HERITAGE COMMERCE CORP [HTBK] Filings

10-Q 1 htbk-20230930x10q.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, 2023
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 61,099,155 shares of Common Stock outstanding on October 30, 2023.

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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)	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	79

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	82

Item 3.	Defaults Upon Senior Securities	82

Item 4.	Mine Safety Disclosures	82

Item 5.	Other Information	82

Item 6.	Exhibits	82

SIGNATURES		83

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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	$	40,076	$	27,595
Other investments and interest-bearing deposits in other financial institutions		605,476		279,008
Total cash and cash equivalents		645,552		306,603
Securities available-for-sale, at fair value		457,194		489,596
Securities held-to-maturity, at amortized cost, net of allowance for credit losses of $13 at September 30, 2023 and
$14 at December 31, 2022 (fair value of $542,009 at September 30, 2023 and $614,452 at December 31, 2022)		664,681		714,990
Loans held-for-sale - SBA, at lower of cost or fair value, including deferred costs		841		2,456
Loans, net of deferred fees		3,285,461		3,298,550
Allowance for credit losses on loans		(47,702)		(47,512)
Loans, net		3,237,759		3,251,038
Federal Home Loan Bank ("FHLB"), Federal Reserve Bank ("FRB") stock and other investments, at cost		32,535		32,522
Company-owned life insurance		79,607		78,945
Premises and equipment, net		9,707		9,301
Goodwill		167,631		167,631
Other intangible assets		9,229		11,033
Accrued interest receivable and other assets		98,571		93,465
Total assets	$	5,403,307	$	5,157,580

Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Demand, noninterest-bearing	$	1,243,501	$	1,736,722
Demand, interest-bearing		1,004,185		1,196,427
Savings and money market		1,110,640		1,285,444
Time deposits - under $250		43,906		32,445
Time deposits - $250 and over		252,001		108,192
ICS/CDARS - interest-bearing demand, money market and time deposits		921,224		30,374
Total deposits		4,575,457		4,389,604
Subordinated debt, net of issuance costs		39,463		39,350
Accrued interest payable and other liabilities		126,457		96,170
Total liabilities		4,741,377		4,525,124

Shareholders' equity:
Preferred stock, no par value; 10,000,000 shares authorized; none issued and outstanding
at September 30, 2023 and December 31, 2022		—		—
Common stock, no par value; 100,000,000 shares authorized;
61,099,155 shares issued and outstanding at September 30, 2023 and
60,852,723 shares issued and outstanding at December 31, 2022		505,692		502,923
Retained earnings		173,707		146,389
Accumulated other comprehensive loss		(17,469)		(16,856)
Total shareholders' equity		661,930		632,456
Total liabilities and shareholders' equity	$	5,403,307	$	5,157,580

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,
	2023		2022		2023		2022

	(Dollars in thousands, except per share amounts)
Interest income:
Loans, including fees	$	44,853	$	38,870	$	132,993	$	110,509
Securities, taxable		6,797		5,874		20,835		13,725
Securities, exempt from Federal tax		232		260		718		828
Other investments, interest-bearing deposits
in other financial institutions and Federal funds sold		8,909		5,170		20,860		8,574
Total interest income		60,791		50,174		175,406		133,636

Interest expense:
Deposits		14,880		1,595		31,504		3,855
Short-term borrowings		—		—		1,365		—
Subordinated debt		539		538		1,614		1,640
Total interest expense		15,419		2,133		34,483		5,495

Net interest income before provision for credit losses on loans		45,372		48,041		140,923		128,141
Provision for credit losses on loans		168		1,006		460		258
Net interest income after provision for credit losses on loans		45,204		47,035		140,463		127,883

Noninterest income:
Service charges and fees on deposit accounts		859		1,360		3,503		2,839
Increase in cash surrender value of life insurance		517		484		1,512		1,444
Gain on sales of SBA loans		207		308		482		491
Termination fees		118		16		129		61
Gain on proceeds from company owned life insurance		100		—		100		27
Servicing income		62		125		297		370
Gain on warrants		—		32		—		669
Other		353		456		1,033		1,438
Total noninterest income		2,216		2,781		7,056		7,339

Noninterest expense:
Salaries and employee benefits		14,147		14,119		42,943		41,416
Occupancy and equipment		2,301		2,415		7,123		7,129
Professional fees		717		1,230		3,265		3,601
Other		8,006		6,135		22,232		18,195
Total noninterest expense		25,171		23,899		75,563		70,341
Income before income taxes		22,249		25,917		71,956		64,881
Income tax expense		6,454		7,848		20,841		19,125
Net income	$	15,795	$	18,069	$	51,115	$	45,756

Earnings per common share:
Basic	$	0.26		0.30	$	0.84	$	0.76
Diluted	$	0.26		0.30	$	0.83	$	0.75

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,
	2023		2022		2023		2022

		(Dollars in thousands)
Net income	$	15,795	$	18,069	$	51,115	$	45,756
Other comprehensive income (loss):
Change in net unrealized holding gains (losses) on
available-for-sale securities and I/O strips		(243)		(13,188)		(701)		(20,317)
Deferred income taxes		70		3,824		203		5,891
Change in unrealized gains (losses) on securities and I/O strips,
net of deferred income taxes		(173)		(9,364)		(498)		(14,426)
Change in net pension and other benefit plan liability adjustment		(35)		104		(104)		311
Deferred income taxes		(3)		(34)		(11)		(101)
Change in pension and other benefit plan liability, net of
deferred income taxes		(38)		70		(115)		210
Other comprehensive income (loss)		(211)		(9,294)		(613)		(14,216)
Total comprehensive income	$	15,584	$	8,775	$	50,502	$	31,540

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, 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 (forfeitures) 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)		—		(7,858)
Stock option expense, net of forfeitures and taxes	—		144		—		—		144
Stock options exercised	69,643		448		—		—		448
Balance June 30, 2022	60,666,794		499,832		123,310		(15,918)		607,224
Net income	—		—		18,069		—		18,069
Other comprehensive loss	—		—		—		(9,294)		(9,294)
Issuance (forfeitures) of restricted stock awards, net	37,000		—		—		—		—
Amortization of restricted stock awards,
net of forfeitures and taxes	—		1,234		—		—		1,234
Cash dividend declared $0.13 per share	—		—		(7,890)		—		(7,890)
Stock option expense, net of forfeitures and taxes	—		153		—		—		153
Stock options exercised	13,000		21		—		—		21
Balance September 30, 2022	60,716,794	$	501,240	$	133,489	$	(25,212)	$	609,517


Balance, January 1, 2023	60,852,723		502,923		146,389		(16,856)		632,456
Net income	—		—		18,917		—		18,917
Other comprehensive income	—		—		—		2,539		2,539
Amortization of restricted stock awards,
net of forfeitures and taxes	—		382		—		—		382
Cash dividend declared $0.13 per share	—		—		(7,916)		—		(7,916)
Stock option expense, net of forfeitures and taxes	—		147				—		147
Stock options exercised	95,884		683				—		683
Balance March 31, 2023	60,948,607		504,135		157,390		(14,317)		647,208
Net income	—		—		16,403		—		16,403
Other comprehensive loss	—		—		—		(2,941)		(2,941)
Issuance (forfeitures) of restricted stock awards, net	65,446		—		—		—		—
Forfeiture of restricted stock awards, net									—
Amortization of restricted stock awards,
net of forfeitures and taxes	—		376		—		—		376
Cash dividend declared $0.13 per share	—		—		(7,940)		—		(7,940)
Restricted stock units ("RSUs") and performance-based
restricted stock units ("PRSUs") expense, net of taxes	—		96		—		—		96
Stock option expense, net of forfeitures and taxes	—		154		—