HERITAGE COMMERCE CORP [HTBK] Filings

10-Q 1 htbk-20220930x10q.htm 10-Q

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, 2022
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)

(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 60,718,994 shares of Common Stock outstanding on October 31, 2022.

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HERITAGE COMMERCE CORP

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

		Page No.
Cautionary Note on Forward-Looking Statements		3

Part I. FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements (unaudited)	5

	Consolidated Balance Sheets	5

	Consolidated Statements of Income	6

	Consolidated Statements of Comprehensive Income	7

	Consolidated Statements of Changes in Shareholders’ Equity	8

	Consolidated Statements of Cash Flows	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	74

Item 4.	Controls and Procedures	74

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	75

Item 1A.	Risk Factors	75

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	75

Item 3.	Defaults Upon Senior Securities	75

Item 4.	Mine Safety Disclosures	75

Item 5.	Other Information	75

Item 6.	Exhibits	76

SIGNATURES		77

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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, 2021, and including, but not limited to the following:

●

geopolitical and domestic political developments 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;

●

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;

●

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 we have made and make;

●

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, 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 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 in our market area, the impact of the cost of deposits and our ability to retain 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;

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●

credit related impairment charges to our securities portfolio;

●

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;

●

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 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;

●

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, fires, and flooding) and other events beyond our control;

●

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,
	2022		2021

	(Dollars in thousands)
Assets
Cash and due from banks	$	40,500	$	15,703
Other investments and interest-bearing deposits in other financial institutions		641,251		1,290,513
Total cash and cash equivalents		681,751		1,306,216
Securities available-for-sale, at fair value		478,534		102,252
Securities held-to-maturity, at amortized cost, net of allowance for credit losses of $15 at September 30, 2022
and $43 at December 31, 2021 (fair value of $593,610 at September 30, 2022 and $657,649 at December 31, 2021)		703,794		658,397
Loans held-for-sale - SBA, at lower of cost or fair value, including deferred costs		2,081		2,367
Loans, net of deferred fees		3,216,473		3,087,326
Allowance for credit losses on loans		(46,921)		(43,290)
Loans, net		3,169,552		3,044,036
Federal Home Loan Bank, Federal Reserve Bank stock and other investments, at cost		32,517		32,504
Company-owned life insurance		78,456		77,589
Premises and equipment, net		9,428		9,639
Goodwill		167,631		167,631
Other intangible assets		11,692		13,668
Accrued interest receivable and other assets		95,826		85,110
Total assets	$	5,431,262	$	5,499,409

Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Demand, noninterest-bearing	$	1,883,574	$	1,903,768
Demand, interest-bearing		1,154,403		1,308,114
Savings and money market		1,487,400		1,375,825
Time deposits - under $250		34,728		38,734
Time deposits - $250 and over		93,263		94,700
CDARS - interest-bearing demand, money market and time deposits		29,897		38,271
Total deposits		4,683,265		4,759,412
Subordinated debt, net of issuance costs		39,312		39,925
Accrued interest payable and other liabilities		99,168		102,044
Total liabilities		4,821,745		4,901,381

Shareholders' equity:
Preferred stock, no par value; 10,000,000 shares authorized; none issued and outstanding
at September 30, 2022 and December 31, 2021		—		—
Common stock, no par value; 100,000,000 shares authorized;
60,716,794 shares issued and outstanding at September 30, 2022 and
60,339,837 shares issued and outstanding at December 31, 2021		501,240		497,695
Retained earnings		133,489		111,329
Accumulated other comprehensive loss		(25,212)		(10,996)
Total shareholders' equity		609,517		598,028
Total liabilities and shareholders' equity	$	5,431,262	$	5,499,409

See notes to consolidated financial statements (unaudited).

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HERITAGE COMMERCE CORP

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021

	(Dollars in thousands, except per share amounts)
Interest income:
Loans, including fees	$	38,870	$	36,207	$	110,509	$	103,482
Securities, taxable		5,874		2,320		13,725		5,992
Securities, exempt from Federal tax		260		382		828		1,215
Other investments, interest-bearing deposits
in other financial institutions and Federal funds sold		5,170		998		8,574		2,611
Total interest income		50,174		39,907		133,636		113,300

Interest expense:
Deposits		1,595		1,141		3,855		3,552
Subordinated debt		538		584		1,640		1,732
Total interest expense		2,133		1,725		5,495		5,284

Net interest income before provision for credit losses on loans		48,041		38,182		128,141		108,016
Provision for (recapture of) credit losses on loans		1,006		(514)		258		(2,519)
Net interest income after provision for credit losses on loans		47,035		38,696		127,883		110,535

Noninterest income:
Service charges and fees on deposit accounts		1,360		584		2,839		1,844
Increase in cash surrender value of life insurance		484		470		1,444		1,384
Gain on sales of SBA loans		308		594		491		1,227
Servicing income		125		129		370		415
Gain on warrants		32		13		669		11
Termination fees		16		32		61		179
Gain on proceeds from company-owned life insurance		—		109		27		571
Other		456		477		1,438		1,247
Total noninterest income		2,781		2,408		7,339		6,878

Noninterest expense:
Salaries and employee benefits		14,119		12,461		41,416		38,991
Occupancy and equipment		2,415		2,151		7,129		6,672
Professional fees		1,230		1,211		3,601		4,701
Other		6,135		6,008		18,195		20,486
Total noninterest expense		23,899		21,831		70,341		70,850
Income before income taxes		25,917		19,273		64,881		46,563
Income tax expense		7,848		5,555		19,125		12,828
Net income	$	18,069	$	13,718	$	45,756	$	33,735

Earnings per common share:
Basic	$	0.30	$	0.23	$	0.76	$	0.56
Diluted	$	0.30	$	0.23	$	0.75	$	0.56

See notes to consolidated financial statements (unaudited).

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HERITAGE COMMERCE CORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021

		(Dollars in thousands)
Net income	$	18,069	$	13,718	$	45,756	$	33,735
Other comprehensive income (loss):
Change in net unrealized holding (losses) gains on available-for-sale
securities and I/O strips		(13,188)		(366)		(20,317)		(1,855)
Deferred income taxes		3,824		107		5,891		540
Change in net unamortized unrealized gain on securities available-for-
sale that were reclassified to securities held-to-maturity		—		(13)		—		(39)
Deferred income taxes		—		4		—		12
Change in unrealized (losses) gains on securities and I/O strips, net of
deferred income taxes		(9,364)		(268)		(14,426)		(1,342)

Change in net pension and other benefit plan liability adjustment		104		132		311		504
Deferred income taxes		(34)		(38)		(101)		(151)
Change in pension and other benefit plan liability, net of
deferred income taxes		70		94		210		353
Other comprehensive (loss)		(9,294)		(174)		(14,216)		(989)

Total comprehensive income	$	8,775	$	13,544	$	31,540	$	32,746

See notes to consolidated financial statements (unaudited).

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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, 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

Net income	—		—		13,718		—		13,718
Other comprehensive loss	—		—		—		(174)		(174)
Amortization of restricted stock awards,
net of forfeitures and taxes	—		522		—		—		522
Cash dividend declared $0.13 per share	—		—		(7,827)		—		(7,827)
Stock option expense, net of forfeitures and taxes	—		150		—		—		150
Stock options exercised	63,550		285		—		—		285
Balance, September 30, 2021	60,266,316	$	496,622	$	91,484	$	(11,706)	$	590,118

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						Accumulated
						Other		Total
	Common Stock			Retained		Comprehensive		Shareholders’
	Shares	Amount		Earnings		Loss		Equity

	(Dollars in thousands, except per share amounts)
Balance, January 1, 2022	60,339,837	$	497,695	$	111,329	$	(10,996)	$	598,028
Net income	—		—		12,866		—		12,866
Other comprehensive loss	—		—		—		(3,058)		(3,058)
Amortization of restricted stock awards,
net of forfeitures and taxes	—		518		—		—		518
Cash dividend declared $0.13 per share	—		—		(7,848)		—		(7,848)
Stock option expense, net of forfeitures and taxes	—		149		—		—		149
Stock options exercised	68,009		401		—		—		401
Balance March 31, 2022	60,407,846		498,763		116,347		(14,054)		601,056

Net income	—		—		14,821		—		14,821
Other comprehensive loss	—		—		—		(1,864)		(1,864)
Issuance of restricted stock awards, net	189,305		—		—		—		—
Amortization of restricted stock awards,
net of forfeitures and taxes	—		477		—		—		477
Cash dividend declared $0.13 per share	—		—		(7,858)		—