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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 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)

(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 61,099,155 shares of Common Stock outstanding on October 30, 2023.

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

2

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;

3

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;

4

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.

5

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).

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

$

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).

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

$

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).

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

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