HERITAGE COMMERCE CORP [HTBK] Filings

10-Q 1 htbk-20240930x10q.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, 2024
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 61,303,366 shares of Common Stock outstanding on October 30, 2024.

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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	42

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	78

Item 4.	Controls and Procedures	78

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	78

Item 1A.	Risk Factors	79

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	104

Item 3.	Defaults Upon Senior Securities	104

Item 4.	Mine Safety Disclosures	104

Item 5.	Other Information	104

Item 6.	Exhibits	105

SIGNATURES		106

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Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q (this “Report”) of Heritage Commerce Corp (“we,” “us,” “our” or the “Company”) 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, and Rule 3b-6 promulgated thereunder and are intended to be protected by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. 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. Forward-looking statements may include, among other things, statements relating to our projected growth, anticipated future financial performance, management’s long-term performance goals and operational strategies, the performance of our loan and investment portfolios, as well as statements relating to the anticipated effects of those conditions, events and developments on the Company’s financial condition and results of operations. These statements reflect, and are based upon, facts and circumstances known to or expected by our executive leadership, and intentions and expectations of those individuals, as of the date of this Report.

These forward-looking statements are subject to various risks and uncertainties that may be outside our control, and our actual results could differ materially and adversely from our projected results. Likewise, statements about or relating to our current plans and intentions are not promises that we will execute those plans, or that we will not deviate from them as a result of changes in conditions or otherwise. Risks and uncertainties that could cause our financial performance to differ materially from our goals, plans, expectations and projections, or that could cause us to deviate from our expected strategies, are identified in “Part II, Item 1A—Risk Factors” of this Report, and include but are not limited to the following:

●

cybersecurity risks that may affect us directly or may impact us indirectly by virtue of their effects on our clients, markets or vendors, including our ability to identify and address cybersecurity risks, including those posed by the increasing use of artificial intelligence, such as data security breaches, “denial of service” attacks, “hacking” and identity theft affecting us, our clients, and our third-party vendors and service providers;

●

geopolitical and domestic political developments, including recent, current and potential future wars and international and multinational conflicts, acts of terrorism, insurrection, piracy and civil unrest, and events reflecting or resulting from social instability, any of which can increase levels of political and economic unpredictability, contribute to rising energy and commodity prices, can affect the physical security of our assets and the assets of our clients, and which may increase the volatility of financial markets;

●

factors that affect our liquidity and our ability to meet client demands for withdrawals from deposit accounts and undrawn lines of credit, including our cash on hand and the availability of funds from our own lines of credit;

●

market fluctuations that affect the costs we pay for sources of funding, including the interest we pay on deposits and on our borrowings;

●

media items and consumer confidence as those factors affect our clients’ confidence in the banking system generally and in our bank specifically;

●

factors that affect the value and liquidity of our investment portfolios, particularly the values of securities available-for-sale;

●

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;

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●

our ability to estimate accurately, and to establish adequate reserves against, the risk of loss associated with our loan and lease portfolios and our factoring business;

●

events and circumstances that affect our borrowers’ and guarantors’ 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 clients;

●

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 fluctuations in economic growth;

●

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 clients, 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;

●

conditions relating to the impact of recent and potential future pandemics, epidemics and other infectious illness outbreaks that may arise in the future, on our clients, employees, businesses, liquidity, financial results and overall condition including severity and duration of the associated uncertainties in U.S. and global markets;

●

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 and practical factors that affect 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;

●

events that affect our ability to attract, recruit, and retain qualified officers and other personnel to implement our strategic plan, and that enable current and future personnel to protect and develop our relationships with clients, and to promote our business, results of operations and growth prospects;

●

factors that affect the carrying value of the goodwill associated with our previous acquisitions;

●

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, particularly including but not limited to the effects of recent and ongoing developments in California labor and employment laws, regulations and court decisions;

●

geographic and sociopolitical factors that arise by virtue of the fact that we operate primarily in the general San Francisco Bay Area of Northern California, including the particular risks of natural disasters (including earthquakes, fires, and flooding) and other events that disproportionately affect that region;

●

actions taken, planned, or announced by federal, state, regional and local governments in response to the occurrence or threat of any of the foregoing; and

●

our success in managing the risks involved in the foregoing factors.

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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 (UNAUDITED)

HERITAGE COMMERCE CORP

CONSOLIDATED BALANCE SHEETS

(Unaudited)


	September 30,		December 31,
	2024		2023

	(Dollars in thousands)
Assets
Cash and due from banks	$	49,722	$	41,592
Other investments and interest-bearing deposits in other financial institutions		906,588		366,537
Total cash and cash equivalents		956,310		408,129
Securities available-for-sale, at fair value		237,612		442,636
Securities held-to-maturity, at amortized cost, net of allowance for credit losses of $12
(fair value of $531,533 and $564,127, respectively)		604,193		650,565
Loans held-for-sale - SBA, at lower of cost or fair value, including deferred costs		1,649		2,205
Loans, net of deferred fees		3,410,236		3,350,378
Allowance for credit losses on loans		(47,819)		(47,958)
Loans, net		3,362,417		3,302,420
Federal Home Loan Bank ("FHLB"), Federal Reserve Bank ("FRB") stock and other investments, at cost		32,553		32,540
Company-owned life insurance		80,682		79,489
Premises and equipment, net		10,398		9,857
Goodwill		167,631		167,631
Other intangible assets		6,966		8,627
Accrued interest receivable and other assets		91,185		89,996
Total assets	$	5,551,596	$	5,194,095

Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Demand, noninterest-bearing	$	1,272,139	$	1,292,486
Demand, interest-bearing		913,910		914,066
Savings and money market		1,309,676		1,087,518
Time deposits - under $250		39,060		38,055
Time deposits - $250 and over		196,945		192,228
Insured Cash Sweep ("ICS")/Certificates of Deposit Account Registry Service ("CDARS") -
interest-bearing demand, money market and time deposits		997,803		854,105
Total deposits		4,729,533		4,378,458
Subordinated debt, net of issuance costs		39,615		39,502
Accrued interest payable and other liabilities		97,096		103,234
Total liabilities		4,866,244		4,521,194

Shareholders' equity:
Preferred stock, no par value; 10,000,000 shares authorized; none issued and outstanding
at September 30, 2024 and December 31, 2023		—		—
Common stock, no par value; 100,000,000 shares authorized;
61,297,344 and 61,146,835 shares issued and outstanding, respectively		509,134		506,539
Retained earnings		185,110		179,092
Accumulated other comprehensive loss		(8,892)		(12,730)
Total shareholders' equity		685,352		672,901
Total liabilities and shareholders' equity	$	5,551,596	$	5,194,095

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,
	2024		2023		2024		2023

	(Dollars in thousands, except per share amounts)
Interest income:
Loans, including fees	$	45,781	$	44,853	$	135,851	$	132,993
Securities, taxable		4,676		6,797		16,342		20,835
Securities, exempt from Federal tax		223		232		674		718
Other investments, interest-bearing deposits
in other financial institutions and Federal funds sold		10,758		8,909		25,199		20,860
Total interest income		61,438		60,791		178,066		175,406

Interest expense:
Deposits		20,985		14,880		56,989		31,504
Short-term borrowings		—		—		—		1,365
Subordinated debt		538		539		1,614		1,614
Total interest expense		21,523		15,419		58,603		34,483

Net interest income before provision for credit losses on loans		39,915		45,372		119,463		140,923
Provision for credit losses on loans		153		168		808		460
Net interest income after provision for credit losses on loans		39,762		45,204		118,655		140,463

Noninterest income:
Service charges and fees on deposit accounts		908		859		2,676		3,503
Increase in cash surrender value of life insurance		530		517		1,569		1,512
Servicing income		108		62		288		297
Gain on sales of SBA loans		94		207		348		482
Termination fees		46		118		159		129
Gain on proceeds from company-owned life insurance		—		100		219		100
Other		554		353		1,304		1,033
Total noninterest income		2,240		2,216		6,563		7,056

Noninterest expense:
Salaries and employee benefits		15,673		14,147		46,976		42,943
Occupancy and equipment		2,599		2,301		7,731		7,123
Professional fees		1,306		717		3,705		3,265
Other		7,977		8,006		24,867		22,232
Total noninterest expense		27,555		25,171		83,279		75,563
Income before income taxes		14,447		22,249		41,939		71,956
Income tax expense		3,940		6,454		12,032		20,841
Net income	$	10,507	$	15,795	$	29,907	$	51,115

Earnings per common share:
Basic	$	0.17	$	0.26	$	0.49	$	0.84
Diluted	$	0.17	$	0.26	$	0.49	$	0.83

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,
	2024		2023		2024		2023

	(Dollars in thousands)
Net income	$	10,507	$	15,795	$	29,907	$	51,115
Other comprehensive income (loss):
Change in net unrealized holding gains (losses) on
available-for-sale securities and I/O strips		4,024		(243)		5,549		(701)
Deferred income taxes		(1,167)		70		(1,609)		203
Change in unrealized gains (losses) on securities and I/O strips,
net of deferred income taxes		2,857		(173)		3,940		(498)
Change in net pension and other benefit plan liability adjustment		(26)		(35)		(79)		(104)
Deferred income taxes		(8)		(3)		(23)		(11)
Change in pension and other benefit plan liability, net of
deferred income taxes		(34)		(38)		(102)		(115)
Other comprehensive income (loss)		2,823		(211)		3,838		(613)
Total comprehensive income	$	13,330	$	15,584	$	33,745	$	50,502

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		Income (Loss)		Equity

	(Dollars in thousands, except per share amounts)
Balance, January 1, 2023	60,852,723	$	502,923	$	146,389	$	(16,856)	$	632,456
Net income	—		—		18,917		—		18,917
Other comprehensive income, net of taxes	—		—		—		2,539		2,539
Net amortization of restricted stock awards	—		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, net of taxes	—		—		—		(2,941)		(2,941)
Issuance (forfeitures) of restricted stock awards, net	65,446		—		—		—		—
Net amortization of restricted stock awards	—		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		—		—		154
Stock options exercised	77,102		314		—		—		314
Balance June 30, 2023	61,091,155		505,075		165,853		(17,258)		653,670
Net income	—		—		15,795		—		15,795
Other comprehensive loss, net of taxes	—		—		—		(211)		(211)
Issuance (forfeitures) of restricted stock awards, net	8,000		—		—		—		—
Amortization of restricted stock awards,
net of forfeitures and taxes	—		321		—		—		321
Cash dividend declared $0.13 per share	—		—		(7,941)		—		(7,941)
RSUs and PRSUs expense, net of taxes	—		148		—		—		148
Stock option expense, net of forfeitures and taxes	—		148		—		—		148
Stock options exercised	—		—		—		—		—
Balance September 30, 2023	61,099,155	$	505,692	$	173,707	$	(17,469)	$	661,930


Balance, January 1, 2024	61,146,835	$	506,539	$	179,092	$	(12,730)	$	672,901
Net income	—		—		10,166		—		10,166
Other comprehensive income, net of taxes	—		—		—		142		142
Issuance of restricted stock awards, net of forfeitures	33,908		—		—		—		—
Net amortization of restricted stock awards	—		311		—		—		311
Cash dividend declared $0.13 per share	—		—		(7,952)		—		(7,952)
RSUs and PRSUs expense, net of taxes	—		198		—		—		198
Stock option expense, net of forfeitures and taxes	—		145		—		—		145
Stock options exercised	72,882		385		—		—		385
Balance March 31, 2024	61,253,625		507,578		181,306		(12,588)		676,296
Net income	—		—		9,234		—		9,234
Other comprehensive income, net of taxes	—		—		—		873		873
Issuance (forfeitures) of restricted stock awards, net	(8,000)		—		—		—		—
Net amortization of restricted stock awards	—		165		—		—		165
Cash dividend declared $0.13 per share	—		—		(7,969)		—		(7,969)
RSUs and PRSUs expense, net of taxes	—		413		—		—		413
RSUs vested	35,837		—		—		—		—
Stock option expense, net of forfeitures and taxes	—		129		—		—		129
Stock options exercised	10,632		58		—		—		58
Balance June 30, 2024	61,292,094		508,343		182,571		(

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10-Q	[2023-08-07]
10-Q	[2023-05-05]
10-K	[2023-03-09]
10-Q	[2022-11-04]
10-Q	[2022-08-05]
10-Q	[2022-05-05]
10-K	[2022-03-04]
10-Q	[2021-11-08]
10-Q	[2021-08-09]
10-Q	[2021-05-07]
10-K	[2021-03-05]
10-Q	[2020-11-06]
10-Q	[2020-08-07]
10-Q	[2020-05-08]
10-K	[2020-03-11]
10-Q	[2019-11-07]
10-Q	[2019-08-06]
10-Q	[2019-05-09]
10-K	[2019-03-14]
10-Q	[2018-11-06]
10-Q	[2018-08-07]
10-Q	[2018-05-08]
10-K	[2018-03-16]
10-Q	[2017-11-03]
10-Q	[2017-08-04]
10-Q	[2017-05-05]
10-K	[2017-03-03]
10-Q	[2016-11-04]
10-Q	[2016-08-05]
10-Q	[2016-05-06]
10-K	[2016-03-07]
10-Q	[2015-11-06]
10-Q	[2015-08-07]
10-Q	[2015-05-08]
10-K	[2015-03-06]
10-Q	[2014-11-06]
10-Q	[2014-08-06]
10-Q	[2014-05-08]
10-K	[2014-03-07]
10-Q	[2013-11-06]
10-Q	[2013-08-07]
10-Q	[2013-05-08]
10-K	[2013-03-08]
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