UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
(MARK ONE) | |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended | |
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
(Exact name of Registrant as Specified in its Charter)
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(
(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: |
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. ☒ 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). ☒ 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 ☐ | 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
The Registrant had
HERITAGE COMMERCE CORP
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 45 | ||
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Cautionary Note Regarding Forward-Looking Statements
This Quarterly 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. All 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. Such forward-looking statements may be deemed to include, among other things, statements relating to the Company’s future financial performance, projected cash flows of our investment securities portfolio, the performance of our loan portfolio, estimated net interest income resulting from a shift in interest rates, expectation of high credit quality issuers ability to repay, as well as statements relating to the anticipated effects on the Company’s financial condition and results of operations from expected developments or events.
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, 2022, as supplemented by the information set forth in Item 1A (Risk Factors) of this report, and including, but not limited to the following:
● | factors that affect our liquidity and our ability to meet customer demands for deposit withdrawals, including our cash on hand and the availability of funds from our lines of credit; |
● | media items and consumer confidence as those factors affect depositors’ confidence in the banking system generally and our bank in particular; |
● | factors that affect the value and liquidity of our investment portfolios, particularly the values of securities available-for-sale; |
● | the effect of our measures to assure adequate liquidity of deposits as those measures affect profitability, including increasing interest rates on deposits as a component of our interest expense; |
● | our ability to estimate accurately, and to establish adequate reserves against, the risk of loss associated with our loan and lease portfolio; |
● | events and circumstances that affect our borrowers’ financial condition, results of operations and cash flows, which may, during periods of economic uncertainty or decline, adversely affect those borrowers’ ability to repay our loans timely and in full, or to comply with their other obligations under our loan agreements with those customers; |
● | geopolitical and domestic political developments, including ongoing conflicts in Ukraine and the Middle East, as well as other regions that are experiencing or that may in the future experience political or economic upheaval, that can increase levels of political and economic unpredictability, contribute to rising energy and commodity prices, and increase the volatility of financial markets; |
● | 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; |
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● | 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 and other factors that affect market interest rates generally; |
● | inflationary pressures and changes in the interest rate environment that reduce our margins and yields, the fair value of financial instruments or our level of loan originations, or increase the level of defaults, losses and prepayments on loans to customers, whether held in the portfolio or in the secondary market; |
● | 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; |
● | volatility in credit and equity markets and its effect on the global economy; |
● | conditions relating to the impact 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 including severity and duration of the associated uncertainties in U.S. and global markets; |
● | our ability to compete effectively 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 in our market area; |
● | 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 vacancy rates, and asset and market prices; |
● | 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; |
● | 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 or of the goodwill associated with previous acquisitions; |
● | 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 the Small Business Administration (“SBA”) or SBA loan programs, or changes in those programs; |
● | compliance with applicable laws and governmental and regulatory requirements, including the Dodd-Frank Act and others relating to banking, consumer protection, securities, accounting and tax matters; |
● | 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; |
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● | 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 or international terrorism, riots, widespread mayhem, and similar events or circumstances; |
● | risks of natural disasters (including earthquakes, fires, and flooding) 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.
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Part I—FINANCIAL INFORMATION
ITEM 1—CONSOLIDATED FINANCIAL STATEMENTS
HERITAGE COMMERCE CORP
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, | December 31, | |||||
| 2023 |
| 2022 | |||
(Dollars in thousands) | ||||||
Assets | ||||||
Cash and due from banks | $ | | $ | | ||
Other investments and interest-bearing deposits in other financial institutions |
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Total cash and cash equivalents |
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Securities available-for-sale, at fair value |
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Securities held-to-maturity, at amortized cost, net of allowance for credit losses of $ | ||||||
$ | |
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Loans held-for-sale - SBA, at lower of cost or fair value, including deferred costs |
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Loans, net of deferred fees |
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Allowance for credit losses on loans |
| ( |
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Loans, net |
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Federal Home Loan Bank ("FHLB"), Federal Reserve Bank ("FRB") stock and other investments, at cost |
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Company-owned life insurance |
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Premises and equipment, net |
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Goodwill | | | ||||
Other intangible assets |
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Accrued interest receivable and other assets |
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Total assets | $ | | $ | | ||
Liabilities and Shareholders' Equity | ||||||
Liabilities: | ||||||
Deposits: | ||||||
Demand, noninterest-bearing | $ | | $ | | ||
Demand, interest-bearing |
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Savings and money market |
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Time deposits - under $250 |
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Time deposits - $250 and over |
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ICS/CDARS - interest-bearing demand, money market and time deposits |
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Total deposits |
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Subordinated debt, net of issuance costs | | | ||||
Accrued interest payable and other liabilities |
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Total liabilities |
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Shareholders' equity: | ||||||
Preferred stock, | ||||||
at September 30, 2023 and December 31, 2022 | ||||||
Common stock, | ||||||
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Retained earnings |
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Accumulated other comprehensive loss |
| ( |
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Total shareholders' equity |
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Total liabilities and shareholders' equity | $ | | $ | | ||
See notes to consolidated financial statements (unaudited).
6
HERITAGE COMMERCE CORP
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
| 2023 |
| 2022 | 2023 |
| 2022 | ||||||
(Dollars in thousands, except per share amounts) | ||||||||||||
Interest income: | ||||||||||||
Loans, including fees | $ | | $ | | $ | | $ | | ||||
Securities, taxable |
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Securities, exempt from Federal tax |
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Other investments, interest-bearing deposits | ||||||||||||
in other financial institutions and Federal funds sold |
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Total interest income |
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Interest expense: | ||||||||||||
Deposits |
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Short-term borrowings | — | — | | — | ||||||||
Subordinated debt |
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Total interest expense |
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Net interest income before provision for credit losses on loans |
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Provision for credit losses on loans |
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Net interest income after provision for credit losses on loans |
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Noninterest income: | ||||||||||||
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Increase in cash surrender value of life insurance |
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Gain on sales of SBA loans |
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Termination fees |
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Gain on proceeds from company owned life insurance | | — | | | ||||||||
Servicing income |
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Gain on warrants | — | | — | | ||||||||
Other |
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Total noninterest income |
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Noninterest expense: | ||||||||||||
Salaries and employee benefits |
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Occupancy and equipment |
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Professional fees |
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Other |
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Total noninterest expense |
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Income before income taxes |
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Income tax expense |
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Net income | $ | | $ | | $ | | $ | | ||||
Earnings per common share: | ||||||||||||
Basic | $ | $ | $ | |||||||||
Diluted | $ | $ | $ |
See notes to consolidated financial statements (unaudited).
7
HERITAGE COMMERCE CORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended | Nine Months Ended | ||||||||||||
September 30, | September 30, | ||||||||||||
| 2023 |
| 2022 |
| 2023 |
| 2022 |
| |||||
(Dollars in thousands) | |||||||||||||
Net income | $ | | $ | | $ | | $ | | |||||
Other comprehensive income (loss): | |||||||||||||
Change in net unrealized holding gains (losses) on | |||||||||||||
available-for-sale securities and I/O strips |
| ( |
| ( |
| ( |
| ( | |||||
Deferred income taxes |
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Change in unrealized gains (losses) on securities and I/O strips, | |||||||||||||
net of deferred income taxes |
| ( |
| ( |
| ( |
| ( | |||||
Change in net pension and other benefit plan liability adjustment |
| ( |
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| ( |
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Deferred income taxes |
| ( |
| ( |
| ( |
| ( | |||||
Change in pension and other benefit plan liability, net of | |||||||||||||
deferred income taxes |
| ( |
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| ( |
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Other comprehensive income (loss) |
| ( |
| ( |
| ( |
| ( | |||||
Total comprehensive income | $ | | $ | | $ | | $ | |
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, January 1, 2022 | | $ | | $ | | $ | ( | $ | | |||||
Net income | — | — | | — | | |||||||||
Other comprehensive loss | — | — | — | ( | ( | |||||||||
Amortization of restricted stock awards, | ||||||||||||||
net of forfeitures and taxes | — | | — | — | | |||||||||
Cash dividend declared $ | — | — | ( | — | ( | |||||||||
Stock option expense, net of forfeitures and taxes | — | | — | — | | |||||||||
Stock options exercised | | | — | — | | |||||||||
Balance March 31, 2022 | | | | ( | | |||||||||
Net income | — | — | | — | | |||||||||
Other comprehensive loss | — | — | — | ( | ( | |||||||||
Issuance (forfeitures) of restricted stock awards, net | | — | — | — | — | |||||||||
Amortization of restricted stock awards, | ||||||||||||||
net of forfeitures and taxes | — | | — | — | | |||||||||
Cash dividend declared $ | — | — | ( | — | ( | |||||||||
Stock option expense, net of forfeitures and taxes | — | | — | — | | |||||||||
Stock options exercised | | | — | — | | |||||||||
Balance June 30, 2022 | | | | ( | | |||||||||
Net income | — | — | | — | | |||||||||
Other comprehensive loss | — | — | — | ( | ( | |||||||||
Issuance (forfeitures) of restricted stock awards, net | | — | — | — | — | |||||||||
Amortization of restricted stock awards, | ||||||||||||||
net of forfeitures and taxes | — | | — | — | | |||||||||
Cash dividend declared $ | — | — | ( | — | ( | |||||||||
Stock option expense, net of forfeitures and taxes | — | | — | — | | |||||||||
Stock options exercised | | | — | — | | |||||||||
Balance September 30, 2022 | | $ | | $ | | $ | ( | $ | | |||||
Balance, January 1, 2023 | | | | ( | | |||||||||
Net income | — | — | | — | | |||||||||
Other comprehensive income | — | — | — | | | |||||||||
Amortization of restricted stock awards, | ||||||||||||||
net of forfeitures and taxes | — | | — | — | | |||||||||
Cash dividend declared $ | — | — | ( | — | ( | |||||||||
Stock option expense, net of forfeitures and taxes | — | | — | | ||||||||||
Stock options exercised | | | — | | ||||||||||
Balance March 31, 2023 | | | | ( | | |||||||||
Net income | — | — | | — | | |||||||||
Other comprehensive loss | — | — | — | ( | ( | |||||||||
Issuance (forfeitures) of restricted stock awards, net | | — | — | — | — | |||||||||
Forfeiture of restricted stock awards, net | ||||||||||||||
Amortization of restricted stock awards, | ||||||||||||||
net of forfeitures and taxes | — | | — | — | | |||||||||
Cash dividend declared $ | — | — | ( | — | ( | |||||||||
Restricted stock units ("RSUs") and performance-based | ||||||||||||||
restricted stock units ("PRSUs") expense, net of taxes | — | | — | — | | |||||||||
Stock option expense, net of forfeitures and taxes | — | | — |