 

8

 

8

Reclassification adjustment for gains realized in income

 

 

(170)

 

 

(270)

Deferred income taxes

 

 

50

 

 

79

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

deferred income taxes

 

(463)

 

(524)

 

(1,074)

 

4,492

Change in net pension and other benefit plan liability adjustment

 

283

 

75

 

372

 

150

Deferred income taxes

 

(84)

 

(22)

 

(113)

 

(44)

Change in pension and other benefit plan liability, net of

deferred income taxes

 

199

 

53

 

259

 

106

Other comprehensive (loss) income

 

(264)

 

(471)

 

(815)

 

4,598

Total comprehensive income

$

8,549

$

10,147

$

19,202

$

17,077

See notes to consolidated financial statements (unaudited).

8

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, except per share amounts)

Balance, December 31, 2019

59,368,156

$

489,745

$

96,741

$

(9,778)

$

576,708

Cumulative effect of change in accounting principles

(6,062)

(6,062)

Balance, January 1, 2020

59,368,156

489,745

90,679

(9,778)

570,646

Net income

1,861

1,861

Other comprehensive income

5,069

5,069

Amortization of restricted stock awards,

net of forfeitures and taxes

348

348

Cash dividend declared $0.13 per share

(7,737)

(7,737)

Stock option expense, net of forfeitures and taxes

148

148

Stock options exercised

200,063

1,106

1,106

Balance, March 31, 2020

59,568,219

491,347

84,803

(4,709)

571,441

Net income

10,618

10,618

Other comprehensive income

(471)

(471)

Issuance of restricted stock awards, net

168,117

Amortization of restricted stock awards,

net of forfeitures and taxes

463

463

Cash dividend declared $0.13 per share

(7,767)

(7,767)

Stock option expense, net of forfeitures and taxes

139

139

Stock options exercised

120,431

384

384

Balance, June 30, 2020

59,856,767

$

492,333

$

87,654

$

(5,180)

$

574,807

Balance, January 1, 2021

59,917,457

$

493,707

$

94,899

$

(10,717)

$

577,889

Net income

11,204

11,204

Other comprehensive loss

(551)

(551)

Issuance (forfeitures) of restricted stock awards, net

(34,358)

Amortization of restricted stock awards,

net of forfeitures and taxes

458

458

Cash dividend declared $0.13 per share

(7,789)

(7,789)

Stock option expense, net of forfeitures and taxes

132

132

Stock options exercised

49,235

320

320

Balance, March 31, 2021

59,932,334

494,617

98,314

(11,268)

581,663

Net income

8,813

8,813

Other comprehensive loss

(264)

(264)

Issuance of restricted stock awards, net

187,325

Amortization of restricted stock awards,

net of forfeitures and taxes

438

438

Cash dividend declared $0.13 per share

(7,816)

(7,816)

Stock option expense, net of forfeitures and taxes

146

146

Stock options exercised

83,107

464

464

Balance, June 30, 2021

60,202,766

$

495,665

$

99,311

$

(11,532)

$

583,444

See notes to consolidated financial statements (unaudited).

9

HERITAGE COMMERCE CORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Six Months Ended

June 30, 

    

2021

    

2020

(Dollars in thousands)

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income

$

20,017

$

12,479

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

Amortization of discounts and premiums on securities

 

1,969

 

1,453

Gain on sale of securities available-for-sale

 

 

(270)

Gain on sale of SBA loans

 

(633)

 

(67)

Proceeds from sale of SBA loans originated for sale

 

6,676

 

916

SBA loans originated for sale

 

(8,688)

 

(4,121)

Provision for (recapture of) credit losses on loans

 

(2,005)

 

14,384

Increase in cash surrender value of life insurance

 

(914)

 

(916)

Depreciation and amortization