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TABLE OF CONTENTS
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
|
|
(MARK ONE) |
|
|
ý |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2015 |
OR |
o |
|
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.) |
150 Almaden Boulevard, San Jose, California
(Address of Principal Executive Offices) |
|
95113
(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)
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 ý NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted 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 and post such files). YES ý NO o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer
and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
|
|
|
|
|
|
|
Large accelerated filer o |
|
Accelerated filer ý |
|
Non-accelerated filer o (Do not check if a
smaller reporting company) |
|
Smaller reporting company o |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). YES o NO ý
The Registrant had 32,076,505 shares of Common Stock outstanding on October 26, 2015.
Table of Contents
HERITAGE COMMERCE CORP
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
2
Table of Contents
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.
In addition, our past results of operations do not necessarily indicate our future results. The forward-looking statements could be affected by many factors, including but not limited
to:
-
- local, regional, and national economic conditions and events and the impact they may have on us and our customers, and our assessment
of that impact on our estimates including, the allowance for loan losses;
-
- changes in the financial performance or condition of the Company's customers, or changes in the performance or creditworthiness of our
customers' suppliers or other counterparties, which could lead to decreased loan utilization rates, delinquencies, or defaults and could negatively affect our customers' ability to meet certain credit
obligations;
-
- volatility in credit and equity markets and its effect on the global economy;
-
- changes in consumer spending, borrowings and saving habits;
-
- competition for loans and deposits and failure to attract or retain deposits and loans;
-
- our ability to increase market share and control expenses;
-
- our ability to develop and promote customer acceptance of new products and services in a timely manner;
-
- risks associated with concentrations in real estate related loans;
-
- other-than-temporary impairment charges to our securities portfolio;
-
- an oversupply of inventory and deterioration in values of California commercial real estate;
-
- a prolonged slowdown in construction activity;
-
- changes in the level of nonperforming assets and charge-offs and other credit quality measures, and their impact on the adequacy of
the Company's allowance for loan losses and the Company's provision for loan losses;
-
- the 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;
-
- changes in inflation, interest rates, and market liquidity which may impact interest margins and impact funding sources;
3
Table of Contents
-
- our ability to raise capital or incur debt on reasonable terms;
-
- regulatory limits on Heritage Bank of Commerce's ability to pay dividends to the Company;
-
- the impact of reputational risk on such matters as business generation and retention, funding and liquidity;
-
- the impact of cyber security attacks or other disruptions to the Company's information systems and any resulting compromise of data or
disruptions in service;
-
- the effect and uncertain impact on the Company of the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010 and the rules and regulations promulgated by supervisory and oversight agencies implementing the new legislation;
-
- significant changes in applicable laws and regulations, including those concerning taxes, banking and securities;
-
- changes in the competitive environment among financial or bank holding companies and other financial service providers;
-
- the 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 costs and effects of legal and regulatory developments, including resolution of legal proceedings or regulatory or other
governmental inquiries, and the results of regulatory examinations or reviews;
-
- the successful integration of the business, employees and operations of Focus Business Bank with the Company and our ability to
achieve the projected synergies of this acquisition; and
-
- our success in managing the risks involved in the foregoing factors.
We
are not able to predict all the factors that may affect future results. You should not place undue reliance on any forward looking statement, which speaks only as of the date of this
Report on Form 10-K. Except as required by applicable laws or regulations, we do not undertake any obligation to update or revise any forward looking statement, whether as a result of new
information, future events or otherwise.
4
Table of Contents
Part IFINANCIAL INFORMATION
ITEM 1CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
HERITAGE COMMERCE CORP
CONSOLIDATED BALANCE SHEETS (Unaudited)
|
|
|
|
|
|
|
|
|
|
September 30,
2015 |
|
December 31,
2014 |
|
|
|
(Dollars in thousands)
|
|
Assets |
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
28,691 |
|
$ |
23,256 |
|
Interest-bearing deposits in other financial institutions |
|
|
364,247 |
|
|
99,147 |
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents |
|
|
392,938 |
|
|
122,403 |
|
Securities available-for-sale, at fair value |
|
|
257,410 |
|
|
206,335 |
|
Securities held-to-maturity, at amortized cost (fair value of $110,035 at September 30, 2015 and $94,953 at December 31, 2014) |
|
|
111,004 |
|
|
95,362 |
|
Loans held-for-saleSBA, at lower of cost or fair value, including deferred costs |
|
|
7,873 |
|
|
1,172 |
|
Loans, net of deferred fees |
|
|
1,332,405 |
|
|
1,088,643 |
|
Allowance for loan losses |
|
|
(18,737 |
) |
|
(18,379 |
) |
|
|
|
|
|
|
|
|
Loans, net |
|
|
1,313,668 |
|
|
1,070,264 |
|
Federal Home Loan Bank and Federal Reserve Bank stock, at cost |
|
|
10,630 |
|
|
10,598 |
|
Company owned life insurance |
|
|
59,549 |
|
|
51,257 |
|
Premises and equipment, net |
|
|
7,513 |
|
|
7,451 |
|
Goodwill |
|
|
44,898 |
|
|
13,044 |
|
Other intangible assets |
|
|
8,906 |
|
|
3,276 |
|
Accrued interest receivable and other assets |
|
|
47,818 |
|
|
35,941 |
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,262,207 |
|
$ |
1,617,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders' Equity |
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
Demand, noninterest-bearing |
|
$ |
758,440 |
|
$ |
517,662 |
|
Demand, interest-bearing |
|
|
440,517 |
|
|
225,821 |
|
Savings and money market |
|
|
490,572 |
|
|
384,644 |
|
Time deposits-under $250 |
|
|
65,626 |
|
|
57,443 |
|
Time deposits-$250 and over |
|
|
174,703 |
|
|
163,452 |
|
Time deposits-brokered |
|
|
24,150 |
|
|
28,116 |
|
CDARSmoney market and time deposits |
|
|
8,015 |
|
|
11,248 |
|
|
|
|
|
|
|
|
|
Total deposits |
|
|
1,962,023 |
|
|
1,388,386 |
|
Other short-term borrowings |
|
|
1,000 |
|
|
|
|
Accrued interest payable and other liabilities |
|
|
51,208 |
|
|
44,359 |
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
2,014,231 |
|
|
1,432,745 |
|
Shareholders' equity: |
|
|
|
|
|
|
|
Preferred stock, no par value; 10,000,000 shares authorized |
|
|
|
|
|
|
|
Series C convertible perpetual preferred stock, 21,004 shares issued and outstanding at September 30, 2015 and December 31, 2014
(liquidation preference of $21,004 at September 30, 2015 and December 31, 2014) |
|
|
19,519 |
|
|
19,519 |
|
Common stock, no par value; 60,000,000 shares authorized; 32,076,505 shares issued and outstanding at September 30, 2015 and 26,503,505 shares issued
and outstanding at December 31, 2014 |
|
|
193,070 |
|
|
133,676 |
|
Retained earnings |
|
|
37,366 |
|
|
33,014 |
|
Accumulated other comprehensive loss |
|
|
(1,979 |
) |
|
(1,851 |
) |
|
|
|
|
|
|
|
|
Total shareholders' equity |
|
|
247,976 |
|
|
184,358 |
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity |
|
$ |
2,262,207 |
|
$ |
1,617,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited consolidated financial statements
5
Table of Contents
HERITAGE COMMERCE CORP
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
September 30, |
|
Nine Months
Ended
September 30, |
|
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
|
|
(Dollars in thousands, except per share data)
|
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, including fees |
|
$ |
17,713 |
|
$ |
12,077 |
|
$ |
48,360 |
|
$ |
34,832 |
|
Securities, taxable |
|
|
1,670 |
|
|
1,675 |
|
|
4,828 |
|
|
5,555 |
|
Securities, non-taxable |
|
|
568 |
|
|
506 |
|
|
1,589 |
|
|
1,518 |
|
Other investments and interest-bearing deposits in other financial institutions |
|
|
355 |
|
|
234 |
|
|
1,070 |
|
|
634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
20,306 |
|
|
14,492 |
|
|
55,847 |
|
|
42,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
623 |
|
|
500 |
|
|
1,664 |
|
|
1,527 |
|
Short-term borrowings |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
623 |
|
|
500 |
|
|
1,664 |
|
|
1,528 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income before provision for loan losses |
|
|
19,683 |
|
|
13,992 |
|
|
54,183 |
|
|
41,011 |
|
Provision (credit) for loan losses |
|
|
(301 |
) |
|
(24 |
) |
|
(339 |
) |
|
(232 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses |
|
|
19,984 |
|
|
14,016 |
|
|
54,522 |
|
|
41,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges and fees on deposit accounts |
|
|
748 |
|
|
631 |
|
|
2,086 |
|
|
1,897 |
|
Increase in cash surrender value of life insurance |
|
|
429 |
|
|
401 |
|
|
1,225 |
|
|
1,196 |
|
Servicing income |
|
|
214 |
|
|
316 |
|
|
819 |
|
|
977 |
|
Gain on sales of SBA loans |
|
|
267 |
|
|
259 |
|
|
660 |
|
|
858 |
|
Gain on sales of securities |
|
|
|
|
|
47 |
|
|
|
|
|
97 |
|
Other |
|
|
408 |
|
|
216 |
|
|
1,366 |
|
|
909 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
2,066 |
|
|
1,870 |
|
|
6,156 |
|
|
5,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
10,358 |
|
|
6,228 |
|
|
26,112 |
|
|
19,290 |
|
Occupancy and equipment |
|
|
1,063 |
|
|
1,055 |
|
|
3,135 |
|
|
2,987 |
|
Acquisition and integration related costs |
|
|
688 |
|
|
234 |
|
|
1,265 |
|
|
287 |
|
Professional fees |
|
|
612 |
|
|
617 |
|
|
946 |
|
|
1,329 |
|
Data processing |
|
|
411 |
|
|
238 |
|
|
950 |
|
|
741 |
|
Software subscriptions |
|
|
292 |
|
|
264 |
|
|
883 |
|
|
702 |
|
Insurance expense |
|
|
273 |
|
|
292 |
|
|
855 |
|
|
830 |
|
Correspondent bank charges |
|
|
269 |
|
|
174 |
|
|
760 |
|
|
539 |
|
Amortization of intangible assets |
|
|
277 |
|
|
115 |
|
|
655 |
|
|
345 |
|
Advertising and promotion |
|
|
262 |
|
|
87 |
|
|
689 |
|
|
504 |
|
FDIC deposit insurance premiums |
|
|
251 |
|
|
220 |
|
|
727 |
|
|
674 |
|
Foreclosed assets |
|
|
113 |
|
|
|
|
|
(93 |
) |
|
(19 |
) |
Other |
|
|
1,550 |
|
|
968 |
|
|
4,428 |
|
|
3,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
16,419 |
|
|
10,492 |
|
|
41,312 |
|
|
31,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
5,631 |
|
|
5,394 |
|
|
19,366 |
|
|
15,370 |
|
Income tax expense |
|
|
2,172 |
|
|
1,969 |
|
|
7,292 |
|
|
5,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
3,459 |
|
|
3,425 |
|
|
12,074 |
|
|
9,825 |
|
Dividends on preferred stock |
|
|
(448 |
) |
|
(280 |
) |
|
(1,344 |
) |
|
(728 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
3,011 |
|
$ |
3,145 |
|
$ |
10,730 |
|
$ |
9,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.10 |
|
$ |
0.11 |
|
$ |
0.37 |
|
$ |
0.31 |
|
Diluted |
|
$ |
0.10 |
|
$ |
0.11 |
|
$ |
0.36 |
|
$ |
0.31 |
|
See notes to unaudited consolidated financial statements
6
Table of Contents
HERITAGE COMMERCE CORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
Months Ended
September 30, |
|
For the Nine
Months Ended
September 30, |
|
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
|
|
(Dollars in thousands)
|
|
Net income |
|
$ |
3,459 |
|
$ |
3,425 |
|
$ |
12,074 |
|
$ |
9,825 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized holding gains (loss) on available-for-sale securities and I/O strips |
|
|
2,185 |
|
|
(1,166 |
) |
|
(331 |
) |
|
5,717 |
|
Deferred income taxes |
|
|
(912 |
) |
|
487 |
|
|
144 |
|
|
(2,404 |
) |
Change in net unamortized unrealized gain on securities available-for-sale that were reclassified to securities held-to-maturity |
|
|
(13 |
) |
|
(14 |
) |
|
(41 |
) |
|
(41 |
) |
Deferred income taxes |
|
|
5 |
|
|
6 |
|
|
17 |
|
|
17 |
|
Reclassification adjustment for gains realized in income |
|
|
|
|
|
(47 |
) |
|
|
|
|
(97 |
) |
Deferred income taxes |
|
|
|
|
|
20 |
|
|
|
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains on securities and I/O strips, net of deferred income taxes |
|
|
1,265 |
|
|
(714 |
) |
|
(211 |
) |
|
3,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net pension and other benefit plan liabilities adjustment |
|
|
47 |
|
|
(9 |
) |
|
143 |
|
|
(27 |
) |
Deferred income taxes |
|
|
(20 |
) |
|
3 |
|
|
(60 |
) |
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in pension and other benefit plan liabilities net of deferred income taxes |
|
|
27 |
|
|
(6 |
) |
|
83 |
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
1,292 |
|
|
(720 |
) |
|
(128 |
) |
|
3,217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
4,751 |
|
$ |
2,705 |
|
$ |
11,946 |
|
$ |
13,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited consolidated financial statements
7
Table of Contents
HERITAGE COMMERCE CORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2015 and 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Other
Comprehensive
Income /
(Loss) |
|
|
|
|
|
Preferred Stock |
|
Common Stock |
|
|
|
|
|
|
|
Retained
Earnings |
|
Total
Shareholders'
Equity |
|
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
|
|
(Dollars in thousands, except share data)
|
|
Balance, January 1, 2014 |
|
|
21,004 |
|
$ |
19,519 |
|
|
26,350,938 |
|
$ |
132,561 |
|
$ |
25,345 |
|
$ |
(4,029 |
) |
$ |
173,396 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,825 |
|
|
|
|
|
9,825 |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,217 |
|
|
3,217 |
|
Issuance of restricted stock awards, net |
|
|
|
|
|
|
|
|
15,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of restricted stock awards, net of forfeitures and taxes |
|
|
|
|
|
|
|
|
|
|
|
(49 |
) |
|
|
|
|
|
|
|
(49 |
) |
Cash dividend declared $0.13 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,156 |
) |
|
|
|
|
(4,156 |
) |
Stock option expense, net of forfeitures and taxes |
|
|
|
|
|
|
|
|
|
|
|
641 |
|
|
|
|
|
|
|
|
641 |
|
Stock options exercised |
|
|
|
|
|
|
|
|
9,042 |
|
|
42 |
|
|
|
|
|
|
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2014 |
|
|
21,004 |
|
$ |
19,519 |
|
|
26,374,980 |
|
$ |
133,195 |
|
$ |
31,014 |
|
$ |
(812 |
) |
$ |
182,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2015 |
|
|
21,004 |
|
$ |
19,519 |
|
|
26,503,505 |
|
$ |
133,676 |
|
$ |
33,014 |
|
$ |
(1,851 |
) |
$ |
184,358 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,074 |
|
|
|
|
|
12,074 |
|
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(128 |
) |
|
(128 |
) |
Issuance of 5,456,713 shares to acquire Focus Business Bank |
|
|
|
|
|
|
|
|
5,456,713 |
|
|
58,278 |
|
|
|
|
|
|
|
|
58,278 |
|
Issuance of restricted stock awards, net |
|
|
|
|
|
|
|
|
68,855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of restricted stock awards, net of forfeitures and taxes |
|
|
|
|
|
|
|
|
|
|
|
126 |
|
|
|
|
|
|
|
|
126 |
|
Cash dividend declared $0.24 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,722 |
) |
|
|
|
|
(7,722 |
) |
Stock option expense, net of forfeitures and taxes |
|
|
|
|
|
|
|
|
|
|
|
721 |
|
|
|
|
|
|
|
|
721 |
|
Stock options exercised |
|
|
|
|
|
|
|
|
47,432 |
|
|
269 |
|
|
|
|
|
|
|
|
269 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2015 |
|
|
21,004 |
|
$ |
19,519 |
|
|
32,076,505 |
|
$ |
193,070 |
|
$ |
37,366 |
|
$ |
(1,979 |
) |
$ |
247,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited consolidated financial statements
8
Table of Contents
HERITAGE COMMERCE CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30, |
|
|
|
2015 |
|
2014 |
|
|
|
(Dollars in thousands)
|
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
Net income |
|
$ |
12,074 |
|
$ |
9,825 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
Amortization of discounts and premiums on securities |
|
|
1,027 |
|
|
859 |
|
Gain on sales of securities available-for-sale |
|
|
|
|
|
(97 |
) |
Gain on sales of SBA loans |
|
|
(660 |
) |
|
(858 |
) |
Proceeds from SBA loans originated for sale |
|
|
8,695 |
|
|
14,439 |
|
Net change in SBA loans originated for sale |
|
|
(10,320 |
) |
|
(11,106 |
) |
Credit provision for loan losses |
|
|
(339 |
) |
|
(232 |
) |
Increase in cash surrender value of life insurance |
|
|
(1,225 |
) |
|
(1,196 |
) |
Depreciation and amortization |
|
|
527 |
|
|
539 |
|
Gain on sale of foreclosed assets, net |
|
|
(106 |
) |
|
|
|
Amortization of intangible assets |
|
|
655 |
|
|
345 |
|
Stock option expense, net |
|
|
721 |
|
|
641 |
|
Amortization of restricted stock awards, net |
|
|
126 |
|
|
(49 |
) |
Gain on proceeds of company owned life insurance |
|
|
|
|
|
(51 |
) |
Effect of changes in: |
|
|
|
|
|
|
|
Accrued interest receivable and other assets |
|
|
4,114 |
|
|
(3,730 |
) |
Accrued interest payable and other liabilities |
|
|
687 |
|
|
2,511 |
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
15,976 |
|
|
11,840 |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
Purchase of securities available-for-sale |
|
|
(19,953 |
) |
|
(34,775 |
) |
Purchase of securities held-to-maturity |
|
|
(9,138 |
) |
|
(2,347 |
) |
Maturities/paydowns/calls of securities available-for-sale |
|
|
21,705 |
|
|
19,696 |
|
Maturities/paydowns/calls of securities held-to-maturity |
|
|
2,308 |
|
|
2,345 |
|
Proceeds from sale of securities available-for-sale |
|
|
|
|
|
108,603 |
|
Net change in loans |
|
|
(69,160 |
) |
|
(115,043 |
) |
Change in Federal Home Loan Bank and Federal Reserve Bank stock |
|
|
(32 |
) |
|
(66 |
) |
Purchase of premises and equipment |
|
|
(589 |
) |
|
(676 |
) |
Proceeds from sale of foreclosed assets |
|
|
1,571 |
|
|
|
|
Proceeds from company owned life insurance |
|
|
|
|
|
406 |
|
Cash received in bank acquisition, net of cash paid |
|
|
165,786 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
92,498 |
|
|
(21,857 |
) |
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
Net change in deposits |
|
|
168,514 |
|
|
55,601 |
|
Payment of cash dividends |
|
|
(7,722 |
) |
|
(4,156 |
) |
Exercise of stock options |
|
|
269 |
|
|
42 |
|
Other short-term borrowing |
|
|
1,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
162,061 |
|
|
51,487 |
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
270,535 |
|
|
41,470 |
|
Cash and cash equivalents, beginning of period |
|
|
122,403 |
|
|
112,605 |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
392,938 |
|
$ |
154,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
Interest paid |
|
$ |
1,650 |
|
$ |
1,523 |
|
Income taxes paid |
|
|
6,500 |
|
|
3,250 |
|
Due to broker for securities purchased, settling after quarter-end |
|
|
344 |
|
|
|
|
Supplemental schedule of non-cash investing activity: |
|
|
|
|
|
|
|
Loans transferred to foreclosed assets |
|
$ |
1,236 |
|
$ |
31 |
|
Summary of assets acquired and liabilities assumed through acquistion: |
|
|
|
|
|
|
|
Cash and cash equivalents, net of cash paid |
|
$ |
165,786 |
|
$ |
|
|
Securities available-for-sale |
|
|
53,940 |
|
|
|
|
Securities held-to-maturity |
|
|
8,665 |
|
|
|
|
Loans held-for-saleSBA |
|
|
4,416 |
|
|
|
|
Net loans |
|
|
172,669 |
|
|
|
|
Goodwill and other intangible assets |
|
|
38,139 |
|
|
|
|
Corporate owned life insurance |
|
|
7,067 |
|
|
|
|
Other assets, net |
|
|
18,700 |
|
|
|
|
Deposits |
|
|
(405,123 |
) |
|
|
|
Other liabilities |
|
|
(5,981 |
) |
|
|
|
Common stock issued to acquire Focus Business Bank |
|
$ |
58,278 |
|
$ |
|
|
See notes to unaudited consolidated financial statements
9
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)
1) Basis of Presentation
The unaudited consolidated financial statements of Heritage Commerce Corp (the "Company" or "HCC") and its wholly owned subsidiary, Heritage Bank of Commerce ("HBC"), have been prepared
pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and notes required by accounting principles generally accepted in the United States of America
("GAAP") for annual financial statements are not included herein. The interim statements should be read in conjunction with the consolidated financial statements and notes that were included in the
Company's Form 10-K for the year ended December 31, 2014.
The
Company acquired BVF/CSNK Acquisition Corp., a Delaware corporation ("BVF/CSNK") on November 1, 2014, the parent company of CSNK Working Capital Finance Corp. dba Bay View
Funding ("Bay View Funding"). BVF/CSNK was subsequently merged into Bay View Funding and Bay View Funding became a wholly owned subsidiary of HBC. Bay View Funding's results of operations have been
included in the Company's results of operations beginning November 1, 2014.
As
discussed in Note 6, the Company completed its acquisition of Focus Business Bank ("Focus") on August 20, 2015. Focus was merged with HBC, with HBC as the surviving
bank. Focus's results of operations have been included in the Company's results of operations beginning August 21, 2015.
HBC
is a commercial bank serving customers located in Santa Clara, Alameda, Contra Costa, and San Benito counties of California. BVF provides business-essential working capital factoring
financing to various industries throughout the United States. No customer accounts for more than 10 percent of revenue for HBC or the Company. With the acquisition of Bay View Funding, the
Company now has two reportable segments consisting of Banking and Factoring. The Company's management uses segment in its operating and strategic planning.
In
management's opinion, all adjustments necessary for a fair presentation of these consolidated financial statements have been included and are of a normal and recurring nature. All
intercompany transactions and balances have been eliminated.
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results
could differ significantly from these estimates.
The
results for the three and nine months ended September 30, 2015 are not necessarily indicative of the results expected for any subsequent period or for the entire year ending
December 31, 2015.
Business Combinations
The Company accounts for acquisitions of businesses using the acquisition method of accounting. Under the acquisition method, assets
acquired and liabilities assumed are recorded at their estimated fair values at the date of acquisition. Management utilizes various valuation techniques including discounted cash flow analyses to
determine these fair values. Any excess of the purchase price over amounts allocated to the acquired assets, including identifiable intangible assets, and liabilities assumed is recorded as goodwill.
10
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2015
(Unaudited)
1) Basis of Presentation (Continued)
Goodwill and Other Intangible Assets
Goodwill resulted from the acquisition of Bay View Funding on November 1, 2014 and Focus on August 21, 2015. Goodwill
represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment
and any such impairment is recognized in the period identified.
Other
intangible assets consist of core deposit and customer relationship intangible assets arising from the Diablo Valley Bank acquisition in June 2007, a core deposit intangible asset
from the Focus acquisition in August 2015, and a below market value lease intangible asset, customer relationship and brokered relationship intangible assets, and a non compete agreement intangible
asset arising from the Bay View Funding acquisition in November 2014. They are initially measured at fair value and then are amortized over their estimated useful lives. The core deposits intangible
assets from the acquisitions of Diablo Valley Bank and Focus Business Bank are being amortized on an accelerated method over ten years. The customer relationship intangible from the acquisition of
Diablo Valley Bank was being amortized on an accelerated method over seven years, and was fully amortized at December 31, 2014. The below market value lease intangible asset, customer
relationship and brokered relationship intangible assets, and non compete agreement intangible asset from the acquisition of Bay View Funding are being amortized on the straight line method over
three, ten, and three years, respectively.
Reclassifications
Certain reclassifications of prior year balances have been made to conform to the current year presentation. These reclassifications
had no impact on the Company's consolidated financial position, results of operations or net change in cash and cash equivalents.
Adoption of New Accounting Standards
In January 2014, the Financial Accounting Standards Board ("FASB") amended existing guidance clarifying that an in substance
repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either
(1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate
property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual
disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by
residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this update are effective for public business
entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. For entities other than public business entities, the amendments in this update
are effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015. The Company has adopted the new guidance
and it does not have a material impact on the consolidated financial statements.
11
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2015
(Unaudited)
1) Basis of Presentation (Continued)
In
January 2014, the FASB issued guidance for accounting for investments in qualified affordable housing projects, which represents a consensus of the Emerging Issues Task Force and sets
forth new accounting for qualifying investments in flow through limited liability entities that invest in affordable housing projects. The new guidance allows a limited liability investor that meets
certain conditions to amortize the cost of its investment in proportion to the tax credits and other tax benefits it receives. The new accounting method, referred to as the proportional amortization
method, allows amortization of the tax credit investment to be reflected along with the primary benefits, the tax credits and other tax benefits, on a net basis in the income statement within the
income tax expense (benefit) line. For public business entities, the guidance is effective for interim and annual periods beginning after December 15, 2014. If elected, the proportional
amortization method is required to be applied retrospectively. Early adoption is permitted in the annual period for which financial statements have not been issued.
The
Company adopted the proportional amortization method of accounting for its low income housing investments in the third quarter of 2014. The Company quantified the impact of adopting
the proportional amortization method compared to the equity method to its current year and prior period financial statements. The Company determined that the adoption of the proportional amortization
method did not have a material impact to its financial statements. The low income housing investment losses, net of the tax benefits received, are included in income tax expense for all periods
reflected on the consolidated income statements. See Note 8Income Taxes for more information on the adoption of the proportional
method of accounting for low income housing investments.
In
May 2014, the FASB issued an update to the guidance for accounting for revenue from contracts with customers. The guidance in this update affects any entity that either enters into
contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example,
insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount
that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides steps to follow to achieve the core principle. An entity
should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.
Qualitative and quantitative information is required about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a
contract. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. We are evaluating the impact of
adopting the new guidance on the consolidated financial statements.
In
September 2015, the FASB issued an update simplifying the accounting for measurement-period adjustments. This update applies to all entities that have reported provisional amounts for
items in a business combination for which the accounting is incomplete by the end of the reporting period in
which the combination occurs and during the measurement period have an adjustment to provisional amounts recognized. The amendments in this update require that an acquirer recognize adjustments to
provisional amounts that are identified during the measurement period in the reporting period in which
12
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2015
(Unaudited)
1) Basis of Presentation (Continued)
the
adjustment amounts are determined. The amendments in this update require that the acquirer record, in the same period's financial statements, the effect on earnings of changes in depreciation,
amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this
update require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have
been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The amendments in this update are effective for fiscal years
beginning after December 15, 2015, including interim periods within those fiscal years. The amendments in this update should be applied prospectively to adjustments to provisional amounts that
occur after the effective date of this update with earlier application permitted for financial statements that have not been issued. We are currently evaluating the impact of adopting the new guidance
on the consolidated financial statements, but it is not expected to have a material impact.
2) Earnings Per Share
Basic earnings per common share is computed by dividing net income, less dividends and discount accretion on preferred stock, by the weighted average common shares outstanding. The
Series C Preferred Stock participates in the earnings of the Company and, therefore, the shares issued on the conversion of the Series C Preferred Stock are considered outstanding under
the two class method of computing basic earnings per common share during periods of earnings. Diluted earnings per share reflect potential dilution from outstanding stock options using the treasury
stock method. A
reconciliation of these factors used in computing basic and diluted earnings per common share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
September 30, |
|
For the Nine Months Ended
September 30, |
|
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
|
|
(Dollars in thousands, except per share amounts)
|
|
Net income available to common shareholders |
|
$ |
3,011 |
|
$ |
3,145 |
|
$ |
10,730 |
|
$ |
9,097 |
|
Less: undistributed earnings allocated to Series C Preferred Stock |
|
|
(111 |
) |
|
(320 |
) |
|
(706 |
) |
|
(993 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributed and undistributed earnings allocated to common shareholders |
|
$ |
2,900 |
|
$ |
2,825 |
|
$ |
10,024 |
|
$ |
8,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding for basic earnings per common share |
|
|
29,075,782 |
|
|
26,371,413 |
|
|
27,386,471 |
|
|
26,367,314 |
|
Dilutive effect of stock options oustanding, using the the treasury stock method |
|
|
256,670 |
|
|
145,450 |
|
|
202,993 |
|
|
134,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing diluted earnings per common share |
|
|
29,332,452 |
|
|
26,516,863 |
|
|
27,589,464 |
|
|
26,501,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.10 |
|
$ |
0.11 |
|
$ |
0.37 |
|
$ |
0.31 |
|
Diluted earnings per share |
|
$ |
0.10 |
|
$ |
0.11 |
|
$ |
0.36 |
|
$ |
0.31 |
|
13
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2015
(Unaudited)
3) Accumulated Other Comprehensive Income (Loss) ("AOCI")
The following table reflects the changes in AOCI by component for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, 2015 and 2014 |
|
|
|
Unrealized
Gains
(Losses) on
Available-
for-Sale
Securities
and I/O
Strips(1) |
|
Unamortized
Unrealized
Gain on
Available-
for-Sale
Securities
Reclassified
to Held-to-
Maturity(1) |
|
Defined
Benefit
Pension
Plan
Items(1) |
|
Total(1) |
|
|
|
(Dollars in thousands)
|
|
Beginning balance July 1, 2015, net of taxes |
|
$ |
2,206 |
|
$ |
419 |
|
$ |
(5,896 |
) |
$ |
(3,271 |
) |
Other comprehensive income (loss) before reclassification, net of taxes |
|
|
1,273 |
|
|
|
|
|
(12 |
) |
|
1,261 |
|
Amounts reclassified from other comprehensive income (loss), net of taxes |
|
|
|
|
|
(8 |
) |
|
39 |
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current period other comprensive income (loss), net of taxes |
|
|
1,273 |
|
|
(8 |
) |
|
27 |
|
|
1,292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance September 30, 2015, net of taxes |
|
$ |
3,479 |
|
$ |
411 |
|
$ |
(5,869 |
) |
$ |
(1,979 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance July 1, 2014, net of taxes |
|
$ |
3,533 |
|
$ |
450 |
|
$ |
(4,075 |
) |
$ |
(92 |
) |
Other comprehensive income (loss) before reclassification, net of taxes |
|
|
(679 |
) |
|
|
|
|
(12 |
) |
|
(691 |
) |
Amounts reclassified from other comprehensive income (loss), net of taxes |
|
|
(27 |
) |
|
(8 |
) |
|
6 |
|
|
(29 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current period other comprensive income (loss), net of taxes |
|
|
(706 |
) |
|
(8 |
) |
|
(6 |
) |
|
(720 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance September 30, 2014, net of taxes |
|
$ |
2,827 |
|
$ |
442 |
|
$ |
(4,081 |
) |
$ |
(812 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- (1)
- Amounts
in parenthesis indicate debits.
14
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2015
(Unaudited)
3) Accumulated Other Comprehensive Income (Loss) ("AOCI") (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2015 and 2014 |
|
|
|
Unrealized
Gains
(Losses) on
Available-
for-Sale
Securities
and I/O
Strips(1) |
|
Unamortized
Unrealized
Gain on
Available-
for-Sale
Securities
Reclassified
to Held-to-
Maturity(1) |
|
Defined
Benefit
Pension
Plan
Items(1) |
|
Total(1) |
|
|
|
(Dollars in thousands)
|
|
Beginning balance January 1, 2015, net of taxes |
|
$ |
3,666 |
|
$ |
435 |
|
$ |
(5,952 |
) |
$ |
(1,851 |
) |
Other comprehensive income (loss) before reclassification, net of taxes |
|
|
(187 |
) |
|
|
|
|
(36 |
) |
|
(223 |
) |
Amounts reclassified from other comprehensive income (loss), net of taxes |
|
|
|
|
|
(24 |
) |
|
119 |
|
|
95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current period other comprensive income (loss), net of
taxes |
|
|
(187 |
) |
|
(24 |
) |
|
83 |
|
|
(128 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance September 30, 2015, net of taxes |
|
$ |
3,479 |
|
$ |
411 |
|
$ |
(5,869 |
) |
$ |
(1,979 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance January 1, 2014, net of taxes |
|
$ |
(430 |
) |
$ |
466 |
|
$ |
(4,065 |
) |
|
(4,029 |
) |
Other comprehensive (loss) before reclassification, net of taxes |
|
|
3,313 |
|
|
|
|
|
(32 |
) |
|
3,281 |
|
Amounts reclassified from other comprehensive income (loss), net of taxes |
|
|
(56 |
) |
|
(24 |
) |
|
16 |
|
|
(64 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current period other comprensive income (loss), net of
taxes |
|
|
3,257 |
|
|
(24 |
) |
|
(16 |
) |
|
3,217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance September 30, 2014, net of taxes |
|
$ |
2,827 |
|
$ |
442 |
|
$ |
(4,081 |
) |
$ |
(812 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- (1)
- Amounts
in parenthesis indicate debits.
15
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2015
(Unaudited)
3) Accumulated Other Comprehensive Income (Loss) ("AOCI") (Continued)
|
|
|
|
|
|
|
|
|
|
|
Amounts
Reclassified
from AOCI(1)
For the Three
Months Ended
September 30, |
|
|
|
|
Affected Line Item Where
Net Income is Presented |
Details About AOCI Components
|
|
2015 |
|
2014 |
|
|
(Dollars in thousands)
|
|
|
Unrealized gains on available-for-sale securities and I/O strips |
|
$ |
|
|
$ |
47 |
|
Realized gains on sale of securities |
|
|
|
|
|
|
(20 |
) |
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27 |
|
Net of tax |
|
|
|
|
|
|
|
|
|
Amortization of unrealized gain on securities available-for-sale that were reclassified to securities held-to-maturity |
|
|
13 |
|
|
14 |
|
Interest income on taxable securities |
|
|
|
(5 |
) |
|
(6 |
) |
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
8 |
|
Net of tax |
|
|
|
|
|
|
|
|
|
Amortization of defined benefit pension plan items |
|
|
|
|
|
|
|
|
Prior transition obligation |
|
|
28 |
|
|
25 |
|
|
Actuarial losses |
|
|
(96 |
) |
|
(35 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(68 |
) |
|
(10 |
) |
Salaries and employee benefits |
|
|
|
29 |
|
|
4 |
|
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
(39 |
) |
|
(6 |
) |
Net of tax |
|
|
|
|
|
|
|
|
|
Total reclassification for the period |
|
$ |
(31 |
) |
$ |
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- (1)
- Amounts
in parenthesis indicate debits.
16
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2015
(Unaudited)
3) Accumulated Other Comprehensive Income (Loss) ("AOCI") (Continued)
|
|
|
|
|
|
|
|
|
|
|
Amounts
Reclassified
from AOCI(1)
For the Nine
Months Ended
September 30, |
|
|
|
|
Affected Line Item Where
Net Income is Presented |
Details About AOCI Components
|
|
2015 |
|
2014 |
|
|
(Dollars in thousands)
|
|
|
Unrealized gains on available-for-sale securities and I/O strips |
|
$ |
|
|
$ |
97 |
|
Realized gains on sale of securities |
|
|
|
|
|
|
(41 |
) |
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56 |
|
Net of tax |
|
|
|
|
|
|
|
|
|
Amortization of unrealized gain on securities available-for-sale that were reclassified to securities held-to-maturity |
|
|
41 |
|
|
41 |
|
Interest income on taxable securities |
|
|
|
(17 |
) |
|
(17 |
) |
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
24 |
|
|
24 |
|
Net of tax |
|
|
|
|
|
|
|
|
|
Amortization of defined benefit pension plan items |
|
|
|
|
|
|
|
|
Prior transition obligation |
|
|
84 |
|
|
77 |
|
|
Actuarial losses |
|
|
(288 |
) |
|
(105 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(204 |
) |
|
(28 |
) |
Salaries and employee benefits |
|
|
|
85 |
|
|
12 |
|
Income tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
(119 |
) |
|
(16 |
) |
Net of tax |
|
|
|
|
|
|
|
|
|
Total reclassification for the period |
|
$ |
(95 |
) |
$ |
64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- (1)
- Amounts
in parenthesis indicate debits.
17
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2015
(Unaudited)
4) Securities
The amortized cost and estimated fair value of securities at September 30, 2015 and December 31, 2014 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2015
|
|
Amortized
Cost |
|
Gross
Unrealized
Gains |
|
Gross
Unrealized
Losses |
|
Estimated
Fair
Value |
|
|
|
(Dollars in thousands)
|
|
Securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
|
$ |
166,943 |
|
$ |
3,673 |
|
$ |
(217 |
) |
$ |
170,399 |
|
Corporate bonds |
|
|
35,817 |
|
|
833 |
|
|
(42 |
) |
|
36,608 |
|
Trust preferred securities |
|
|
15,000 |
|
|
|
|
|
|
|
|
15,000 |
|
Collateralized mortgage obligations |
|
|
11,700 |
|
|
92 |
|
|
(1 |
) |
|
11,791 |
|
U.S. Government sponsored entities |
|
|
11,039 |
|
|
86 |
|
|
|
|
|
11,125 |
|
Municipalstax exempt |
|
|
5,683 |
|
|
82 |
|
|
|
|
|
5,765 |
|
U.S. Treasury |
|
|
4,036 |
|
|
3 |
|
|
|
|
|
4,039 |
|
Municipalstaxable |
|
|
2,645 |
|
|
38 |
|
|
|
|
|
2,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
252,863 |
|
$ |
4,807 |
|
$ |
(260 |
) |
$ |
257,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held-to-maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipalstax exempt |
|
$ |
94,704 |
|
$ |
1,109 |
|
$ |
(1,988 |
) |
$ |
93,825 |
|
Agency mortgage-backed securities |
|
|
16,300 |
|
|
26 |
|
|
(116 |
) |
|
16,210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
111,004 |
|
$ |
1,135 |
|
$ |
(2,104 |
) |
$ |
110,035 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2014
|
|
Amortized
Cost |
|
Gross
Unrealized
Gains |
|
Gross
Unrealized
Losses |
|
Estimated
Fair
Value |
|
|
|
(Dollars in thousands)
|
|
Securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
|
$ |
150,570 |
|
$ |
3,867 |
|
$ |
(265 |
) |
$ |
154,172 |
|
Corporate bonds |
|
|
35,927 |
|
|
959 |
|
|
(23 |
) |
|
36,863 |
|
Trust preferred securities |
|
|
15,000 |
|
|
300 |
|
|
|
|
|
15,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
201,497 |
|
$ |
5,126 |
|
$ |
(288 |
) |
$ |
206,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held-to-maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipalstax exempt |
|
$ |
79,882 |
|
$ |
1,011 |
|
$ |
(1,346 |
) |
$ |
79,547 |
|
Agency mortgage-backed securities |
|
|
15,480 |
|
|
44 |
|
|
(118 |
) |
|
15,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
95,362 |
|
$ |
1,055 |
|
$ |
(1,464 |
) |
$ |
94,953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2015
(Unaudited)
4) Securities (Continued)
Securities
with unrealized losses at September 30, 2015 and December 31, 2014, aggregated by investment category and length of time that individual securities have been in
a continuous unrealized loss position are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months |
|
12 Months or More |
|
Total |
|
September 30, 2015
|
|
Fair
Value |
|
Unrealized
Losses |
|
Fair
Value |
|
Unrealized
Losses |
|
Fair
Value |
|
Unrealized
Losses |
|
|
|
(Dollars in thousands)
|
|
Securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
|
$ |
42,937 |
|
$ |
(194 |
) |
$ |
2,274 |
|
$ |
(23 |
) |
$ |
45,211 |
|
$ |
(217 |
) |
Corporate bonds |
|
|
5,111 |
|
|
(42 |
) |
$ |
|
|
$ |
|
|
|
5,111 |
|
|
(42 |
) |
Collateralized mortgage obligations |
|
|
249 |
|
|
(1 |
) |
$ |
|
|
$ |
|
|
|
249 |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
48,297 |
|
$ |
(237 |
) |
$ |
2,274 |
|
$ |
(23 |
) |
$ |
50,571 |
|
$ |
(260 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held-to-maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipalstax exempt |
|
$ |
28,243 |
|
$ |
(577 |
) |
$ |
23,283 |
|
$ |
(1,411 |
) |
$ |
51,526 |
|
$ |
(1,988 |
) |
Agency mortgage-backed securities |
|
|
5,704 |
|
|
(40 |
) |
$ |
4,475 |
|
$ |
(76 |
) |
|
10,179 |
|
|
(116 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
33,947 |
|
$ |
(617 |
) |
$ |
27,758 |
|
$ |
(1,487 |
) |
$ |
61,705 |
|
$ |
(2,104 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months |
|
12 Months or More |
|
Total |
|
December 31, 2014
|
|
Fair
Value |
|
Unrealized
(Losses) |
|
Fair
Value |
|
Unrealized
(Losses) |
|
Fair
Value |
|
Unrealized
(Losses) |
|
|
|
(Dollars in thousands)
|
|
Securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
|
$ |
12,491 |
|
$ |
(27 |
) |
$ |
35,614 |
|
$ |
(238 |
) |
$ |
48,105 |
|
$ |
(265 |
) |
Corporate bonds |
|
|
|
|
|
|
|
|
5,148 |
|
|
(23 |
) |
|
5,148 |
|
|
(23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
12,491 |
|
$ |
(27 |
) |
$ |
40,762 |
|
$ |
(261 |
) |
$ |
53,253 |
|
$ |
(288 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held-to-maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
|
$ |
4,869 |
|
$ |
(29 |
) |
$ |
4,974 |
|
$ |
(89 |
) |
$ |
9,843 |
|
$ |
(118 |
) |
MunicipalsTax Exempt |
|
|
1,884 |
|
|
(16 |
) |
|
42,867 |
|
|
(1,330 |
) |
|
44,751 |
|
|
(1,346 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,753 |
|
$ |
(45 |
) |
$ |
47,841 |
|
$ |
(1,419 |
) |
$ |
54,594 |
|
$ |
(1,464 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There
were no holdings of securities of any one issuer, other than the U.S. Government and its sponsored entities, in an amount greater than 10% of shareholders' equity. At
September 30, 2015, the Company held 476 securities (206 available-for-sale and 270 held-to-maturity), of which 179 had fair values below amortized cost. At September 30, 2015, there
were $2,274,000 of agency mortgage-backed securities available-for-sale, $4,475,000 of agency mortgage-backed securities held-to-maturity, and $23,283,000 of municipals bonds held-to-maturity carried
with an unrealized loss for over 12 months. The total unrealized loss for securities over 12 months was $1,510,000 at September 30, 2015. The unrealized losses were due to higher
interest rates. The issuers are of high credit quality and all principal amounts are expected to be paid when securities mature. The fair value is expected to recover as the securities approach their
maturity date and/or market rates decline. The Company does not
19
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2015
(Unaudited)
4) Securities (Continued)
believe
that it is more likely than not that the Company will be required to sell a security in an unrealized loss position prior to recovery in value. The Company does not consider these securities
to be other than temporarily impaired at September 30, 2015.
At
December 31, 2014, the Company held 361 securities (130 available- for-sale and 231 held-to-maturity), of which 151 had fair values below amortized cost. At December 31,
2014, there were $35,614,000 of agency mortgage backed securities available-for-sale, $5,148,000 of corporate bonds available for sale, $4,974,000 of agency mortgage backed securities held-to-
maturity and $42,867,000 of municipals bonds held to maturity carried with an unrealized loss for over 12 months. The total
unrealized loss for securities over 12 months was $1,680,000 at December 31, 2014. The unrealized losses were due to higher interest rates. The issuers are of high credit quality and all
principal amounts are expected to be paid when securities mature. The fair value is expected to recover as the securities approach their maturity date and/or market rates decline. The Company does not
believe that it is more likely than not that the Company will be required to sell a security in an unrealized loss position prior to recovery in value. The Company does not consider these securities
to be other than temporarily impaired at December 31, 2014.
The
proceeds from sales of securities and the resulting gains and losses were as follows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months
Ended
September 30, |
|
Nine
Months
Ended
September 30, |
|
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
|
|
(Dollars in thousands)
|
|
Proceeds |
|
$ |
|
|
$ |
58,592 |
|
$ |
|
|
$ |
108,603 |
|
Gross gains |
|
|
|
|
|
288 |
|
|
|
|
|
1,008 |
|
Gross losses |
|
|
|
|
|
(241 |
) |
|
|
|
|
(911 |
) |
The
amortized cost and estimated fair values of securities as of September 30, 2015, are shown by contractual maturity below. The expected maturities will differ from contractual
maturities if borrowers have the right to call or pre-pay obligations with or without call or pre-payment penalties. Securities not due at a single maturity date are shown separately.
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
|
Amortized Cost |
|
Estimated Fair Value |
|
|
|
(Dollars in thousands)
|
|
Due after 3 months through one year |
|
$ |
4,919 |
|
$ |
4,932 |
|
Due after one through five years |
|
|
19,794 |
|
|
20,200 |
|
Due after five through ten years |
|
|
38,979 |
|
|
39,594 |
|
Due after ten years |
|
|
22,228 |
|
|
22,285 |
|
Agency mortgage-backed securities |
|
|
166,943 |
|
|
170,399 |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
252,863 |
|
$ |
257,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2015
(Unaudited)
4) Securities (Continued)
|
|
|
|
|
|
|
|
|
|
Held-to-maturity |
|
|
|
Amortized Cost |
|
Estimated Fair Value |
|
|
|
(Dollars in thousands)
|
|
Due after 3 months or less |
|
$ |
1,090 |
|
$ |
1,146 |
|
Due after 3 months through one year |
|
|
2,066 |
|
|
2,089 |
|
Due after one through five years |
|
|
4,810 |
|
|
4,876 |
|
Due after five through ten years |
|
|
13,415 |
|
|
13,911 |
|
Due after ten years |
|
|
73,323 |
|
|
71,803 |
|
Agency mortgage-backed securities |
|
|
16,300 |
|
|
16,210 |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
111,004 |
|
$ |
110,035 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5) Loans
Loans were as follows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
September 30,
2015 |
|
December 31,
2014 |
|
|
|
(Dollars in thousands)
|
|
Loans held-for-investment: |
|
|
|
|
|
|
|
Commercial |
|
$ |
554,169 |
|
$ |
462,403 |
|
Real estate: |
|
|
|
|
|
|
|
Commercial and residential |
|
|
606,819 |
|
|
478,335 |
|
Land and construction |
|
|
84,867 |
|
|
67,980 |
|
Home equity |
|
|
74,624 |
|
|
61,644 |
|
Consumer |
|
|
12,595 |
|
|
18,867 |
|
|
|
|
|
|
|
|
|
Loans |
|
|
1,333,074 |
|
|
1,089,229 |
|
Deferred loan origination fees, net |
|
|
(669 |
) |
|
(586 |
) |
|
|
|
|
|
|
|
|
Loans, net of deferred fees |
|
|
1,332,405 |
|
|
1,088,643 |
|
Allowance for loan losses |
|
|
(18,737 |
) |
|
(18,379 |
) |
|
|
|
|
|
|
|
|
Loans, net |
|
$ |
1,313,668 |
|
$ |
1,070,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2015
(Unaudited)
5) Loans (Continued)
Changes
in the allowance for loan losses were as follows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2015 |
|
|
|
Commercial |
|
Real Estate |
|
Consumer |
|
Total |
|
|
|
(Dollars in thousands)
|
|
Balance, beginning of period |
|
$ |
11,193 |
|
$ |
7,450 |
|
$ |
114 |
|
$ |
18,757 |
|
Charge-offs |
|
|
(8 |
) |
|
|
|
|
(9 |
) |
|
(17 |
) |
Recoveries |
|
|
284 |
|
|
14 |
|
|
|
|
|
298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net recoveries |
|
|
276 |
|
|
14 |
|
|
(9 |
) |
|
281 |
|
Provision (credit) for loan losses |
|
|
(941 |
) |
|
672 |
|
|
(32 |
) |
|
(301 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
10,528 |
|
$ |
8,136 |
|
$ |
73 |
|
$ |
18,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2014 |
|
|
|
Commercial |
|
Real Estate |
|
Consumer |
|
Total |
|
|
|
(Dollars in thousands)
|
|
Balance, beginning of period |
|
$ |
11,454 |
|
$ |
7,069 |
|
$ |
69 |
|
$ |
18,592 |
|
Charge-offs |
|
|
(132 |
) |
|
|
|
|
(25 |
) |
|
(157 |
) |
Recoveries |
|
|
123 |
|
|
7 |
|
|
|
|
|
130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (charge-offs) recoveries |
|
|
(9 |
) |
|
7 |
|
|
(25 |
) |
|
(27 |
) |
Provision (credit) for loan losses |
|
|
163 |
|
|
(205 |
) |
|
18 |
|
|
(24 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
11,608 |
|
$ |
6,871 |
|
$ |
62 |
|
$ |
18,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2015 |
|
|
|
Commercial |
|
Real Estate |
|
Consumer |
|
Total |
|
|
|
(Dollars in thousands)
|
|
Balance, beginning of period |
|
$ |
11,187 |
|
$ |
7,070 |
|
$ |
122 |
|
$ |
18,379 |
|
Charge-offs |
|
|
(229 |
) |
|
(2 |
) |
|
(9 |
) |
|
(240 |
) |
Recoveries |
|
|
766 |
|
|
141 |
|
|
30 |
|
|
937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net recoveries |
|
|
537 |
|
|
139 |
|
|
21 |
|
|
697 |
|
Provision (credit) for loan losses |
|
|
(1,196 |
) |
|
927 |
|
|
(70 |
) |
|
(339 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
10,528 |
|
$ |
8,136 |
|
$ |
73 |
|
$ |
18,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2015
(Unaudited)
5) Loans (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2014 |
|
|
|
Commercial |
|
Real Estate |
|
Consumer |
|
Total |
|
|
|
(Dollars in thousands)
|
|
Balance, beginning of period |
|
$ |
12,533 |
|
$ |
6,548 |
|
$ |
83 |
|
$ |
19,164 |
|
Charge-offs |
|
|
(726 |
) |
|
|
|
|
(25 |
) |
|
(751 |
) |
Recoveries |
|
|
309 |
|
|
51 |
|
|
|
|
|
360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (charge-offs) recoveries |
|
|
(417 |
) |
|
51 |
|
|
(25 |
) |
|
(391 |
) |
Provision (credit) for loan losses |
|
|
(508 |
) |
|
272 |
|
|
4 |
|
|
(232 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
11,608 |
|
$ |
6,871 |
|
$ |
62 |
|
$ |
18,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment, based on the impairment method at the following
period-ends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2015 |
|
|
|
Commercial |
|
Real Estate |
|
Consumer |
|
Total |
|
|
|
(Dollars in thousands)
|
|
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable to loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment |
|
$ |
133 |
|
$ |
|
|
$ |
|
|
$ |
133 |
|
Collectively evaluated for impairment |
|
|
10,395 |
|
|
8,136 |
|
|
73 |
|
|
18,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance balance |
|
$ |
10,528 |
|
$ |
8,136 |
|
$ |
73 |
|
$ |
18,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment |
|
$ |
1,804 |
|
$ |
3,878 |
|
$ |
4 |
|
$ |
5,686 |
|
Collectively evaluated for impairment |
|
|
552,365 |
|
|
762,432 |
|
|
12,591 |
|
|
1,327,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loan balance |
|
$ |
554,169 |
|
$ |
766,310 |
|
$ |
12,595 |
|
$ |
1,333,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2014 |
|
|
|
Commercial |
|
Real Estate |
|
Consumer |
|
Total |
|
|
|
(Dollars in thousands)
|
|
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable to loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment |
|
$ |
404 |
|
$ |
|
|
$ |
|
|
$ |
404 |
|
Collectively evaluated for impairment |
|
|
10,783 |
|
|
7,070 |
|
|
122 |
|
|
17,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance balance |
|
$ |
11,187 |
|
$ |
7,070 |
|
$ |
122 |
|
$ |
18,379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment |
|
$ |
2,701 |
|
$ |
3,315 |
|
$ |
6 |
|
$ |
6,022 |
|
Collectively evaluated for impairment |
|
|
459,702 |
|
|
604,644 |
|
|
18,861 |
|
|
1,083,207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loan balance |
|
$ |
462,403 |
|
$ |
607,959 |
|
$ |
18,867 |
|
$ |
1,089,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2015
(Unaudited)
5) Loans (Continued)
The
following table presents loans held-for-investment individually evaluated for impairment by class of loans as of September 30, 2015 and December 31, 2014. The recorded
investment included in the following table represents loan principal net of any partial charge-offs recognized on the loans. The unpaid principal balance represents the recorded balance prior to any
partial charge-offs. The recorded investment in consumer loans collateralized by residential real estate property that are in process of foreclosure according to local requirements of the applicable
jurisdiction are not material as of September 30, 2015 and December 31, 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2015 |
|
December 31, 2014 |
|
|
|
Unpaid
Principal
Balance |
|
Recorded
Investment |
|
Allowance
for Loan
Losses
Allocated |
|
Unpaid
Principal
Balance |
|
Recorded
Investment |
|
Allowance
for Loan
Losses
Allocated |
|
|
|
(Dollars in thousands)
|
|
With no related allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
947 |
|
$ |
947 |
|
$ |
|
|
$ |
2,282 |
|
$ |
1,872 |
|
$ |
|
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and residential |
|
|
3,933 |
|
|
3,074 |
|
|
|
|
|
2,510 |
|
|
1,651 |
|
|
|
|
Land and construction |
|
|
529 |
|
|
492 |
|
|
|
|
|
1,808 |
|
|
1,319 |
|
|
|
|
Home Equity |
|
|
312 |
|
|
312 |
|
|
|
|
|
345 |
|
|
345 |
|
|
|
|
Consumer |
|
|
4 |
|
|
4 |
|
|
|
|
|
6 |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total with no related allowance recorded |
|
|
5,725 |
|
|
4,829 |
|
|
|
|
|
6,951 |
|
|
5,193 |
|
|
|
|
With an allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
857 |
|
|
857 |
|
$ |
133 |
|
|
829 |
|
|
829 |
|
|
404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total with an allowance recorded |
|
|
857 |
|
|
857 |
|
|
133 |
|
|
829 |
|
|
829 |
|
|
404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,582 |
|
$ |
5,686 |
|
$ |
133 |
|
$ |
7,780 |
|
$ |
6,022 |
|
$ |
404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following tables present interest recognized and cash-basis interest earned on impaired loans for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2015 |
|
|
|
|
|
Real Estate |
|
|
|
|
|
|
|
Commercial |
|
Commercial
and Residential |
|
Land and
Construction |
|
Home
Equity |
|
Consumer |
|
Total |
|
|
|
(Dollars in thousands)
|
|
Average of impaired loans during the period |
|
$ |
1,403 |
|
$ |
3,117 |
|
$ |
496 |
|
$ |
317 |
|
$ |
5 |
|
$ |
5,338 |
|
Interest income during impairment |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Cash-basis interest earned |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
24
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2015
(Unaudited)
5) Loans (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2014 |
|
|
|
|
|
Real Estate |
|
|
|
|
|
|
|
Commercial |
|
Commercial
and Residential |
|
Land and
Construction |
|
Home
Equity |
|
Consumer |
|
Total |
|
|
|
(Dollars in thousands)
|
|
Average of impaired loans during the period |
|
$ |
3,790 |
|
$ |
2,273 |
|
$ |
1,672 |
|
$ |
513 |
|
$ |
19 |
|
$ |
8,267 |
|
Interest income during impairment |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Cash-basis interest earned |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2015 |
|
|
|
|
|
Real Estate |
|
|
|
|
|
|
|
Commercial |
|
Commercial
and Residential |
|
Land and
Construction |
|
Home
Equity |
|
Consumer |
|
Total |
|
|
|
(Dollars in thousands)
|
|
Average of impaired loans during the period |
|
$ |
1,605 |
|
$ |
3,031 |
|
$ |
819 |
|
$ |
327 |
|
$ |
5 |
|
$ |
5,787 |
|
Interest income during impairment |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Cash-basis interest earned |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2014 |
|
|
|
|
|
Real Estate |
|
|
|
|
|
|
|
Commercial |
|
Commercial
and Residential |
|
Land and
Construction |
|
Home
Equity |
|
Consumer |
|
Total |
|
|
|
(Dollars in thousands)
|
|
Average of impaired loans during the period |
|
$ |
4,411 |
|
$ |
3,034 |
|
$ |
1,705 |
|
$ |
575 |
|
$ |
69 |
|
$ |
9,794 |
|
Interest income during impairment |
|
$ |
56 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
56 |
|
Cash-basis interest earned |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Nonperforming
loans include both smaller dollar balance homogenous loans that are collectively evaluated for impairment and individually classified loans. Nonperforming loans were as
follows at period-end:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
December 31,
2014 |
|
|
|
2015 |
|
2014 |
|
|
|
(Dollars in thousands)
|
|
Nonaccrual loansheld-for-investment |
|
$ |
5,503 |
|
$ |
7,010 |
|
$ |
5,855 |
|
Restructured and loans over 90 days past due and still accruing |
|
|
|
|
|
200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans |
|
$ |
5,503 |
|
$ |
7,210 |
|
$ |
5,855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other restructured loans |
|
$ |
183 |
|
$ |
|
|
$ |
167 |
|
Impaired loans, excluding loans held-for-sale |
|
$ |
5,686 |
|
$ |
7,210 |
|
$ |
6,022 |
|
25
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2015
(Unaudited)
5) Loans (Continued)
The
following table presents the nonperforming loans by class for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2015 |
|
December 31, 2014 |
|
|
|
Nonaccrual |
|
Restructured and
Loans Over 90 Days
Past Due and
Still Accruing |
|
Total |
|
Nonaccrual |
|
Restructured and
Loans Over 90 Days
Past Due and
Still Accruing |
|
Total |
|
|
|
(Dollars in thousands)
|
|
Commercial |
|
$ |
1,620 |
|
$ |
|
|
$ |
1,620 |
|
$ |
2,534 |
|
|
|
|
$ |
2,534 |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and residential |
|
|
3,075 |
|
|
|
|
|
3,075 |
|
|
1,651 |
|
|
|
|
|
1,651 |
|
Land and construction |
|
|
492 |
|
|
|
|
|
492 |
|
|
1,320 |
|
|
|
|
|
1,320 |
|
Home equity |
|
|
312 |
|
|
|
|
|
312 |
|
|
344 |
|
|
|
|
|
344 |
|
Consumer |
|
|
4 |
|
|
|
|
|
4 |
|
|
6 |
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,503 |
|
$ |
|
|
$ |
5,503 |
|
$ |
5,855 |
|
$ |
|
|
$ |
5,855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following tables present the aging of past due loans by class for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2015 |
|
|
|
30 - 59
Days
Past Due |
|
60 - 89
Days
Past Due |
|
90 Days or
Greater
Past Due |
|
Total
Past Due |
|
Loans Not
Past Due |
|
Total |
|
|
|
(Dollars in thousands)
|
|
Commercial |
|
$ |
4,201 |
|
$ |
466 |
|
$ |
373 |
|
$ |
5,040 |
|
$ |
549,129 |
|
$ |
554,169 |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and residential |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
606,819 |
|
|
606,819 |
|
Land and construction |
|
|
|
|
|
|
|
|
2,551 |
|
|
2,551 |
|
|
82,316 |
|
|
84,867 |
|
Home equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,624 |
|
|
74,624 |
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,595 |
|
|
12,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,201 |
|
$ |
466 |
|
$ |
2,924 |
|
$ |
7,591 |
|
$ |
1,325,483 |
|
$ |
1,333,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2014 |
|
|
|
30 - 59
Days
Past Due |
|
60 - 89
Days
Past Due |
|
90 Days or
Greater
Past Due |
|
Total
Past Due |
|
Loans Not
Past Due |
|
Total |
|
|
|
(Dollars in thousands)
|
|
Commercial |
|
$ |
3,002 |
|
$ |
195 |
|
$ |
1,978 |
|
$ |
5,175 |
|
$ |
457,228 |
|
$ |
462,403 |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and residential |
|
|
|
|
|
|
|
|
1,065 |
|
|
1,065 |
|
|
477,270 |
|
|
478,335 |
|
Land and construction |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67,980 |
|
|
67,980 |
|
Home equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,644 |
|
|
61,644 |
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,867 |
|
|
18,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,002 |
|
$ |
195 |
|
$ |
3,043 |
|
$ |
6,240 |
|
$ |
1,082,989 |
|
$ |
1,089,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2015
(Unaudited)
5) Loans (Continued)
Past
due loans 30 days or greater totaled $7,591,000 and $6,240,000 at September 30, 2015 and December 31, 2014, respectively, of which $3,774,000 and $3,130,000
were on nonaccrual. At September 30, 2015, there were also $1,729,000 loans less than 30 days past due included in nonaccrual loans held for investment. At December 31, 2014,
there were also $2,725,000 loans less than 30 days past due included in nonaccrual loans held for investment. Management's classification of a loan as "nonaccrual" is an indication that there
is reasonable doubt as to the full recovery of principal or interest on the loan. At that point, the Company stops accruing interest income, and reverses any uncollected interest that had been accrued
as income. The Company begins recognizing interest income only as cash interest payments are received and it has been determined the collection of all outstanding principal is not in doubt. The loans
may or may not be collateralized, and collection efforts are pursued.
Credit Quality Indicators
Concentrations of credit risk arise when a number of customers are engaged in similar business activities, or activities in the same
geographic region, or have similar features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. The Company's loan portfolio is
concentrated in commercial (primarily manufacturing, wholesale, and service) and real estate lending, with the balance in consumer loans. While no specific industry concentration is considered
significant, the Company's lending operations are located in the Company's market areas that are dependent on the technology and real estate industries and their supporting companies. Thus, the
Company's borrowers could be adversely impacted by a downturn in these sectors of the economy which could reduce the demand for loans and adversely impact the borrowers' ability to repay their loans.
The
Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical
payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This
analysis is performed on a quarterly basis. Nonclassified loans generally include those loans that are expected to be repaid in accordance with contractual loans terms. Classified loans are those
loans that are assigned a substandard, substandard-nonaccrual, or doubtful risk rating using the following definitions:
Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or
of the
collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the
institution will sustain some loss if the deficiencies are not corrected.
27
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2015
(Unaudited)
5) Loans (Continued)
Substandard-Nonaccrual. Loans classified as substandard-nonaccrual are inadequately protected by the current net worth and paying
capacity of the
obligor or of the collateral pledged, if any, and it is probable that the Company will not receive payment of the full contractual principal and interest. Loans so classified have a well-defined
weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not
corrected. In addition, the Company no longer accrues interest on the loan because of the underlying weaknesses.
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added
characteristic that the
weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loss. Loans classified as loss are considered uncollectable or of so little value that their continuance as assets is not warranted.
This
classification does not necessarily mean that a loan has no recovery or salvage value; but rather, there is much doubt about whether, how much, or when the recovery would occur. Loans classified as
loss are immediately charged off against the allowance for loan losses. Therefore, there is no balance to report at September 30, 2015 and December 31, 2014.
The
following table provides a summary of the loan portfolio by loan type and credit quality classification at period end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2015 |
|
December 31, 2014 |
|
|
|
Nonclassified |
|
Classified* |
|
Total |
|
Nonclassified |
|
Classified* |
|
Total |
|
|
|
(Dollars in thousands)
|
|
Commercial |
|
$ |
543,879 |
|
$ |
10,290 |
|
$ |
554,169 |
|
$ |
455,767 |
|
$ |
6,636 |
|
$ |
462,403 |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and residential |
|
|
601,671 |
|
|
5,148 |
|
|
606,819 |
|
|
472,061 |
|
|
6,274 |
|
|
478,335 |
|
Land and construction |
|
|
84,375 |
|
|
492 |
|
|
84,867 |
|
|
66,660 |
|
|
1,320 |
|
|
67,980 |
|
Home equity |
|
|
73,286 |
|
|
1,338 |
|
|
74,624 |
|
|
60,736 |
|
|
908 |
|
|
61,644 |
|
Consumer |
|
|
12,279 |
|
|
316 |
|
|
12,595 |
|
|
18,518 |
|
|
349 |
|
|
18,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,315,490 |
|
$ |
17,584 |
|
$ |
1,333,074 |
|
$ |
1,073,742 |
|
$ |
15,487 |
|
$ |
1,089,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- *
- Classified
loans in the table above include Small Business Administration ("SBA") guarantees.
In
order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its
debt in the foreseeable future without the modification. This evaluation is performed in accordance with the Company's underwriting policy.
The
book balance of troubled debt restructurings at September 30, 2015 was $187,000, which included $4,000 of nonaccrual loans and $183,000 of accruing loans. The book balance of
troubled debt restructurings at December 31, 2014 was $1,083,000, which included $916,000 of nonaccrual loans and
28
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2015
(Unaudited)
5) Loans (Continued)
$167,000
of accruing loans. Approximately $5,000 and $113,000 in specific reserves were established with respect to these loans as of September 30, 2015 and December 31, 2014,
respectively. As of September 30, 2015 and December 31, 2014, the Company had no additional amounts committed on any loan classified as a troubled debt restructuring.
There
were no new loans modified as troubled debt restructurings during the three and nine month periods ended September 30, 2015 and 2014.
A
loan is considered to be in payment default when it is 30 days contractually past due under the modified terms. There were no defaults on troubled debt restructurings, within
twelve months following the modification, during the three and nine month periods ended September 30, 2015 and 2014.
A
loan that is a troubled debt restructuring on nonaccrual status may return to accruing status after a period of at least six months of consecutive payments in accordance with the
modified terms.
6) Business Combinations
Bay View Funding
On October 8, 2014, HBC entered into a Stock Purchase Agreement ("Purchase Agreement") with BVF/CSNK Acquisition Corp., a
Delaware corporation ("BVF/CSNK") pursuant to which HBC agreed to acquire all of the outstanding common stock from the stockholders of BVF/CSNK for an aggregate purchase price of $22,520,000
("Acquisition"). The Acquisition closed on November 1, 2014. Based in Santa Clara, California, BVF/CSNK through its wholly-owned subsidiary CSNK Working Capital Finance Corp., a California
corporation, dba Bay View Funding ("Bay View Funding") provides business essential working capital factoring financing to various industries throughout the United States. BVF/CSNK was subsequently
merged into Bay View Funding and Bay View Funding became a wholly owned subsidiary of HBC. Bay View Funding's results of operations have been included in the Company's results beginning
November 1, 2014.
The
fair values of assets acquired and liabilities assumed are subject to adjustment during the first twelve months after the acquisition date if additional information becomes available
to indicate more accurate or appropriate values for the assets acquired and liabilities assumed, which may be reflective of conditions or events that existed at the acquisition date. Deferred tax
assets may be adjusted for uncertain tax positions of Bay View Funding, with a corresponding change to goodwill.
The
following table presents pro forma financial information as if the acquisition had occurred on January 1, 2014, which includes the pre-acquisition period for Bay View Funding.
The historical unaudited pro forma financial information has been adjusted to reflect supportable items that are directly attributable to the acquisition and expected to have a continuing impact on
consolidated results of operations, as such, one-time acquisition costs are not included. The unaudited pro forma financial information is provided for informational purposes only. The unaudited pro
forma financial information is not necessarily, and should not be assumed to be, an indication of the results that would have been achieved had the acquisition been completed as of the dates indicated
or that may be achieved in the
29
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2015
(Unaudited)
6) Business Combinations (Continued)
future.
The preparation of the unaudited pro forma combined consolidated financial statements and related adjustments required management to make certain assumptions and estimates.
|
|
|
|
|
|
|
|
UNAUDITED
|
|
For the Three Months
Ended September 30, 2014 |
|
For the Nine Months
Ended September 30, 2014 |
|
|
|
(Dollars in thousands, except per share amounts)
|
|
Net interest income |
|
$ |
16,872 |
|
$ |
49,004 |
|
Noninterest income |
|
|
2,026 |
|
|
6,424 |
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
18,898 |
|
$ |
55,428 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,014 |
|
$ |
11,441 |
|
Net income per sharebasic |
|
$ |
0.13 |
|
$ |
0.36 |
|
Net income per sharediluted |
|
$ |
0.13 |
|
$ |
0.36 |
|
Focus Business Bank
On April 23, 2015, the Company and Focus entered into a definitive agreement and plan of merger and reorganization whereby Focus
would merge into HBC. The Company completed the merger of its wholly-owned bank subsidiary HBC with Focus on August 20, 2015 for an aggregate transaction value of $66,558,000. Shareholders of
Focus received a fixed exchange ratio at closing of 1.8235 shares of the Company's common stock for each share of Focus common stock. Upon closing of the transaction, the Company issued 5,456,713
shares of the Company's common stock to Focus shareholders for a total value of $58,278,000 based on the Company's closing stock price of $10.68 on August 20, 2015. In addition, the Company
paid cash to the Focus holders of in-the-money stock options on August 20, 2015 totaling $8,280,000.
The
Company believes the merger provides the opportunity to combine two independent business banking franchises with similar philosophies and cultures into a combined $2.3 billion
business bank based in San Jose. The pooling of the two banks' resources and knowledge enhance our capabilities, operational efficiencies, and community outreach. The Company also believes the
combined bank will be much better positioned to meet the needs of our customers, shareholders and the community.
Focus's
results of operations have been included in the Company's results of operations beginning August 21, 2015. The one-time pre-tax severance, retention, acquisition and
integration costs totaled $2,865,000 and $3,407,000 for the three months and nine months ended September 30, 2015, respectively.
30
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2015
(Unaudited)
6) Business Combinations (Continued)
The
following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. The Company is in the process of finalizing the
purchase accounting for the acquisition.
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Assets acquired: |
|
|
|
|
Cash and cash equivalents |
|
$ |
174,066 |
|
Securities available-for-sale |
|
|
53,940 |
|
Securities held-to-maturity |
|
|
8,665 |
|
Loans held-for-saleSBA |
|
|
4,416 |
|
Net loans |
|
|
172,669 |
|
Goodwill |
|
|
31,854 |
|
Core deposit intangible asset |
|
|
6,285 |
|
Corporate owned life insurance |
|
|
7,067 |
|
Other assets, net |
|
|
18,700 |
|
|
|
|
|
|
Total assets acquired |
|
|
477,662 |
|
Liabilities asssumed: |
|
|
|
|
Deposits |
|
|
405,123 |
|
Other liabilities |
|
|
5,981 |
|
|
|
|
|
|
Total liabilities |
|
|
411,104 |
|
|
|
|
|
|
Net assets acquired |
|
$ |
66,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
fair value of net assets acquired includes fair value adjustments to certain receivables of which some were considered impaired and some were not considered impaired as of the
acquisition date. The fair value adjustments were determined using discounted contractual cash flows, adjusted for expected losses and prepayments, where appropriate. The gross contractual amount of
four purchased credit impaired loans as of the acquisition date totaled $1,124,000. As of that date, contractual cash flows not expected to be collected on the purchased credit impaired loans totaled
$770,000, which represents 68.5% of their gross outstanding principal balances. The receivables that were not considered impaired at the acquisition date were not subject to the guidance relating to
purchased credit impaired loans, which have shown evidence of credit deterioration since origination. Receivables acquired that were not subject to these requirements include nonimpaired loans with a
fair value and gross contractual amounts receivable of $176,551,000 and $181,124,000 respectively, on the date of acquisition. As of that
date, the purchase discount on these nonimpaired loans totaled $4,573,000, which represents 2.5% of their gross outstanding principal balances.
Goodwill
of $31,854,000 arising from the acquisition is largely attributable to synergies and cost savings resulting from combining the operations of the companies. As this transaction
was structured as a taxfree exchange, the goodwill will not be deductible for tax purposes. The fair values of assets acquired and liabilities assumed are subject to adjustment during the first twelve
months after the acquisition date if additional information becomes available to indicate a more accurate or appropriate
31
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2015
(Unaudited)
6) Business Combinations (Continued)
value
for an asset or liability. The loans with a fair value of $177,085,000 and $1,694,000 of income tax attributes related to the purchase accounting adjustments and Focus' legacy deferred tax
assets are subject to change pending receipt of the final valuations and analyses. Loan valuations may be adjusted based on new information obtained by the Company in future periods that may reflect
conditions or events that existed on the acquisition date. Deferred tax assets may be adjusted for purchase accounting adjustments on open areas such as loans or upon filing Focus' final
August 20, 2015 "stub" period tax returns. The closing equity balance for Focus is also subject to adjustments for invoices received after the close of the transaction that were attributable to
Focus operations through August 20, 2015.
The
following table summarizes the consideration paid for Focus:
|
|
|
|
|
|
|
August 20, 2015 |
|
|
|
(Dollars in thousands)
|
|
Cash paid for Focus in-the-money stock options |
|
$ |
8,280 |
|
Common stock issued to Focus shareholders at $10.68 per share |
|
|
58,278 |
|
|
|
|
|
|
Total consideration |
|
$ |
66,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table presents pro forma financial information as if the acquisition had occurred on January 1, 2014, which includes the pre-acquisition period for Focus. The
historical unaudited pro forma financial information has been adjusted to reflect supportable items that are directly attributable to the acquisition and expected to have a continuing impact on
consolidated results of operations, as such, one-time acquisition costs are not included. The unaudited pro forma financial information is provided for informational purposes only. The unaudited pro
forma financial information is not necessarily, and should not be assumed to be, an indication of the results that would have been achieved had the acquisition been completed as of the dates indicated
or that may be achieved in the future. The preparation of the unaudited pro forma combined consolidated financial statements and related adjustments required management to make certain assumptions and
estimates.
|
|
|
|
|
|
|
|
UNAUDITED
|
|
For the Three Months
Ended September 30, 2015 |
|
For the Three Months
Ended September 30, 2014 |
|
|
|
(Dollars in thousands, except per share amounts)
|
|
Net interest income |
|
$ |
21,057 |
|
$ |
16,667 |
|
Provision for loan losses |
|
|
(301 |
) |
|
1 |
|
Noninterest income |
|
|
2,863 |
|
|
2,368 |
|
Noninterest expense |
|
|
15,667 |
|
|
12,898 |
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
8,554 |
|
|
6,136 |
|
Income tax expense |
|
|
3,806 |
|
|
2,261 |
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,748 |
|
$ |
3,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per sharebasic |
|
$ |
0.13 |
|
$ |
0.10 |
|
Net income per sharediluted |
|
$ |
0.13 |
|
$ |
0.10 |
|
32
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2015
(Unaudited)
6) Business Combinations (Continued)
|
|
|
|
|
|
|
|
UNAUDITED
|
|
For the Nine Months
Ended September 30, 2015 |
|
For the Nine Months
Ended September 30, 2014 |
|
|
|
(Dollars in thousands, except per share amounts)
|
|
Net interest income |
|
$ |
61,814 |
|
$ |
49,213 |
|
Provision for loan losses |
|
|
(289 |
) |
|
(32 |
) |
Noninterest income |
|
|
8,568 |
|
|
7,452 |
|
Noninterest expense |
|
|
46,002 |
|
|
38,727 |
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
24,669 |
|
|
17,970 |
|
Income tax expense |
|
|
9,932 |
|
|
6,562 |
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
14,737 |
|
$ |
11,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per sharebasic |
|
$ |
0.39 |
|
$ |
0.30 |
|
Net income per sharediluted |
|
$ |
0.39 |
|
$ |
0.30 |
|
(7) Goodwill and Other Intangible Assets
The Company recognized $13,044,000 of goodwill upon its acquisition of Bay View Funding on November 1, 2014, and $31,854,000
upon its acquisition of Focus on August 20, 2015.
Core deposit and customer relationship intangible assets acquired in the 2007 acquisition of Diablo Valley Bank were $5,049,000 and
$276,000, respectively. These assets are amortized over their estimated useful lives of 10 years. The customer relationship intangible asset was fully amortized at December 31, 2014.
Accumulated amortization of these intangible assets was $4,592,000 and $4,257,000 at September 30, 2015 and December 31, 2014, respectfully.
The
core deposit intangible asset acquired in the acquisition of Focus in August 2015 was $6,285,000. This asset is amortized over its estimated useful lives of 10 years.
Accumulated amortization of this intangible asset was $88,000 at September 30, 2015.
Other
intangible assets acquired in the acquisition of Bay View Funding in November 2014 included: a below market value lease intangible asset of $109,000 (amortized over
3 years), customer relationship and brokered relationship intangible assets of $1,900,000, (amortized over the 10 year estimated useful lives), and a non compete agreement intangible
asset of $250,000 (amortized over 3 years). Accumulated amortization of these intangible assets was $283,000 and $51,000 at September 30, 2015 and December 31, 2014, respectfully.
33
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2015
(Unaudited)
(7) Goodwill and Other Intangible Assets (Continued)
Estimated
amortization expense for 2015 and each of the next five years follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bay View Funding |
|
|
|
|
|
Diablo Valley
Bank Core
Deposit
Intangible |
|
Focus
Core
Deposit
Intangible |
|
Below Market
Value
Lease
Intangible |
|
Customer &
Brokered
Relationship
Intangible |
|
Non-Compete
Agreement
Intangible |
|
Total
Amortization
Expense |
|
|
|
(Dollars in thousands)
|
|
2015 |
|
$ |
446 |
|
$ |
286 |
|
$ |
36 |
|
$ |
190 |
|
$ |
83 |
|
$ |
1,041 |
|
2016 |
|
|
427 |
|
|
831 |
|
|
36 |
|
|
190 |
|
|
83 |
|
|
1,567 |
|
2017 |
|
|
195 |
|
|
875 |
|
|
31 |
|
|
190 |
|
|
70 |
|
|
1,361 |
|
2018 |
|
|
|
|
|
775 |
|
|
|
|
|
190 |
|
|
|
|
|
965 |
|
2019 |
|
|
|
|
|
734 |
|
|
|
|
|
190 |
|
|
|
|
|
924 |
|
2020 |
|
|
|
|
|
716 |
|
|
|
|
|
190 |
|
|
|
|
|
906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,068 |
|
$ |
4,217 |
|
$ |
103 |
|
$ |
1,140 |
|
$ |
236 |
|
$ |
6,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
testing of the intangible assets is performed at the individual asset level. Impairment exists if the carrying amount of the asset is not recoverable and exceeds its fair
value at the date of the impairment test. For intangible assets, estimates of expected future cash flows (cash inflows less cash outflows) that are directly associated with an intangible asset are
used to determine the fair value of that asset. Management makes certain estimates and assumptions in determining the expected future cash flows from core deposit and customer relationship intangibles
including account attrition, expected lives, discount rates, interest rates, servicing costs and other factors. Significant changes in these estimates and assumptions could adversely impact the
valuation of these intangible assets. If an impairment loss exists, the carrying amount of the intangible asset is adjusted to a new cost basis. The new cost basis is then amortized over the remaining
useful life of the asset. Based on its assessment, management concluded that there was no impairment of intangible assets at September 30, 2015 and December 31, 2014.
8) Income Taxes
Some items of income and expense are recognized in different years for tax purposes than when applying generally accepted accounting principles, leading to timing differences between the
Company's actual current tax liability and the amount accrued for this liability based on book income. These temporary differences comprise the "deferred" portion of the Company's tax expense or
benefit, which is accumulated on the Company's books as a deferred tax asset or deferred tax liability until such time as they reverse.
Realization
of the Company's deferred tax assets is primarily dependent upon the Company generating sufficient taxable income to obtain benefit from the reversal of net deductible
temporary differences
and utilization of tax credit carryforwards are as of December 31, 2014 for Federal and California state income tax purposes. The amount of deferred tax assets considered realizable is subject
to adjustment in future periods based on estimates of future taxable income. Under generally accepted accounting principles, a valuation allowance is required to be recognized if it is "more likely
than not"
34
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2015
(Unaudited)
8) Income Taxes (Continued)
that
a deferred tax asset will not be realized. The determination of the realizability of the deferred tax assets is highly subjective and dependent upon judgment concerning management's evaluation of
both positive and negative evidence, including forecasts of future income, cumulative losses, applicable tax planning strategies, and assessments of current and future economic and business
conditions. In accordance with Accounting for Uncertainty in Income Taxes, the Company estimated the need for a reserve for income taxes of $250,000 for uncertain state income tax positions of Bay
View Funding. It is also estimated that a need for a reserve for uncertain tax positions of $82,000 for the Company.
The
Company had net deferred tax assets of $20,111,000, and $18,527,000, at September 30, 2015, and December 31, 2014, respectively. After consideration of the matters in
the preceding paragraph, the Company determined that it is more likely than not that the net deferred tax asset at September 30, 2015 and December 31, 2014 will be fully realized in
future years.
The
Company adopted the proportional amortization method of accounting for its low income housing investments in the third quarter of 2014. The Company quantified the impact of adopting
the proportional amortization method compared to the equity method to its current year and prior period financial statements. The Company determined that the adoption of the proportional amortization
method did not have a material impact to its financial statements. As a result of the change in accounting method, the Company reclassified $353,000 of low income housing investment losses during the
third quarter of 2014 that was previously reported as noninterest expense for the six months of 2014. The low income housing investment losses, net of the tax benefits received, are included in income
tax expense for all periods reflected on the consolidated income statements. The following tables reflect noninterest expense, income tax expense, and the effective tax rate as originally reported and
with the low income housing investment losses reclassified under the proportional amortization method of accounting for the periods indicated:
|
|
|
|
|
|
|
|
|
|
For the Three
Months Ended
09/30/14 |
|
For the Nine
Months Ended
09/30/14 |
|
|
|
(Dollars in thousands)
|
|
Noninterest expense as originally reported |
|
$ |
10,139 |
|
$ |
31,807 |
|
Low income housing investment losses reclassified to income tax expense |
|
|
353 |
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense under the proportional method |
|
$ |
10,492 |
|
$ |
31,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense as originally reported |
|
$ |
2,322 |
|
$ |
5,545 |
|
Low income housing investment losses reclassified from noninterest expense |
|
|
(353 |
) |
|
|
|
|
|
|
|
|
|
|
|
Income tax expense under the proportional method |
|
$ |
1,969 |
|
$ |
5,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate as originally reported |
|
|
40.4 |
% |
|
36.1 |
% |
Effective under the proportional method |
|
|
36.5 |
% |
|
36.1 |
% |
35
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2015
(Unaudited)
8) Income Taxes (Continued)
The
following table reflects the carry amounts of the low income housing investments included in accrued interest receivable and other assets, and the future commitments as of
September 30, 2015 and December 31, 2014:
|
|
|
|
|
|
|
|
|
|
September 30,
2015 |
|
December 31,
2014 |
|
|
|
(Dollars in thousands)
|
|
Low income housing investments |
|
$ |
4,532 |
|
$ |
5,268 |
|
Future commitments |
|
$ |
1,827 |
|
$ |
1,827 |
|
The
Company expects $938,000 of the future commitments to be paid in 2015, $550,000 in 2016, and $339,000 in 2017 through 2023.
For
tax purposes, the Company had low income housing tax credits of $175,000 and $198,000 for the three months ended September 30, 2015 and September 30, 2014,
respectively, and low income housing investment losses of $230,000 and $272,000, respectively. For tax purposes, the Company had low income housing tax credits of $525,000 and $404,000 for the nine
months ended September 30, 2015 and September 30, 2014, respectively, and low income housing investment losses of $687,000 and $624,000, respectively. The Company recognized low income
housing investment expense as a component of income tax expense.
9) Benefit Plans
Supplemental Retirement Plan
The Company has a supplemental retirement plan (the "Plan") covering some current and some former key employees and directors. The Plan
is a nonqualified defined benefit plan. Benefits are unsecured as there are no Plan assets. The following table presents the amount of periodic cost recognized for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
September 30, |
|
Nine Months
Ended
September 30, |
|
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
|
|
(Dollars in thousands)
|
|
Components of net periodic benefit cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
216 |
|
$ |
179 |
|
$ |
648 |
|
$ |
537 |
|
Interest cost |
|
|
221 |
|
|
228 |
|
|
663 |
|
|
684 |
|
Amortization of net actuarial loss |
|
|
96 |
|
|
35 |
|
|
288 |
|
|
105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
533 |
|
$ |
442 |
|
$ |
1,599 |
|
$ |
1,326 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2015
(Unaudited)
9) Benefit Plans (Continued)
Split-Dollar Life Insurance Benefit Plan
The Company maintains life insurance policies for current and former directors and officers that are subject to split-dollar life
insurance agreements. The following table sets forth the funded status of the split-dollar life insurance benefits for the periods indicated:
|
|
|
|
|
|
|
|
|
|
September 30,
2015 |
|
December 31,
2014 |
|
|
|
(Dollars in thousands)
|
|
Change in projected benefit obligation: |
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year |
|
$ |
4,641 |
|
$ |
4,353 |
|
Interest cost |
|
|
127 |
|
|
196 |
|
Amortization of net actuarial loss |
|
|
|
|
|
92 |
|
|
|
|
|
|
|
|
|
Projected benefit obligation at end of period |
|
$ |
4,768 |
|
$ |
4,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2015 |
|
December 31,
2014 |
|
|
|
(Dollars in thousands)
|
|
Net actuarial loss |
|
$ |
692 |
|
$ |
540 |
|
Prior transition obligation |
|
|
1,440 |
|
|
1,507 |
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss |
|
$ |
2,132 |
|
$ |
2,047 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
September 30, |
|
Nine Months
Ended September 30, |
|
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
|
|
(Dollars in thousands)
|
|
Amortization of prior transition obligation |
|
$ |
(28 |
) |
$ |
(25 |
) |
$ |
(84 |
) |
$ |
(77 |
) |
Interest cost |
|
|
42 |
|
|
49 |
|
|
126 |
|
|
147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
14 |
|
$ |
24 |
|
$ |
42 |
|
$ |
70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10) Equity
Series C Preferred Stock
On June 21, 2010, the Company issued to various institutional investors 21,004 shares of Series C Convertible Perpetual
Preferred Stock ("Series C Preferred Stock"). The Series C Preferred Stock is mandatorily convertible into common stock at a conversion price of $3.75 per share upon a subsequent
transfer of the Series C Preferred Stock to third parties not affiliated with the holder in a widely dispersed offering. The 21,004 shares of Series C Preferred Stock are convertible
into 5,601,000 shares of common stock. The Series C Preferred Stock is non-voting except in the case of certain transactions that would affect the rights of the holders of the Series C
Preferred Stock or applicable law. The holders of Series C Preferred Stock receive dividends on an as converted basis when dividends are also
37
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2015
(Unaudited)
10) Equity (Continued)
declared
for holders of common stock. The Series C Preferred Stock is not redeemable by the Company or by the holders and has a liquidation preference of $1,000 per share. The Series C
Preferred Stock ranks senior to the Company's common stock.
11) Fair Value
Accounting guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair
value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1:
Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2:
Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities in active markets; quoted prices for
identical assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data (for example, interest rates and yield curves
observable at commonly quoted intervals, prepayment speeds, credit risks, and default rates).
Level 3:
Significant unobservable inputs that reflect a reporting entity's own assumptions about the assumptions that market participants would use in pricing an asset or
liability.
Financial Assets and Liabilities Measured on a Recurring Basis
The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities
exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the
specific securities, but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2 inputs).
38
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2015
(Unaudited)
11) Fair Value (Continued)
The
fair value of interest-only ("I/O") strip receivable assets is based on a valuation model used by a third party. The Company is able to compare the valuation model inputs and results
to widely available published industry data for reasonableness (Level 2 inputs).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using |
|
|
|
Balance |
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1) |
|
Significant
Other
Observable
Inputs
(Level 2) |
|
Significant
Unobservable
Inputs
(Level 3) |
|
|
|
(Dollars in thousands)
|
|
Assets at September 30, 2015: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
|
$ |
170,399 |
|
$ |
|
|
$ |
170,399 |
|
$ |
|
|
Corporate bonds |
|
|
36,608 |
|
|
|
|
|
36,608 |
|
|
|
|
Trust preferred securities |
|
|
15,000 |
|
|
|
|
|
15,000 |
|
|
|
|
Collateralized mortgage obligations |
|
|
11,791 |
|
|
|
|
|
11,791 |
|
|
|
|
U.S. Government sponsored entities |
|
|
11,125 |
|
|
|
|
|
11,125 |
|
|
|
|
Municipalstax exempt |
|
|
5,765 |
|
|
|
|
|
5,765 |
|
|
|
|
U.S. Treasury |
|
|
4,039 |
|
|
4,039 |
|
|
|
|
|
|
|
Municipalstaxable |
|
|
2,683 |
|
|
|
|
|
2,683 |
|
|
|
|
I/O strip receivables |
|
|
1,441 |
|
|
|
|
|
1,441 |
|
|
|
|
Assets at December 31, 2014: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
|
$ |
154,172 |
|
$ |
|
|
$ |
154,172 |
|
$ |
|
|
Corporate bonds |
|
|
36,863 |
|
|
|
|
|
36,863 |
|
|
|
|
Trust preferred securities |
|
|
15,300 |
|
|
|
|
|
15,300 |
|
|
|
|
I/O strip receivables |
|
|
1,481 |
|
|
|
|
|
1,481 |
|
|
|
|
There
were no transfers between Level 1 and Level 2 during the period for assets measured at fair value on a recurring basis.
Assets and Liabilities Measured on a Non-Recurring Basis
The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate
appraisals. The appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal
process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3
classification of the inputs for determining fair value.
Foreclosed
assets are valued at the time the loan is foreclosed upon and the asset is transferred to foreclosed assets. The fair value is based primarily on third party appraisals, less
costs to sell. The appraisals may utilize a single valuation approach or a combination of approaches including the comparable sales and income approach. Adjustments are routinely made in the appraisal
process by the
39
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2015
(Unaudited)
11) Fair Value (Continued)
appraisers
to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for
determining fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using |
|
|
|
Balance |
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1) |
|
Significant
Other
Observable
Inputs
(Level 2) |
|
Significant
Unobservable
Inputs
(Level 3) |
|
|
|
(Dollars in thousands)
|
|
Assets at September 30, 2015: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loansheld-for-investment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
723 |
|
|
|
|
|
|
|
$ |
723 |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and residential |
|
|
524 |
|
|
|
|
|
|
|
|
524 |
|
Land and construction |
|
|
492 |
|
|
|
|
|
|
|
|
492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,739 |
|
|
|
|
|
|
|
$ |
1,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at December 31, 2014: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loansheld-for-investment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
859 |
|
|
|
|
|
|
|
$ |
859 |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and residential |
|
|
587 |
|
|
|
|
|
|
|
|
587 |
|
Land and construction |
|
|
1,176 |
|
|
|
|
|
|
|
|
1,176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,622 |
|
|
|
|
|
|
|
$ |
2,622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Land and construction |
|
$ |
31 |
|
|
|
|
|
|
|
$ |
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
31 |
|
|
|
|
|
|
|
$ |
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2015
(Unaudited)
11) Fair Value (Continued)
The
following table shows the detail of the impaired loans held-for-investment and the impaired loans held-for-investment carried at fair value for the periods indicated:
|
|
|
|
|
|
|
|
|
|
September 30,
2015 |
|
December 31,
2014 |
|
|
|
(Dollars in thousands)
|
|
Impaired loans held-for-investment: |
|
|
|
|
|
|
|
Book value of impaired loans held-for-investment carried at fair value |
|
$ |
1,872 |
|
$ |
3,026 |
|
Book value of impaired loans held-for-investment carried at cost |
|
|
3,814 |
|
|
2,996 |
|
|
|
|
|
|
|
|
|
Total impaired loans held-for-investment |
|
$ |
5,686 |
|
$ |
6,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans held-for-investment carried at fair value: |
|
|
|
|
|
|
|
Book value of impaired loans held-for-investment carried at fair value |
|
$ |
1,872 |
|
$ |
3,026 |
|
Specific valuation allowance |
|
|
(133 |
) |
|
(404 |
) |
|
|
|
|
|
|
|
|
Impaired loans held-for-investment carried at fair value, net |
|
$ |
1,739 |
|
$ |
2,622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans held-for-investment which are measured primarily for impairment using the fair value of the collateral were $5,686,000 at September 30, 2015. In addition, these
loans had a specific valuation allowance of $133,000 at September 30, 2015. Impaired loans held-for-investment totaling $1,872,000 at September 30, 2015, were carried at fair value as a
result of the aforementioned partial charge-offs and specific valuation allowances at period-end. The remaining $3,814,000 of impaired loans were carried at cost at September 30, 2015, as the
fair value of the collateral exceeded the cost basis of each respective loan. Partial charge-offs and changes in specific valuation allowances during the first nine months of 2015 on impaired loans
held-for-investment carried at fair value at September 30, 2015 resulted in a credit to the provision for loan losses of $191,000.
At
September 30, 2015, foreclosed assets had a carrying amount of $393,000, with no valuation allowance at September 30, 2015.
Impaired
loans held-for-investment of $6,022,000 at December 31, 2014, after partial charge-offs of $107,000 in 2014, were analyzed for additional impairment primarily using the
fair value of collateral. In addition, these loans had a specific valuation allowance of $404,000 at December 31, 2014. Impaired loans held-for-investment totaling $3,026,000 at
December 31, 2014 were carried at fair value as a result of the aforementioned partial charge-offs and specific valuation allowances at year-end. The remaining $2,996,000 of impaired loans were
carried at cost at December 31, 2014, as the fair value of the collateral exceeded the cost basis of each respective loan. Partial charge-offs and changes in specific valuation allowances
during 2014 on impaired loans held-for-investment carried at fair value at December 31, 2014 resulted in a credit to the provision for loan losses of $100,000.
41
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2015
(Unaudited)
11) Fair Value (Continued)
At
December 31, 2014, foreclosed assets had a carrying amount of $696,000, with no valuation allowance at December 31, 2014.
The
following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2015 |
|
|
Fair
Value |
|
Valuation
Techniques |
|
Unobservable Inputs |
|
Range
(Weighted
Average) |
|
|
(Dollars in thousands)
|
Impaired loansheld-for-investment: |
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
723 |
|
Market
Approach |
|
Discount adjustment for differences between comparable sales |
|
0% to 3% (3%) |
Real estate: |
|
|
|
|
|
|
|
|
|
Commercial and residential |
|
$ |
524 |
|
Market
Approach |
|
Discount adjustment for differences between comparable sales |
|
0% to 3% (3%) |
Land and construction |
|
$ |
492 |
|
Market
Approach |
|
Discount adjustment for differences between comparable sales |
|
0% to 1% (1%) |
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2014 |
|
|
Fair
Value |
|
Valuation
Techniques |
|
Unobservable Inputs |
|
Range
(Weighted
Average) |
|
|
(Dollars in thousands)
|
Impaired loansheld-for-investment: |
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
859 |
|
Market Approach |
|
Discount adjustment for differences between comparable sales |
|
0% to 3% (3%) |
Real estate: |
|
|
|
|
|
|
|
|
|
Commercial and residential |
|
$ |
587 |
|
Market
Approach |
|
Discount adjustment for differences between comparable sales |
|
0% to 3% (3%) |
Land and construction |
|
$ |
1,176 |
|
Market
Approach |
|
Discount adjustment for differences between comparable sales |
|
1% to 2% (2%) |
Foreclosed assets: |
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
31 |
|
Market
Approach |
|
Discount adjustment for differences between comparable sales |
|
Less than 1% |
The
Company obtains third party appraisals on its impaired loans held- for-investment and foreclosed assets to determine fair value. Generally, the third party appraisals apply the
"market approach," which is a valuation technique that uses prices and other relevant information generated by
42
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2015
(Unaudited)
11) Fair Value (Continued)
market
transactions involving identical or comparable (that is, similar) assets, liabilities, or a group of assets and liabilities, such as a business. Adjustments are then made based on the type of
property, age of appraisal, current status of property and other related factors to estimate the current value of collateral.
The
carrying amounts and estimated fair values of financial instruments at September 30, 2015 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair Value |
|
|
|
Carrying Amounts |
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1) |
|
Significant
Other
Observable
Inputs
(Level 2) |
|
Significant
Unobservable
Inputs
(Level 3) |
|
Total |
|
|
|
(Dollars in thousands)
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
392,938 |
|
$ |
392,938 |
|
$ |
|
|
$ |
|
|
$ |
392,938 |
|
Securities available-for-sale |
|
|
257,410 |
|
|
|
|
|
257,410 |
|
|
|
|
|
257,410 |
|
Securities held-to-maturity |
|
|
111,004 |
|
|
|
|
|
110,035 |
|
|
|
|
|
110,035 |
|
Loans (including loans held-for-sale), net |
|
|
1,321,541 |
|
|
|
|
|
7,873 |
|
|
1,328,678 |
|
|
1,336,551 |
|
FHLB and FRB stock |
|
|
10,630 |
|
|
|
|
|
|
|
|
|
|
|
N/A |
|
Accrued interest receivable |
|
|
5,212 |
|
|
|
|
|
1,906 |
|
|
3,306 |
|
|
5,212 |
|
Loan servicing rights and I/O strips receivables |
|
|
3,820 |
|
|
|
|
|
5,470 |
|
|
|
|
|
5,470 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits |
|
$ |
272,494 |
|
$ |
|
|
$ |
228,490 |
|
$ |
|
|
$ |
228,490 |
|
Other deposits |
|
|
1,689,529 |
|
|
|
|
|
1,733,533 |
|
|
|
|
|
1,733,533 |
|
Short-term borrowings |
|
|
1,000 |
|
|
|
|
|
1,000 |
|
|
|
|
|
1,000 |
|
Accrued interest payable |
|
|
215 |
|
|
|
|
|
215 |
|
|
|
|
|
215 |
|
43
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2015
(Unaudited)
11) Fair Value (Continued)
The
carrying amounts and estimated fair values of the Company's financial instruments at December 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair Value |
|
|
|
Carrying
Amounts |
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1) |
|
Significant
Other
Observable
Inputs
(Level 2) |
|
Significant
Unobservable
Inputs
(Level 3) |
|
Total |
|
|
|
(Dollars in thousands)
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
122,403 |
|
$ |
122,403 |
|
$ |
|
|
$ |
|
|
$ |
122,403 |
|
Securities available-for-sale |
|
|
206,335 |
|
|
|
|
|
206,335 |
|
|
|
|
|
206,335 |
|
Securities held-to-maturity |
|
|
95,362 |
|
|
|
|
|
94,953 |
|
|
|
|
|
94,953 |
|
Loans (including loans held-for-sale), net |
|
|
1,071,436 |
|
|
|
|
|
1,172 |
|
|
1,071,854 |
|
|
1,073,026 |
|
FHLB and FRB stock |
|
|
10,598 |
|
|
|
|
|
|
|
|
|
|
|
N/A |
|
Accrued interest receivable |
|
|
5,044 |
|
|
|
|
|
1,435 |
|
|
3,609 |
|
|
5,044 |
|
Loan servicing rights and I/O strips receivables |
|
|
2,046 |
|
|
|
|
|
3,906 |
|
|
|
|
|
3,906 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits |
|
$ |
256,223 |
|
$ |
|
|
$ |
256,589 |
|
$ |
|
|
$ |
256,589 |
|
Other deposits |
|
|
1,132,163 |
|
|
|
|
|
1,132,163 |
|
|
|
|
|
1,132,163 |
|
Accrued interest payable |
|
|
201 |
|
|
|
|
|
201 |
|
|
|
|
|
201 |
|
The
methods and assumptions, not previously discussed, used to estimate the fair value are described as follows:
Cash and Cash Equivalents
The carrying amounts of cash on hand, noninterest and interest bearing due from bank accounts, and Fed funds sold approximate fair
values and are classified as Level 1.
Loans
The fair value of loans held-for-sale is estimated based upon binding contracts and quotes from third parties resulting in a
Level 2 classification.
Fair
values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values
are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered
for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously.
The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.
44
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2015
(Unaudited)
11) Fair Value (Continued)
FHLB and FRB Stock
It was not practical to determine the fair value of FHLB and FRB stock due to restrictions placed on their transferability.
Accrued Interest Receivable/Payable
The carrying amounts of accrued interest approximate fair value resulting in a Level 2 or Level 3 classification.
Deposits
The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings, and certain types of
money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 2 classification. The carrying
amounts of variable rate, fixed-term money market accounts approximate their fair values at the reporting date resulting in a Level 2 classification. The carrying amounts of variable rate,
certificates of deposit approximate their fair values at the reporting date resulting in a Level 2 classification. Fair values for fixed rate certificates of deposit are estimated using a
discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a
Level 2 classification.
Short-term Borrowings
The carrying amount approximates the fair value of short-term borrowings that reprice frequently and fully.
Off-balance Sheet Instruments
Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The fair value of commitments is not material.
Limitations
Fair value estimates are made at a specific point in time, based on relevant market information about the financial instruments. These
estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Fair value estimates are based on
judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
45
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2015
(Unaudited)
12) Equity Plan
The Company maintained an Amended and Restated 2004 Equity Plan (the "2004 Plan") for directors, officers, and key employees. The 2004 Plan was terminated on May 23, 2013. On
May 23, 2013, the Company's shareholders approved the 2013 Equity Incentive Plan (the "2013 Plan"). The equity plans provide for the grant of incentive and nonqualified stock options and
restricted stock. The equity plans provide that the option price for both incentive and nonqualified stock options will be determined by the Board of Directors at no less than the fair value at the
date of grant. Options granted vest on a schedule determined by the Board of Directors at the time of grant. Generally options vest over four years. All options expire no later than ten years from the
date of grant. Restricted stock is subject to time vesting. For the nine months ended September 30, 2015, the Company granted 223,000 shares of nonqualified stock options and 73,855 shares of
restricted stock subject to time vesting requirements. There were 984,392 shares available for the issuance of equity awards under the 2013 Plan as of September 30, 2015.
Stock
option activity under the equity plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stock Options
|
|
Number
of Shares |
|
Weighted
Average
Exercise
Price |
|
Weighted
Average
Remaining
Contractual
Life (Years) |
|
Aggregate
Intrinsic
Value |
|
Outstanding at January 1, 2015 |
|
|
1,726,106 |
|
$ |
11.23 |
|
|
|
|
|
|
|
Granted |
|
|
223,000 |
|
$ |
9.36 |
|
|
|
|
|
|
|
Exercised |
|
|
(47,432 |
) |
$ |
5.66 |
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(128,248 |
) |
$ |
18.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2015 |
|
|
1,773,426 |
|
$ |
10.60 |
|
|
6.0 |
|
$ |
5,593,499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest |
|
|
1,684,755 |
|
|
|
|
|
6.0 |
|
$ |
5,313,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2015 |
|
|
1,197,888 |
|
|
|
|
|
4.8 |
|
$ |
3,787,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of September 30, 2015, there was $2,058,000 of total unrecognized compensation cost related to nonvested stock options granted under the equity plans. That cost is expected to
be recognized over a weighted-average period of approximately 2.63 years.
Restricted
stock activity under the equity plans is as follows:
|
|
|
|
|
|
|
|
Total Restricted Stock Award
|
|
Number
of Shares |
|
Weighted
Average
Grant Date
Fair Value |
|
Nonvested shares at January 1, 2015 |
|
|
100,000 |
|
$ |
8.25 |
|
Granted |
|
|
73,855 |
|
$ |
9.30 |
|
Vested |
|
|
(13,750 |
) |
$ |
6.98 |
|
Forfeited or expired |
|
|
(5,000 |
) |
$ |
8.70 |
|
|
|
|
|
|
|
|
|
Nonvested shares at September 30, 2015 |
|
|
155,105 |
|
$ |
8.85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2015
(Unaudited)
12) Equity Plan (Continued)
As
of September 30, 2015, there was $1,150,000 of total unrecognized compensation cost related to nonvested restricted stock awards granted under the equity plans. The cost is
expected to be recognized over a weighted-average period of approximately 3.3 years.
13) Capital Requirements
The Company and its subsidiary bank are subject to various regulatory capital requirements
administered by the banking agencies. Failure to meet minimum capital requirements can initiate certain mandatoryand possibly additional discretionaryactions by regulators
that, if undertaken, could have a direct material effect on the Company's financial statements and operations. Under capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and HBC must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off balance sheet items as calculated under regulatory
accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
As
of January 1, 2015, HCC and HBC along with other community banking organizations became subject to new capital requirements on January 1, 2015 and certain provisions of
the new rules will be phased in from 2015 through 2019. The Federal Banking regulators approved the new rules to implement the revised capital adequacy standards of the Basel Committee on Banking
Supervision, commonly called Basel III, and address relevant provisions of The Dodd Frank Wall Street Reform and Consumer Protection Act of 2010, as amended. The Company's consolidated capital ratios
and the Bank's capital ratios exceeded the regulatory guidelines for a well-capitalized financial institution under the Basel III regulatory requirements at September 30, 2015.
Quantitative
measures established by regulation to help ensure capital adequacy require the Company and HBC to maintain minimum amounts and ratios (set forth in the tables below) of
total, Tier 1 capital, and common equity Tier 1 capital (as defined in the regulations) to risk weighted assets (as defined), and of Tier 1 capital to average assets (as defined).
Management believes that, as of September 30, 2015 and December 31, 2014, the Company and HBC met all capital adequacy guidelines to which they were subject.
47
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2015
(Unaudited)
13) Capital Requirements (Continued)
The
Company's consolidated capital amounts and ratios are presented in the following table, together with capital adequacy requirements, under the Basel III regulatory requirements as of
September 30, 2015, and under the Basel I regulatory requirements as of December 31, 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual |
|
To Be
Well-Capitalized
Under Basel III
Regulatory
Requirements |
|
Required For
Capital Adequacy
Purposes Under
Basel III |
|
|
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
|
|
(Dollars in thousands)
|
|
As of September 30, 2015: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital |
|
$ |
217,200 |
|
|
12.3 |
% |
|
N/A |
|
|
N/A |
|
$ |
141,097 |
|
|
8.0 |
% |
(to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Capital |
|
$ |
197,720 |
|
|
11.2 |
% |
|
N/A |
|
|
N/A |
|
$ |
105,825 |
|
|
6.0 |
% |
(to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Tier 1 Capital |
|
$ |
180,353 |
|
|
10.2 |
% |
|
N/A |
|
|
N/A |
|
$ |
79,367 |
|
|
4.5 |
% |
(to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Capital |
|
$ |
197,720 |
|
|
10.4 |
% |
|
N/A |
|
|
N/A |
|
$ |
76,079 |
|
|
4.0 |
% |
(to average assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual |
|
To Be
Well-Capitalized
Under Basel I
Regulatory
Requirements |
|
Required For
Capital Adequacy
Purposes Under
Basel I |
|
|
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
|
|
(Dollars in thousands)
|
|
As of December 31, 2014: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital |
|
$ |
186,068 |
|
|
13.9 |
% |
$ |
134,109 |
|
|
10.0 |
% |
$ |
107,287 |
|
|
8.0 |
% |
(to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Capital |
|
$ |
169,278 |
|
|
12.6 |
% |
$ |
80,465 |
|
|
6.0 |
% |
$ |
53,644 |
|
|
4.0 |
% |
(to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Capital |
|
$ |
169,278 |
|
|
10.6 |
% |
|
N/A |
|
|
N/A |
|
$ |
63,949 |
|
|
4.0 |
% |
(to average assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2015
(Unaudited)
13) Capital Requirements (Continued)
HBC's
actual capital amounts and ratios are presented in the following table, together with capital adequacy requirements, under the Basel III regulatory requirements as of
September 30, 2015, and under the Basel I regulatory requirements as of December 31, 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual |
|
To Be
Well-Capitalized
Under Basel III
Regulatory
Requirements |
|
Required For
Capital Adequacy
Purposes Under
Basel III |
|
|
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
|
|
(Dollars in thousands)
|
|
As of September 30, 2015: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital |
|
$ |
213,519 |
|
|
12.1 |
% |
$ |
176,043 |
|
|
10.0 |
% |
$ |
140,835 |
|
|
8.0 |
% |
(to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Capital |
|
$ |
194,039 |
|
|
11.0 |
% |
$ |
140,835 |
|
|
8.0 |
% |
$ |
105,626 |
|
|
6.0 |
% |
(to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Tier 1 Capital |
|
$ |
194,039 |
|
|
11.0 |
% |
$ |
114,420 |
|
|
6.5 |
% |
$ |
79,220 |
|
|
4.5 |
% |
(to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Capital |
|
$ |
194,039 |
|
|
10.2 |
% |
$ |
95,015 |
|
|
5.0 |
% |
$ |
76,012 |
|
|
4.0 |
% |
(to average assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual |
|
To Be
Well-Capitalized
Under Basel I
Regulatory
Requirements |
|
Required For
Capital Adequacy
Purposes Under
Basel I |
|
|
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
|
|
(Dollars in thousands)
|
|
As of December 31, 2014: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital |
|
$ |
175,765 |
|
|
13.1 |
% |
$ |
134,095 |
|
|
10.0 |
% |
$ |
107,276 |
|
|
8.0 |
% |
(to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Capital |
|
$ |
158,976 |
|
|
11.9 |
% |
$ |
80,457 |
|
|
6.0 |
% |
$ |
53,638 |
|
|
4.0 |
% |
(to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Capital |
|
$ |
158,976 |
|
|
9.9 |
% |
$ |
79,959 |
|
|
5.0 |
% |
$ |
63,967 |
|
|
4.0 |
% |
(to average assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
September 30, 2015, the Company's and HBC's regulatory capital increased concurrent with average assets for capital purposes and risk-weighted assets due to the common stock
issuance of the Focus transaction, net of normal fluctuations to regulatory capital from dividends, share based compensation, and net income.
HCC
is dependent upon dividends from HBC. Under California General Corporation Law, the holders of common stock are entitled to receive dividends when and as declared by the Board of
Directors, out of funds legally available. The California Financial Code provides that a state licensed bank may not make a cash distribution to its shareholders in excess of the lesser of the
following: (i) the bank's retained earnings; or (ii) the bank's net income for its last three fiscal years, less the amount of any distributions made by the bank to its shareholders
during such period. However, a bank, with the prior approval of the Commissioner of the California Department of Business
49
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2015
(Unaudited)
13) Capital Requirements (Continued)
OversightDivision
of Financial Institutions ("DBO") may make a distribution to its shareholders of an amount not to exceed the greater of (i) a bank's retained earnings;
(ii) its net income for its last fiscal year; or (iii) its net income for the current fiscal year. Also with the prior approval of the Commissioner of the DBO and the shareholders of the
bank, the bank may make a distribution to its shareholders, as a reduction in capital of the bank. In the event that the Commissioner determines that the shareholders' equity of a bank is inadequate
or that the making of a distribution by a bank would be unsafe or unsound, the Commissioner may order a bank to refrain from making such a proposed distribution. As of September 30, 2015, HBC
would be required to obtain regulatory approval from the DBO for a dividend or other distribution to HCC. Similar restrictions applied to the amount and sum of loan advances and other transfers of
funds from HBC to the parent company.
14) Loss Contingencies
The Company's policy is to accrue for legal costs associated with both asserted and unasserted claims when it is probable that such costs will be incurred and such costs can be
reasonably estimated. A number of parties have filed complaints in the Superior Court of California for the County of Santa Clara asserting certain claims against the Company arising from the transfer
of funds. The litigation is in the early stages and it is not possible to determine the amount of the loss, if any, arising from the claim in excess of the legal expenses expected to be incurred in
defense of the litigation. The Company intends to vigorously defend the litigation.
15) Business Segment Information
The following presents the Company's operating segments. The Company operates through two business segments: Banking segment and Factoring segment. Transactions between segments consist
primarily of borrowed funds. Intersegment interest expense is allocated to the Factoring segment based on the Company's prime rate and funding costs. The provision for loan loss is allocated based on
the segment's allowance for loan loss determination which considers the effects of charge-offs. Noninterest income and expense directly attributable to a segment are assigned to it. Taxes are paid on
a consolidated basis and allocated for segment purposes. The Factoring segment includes only factoring
50
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2015
(Unaudited)
15) Business Segment Information (Continued)
originated
by Bay View Funding, which has been included in the results of operations since the acquisition on November 1, 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
September 30, 2015 |
|
|
|
Banking(1) |
|
Factoring |
|
Consolidated |
|
|
|
(Dollars in thousands)
|
|
Interest income |
|
$ |
17,117 |
|
$ |
3,189 |
|
$ |
20,306 |
|
Intersegment interest allocations |
|
|
280 |
|
|
(280 |
) |
|
|
|
Total interest expense |
|
|
623 |
|
|
|
|
|
623 |
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
16,774 |
|
|
2,909 |
|
|
19,683 |
|
Provision (credit) for loan losses |
|
|
(291 |
) |
|
(10 |
) |
|
(301 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision |
|
|
17,065 |
|
|
2,919 |
|
|
19,984 |
|
Noninterest income |
|
|
1,869 |
|
|
197 |
|
|
2,066 |
|
Noninterest expense |
|
|
14,616 |
|
|
1,803 |
|
|
16,419 |
|
Intersegment expense allocations |
|
|
112 |
|
|
(112 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
4,430 |
|
|
1,201 |
|
|
5,631 |
|
Income tax expense |
|
|
1,668 |
|
|
504 |
|
|
2,172 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,762 |
|
$ |
697 |
|
$ |
3,459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,218,007 |
|
$ |
44,200 |
|
$ |
2,262,207 |
|
Loans, net of deferred fees |
|
$ |
1,290,062 |
|
$ |
42,343 |
|
$ |
1,332,405 |
|
- (1)
- Includes
the holding company's results of operations
51
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2015
(Unaudited)
15) Business Segment Information (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
September 30, 2015 |
|
|
|
Banking(1) |
|
Factoring |
|
Consolidated |
|
|
|
(Dollars in thousands)
|
|
Interest income |
|
$ |
46,458 |
|
$ |
9,389 |
|
$ |
55,847 |
|
Intersegment interest allocations |
|
|
822 |
|
|
(822 |
) |
|
|
|
Total interest expense |
|
|
1,664 |
|
|
|
|
|
1,664 |
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
45,616 |
|
|
8,567 |
|
|
54,183 |
|
Provision (credit) for loan losses |
|
|
(328 |
) |
|
(11 |
) |
|
(339 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision |
|
|
45,944 |
|
|
8,578 |
|
|
54,522 |
|
Noninterest income |
|
|
5,581 |
|
|
575 |
|
|
6,156 |
|
Noninterest expense |
|
|
35,930 |
|
|
5,382 |
|
|
41,312 |
|
Intersegment expense allocations |
|
|
266 |
|
|
(266 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
15,861 |
|
|
3,505 |
|
|
19,366 |
|
Income tax expense |
|
|
5,820 |
|
|
1,472 |
|
|
7,292 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
10,041 |
|
$ |
2,033 |
|
$ |
12,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,218,007 |
|
$ |
44,200 |
|
$ |
2,262,207 |
|
Loans, net of deferred fees |
|
$ |
1,290,062 |
|
$ |
42,343 |
|
$ |
1,332,405 |
|
- (1)
- Includes
the holding company's results of operations
16) Subsequent Events
On October 26, 2015, the Company announced that its Board of Directors declared a $0.08 per share quarterly cash dividend to holders of common stock and Series C Preferred
Stock (on an as converted basis). The dividend will be paid on November 24, 2015, to shareholders of record on November 10, 2015.
52
Table of Contents
ITEM 2MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information about the results of operations, financial condition, liquidity, and capital resources of
Heritage Commerce Corp (the "Company" or "HCC"), its wholly-owned subsidiary, Heritage Bank of Commerce ("HBC"), and HBC's wholly-owned subsidiary, CSNK Working Capital Finance Corp, a California
Corporation, dba Bay View Funding ("Bay View Funding"). This information is intended to facilitate the understanding and assessment of significant changes and trends related to our financial condition
and the results of operations. This discussion and analysis should be read in conjunction with our consolidated financial statements and the accompanying notes presented elsewhere in this report.
Unless we state otherwise or the context indicates otherwise, references to the "Company," "Heritage," "we," "us," and "our," in this Report on Form 10-Q refer to Heritage Commerce Corp and its
subsidiaries.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are discussed in our Form 10-K for the year ended December 31, 2014. There are no changes to
these policies as of September 30, 2015, except for the following policies on segment reporting to include two reportable segments consisting of Banking and Factoring as a result of the
acquisition of Bay View Funding, and business combinations as a result of both the Bay View Funding and Focus acquisitions:
Segment Reporting
HBC is a commercial bank serving customers located in Santa Clara, Alameda, Contra Costa, and San Benito counties of California. Bay
View Funding provides business-essential working capital factoring financing to various industries throughout the United States through its Banking and Factoring business segments. No customer
accounts for more than 10 percent of revenue for HBC or the Company. The Company's management uses segments results in its operating and strategic planning.
Business Combinations
The Company accounts for acquisitions of businesses using the acquisition method of accounting. Under the acquisition method, assets
acquired and liabilities assumed are recorded at their estimated fair values at the date of acquisition. Management utilizes various valuation techniques including discounted cash flow analyses to
determine these fair values. Any excess of the purchase price over amounts allocated to the acquired assets, including identifiable intangible assets, and liabilities assumed is recorded as goodwill.
EXECUTIVE SUMMARY
This summary is intended to identify the most important matters on which management focuses when it evaluates the financial condition
and performance of the Company. When evaluating financial condition and performance, management looks at certain key metrics and measures. The Company's evaluation includes comparisons with peer group
financial institutions and its own performance objectives established in the internal planning process.
The
primary activity of the Company is commercial banking. The Company's operations are located entirely in the southern and eastern regions of the general San Francisco Bay Area of
California in the counties of Santa Clara, Alameda, Contra Costa, and San Benito. The largest city in this area is San Jose and the Company's market includes the headquarters of a number of technology
based companies in the region known commonly as Silicon Valley. The Company's customers are primarily closely held businesses and professionals.
53
Table of Contents
Performance Overview
For the three months ended September 30, 2015, net income was $3.5 million, or $0.10 per average diluted common share,
compared to $3.4 million, or $0.11 per average diluted common share, for the three months ended September 30, 2014. The Company's annualized return on average tangible assets was 0.71%
and annualized return on average tangible equity was 7.46% for the three months ended September 30, 2015, compared to 0.88% and 7.51%, respectively, for the three months ended
September 30, 2014.
For
the nine months ended September 30, 2015, net income was $12.1 million, or $0.36 per average diluted common share, compared to $9.8 million, or $0.31 per average
diluted common share, for the nine months ended September 30, 2014. The Company's annualized return on average tangible assets was 0.93% and annualized return on average tangible equity was
9.22% for the nine months ended September 30, 2015, compared to 0.88% and 7.40%, respectively, for the nine months ended September 30, 2014.
Bay View Funding Acquisition
On November 1, 2014, the Company acquired Bay View Funding, by purchasing all of the outstanding common stock from the
stockholders of Bay View Funding for an aggregate purchase price of $22.52 million. Bay View Funding became a wholly owned subsidiary of HBC. Based in Santa Clara, California, Bay View Funding,
provides business essential working capital factoring financing to various industries throughout the United States. Bay View Funding's results of operations have been included in the Company's results
beginning November 1, 2014. The following table reflects selected financial information for Bay View Funding at or for the periods indicated:
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Total factored receivables at September 30, 2015 |
|
$ |
42,343 |
|
Average factored receivables: |
|
|
|
|
For the three months ended September 30, 2015 |
|
$ |
43,364 |
|
For the nine months ended September 30, 2015 |
|
$ |
41,791 |
|
Total full time equivalent employees at September 30, 2015 |
|
|
37 |
|
Focus Business Bank Merger
On April 23, 2015, the Company and Focus entered into a definitive agreement and plan of merger and reorganization whereby Focus
would merge into HBC. The Company completed the merger of its wholly-owned bank subsidiary HBC with Focus on August 20, 2015 for an aggregate transaction value of $66.6 million.
Shareholders of Focus received a fixed exchange ratio at closing of 1.8235 shares of the Company's common stock for each share of Focus common stock. Upon closing of the transaction, the Company
issued 5,456,713 shares of the Company's
common stock to Focus shareholders for a total value of $58.3 million based on the Company's closing stock price of $10.68 on August 20, 2015. In addition, the Company paid cash to the
Focus holders of in-the-money stock options on August 20, 2015 totaling $8.3 million.
The
Company believes the merger provides the opportunity to combine two independent business banking franchises with similar philosophies and cultures into a combined $2.3 billion
business bank based in San Jose. The pooling of the two banks' resources and knowledge enhance our capabilities, operational efficiencies, and community outreach. The Company also believes the
combined bank will be much better positioned to meet the needs of our customers, shareholders and the community.
The
Focus acquisition added $168.1 million in Federal funds sold and interest-bearing deposits in other financial institutions, $62.0 million in investment securities (at
fair value), $167.3 million in loans (at fair value, including loans held-for-sale), and $396.5 million in deposits at September 30, 2015. The
54
Table of Contents
Focus
acquisition added $79.4 million in average total loans, $189.1 million in average total assets, and $176.0 million in average total deposits for the three months ended
September 30, 2015. The Focus acquisition added $26.8 million in average total loans, $63.7 million in average total assets, and $59.3 million in average total deposits for
the nine months ended September 30, 2015. Focus's results of operations have been included in the Company's results of operations beginning August 21, 2015. The one-time pre-tax
severance, retention, acquisition and integration costs totaled $2.9 million and $3.4 million for the three months and nine months ended September 30, 2015, respectively.
Third Quarter and Year-to-Date 2015 Highlights
The
following are major factors that impacted the Company's results of operations:
-
- The net interest margin (FTE) increased 46 basis points to 4.39% for the third quarter of 2015, from 3.93% for the third quarter of
2014, primarily due to loan growth, higher yields on securities, and revenue from the higher yielding Bay View Funding factored receivables portfolio partially offset by the temporary investment of
the excess liquidity from the Focus acquisition into lower yielding Federal funds sold and deposits at the Federal Reserve Bank. For the first nine months of 2015, net interest margin increased 52
basis points to 4.54%, compared to 4.02% for the first nine months of 2014, primarily due to revenue from the higher yielding Bay View Funding factored receivables portfolio, and a special dividend of
$203,000 paid by the FHLB in the second quarter of 2015, partially offset by the temporary investment of excess liquidity from the Focus acquisition. At September 30, 2015, Federal funds sold
and interest-bearing deposits in other financial institutions totaled $364.2 million. Average Federal funds sold and interest-bearing deposits in other financial institutions were
$226.3 million for the third quarter of 2015, compared to $114.9 million for the second quarter of 2015.
-
- Net interest income increased 41% to $19.7 million for the third quarter of 2015, compared to $14.0 million for the thid
quarter of 2014. Net interest income increased 32% to $54.2 million for the nine months ended September 30, 2015, compared to $41.0 million for the nine months ended
September 30, 2014.
-
- There was a $301,000 credit provision for loan losses for the third quarter of 2015, compared to a $24,000 credit provision for loan
losses for the third quarter of 2014. For the nine months ended September 30, 2015, there was a $339,000 credit provision for loan losses compared to a $232,000 credit provision for loan losses
for the nine months ended September 30, 2014.
-
- Noninterest income was $2.1 million for the third quarter of 2015, compared to $1.9 million for the third quarter of
2014. For the nine months ended September 30, 2015 noninterest income was $6.2 million, compared to $5.9 million for the nine months ended September 30, 2014.
-
- Total noninterest expense for the third quarter of 2015 increased to $16.4 million, from $10.5 million for the third
quarter of 2014. Noninterest expense for the nine months ended September 30, 2015 increased to $41.3 million, compared to $31.8 million for the nine months ended
September 30, 2014. The increase in noninterest expense for the nine months ended September 30, 2015, was primarily due to costs related to the Focus transaction, and the additional
operating costs of Focus and Bay View Funding. Noninterest expense included Focus pre-tax severance, retention, acquisition and integration costs of $2.9 million and $3.4 million for the
three months and nine months ended September 30, 2015, respectively. The Company will incur additional Focus related acquisition and integration expenses in the fourth quarter of 2015 for
severance and retention, systems integration costs, lease termination and other non-recurring expenses.
-
- The efficiency ratio for the third quarter of 2015 was 75.49%, compared to 66.15% for the third quarter of 2014. The efficiency ratio
for the nine months ended September 30, 2015 was 68.47%,
55
Table of Contents
compared
to 67.75% for the nine months ended September 30, 2014. The increase in the efficiency ratio in the third quarter and nine months ended September 30, 2015 compared to the same
periods in 2014 was primarily due to one-time Focus acquisition costs. Excluding the impact of the one-time Focus acquisition and severance and retention costs, the efficiency ratio was 62.32% for the
third quarter of 2015, and 62.76% for the nine months ended September 30, 2015.
-
- Income tax expense for the third quarter of 2015 was $2.2 million, compared to $2.0 million for the second quarter of
2014. The effective tax rate for the third quarter of 2015 was 38.6%, compared to 40.4% for the third quarter of 2014. Income tax expense for the nine months ended September 30, 2015 was
$7.3 million, compared to $5.5 million for the nine months ended September 30, 2014. The effective tax rate for the nine months ended September 30, 2015 was 37.7%, compared
to 36.1% for the nine months ended September 30, 2014.
The
following are important factors in understanding our current financial condition and liquidity position:
-
- Primarily due to the Focus transaction, cash, Federal funds sold, interest-bearing deposits in other financial institutions and
securities available-for-sale increased 88% to $650.3 million at September 30, 2015, from $345.8 million at September 30, 2014, and increased 98% from $328.7 million
at December 31, 2014.
-
- At September 30, 2015, investment securities held-to-maturity totaled $111.0 million, compared to $94.8 million
at September 30, 2014, and $95.4 million at December 31, 2014.
-
- Loans (excluding loans-held-for-sale) increased $302.8 million, or 29%, to $1.33 billion at September 30, 2015,
compared to $1.03 billion at September 30, 2014, which included an increase of $139.9 million, or 14%, in the Company's legacy loan portfolio, and $162.9 million from the
Focus transaction. Loans increased $243.8 million, or 22%, from $1.09 billion at December 31, 2014 which included an increase of $80.9 million, or 7%, in the Company's
legacy loan portfolio, and $162.9 million from the Focus transaction.
-
- Nonperforming assets were $5.9 million, or 0.26% of total assets, at September 30, 2015, compared to
$7.7 million, or 0.50%, of total assets, at September 30, 2014, and $6.6 million, or 0.41% of total assets, at December 31, 2014. At September 30, 2015,
$5.0 million of the NPAs were in the Company's legacy loan portfolio, and $931,000 of the NPAs were in the Focus loan portfolio.
-
- Classified assets, net of SBA guarantees, increased to $18.0 million at September 30, 2015, from $17.7 million at
September 30, 2014, and $16.0 million at December 31, 2014. The increase in classified assets at September 30, 2015 from September 30, 2014 and December 31,
2014 was primarily due to the Focus acquisition. At September 30, 2015, $10.3 million of the classified assets were in the the Company's legacy loan portfolio, and $7.7 million of
the classified assets were in the Focus loan portfolio.
-
- Net recoveries totaled $281,000 for the third quarter of 2015, compared to net charge-offs of $27,000 for the third quarter 2014, and
net charge-offs of $56,000 for the fourth quarter of 2014.
-
- The allowance for loan losses at September 30, 2015 was $18.7 million, or 1.41% of total loans, representing 340.49% of
nonperforming loans. The allowance for loan losses at September 30, 2014 was $18.5 million, or 1.80% of total loans, representing 257.16% of nonperforming loans. The allowance for loan
losses at December 31, 2014 was $18.4 million, or 1.69% of total loans, representing 313.90% of nonperforming loans. The loans acquired from Focus are included in total loans; however,
there is no allowance for loan losses attributed to these loans at
56
Table of Contents
September 30,
2015 because upon acquisition they were marked to fair market value, and included a fair value adjustment of $4.9 million at September 30, 2015.
-
- Deposits increased $620.2 million, or 46%, to $1.96 billion at September 30, 2015, compared to
$1.34 billion at September 30, 2014, which included an increase of $223.7 million, or 17%, in the Company's legacy deposit portfolio, and $396.5 million from the Focus
transaction. Deposits increased $573.6 million, or 41%, at September 30, 2015, compared to $1.39 billion at December 31, 2014, which included an increase of
$177.1 million, or 13%, in the Company's legacy deposit portfolio, and $396.5 million from the Focus transaction.
-
- The ratio of noncore funding (which consists of time deposits of $250,000 and over, CDARS deposits, brokered deposits, securities
under agreement to repurchase and short-term borrowings) to total assets was 9.19% at September 30, 2015, compared to 13.06% at September 30, 2014, and 12.54% at December 31,
2014.
-
- The loan to deposit ratio was 67.91% at September 30, 2015, compared to 76.73% at September 30, 2014, and 78.41% at
December 31, 2014.
-
- The Company announced it will pay a quarterly cash dividend of $0.08 per share in the fourth quarter of 2015 to holders of common
stock and Series C convertible perpetual preferred stock ("Series C Preferred Stock"), on an as converted basis.
-
- As of January 1, 2015, along with other community banking organizations, the Company and the Bank became subject to new capital
requirements, and certain provisions of the new rules will be phased in from 2015 through 2019 under the Dodd-Frank Act and Basel III. The Company's consolidated capital ratios and the Bank's capital
ratios are presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transitional
Minimum
Regulatory
Requirement
Effective
January 1, 2015 |
|
|
|
Well-capitalized
by Regulatory
Definition
Under FDICIA
Effective
January 1, 2015 |
|
|
|
At September 30, 2015 |
|
Minimum
Regulatory
Requirement(1)
Effective
January 1, 2019 |
|
Capital Ratios
|
|
Heritage
Commerce
Corp |
|
Heritage
Bank of
Commerce |
|
Total Risk-Based |
|
|
12.3 |
% |
|
12.1 |
% |
|
8.0 |
% |
|
10.5 |
% |
|
10.0 |
% |
Tier 1 Risk-Based |
|
|
11.2 |
% |
|
11.0 |
% |
|
6.0 |
% |
|
8.5 |
% |
|
8.0 |
% |
Common Equity Tier 1 Risk-based |
|
|
10.2 |
% |
|
11.0 |
% |
|
4.5 |
% |
|
7.0 |
% |
|
6.5 |
% |
Leverage |
|
|
10.4 |
% |
|
10.2 |
% |
|
4.0 |
% |
|
4.0 |
% |
|
5.0 |
% |
- (1)
- Includes
2.5% capital conservation buffer.
Deposits
The composition and cost of the Company's deposit base are important in analyzing the Company's net interest margin and balance sheet
liquidity characteristics. Except for brokered time deposits, the Company's depositors are generally located in its primary market area. Depending on loan demand and other funding requirements, the
Company also obtains deposits from wholesale sources including deposit brokers. HBC is a member of the Certificate of Deposit Account Registry Service ("CDARS") program. The CDARS program allows
customers with deposits in excess of FDIC insured limits to obtain coverage on time deposits through a network of banks within the CDARS program. Deposits gathered through this program are considered
brokered deposits under regulatory guidelines. The Company has a policy to monitor all deposits that may be sensitive to interest rate changes to help assure that liquidity risk does not become
excessive due to concentrations.
Deposits
totaled $1.96 billion at September 30, 2015, compared to $1.34 billion at September 30, 2014, and $1.39 billion at December 31, 2014.
Deposits (excluding all time deposits and CDARS deposits) increased $608.0 million, or 56%, to $1.69 billion at September 30, 2015, from $1.10 billion at
57
Table of Contents
September 30,
2014 and increased $561.4 million, or 50%, from $1.13 billion at December 31, 2014. At September 30, 2015, total deposits from Focus were
$396.5 million, which was comprised of $125.3 million of noninterest-bearing demand deposits, $191.1 million of interest-bearing demand deposits, $10.6 million of time
deposits (under $250,000), and $11.9 million of time deposits ($250,000 and over).
The
Company had $24.2 million in brokered deposits at September 30, 2015, compared to $28.1 million at September 30, 2014 and December 31, 2014.
Deposits from title insurance companies, escrow accounts and real estate exchange facilitators was $24.6 million at September 30, 2015, compared to $33.6 million at
September 30, 2014, and $41.5 million at December 31, 2014. Certificates of deposit from the State of California totaled $98.0 million at September 30, 2015,
September 30, 2014 and December 31, 2014.
Liquidity
Our liquidity position refers to our ability to maintain cash flows sufficient to fund operations and to meet obligations and other
commitments in a timely fashion. At September 30, 2015, we had $392.9 million in cash and cash equivalents and approximately $445.3 million in available borrowing capacity from
various sources including the Federal Home Loan Bank ("FHLB"), the Federal Reserve Bank of San Francisco ("FRB"), and Federal funds facilities with several financial institutions. The Company also had
$218.3 million at fair value in unpledged securities available at September 30, 2015. Our loan to deposit ratio decreased to 67.91% at September 30, 2015, compared to 76.73% at
September 30, 2014, and 78.41% at December 31, 2014.
Lending
Our lending business originates principally through our branch offices located in our primary markets. In addition, Bay View Funding
provides factoring financing throughout the United States. Loans, excluding loans held-for-sale, increased 29% to $1.33 billion at September 30, 2015, from $1.03 billion at
September 30, 2014, and increased 22% from $1.09 billion at December 31, 2014. At September 30, 2015, the Focus loan portfolio totaled $162.9 million (at fair
value), which was comprised of $76.6 million of commercial and industrial loans ("C&I"), $83.9 million of commercial and residential real estate loans, $834,000 of land and construction
loans, $1.2 million of home equity loans, and $353,000 of consumer loans.
The
loan portfolio remains well-diversified with C&I loans accounting for 42% of the loan portfolio at September 30, 2015, which included $42.3 million of factored
receivables at Bay View Funding. Commercial and residential real estate loans accounted for 45% of the total loan portfolio. Consumer and home equity loans accounted for 7% of total loans, and land
and construction loans accounted for the remaining 6% of total loans at September 30, 2015.
Net Interest Income
The management of interest income and expense is fundamental to the performance of the Company. Net interest income, the difference
between interest income and interest expense, is the largest component of the Company's total revenue. Management closely monitors both total net interest income and the net interest margin (net
interest income divided by average earning assets). Net interest income increased 41% to $19.7 million for the third quarter of 2015, compared to $14.0 million for the third quarter of
2014. Net interest income increased 32% to $54.2 million for the nine months ended September 30, 2015, compared to $41.0 million for the nine months ended September 30,
2014. The increase in the net interest income for the third quarter and for the nine months ended September 30, 2015, compared to the same periods in 2014, was primarily the result of the Focus
acquisition, organic growth in the loan portfolio, contribution to revenue from operations from Bay
58
Table of Contents
View
Funding, and increases in core deposits. Net interest income for the nine months ended September 30, 2015 also increased from a special dividend of $203,000 paid by the FHLB in the second
quarter of 2015.
For
the three months and nine months ended September 30, 2015, net interest income included the accretion of $262,000 from the loan interest rate and credit fair value adjustments
in loan interest income, and the accretion of $2,000 from the securities fair value adjustment to securities interest income.
The
Company through its asset and liability policies and practices seeks to maximize net interest income without exposing the Company to an excessive level of interest rate risk.
Interest rate risk is managed by monitoring the pricing, maturity and repricing options of all classes of interest bearing assets and liabilities. This is discussed in more detail under "Liquidity and Asset/Liability
Management." In addition, we believe there are measures and initiatives we can take to improve the net interest
margin, including increasing loan rates, adding floors on floating rate loans, reducing nonperforming assets, managing deposit interest rates, and reducing higher cost deposits.
The
net interest margin is also adversely impacted by the reversal of interest on nonaccrual loans and the reinvestment of loan payoffs into lower yielding investment securities and
other short-term investments.
Management of Credit Risk
We continue to proactively identify, quantify, and manage our problem loans. Early identification of problem loans and potential future
losses helps enable us to resolve credit issues with potentially less risk and ultimate losses. We maintain an allowance for loan losses in an amount that we believe is adequate to absorb probable
incurred losses in the portfolio. While we strive to carefully manage and monitor credit quality and to identify loans that may be deteriorating, circumstances can change at any time for loans
included in the portfolio that may result in future losses, that as of the date of the financial statements have not yet been identified as potential problem loans. Through established credit
practices, we adjust the allowance for loan losses accordingly. However, because future events are uncertain, there may be loans that will deteriorate, some of which could occur in an accelerated
time-frame. As a result, future additions to the allowance for loan losses may be necessary. Because the loan portfolio contains a number of commercial loans, commercial real estate, construction and
land development loans with relatively large balances, deterioration in the credit quality of one or more of these loans may require a significant increase to the allowance for loan losses. Future
additions to the allowance may also be required based on changes in the financial condition of borrowers. Additionally, Federal and state banking regulators, as an integral part of their supervisory
function, periodically review our allowance for loan losses. These regulatory agencies may require us to recognize further loan loss provisions or charge-offs based upon their judgments, which may be
different from ours. Any increase in the allowance for loan losses would have an adverse effect, which may be material, on our financial condition and results of operation.
Further
discussion of the management of credit risk appears under "Provision for Loan Losses" and "Allowance for
Loan Losses."
Noninterest Income
While net interest income remains the largest single component of total revenues, noninterest income is an important component. A
portion of the Company's noninterest
income is associated with its SBA lending activity, consisting of gains on the sale of loans sold in the secondary market and servicing income from loans sold with servicing retained. Other sources of
noninterest income include loan servicing fees, service charges and fees, cash surrender value from company owned life insurance policies, and gains on the sale of securities.
59
Table of Contents
Noninterest Expense
Management considers the control of operating expenses to be a critical element of the Company's performance. Noninterest expense for
the third quarter of 2015 was $16.4 million, compared to $10.5 million for the third quarter of 2014. Noninterest expense for the nine months ended September 30, 2015 was
$41.3 million, compared to $31.8 million for the nine months ended September 30, 2014. The increase in noninterest expense for the third quarter and nine months ended
September 30, 2015 was primarily due to costs related to the Focus transaction, and the additional operating costs of Focus and Bay View Funding. The one-time pre-tax severance, retention,
acquisition and integration costs totaled $2.9 million and $3.4 million for the three months and nine months ended September 30, 2015, respectively.
Capital Management
As part of its asset and liability management process, the Company continually assesses its capital position to take into consideration
growth, expected earnings, risk profile and potential corporate activities that it may choose to pursue.
RESULTS OF OPERATIONS
The Company earns income from two primary sources. The first is net interest income, which is interest income generated by earning
assets less interest expense on interest-bearing liabilities. The second is noninterest income, which primarily consists of gains on the sale of loans, loan servicing fees, customer service charges
and fees, the increase in cash surrender value of life insurance, and gains on the sale of securities. The majority of the Company's noninterest expenses are operating costs that relate to providing a
full range of banking and lending services to our customers.
Net Interest Income and Net Interest Margin
The level of net interest income depends on several factors in combination, including yields on earning assets, the cost of
interest-bearing liabilities, the relative volumes of earning assets and interest-bearing liabilities, and the mix of products which comprise the Company's earning assets, deposits, and other
interest-bearing liabilities. To maintain its net interest margin the Company must manage the relationship between interest earned and paid.
The
following Distribution, Rate and Yield table presents the average amounts outstanding for the major categories of the Company's balance sheet, the average interest rates earned or
paid thereon, and the resulting net interest margin on average interest earning assets for the periods indicated. Average balances are based on daily averages.
60
Table of Contents
Distribution, Rate and Yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended September 30, 2015 |
|
For the Three Months
Ended September 30, 2014 |
|
NET INTEREST INCOME AND NET
INTEREST MARGIN
|
|
Average
Balance |
|
Interest
Income/
Expense |
|
Average
Yield/
Rate |
|
Average
Balance |
|
Interest
Income/
Expense |
|
Average
Yield/
Rate |
|
|
|
(Dollars in thousands)
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, gross(1) |
|
$ |
1,232,989 |
|
$ |
17,713 |
|
|
5.70 |
% |
$ |
1,004,271 |
|
$ |
12,077 |
|
|
4.77 |
% |
Securitiestaxable |
|
|
244,313 |
|
|
1,670 |
|
|
2.71 |
% |
|
238,748 |
|
|
1,675 |
|
|
2.78 |
% |
Securitiestax exempt(2) |
|
|
91,127 |
|
|
874 |
|
|
3.80 |
% |
|
79,926 |
|
|
779 |
|
|
3.87 |
% |
Federal funds sold and interest-bearing deposits in other financial institutions |
|
|
237,372 |
|
|
355 |
|
|
0.59 |
% |
|
118,847 |
|
|
234 |
|
|
0.78 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets(2) |
|
|
1,805,801 |
|
|
20,612 |
|
|
4.53 |
% |
|
1,441,792 |
|
|
14,765 |
|
|
4.06 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
34,921 |
|
|
|
|
|
|
|
|
26,535 |
|
|
|
|
|
|
|
Premises and equipment, net |
|
|
7,374 |
|
|
|
|
|
|
|
|
7,435 |
|
|
|
|
|
|
|
Intangible assets |
|
|
30,135 |
|
|
|
|
|
|
|
|
1,247 |
|
|
|
|
|
|
|
Other assets |
|
|
77,816 |
|
|
|
|
|
|
|
|
66,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,956,047 |
|
|
|
|
|
|
|
$ |
1,543,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders' equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand, noninterest-bearing |
|
$ |
652,529 |
|
|
|
|
|
|
|
$ |
471,326 |
|
|
|
|
|
|
|
Demand, interest-bearing |
|
|
326,922 |
|
|
144 |
|
|
0.17 |
% |
|
212,579 |
|
|
89 |
|
|
0.17 |
% |
Savings and money market |
|
|
444,702 |
|
|
240 |
|
|
0.21 |
% |
|
379,733 |
|
|
171 |
|
|
0.18 |
% |
Time depositsunder $100 |
|
|
20,681 |
|
|
15 |
|
|
0.29 |
% |
|
20,163 |
|
|
16 |
|
|
0.31 |
% |
Time deposits$100 and over |
|
|
206,909 |
|
|
173 |
|
|
0.33 |
% |
|
196,062 |
|
|
158 |
|
|
0.32 |
% |
Time depositsbrokered |
|
|
24,861 |
|
|
50 |
|
|
0.80 |
% |
|
31,116 |
|
|
63 |
|
|
0.80 |
% |
CDARSmoney market and time deposits |
|
|
16,678 |
|
|
1 |
|
|
0.02 |
% |
|
14,755 |
|
|
3 |
|
|
0.08 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
1,040,753 |
|
|
623 |
|
|
0.24 |
% |
|
854,408 |
|
|
500 |
|
|
0.23 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
|
1,693,282 |
|
|
623 |
|
|
0.15 |
% |
|
1,325,734 |
|
|
500 |
|
|
0.15 |
% |
Short-term borrowings |
|
|
166 |
|
|
|
|
|
0.00 |
% |
|
52 |
|
|
|
|
|
0.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
1,040,919 |
|
|
623 |
|
|
0.24 |
% |
|
854,460 |
|
|
500 |
|
|
0.23 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds |
|
|
1,693,448 |
|
|
623 |
|
|
0.15 |
% |
|
1,325,786 |
|
|
500 |
|
|
0.15 |
% |
Other liabilities |
|
|
48,494 |
|
|
|
|
|
|
|
|
35,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,741,942 |
|
|
|
|
|
|
|
|
1,361,159 |
|
|
|
|
|
|
|
Shareholders' equity |
|
|
214,105 |
|
|
|
|
|
|
|
|
182,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity |
|
$ |
1,956,047 |
|
|
|
|
|
|
|
$ |
1,543,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income(2) / margin |
|
|
|
|
|
19,989 |
|
|
4.39 |
% |
|
|
|
|
14,265 |
|
|
3.93 |
% |
Less tax equivalent adjustment(2) |
|
|
|
|
|
(306 |
) |
|
|
|
|
|
|
|
(273 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
$ |
19,683 |
|
|
|
|
|
|
|
$ |
13,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- (1)
- Includes
loans held for sale. Yield amounts earned on loans include loan fees and costs. Nonaccrual loans are included in average balance.
- (2)
- Reflects
tax equivalent adjustment for tax exempt income based on a 35% tax rate.
61
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
Ended September 30, 2015 |
|
For the Nine Months
Ended September 30, 2014 |
|
NET INTEREST INCOME AND NET
INTEREST MARGIN
|
|
Average
Balance |
|
Interest
Income/
Expense |
|
Average
Yield/
Rate |
|
Average
Balance |
|
Interest
Income/
Expense |
|
Average
Yield/
Rate |
|
|
|
(Dollars in thousands)
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, gross(1) |
|
$ |
1,136,208 |
|
$ |
48,360 |
|
|
5.69 |
% |
$ |
970,032 |
|
$ |
34,832 |
|
|
4.80 |
% |
Securitiestaxable |
|
|
230,608 |
|
|
4,828 |
|
|
2.80 |
% |
|
264,437 |
|
|
5,555 |
|
|
2.81 |
% |
Securitiestax exempt(2) |
|
|
84,286 |
|
|
2,444 |
|
|
3.88 |
% |
|
79,905 |
|
|
2,336 |
|
|
3.91 |
% |
Federal funds sold and interest-bearing deposits in other financial institutions |
|
|
171,503 |
|
|
1,070 |
|
|
0.83 |
% |
|
78,476 |
|
|
634 |
|
|
1.08 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets(2) |
|
|
1,622,605 |
|
|
56,702 |
|
|
4.67 |
% |
|
1,392,850 |
|
|
43,357 |
|
|
4.16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
28,647 |
|
|
|
|
|
|
|
|
25,068 |
|
|
|
|
|
|
|
Premises and equipment, net |
|
|
7,388 |
|
|
|
|
|
|
|
|
7,295 |
|
|
|
|
|
|
|
Goodwill and other intangible assets |
|
|
20,721 |
|
|
|
|
|
|
|
|
1,365 |
|
|
|
|
|
|
|
Other assets |
|
|
73,417 |
|
|
|
|
|
|
|
|
64,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,752,778 |
|
|
|
|
|
|
|
$ |
1,490,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders' equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand, noninterest-bearing |
|
$ |
578,117 |
|
|
|
|
|
|
|
$ |
445,585 |
|
|
|
|
|
|
|
Demand, interest-bearing |
|
|
265,095 |
|
|
349 |
|
|
0.18 |
% |
|
203,713 |
|
|
248 |
|
|
0.16 |
% |
Savings and money market |
|
|
403,385 |
|
|
623 |
|
|
0.21 |
% |
|
357,535 |
|
|
489 |
|
|
0.18 |
% |
Time depositsunder $100 |
|
|
19,812 |
|
|
45 |
|
|
0.30 |
% |
|
20,643 |
|
|
49 |
|
|
0.32 |
% |
Time deposits$100 and over |
|
|
202,512 |
|
|
485 |
|
|
0.32 |
% |
|
195,122 |
|
|
473 |
|
|
0.32 |
% |
Time depositsbrokered |
|
|
26,578 |
|
|
157 |
|
|
0.79 |
% |
|
39,249 |
|
|
262 |
|
|
0.89 |
% |
CDARSmoney market and time deposits |
|
|
13,711 |
|
|
5 |
|
|
0.05 |
% |
|
16,091 |
|
|
6 |
|
|
0.05 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
931,093 |
|
|
1,664 |
|
|
0.24 |
% |
|
832,353 |
|
|
1,527 |
|
|
0.25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
|
1,509,210 |
|
|
1,664 |
|
|
0.15 |
% |
|
1,277,938 |
|
|
1,527 |
|
|
0.16 |
% |
Short-term borrowings |
|
|
80 |
|
|
|
|
|
0.00 |
% |
|
556 |
|
|
1 |
|
|
0.24 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
931,173 |
|
|
1,664 |
|
|
0.24 |
% |
|
832,909 |
|
|
1,528 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds |
|
|
1,509,290 |
|
|
1,664 |
|
|
0.15 |
% |
|
1,278,494 |
|
|
1,528 |
|
|
0.25 |
% |
Other liabilities |
|
|
47,757 |
|
|
|
|
|
|
|
|
33,253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,557,047 |
|
|
|
|
|
|
|
|
1,311,747 |
|
|
|
|
|
|
|
Shareholders' equity |
|
|
195,731 |
|
|
|
|
|
|
|
|
178,967 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity |
|
$ |
1,752,778 |
|
|
|
|
|
|
|
$ |
1,490,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income(2) / margin |
|
|
|
|
|
55,038 |
|
|
4.54 |
% |
|
|
|
|
41,829 |
|
|
4.02 |
% |
Less tax equivalent adjustment(2) |
|
|
|
|
|
(855 |
) |
|
|
|
|
|
|
|
(818 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
$ |
54,183 |
|
|
|
|
|
|
|
$ |
41,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- (1)
- Includes
loans held-for-sale. Yield amounts earned on loans include loan fees and costs. Nonaccrual loans are included in average balance.
- (2)
- Reflects
tax equivalent adjustment for tax exempt income based on a 35% tax rate.
Volume and Rate Variances
The Volume and Rate Variances table below sets forth the dollar difference in interest earned and paid for each major category of
interest-earning assets and interest-bearing liabilities for the noted periods, and the amount of such change attributable to changes in average balances (volume) or changes in average interest rates.
Volume variances are equal to the increase or decrease in the average
62
Table of Contents
balance
times the prior period rate, and rate variances are equal to the increase or decrease in the average rate times the prior period average balance. Variances attributable to both rate and volume
changes are equal to the change in rate times the change in average balance and are included below in the average volume column.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
2015 vs. 2014
Increase (Decrease) Due to
Change In: |
|
|
|
Average
Volume |
|
Average
Rate |
|
Net
Change |
|
|
|
(Dollars in thousands)
|
|
Income from interest earning assets: |
|
|
|
|
|
|
|
|
|
|
Loans, gross |
|
$ |
3,285 |
|
$ |
2,351 |
|
$ |
5,636 |
|
Securitiestaxable |
|
|
39 |
|
|
(44 |
) |
|
(5 |
) |
Securitiestax exempt(1) |
|
|
108 |
|
|
(13 |
) |
|
95 |
|
Federal funds sold and interest-bearing deposits in other financial institutions |
|
|
178 |
|
|
(57 |
) |
|
121 |
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income from interest earnings assets(1) |
|
|
3,610 |
|
|
2,237 |
|
|
5,847 |
|
|
|
|
|
|
|
|
|
|
|
|
Expense on interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
Demand, interest-bearing |
|
|
53 |
|
|
2 |
|
|
55 |
|
Savings and money market |
|
|
39 |
|
|
30 |
|
|
69 |
|
Time depositsunder $100 |
|
|
|
|
|
(1 |
) |
|
(1 |
) |
Time deposits$100 and over |
|
|
10 |
|
|
5 |
|
|
15 |
|
Time depositsbrokered |
|
|
(13 |
) |
|
|
|
|
(13 |
) |
CDARSmoney market and time deposits |
|
|
|
|
|
(2 |
) |
|
(2 |
) |
Short-term borrowings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense on interest-bearing liabilities |
|
|
89 |
|
|
34 |
|
|
123 |
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income(1) |
|
$ |
3,521 |
|
$ |
2,203 |
|
|
5,724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less tax equivalent adjustment(1) |
|
|
|
|
|
|
|
|
(33 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
|
|
$ |
5,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- (1)
- Reflects
tax equivalent adjustment for tax exempt income based on a 35% tax rate.
63
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
2015 vs. 2014
Increase (Decrease) Due to
Change In: |
|
|
|
Average
Volume |
|
Average
Rate |
|
Net
Change |
|
|
|
(Dollars in thousands)
|
|
Income from interest earning assets: |
|
|
|
|
|
|
|
|
|
|
Loans, gross |
|
$ |
7,077 |
|
$ |
6,451 |
|
$ |
13,528 |
|
Securitiestaxable |
|
|
(710 |
) |
|
(17 |
) |
|
(727 |
) |
Securitiestax exempt(1) |
|
|
125 |
|
|
(17 |
) |
|
108 |
|
Federal funds sold and interest-bearing deposits in other financial institutions |
|
|
583 |
|
|
(147 |
) |
|
436 |
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income from interest earnings assets(1) |
|
|
7,075 |
|
|
6,270 |
|
|
13,345 |
|
|
|
|
|
|
|
|
|
|
|
|
Expense on interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
Demand, interest-bearing |
|
|
75 |
|
|
26 |
|
|
101 |
|
Savings and money market |
|
|
61 |
|
|
73 |
|
|
134 |
|
Time depositsunder $100 |
|
|
(1 |
) |
|
(3 |
) |
|
(4 |
) |
Time deposits$100 and over |
|
|
18 |
|
|
(6 |
) |
|
12 |
|
Time depositsbrokered |
|
|
(75 |
) |
|
(30 |
) |
|
(105 |
) |
CDARSmoney market and time deposits |
|
|
(1 |
) |
|
|
|
|
(1 |
) |
Short-term borrowings |
|
|
|
|
|
(1 |
) |
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total interest expense on interest-bearing liabilities |
|
|
77 |
|
|
59 |
|
|
136 |
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income(1) |
|
$ |
6,998 |
|
$ |
6,211 |
|
|
13,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less tax equivalent adjustment(1) |
|
|
|
|
|
|
|
|
(37 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
|
|
$ |
13,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- (1)
- Reflects
tax equivalent adjustment for tax exempt income based on a 35% tax rate.
The
Company's net interest margin (FTE), expressed as a percentage of average earning assets, increased 46 basis points to 4.39% for the third quarter of 2015, from 3.93% for the third
quarter of 2014, primarily due to loan growth, higher yields on securities, and revenue from the higher yielding Bay View Funding factored receivables portfolio, partially offset by the temporary
investment of the excess liquidity from the Focus acquisition into lower yielding Federal funds sold and deposits at the Federal Reserve Bank. For the first nine months of 2015, net interest margin
increased 52 basis points to 4.54%, compared to 4.02% for the first nine months of 2014, primarily due to revenue from the higher yielding Bay View Funding factored receivables portfolio, and a
special dividend of $203,000 paid by the FHLB in the second quarter of 2015, partially offset by the temporary investment of excess liquidity from the Focus acquisition.
Net
interest income increased 41% to $19.7 million for the third quarter of 2015, compared to $14.0 million for the third quarter of 2014. Net interest income increased 32%
to $54.2 million for the nine months ended September 30, 2015, compared to $41.0 million the nine months ended September 30, 2014. The increase in the net interest income
for the third quarter and for the nine months ended September 30, 2015, compared to the same periods in 2014, was primarily the result of the Focus acquisition, organic growth in the loan
portfolio, contribution to revenue from operations from Bay View Funding, and increases in core deposits. Net interest income for the nine months ended September 30, 2015 also increased from
the special dividend paid by the FHLB in the second quarter of 2015.
64
Table of Contents
For
the three months and nine months ended September 30, 2015, net interest income included the accretion of $262,000 from the loan interest rate and credit fair value adjustments
in loan interest income, and the accretion of $2,000 from the securities fair value adjustment to securities interest income.
A
majority of the Company's earning assets are variable-rate loans that re-price when the Company's prime lending rate is changed, compared to a large base of core deposits that are
generally slower to re-price. This causes the Company's balance sheet to be asset-sensitive, which means that all else being equal, the Company's net interest margin will be lower during periods when
short-term interest rates are falling and higher when rates are rising.
Provision for Loan Losses
Credit risk is inherent in the business of making loans. The Company establishes an allowance for loan losses through charges to
earnings, which are presented in the statements of income as the provision for loan losses. Specifically identifiable and quantifiable known losses are promptly charged off against the allowance. The
provision for loan losses is determined by conducting a quarterly evaluation of the adequacy of the Company's allowance for loan losses and charging the shortfall or excess, if any, to the current
quarter's expense. This has the effect of creating variability in the amount and frequency of charges to the Company's earnings. The provision for loan losses and level of allowance for each period
are dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management's assessment of the quality of the loan portfolio,
the valuation of problem loans and the general economic conditions in the Company's market area.
There
was a credit provision for loan losses of $301,000 for the third quarter of 2015, compared to a credit provision for loan losses of $24,000 for the third quarter of 2014. The
credit provision for loan losses for the nine months ended September 30, 2015 was $339,000, compared to a credit to the provision for loan losses of $232,000 for the nine months ended
September 30, 2014. There was no impact to the provision for loan losses from the Focus transaction for the three months and nine months ended September 30, 2015.
The
allowance for loan losses totaled $18.7 million, or 1.41% of total loans at September 30, 2015, compared to $18.5 million, or 1.80% of total loans at
September 30, 2014, and $18.4 million, or 1.69% of total loans at December 31, 2014. The allowance for loan losses to total loans decreased at September 30, 2015, compared
to September 30, 2014 and December 31, 2014, primarily due to the impact of the Focus acquisition. The loans acquired from Focus are included in total loans; however, there is no
allowance for loan losses attributed to these loans at September 30, 2015 because they were marked to fair market value on acquisition, and included a fair value adjustment of
$4.9 million at September 30, 2015. Excluding the $162.9 million (at fair value) Focus loan portfolio, the ALLL to total loans was 1.60% at September 30, 2015. Net
recoveries totaled $281,000 for the third quarter of 2015, compared to net charge-offs of $27,000 for the third quarter of 2014, and net charge-offs of $56,000 for the fourth quarter of 2014. The
allowance for loan losses to total nonperforming loans was 340.49% at September 30, 2015, compared to 257.16% at September 30, 2014, and 313.90% at December 31, 2014. Provisions
for loan losses are charged to operations to bring the allowance for loan losses to a level deemed appropriate by the Company based on the factors discussed under "Allowance for Loan Losses".
65
Table of Contents
Noninterest Income
The following table sets forth the various components of the Company's noninterest income for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
Months Ended
September 30, |
|
Increase
(decrease)
2015 versus 2014 |
|
|
|
2015 |
|
2014 |
|
Amount |
|
Percent |
|
|
|
(Dollars in thousands)
|
|
Service charges and fees on deposit accounts |
|
$ |
748 |
|
$ |
631 |
|
$ |
117 |
|
|
19 |
% |
Increase in cash surrender value of life insurance |
|
|
429 |
|
|
401 |
|
|
28 |
|
|
7 |
% |
Servicing income |
|
|
214 |
|
|
316 |
|
|
(102 |
) |
|
32 |
% |
Gain on sales of SBA loans |
|
|
267 |
|
|
259 |
|
|
8 |
|
|
3 |
% |
Gain on sales of securities |
|
|
|
|
|
47 |
|
|
(47 |
) |
|
100 |
% |
Other |
|
|
408 |
|
|
216 |
|
|
192 |
|
|
89 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
$ |
2,066 |
|
$ |
1,870 |
|
$ |
196 |
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine
Months Ended
September 30, |
|
Increase
(decrease)
2015 versus 2014 |
|
|
|
2015 |
|
2014 |
|
Amount |
|
Percent |
|
|
|
(Dollars in thousands)
|
|
Service charges and fees on deposit accounts |
|
$ |
2,086 |
|
$ |
1,897 |
|
$ |
189 |
|
|
10 |
% |
Increase in cash surrender value of life insurance |
|
|
1,225 |
|
|
1,196 |
|
|
29 |
|
|
2 |
% |
Servicing income |
|
|
819 |
|
|
977 |
|
|
(158 |
) |
|
16 |
% |
Gain on sales of SBA loans |
|
|
660 |
|
|
858 |
|
|
(198 |
) |
|
23 |
% |
Gain on sales of securities |
|
|
|
|
|
97 |
|
|
(97 |
) |
|
100 |
% |
Other |
|
|
1,366 |
|
|
909 |
|
|
457 |
|
|
50 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
$ |
6,156 |
|
$ |
5,934 |
|
$ |
222 |
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
income was $2.1 million for the third quarter of 2015, compared to $1.9 million for the third quarter of 2014. For the nine months ended September 30,
2015 noninterest income was $6.2 million compared to $5.9 million for the nine months ended September 30, 2014.
Historically,
a significant percentage of the Company's noninterest income has been associated with its SBA lending activity, as gains on the sale of loans sold in the secondary market
and servicing income from loans sold with servicing rights retained. For the three months ended September 30, 2015, SBA loan sales resulted in an $267,000 gain, compared to a $259,000 gain on
sale of SBA loans for the three months ended September 30, 2014. For the nine months ended September 30, 2015, SBA loan sales resulted in a $660,000 gain, compared to a $858,000 gain on
sale of SBA loans for the nine months ended September 30, 2014.
The
servicing assets that result from the sales of SBA loans with servicing retained are amortized over the expected term of the loans using a method approximating the interest method.
Servicing income generally declines as the respective loans are repaid.
66
Table of Contents
Noninterest Expense
The following table sets forth the various components of the Company's noninterest expense for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
Months Ended
September 30, |
|
Increase
(decrease)
2015 versus 2014 |
|
|
|
2015 |
|
2014 |
|
Amount |
|
Percent |
|
|
|
(Dollars in thousands)
|
|
Salaries and employee benefits |
|
$ |
10,358 |
|
$ |
6,228 |
|
$ |
4,130 |
|
|
66 |
% |
Occupancy and equipment |
|
|
1,063 |
|
|
1,055 |
|
|
8 |
|
|
1 |
% |
Acquisition and integration related costs |
|
|
688 |
|
|
234 |
|
|
454 |
|
|
194 |
% |
Professional fees |
|
|
612 |
|
|
617 |
|
|
(5 |
) |
|
1 |
% |
Data processing |
|
|
411 |
|
|
238 |
|
|
173 |
|
|
73 |
% |
Software subscriptions |
|
|
292 |
|
|
264 |
|
|
28 |
|
|
11 |
% |
Insurance expense |
|
|
273 |
|
|
292 |
|
|
(19 |
) |
|
7 |
% |
Correspondent bank charges |
|
|
269 |
|
|
174 |
|
|
95 |
|
|
55 |
% |
Amortization of intangible assets |
|
|
277 |
|
|
115 |
|
|
162 |
|
|
141 |
% |
Advertising and promotion |
|
|
262 |
|
|
87 |
|
|
175 |
|
|
201 |
% |
FDIC deposit insurance premiums |
|
|
251 |
|
|
220 |
|
|
31 |
|
|
14 |
% |
Foreclosed assets |
|
|
113 |
|
|
|
|
|
113 |
|
|
N/A |
|
Other |
|
|
1,550 |
|
|
968 |
|
|
582 |
|
|
60 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
$ |
16,419 |
|
$ |
10,492 |
|
$ |
5,927 |
|
|
56 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine
Months Ended
September 30, |
|
Increase
(decrease)
2015 versus 2014 |
|
|
|
2015 |
|
2014 |
|
Amount |
|
Percent |
|
|
|
(Dollars in thousands)
|
|
Salaries and employee benefits |
|
$ |
26,112 |
|
$ |
19,290 |
|
$ |
6,822 |
|
|
35 |
% |
Occupancy and equipment |
|
|
3,135 |
|
|
2,987 |
|
|
148 |
|
|
5 |
% |
Acquisition and integration related costs |
|
|
1,265 |
|
|
287 |
|
|
978 |
|
|
341 |
% |
Professional fees |
|
|
946 |
|
|
1,329 |
|
|
(383 |
) |
|
29 |
% |
Data processing |
|
|
950 |
|
|
741 |
|
|
209 |
|
|
28 |
% |
Software subscriptions |
|
|
883 |
|
|
702 |
|
|
181 |
|
|
26 |
% |
Insurance expense |
|
|
855 |
|
|
830 |
|
|
25 |
|
|
3 |
% |
Correspondent bank charges |
|
|
760 |
|
|
539 |
|
|
221 |
|
|
41 |
% |
Amortization of intangible assets |
|
|
655 |
|
|
345 |
|
|
310 |
|
|
90 |
% |
Advertising and promotion |
|
|
689 |
|
|
504 |
|
|
185 |
|
|
37 |
% |
FDIC deposit insurance premiums |
|
|
727 |
|
|
674 |
|
|
53 |
|
|
8 |
% |
Foreclosed assets |
|
|
(93 |
) |
|
(19 |
) |
|
(74 |
) |
|
389 |
% |
Other |
|
|
4,428 |
|
|
3,598 |
|
|
830 |
|
|
23 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
$ |
41,312 |
|
$ |
31,807 |
|
$ |
9,505 |
|
|
30 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67
Table of Contents
The
following table indicates the percentage of noninterest expense in each category for the periods indicated:
Noninterest Expense by Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30 |
|
|
|
2015 |
|
Percent
of Total |
|
2014 |
|
Percent
of Total |
|
|
|
(Dollars in thousands)
|
|
Salaries and employee benefits |
|
$ |
10,358 |
|
|
63 |
% |
$ |
6,228 |
|
|
59 |
% |
Occupancy and equipment |
|
|
1,063 |
|
|
6 |
% |
|
1,055 |
|
|
10 |
% |
Acquisition and integration related costs |
|
|
688 |
|
|
4 |
% |
|
234 |
|
|
2 |
% |
Professional fees |
|
|
612 |
|
|
4 |
% |
|
617 |
|
|
6 |
% |
Data processing |
|
|
411 |
|
|
2 |
% |
|
238 |
|
|
2 |
% |
Software subscriptions |
|
|
292 |
|
|
2 |
% |
|
264 |
|
|
3 |
% |
Insurance expense |
|
|
273 |
|
|
2 |
% |
|
292 |
|
|
3 |
% |
Correspondent bank charges |
|
|
269 |
|
|
2 |
% |
|
174 |
|
|
2 |
% |
Amortization of intangible assets |
|
|
277 |
|
|
2 |
% |
|
115 |
|
|
1 |
% |
Advertising and promotion |
|
|
262 |
|
|
2 |
% |
|
87 |
|
|
1 |
% |
FDIC deposit insurance premiums |
|
|
251 |
|
|
1 |
% |
|
220 |
|
|
2 |
% |
Foreclosed assets |
|
|
113 |
|
|
1 |
% |
|
|
|
|
0 |
% |
Other |
|
|
1,550 |
|
|
9 |
% |
|
968 |
|
|
9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
$ |
16,419 |
|
|
100 |
% |
$ |
10,492 |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, |
|
|
|
2015 |
|
Percent
of Total |
|
2014 |
|
Percent
of Total |
|
|
|
(Dollars in thousands)
|
|
Salaries and employee benefits |
|
$ |
26,112 |
|
|
63 |
% |
$ |
19,290 |
|
|
61 |
% |
Occupancy and equipment |
|
|
3,135 |
|
|
8 |
% |
|
2,987 |
|
|
9 |
% |
Acquisition and integration related costs |
|
|
1,265 |
|
|
3 |
% |
|
287 |
|
|
1 |
% |
Professional fees |
|
|
946 |
|
|
2 |
% |
|
1,329 |
|
|
4 |
% |
Data processing |
|
|
950 |
|
|
2 |
% |
|
741 |
|
|
2 |
% |
Software subscriptions |
|
|
883 |
|
|
2 |
% |
|
702 |
|
|
2 |
% |
Insurance expense |
|
|
855 |
|
|
2 |
% |
|
830 |
|
|
3 |
% |
Correspondent bank charges |
|
|
760 |
|
|
2 |
% |
|
539 |
|
|
2 |
% |
Amortization of intangible assets |
|
|
655 |
|
|
1 |
% |
|
345 |
|
|
1 |
% |
Advertising and promotion |
|
|
689 |
|
|
2 |
% |
|
504 |
|
|
2 |
% |
FDIC deposit insurance premiums |
|
|
727 |
|
|
2 |
% |
|
674 |
|
|
2 |
% |
Foreclosed assets |
|
|
(93 |
) |
|
0 |
% |
|
(19 |
) |
|
0 |
% |
Other |
|
|
4,428 |
|
|
11 |
% |
|
3,598 |
|
|
11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
$ |
41,312 |
|
|
100 |
% |
$ |
31,807 |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
noninterest expense for the third quarter of 2015 increased to $16.4 million, from $10.5 million for the third quarter of 2014. Noninterest expense for the nine
months ended September 30, 2015 increased to $41.3 million, compared to $31.8 million for the nine months ended September 30, 2014. The increase in noninterest expense for
the nine months ended September 30, 2015, was primarily due to costs related to the Focus transaction, and the additional operating costs of Focus and Bay View Funding. Noninterest expense
included Focus pre-tax acquisition and integration costs of $688,000 and $1.2 million for the three months and nine months ended September 30, 2015, respectively. In addition, salaries
and employee benefits included severance and retention expense of $2.2 million related to the Focus acquisition, and other noninterest expense included $88,000 of amortization expense from the
Focus core deposit intangible for the three months and nine months
68
Table of Contents
ended
September 30, 2015. The Company will incur additional Focus related acquisition and integration expenses in the fourth quarter of 2015 for severance and retention, systems integration
costs, lease termination and other non-recurring expenses. Full time equivalent employees were 272, 200, and 243 at September 30, 2015, September 30, 2014, and June 30, 2015,
respectively. Included in the 270 full time equivalent employees at September 30, 2015 were 30 former Focus employees and 37 Bay View Funding employees.
In
the normal course of business, the Company becomes a party to financial instruments with off-balance sheet risk to meet the financing needs of its customers. These financial
instruments include commitments to extend credit in the form of loans, or through commercial or standby letters of credit, and financial guarantees. These instruments represent varying degrees of
exposure to risk in excess of the amounts included in the accompanying condensed consolidated balance sheets. The Company calculates an off-balance sheet credit risk reserve for all unfunded
commitments.
Income Tax Expense
The Company computes its provision for income taxes on a monthly basis. The effective tax rate is determined by applying the Company's
statutory income tax rates to pre-tax book income as adjusted for permanent differences between pre-tax book income and actual taxable income. These permanent differences include, but are not limited
to, increases in the cash surrender value of life insurance policies, interest on tax-exempt securities, certain expenses that are not allowed as tax deductions, and tax credits.
The
Company's Federal and state income tax expense for the quarter and nine months ended September 30, 2015 was $2.2 million and $7.3 million, respectively. The
income tax expense was $2.0 million and $5.5 million for the same periods in 2014. The following table shows the Company's effective income tax rates for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
Months Ended
September 30, |
|
For the Nine
Months Ended
September 30, |
|
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
Effective income tax rate |
|
|
38.6 |
% |
|
36.5 |
% |
|
37.7 |
% |
|
36.1 |
% |
The
difference in the effective tax rate compared to the combined Federal and state statutory tax rate of 42% is primarily the result of tax exempt securities, the Company's investment
in life insurance policies whose earnings are not subject to taxes, tax credits related to investments in low income housing limited partnerships, and Enterprise Zone hiring credits.
The
Company adopted the proportional amortization method of accounting for its low income housing investments in the third quarter of 2014. The Company quantified the impact of adopting
the proportional amortization method compared to the equity method to its current year and prior period financial statements. The Company determined that the adoption of the proportional amortization
method did not have a material impact to its financial statements. The low income housing investment losses, net of the tax benefits received, are included in income tax expense for all periods
reflected on the consolidated income statements.
Some
items of income and expense are recognized in different years for tax purposes than when applying generally accepted accounting principles leading to timing differences between the
Company's
actual tax liability, and the amount accrued for this liability based on book income. These temporary differences comprise the "deferred" portion of the Company's tax expense or benefit, which is
accumulated on the Company's books as a deferred tax asset or deferred tax liability until such time as they reverse.
69
Table of Contents
Realization
of the Company's deferred tax assets is primarily dependent upon the Company generating sufficient future taxable income to obtain benefit from the reversal of net deductible
temporary differences and utilization of tax credit carryforwards and the net operating loss carryforwards for Federal and California state income tax purposes. The amount of deferred tax assets
considered realizable is subject to adjustment in future periods based on estimates of future taxable income. Under generally accepted accounting principles a valuation allowance is required to be
recognized if it is "more likely than not" that the deferred tax assets will not be realized. The determination of the realizability of the deferred tax assets is highly subjective and dependent upon
judgment concerning management's evaluation of both positive and negative evidence, including forecasts of future income, cumulative losses, applicable tax planning strategies, and assessments of
current and future economic and business conditions.
The
Company had net deferred tax assets of $20.1 million at September 30, 2015, and $18.5 million at December 31, 2014. After consideration of the matters in
the preceding paragraph, the Company determined that it is more likely than not that the net deferred tax asset at September 30, 2015 and December 31, 2014 will be fully realized in
future years.
Business Segment Information
The following presents the Company's operating segments. Transactions between segments consist primarily of borrowed funds.
Intersegment interest expense is allocated to the Factoring segment based on the Company's prime rate and funding costs. The provision for loan loss is allocated based on the segment's allowance for
loan loss determination which considers the effects of charge-offs. Noninterest income and expense directly attributable to a segment are assigned to it. Taxes are paid on a consolidated basis and
allocated for segment purposes. The Factoring segment includes only factoring originated by Bay View Funding, which has been included in the results of operations since the acquisition on
November 1, 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
September 30, 2015 |
|
|
|
Banking(1) |
|
Factoring |
|
Consolidated |
|
|
|
(Dollars in thousands)
|
|
Interest income |
|
$ |
17,117 |
|
$ |
3,189 |
|
$ |
20,306 |
|
Intersegment interest allocations |
|
|
280 |
|
|
(280 |
) |
|
|
|
Total interest expense |
|
|
623 |
|
|
|
|
|
623 |
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
16,774 |
|
|
2,909 |
|
|
19,683 |
|
Provision (credit) for loan losses |
|
|
(291 |
) |
|
(10 |
) |
|
(301 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision |
|
|
17,065 |
|
|
2,919 |
|
|
19,984 |
|
Noninterest income |
|
|
1,869 |
|
|
197 |
|
|
2,066 |
|
Noninterest expense |
|
|
14,616 |
|
|
1,803 |
|
|
16,419 |
|
Intersegment expense allocations |
|
|
112 |
|
|
(112 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
4,430 |
|
|
1,201 |
|
|
5,631 |
|
Income tax expense |
|
|
1,668 |
|
|
504 |
|
|
2,172 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,767 |
|
$ |
697 |
|
$ |
3,459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,218,007 |
|
$ |
44,200 |
|
$ |
2,262,207 |
|
Loans, net of deferred fees |
|
$ |
1,290,062 |
|
$ |
42,343 |
|
$ |
1,332,405 |
|
- (1)
- Includes
the holding company's results of operations
70
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
September 30, 2015 |
|
|
|
Banking(1) |
|
Factoring |
|
Consolidated |
|
|
|
(Dollars in thousands)
|
|
Interest income |
|
$ |
46,458 |
|
$ |
9,389 |
|
$ |
55,847 |
|
Intersegment interest allocations |
|
|
822 |
|
|
(822 |
) |
|
|
|
Total interest expense |
|
|
1,664 |
|
|
|
|
|
1,664 |
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
45,616 |
|
|
8,567 |
|
|
54,183 |
|
Provision (credit) for loan losses |
|
|
(328 |
) |
|
(11 |
) |
|
(339 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision |
|
|
45,944 |
|
|
8,578 |
|
|
54,522 |
|
Noninterest income |
|
|
5,581 |
|
|
575 |
|
|
6,156 |
|
Noninterest expense |
|
|
35,930 |
|
|
5,382 |
|
|
41,312 |
|
Intersegment expense allocations |
|
|
266 |
|
|
(266 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
15,861 |
|
|
3,505 |
|
|
19,366 |
|
Income tax expense |
|
|
5,820 |
|
|
1,472 |
|
|
7,292 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
10,041 |
|
$ |
2,033 |
|
$ |
12,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,218,007 |
|
$ |
44,200 |
|
$ |
2,262,207 |
|
Loans, net of deferred fees |
|
$ |
1,290,062 |
|
$ |
42,343 |
|
$ |
1,332,405 |
|
- (1)
- Includes
the holding company's results of operations
Banking. Our banking segment's net income decreased to $2.8 million for the three months ended September 30, 2015 compared to
net
income of $3.4 million for the three months ended September 30, 2014. For the nine months ended September 30, 2015, our banking segment's net income increased to
$10.0 million, compared with $9.8 million for the nine months ended September 30, 2014. Net interest income increased to $16.8 million for the three months ended
September 30, 2015, compared to $14.0 million for the three months ended September 30, 2014. For the nine months ended September 30, 2015, net interest income increased to
$45.6 million, compared to $41.0 million for the nine months ended September 30, 2014. The increase in net interest income for the three months and nine months ended
September 30, 2015, compared to the comparable periods in 2014, was primarily as a result of the Focus acquisition and organic growth in the loan portfolio and core deposits. Noninterest
expense was $14.6 million for the three months ended September 30, 2015 compare to $10.5 million at September 30, 2014. For the nine months ended September 30, 2015
noninterest expense was $35.9 million, compared to $31.8 million for the nine months ended September 30, 2014. The increase in noninterest expense for the nine months ended
September 30, 2015, was primarily due to one-time costs related to the Focus transaction, and the additional operating costs of Focus. The credit provision for loan losses was $291,000, for the
three months ended September 30, 2015 compared with a credit provision for loan losses of $24,000 for the three months ended September 30, 2014. For the nine months ended
September 30, 2015, the credit provision for loan losses was $328,000, compared with a credit for loan losses of $232,000, for the nine months ended September 30, 2014.
Factoring. Bay View Funding's results of operations have been included in the Company's results beginning November 1, 2014. For the
three
months ended September 30, 2015, Bay View Funding provided net interest income of $2.9 million, noninterest income of $197,000, and $697,000 of the Company's net income. For the nine
months ended September 30, 2015, Bay View Funding provided net interest income of $8.6 million, noninterest income of $575,000, and $2.0 million of the Company's net income. The
portfolio of factored receivables totaled $42.3 million at September 30, 2015, compared to $40.0 million at December 31, 2014.
71
Table of Contents
FINANCIAL CONDITION
As of September 30, 2015, total assets increased to $2.26 billion, compared to $1.56 billion at
September 30, 2014, and $1.62 billion at December 31, 2014. Securities available-for-sale (at fair value) were $257.4 million at September 30, 2015, an increase of
34% from $191.7 million at September 30, 2014, and an increase of 25% from $206.3 million at December 31, 2014. Securities held-to-maturity (at amortized cost) were
$111.0 million at September 30, 2015, compared to $94.8 million at September 30, 2014, and $95.4 million at December 31, 2014. The total loan portfolio,
excluding loans held-for-sale, was $1.33 billion at September 30, 2015, an increase of 29% from $1.03 billion at September 30, 2014, and an increase of 22% from
$1.09 billion at December 31, 2014. Deposits totaled $1.96 billion at September 30, 2015, compared to $1.34 billion at September 30, 2014, and
$1.39 billion at December 31, 2014.
The
Focus acquisition added $168.1 million in Federal funds sold and interest-bearing deposits in other financial institutions, $62.0 million in investment securities (at
fair value), $167.3 million in loans (at fair value, including loans held-for-sale), and $396.5 million in deposits at September 30, 2015.
Securities Portfolio
The following table reflects the balances for each category of securities at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
December 31,
2014 |
|
|
|
2015 |
|
2014 |
|
|
|
(Dollars in thousands)
|
|
Securities available-for-sale (at fair value): |
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
|
$ |
170,399 |
|
$ |
139,777 |
|
$ |
154,172 |
|
Corporate bonds |
|
|
36,608 |
|
|
36,416 |
|
|
36,863 |
|
Trust preferred securities |
|
|
15,000 |
|
|
15,487 |
|
|
15,300 |
|
Collateralized mortgage obligations |
|
|
11,791 |
|
|
|
|
|
|
|
U.S. Government sponsored entities |
|
|
11,125 |
|
|
|
|
|
|
|
Municipalstax exempt |
|
|
5,765 |
|
|
|
|
|
|
|
U.S. Treasury |
|
|
4,039 |
|
|
|
|
|
|
|
Municipalstaxable |
|
|
2,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
257,410 |
|
$ |
191,680 |
|
$ |
206,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held-to-maturity (at amortized cost): |
|
|
|
|
|
|
|
|
|
|
Municipalstax exempt |
|
$ |
94,704 |
|
$ |
79,908 |
|
$ |
79,882 |
|
Agency mortgage-backed securities |
|
|
16,300 |
|
|
14,851 |
|
|
15,480 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
111,004 |
|
$ |
94,759 |
|
$ |
95,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
Table of Contents
The
following table summarizes the weighted average life and weighted average yields of securities at September 30, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Life |
|
|
|
Within One
Year
Or Less |
|
After One and
Within Five
Years |
|
After Five and
Within Ten
Years |
|
After Ten Years |
|
Total |
|
|
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
|
|
(Dollars in thousands)
|
|
Securities available-for-sale (at fair value): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
|
$ |
|
|
|
|
|
$ |
107,673 |
|
|
2.67 |
% |
$ |
62,726 |
|
|
2.25 |
% |
$ |
|
|
|
|
|
$ |
170,399 |
|
|
2.51 |
% |
Corporate bonds |
|
|
|
|
|
|
|
|
6,699 |
|
|
2.80 |
% |
|
29,909 |
|
|
3.10 |
% |
|
|
|
|
|
|
|
36,608 |
|
|
3.05 |
% |
Trust preferred securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000 |
|
|
5.95 |
% |
|
15,000 |
|
|
5.95 |
% |
Collateralized mortgage obligations |
|
|
4,061 |
|
|
1.18 |
% |
|
7,730 |
|
|
2.03 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
11,791 |
|
|
1.74 |
% |
U.S. Government sponsored entities |
|
|
2,000 |
|
|
1.12 |
% |
|
5,010 |
|
|
0.86 |
% |
|
4,115 |
|
|
2.04 |
% |
|
|
|
|
|
|
|
11,125 |
|
|
1.34 |
% |
Municipalstax exempt |
|
|
893 |
|
|
3.30 |
% |
|
2,539 |
|
|
2.29 |
% |
|
2,333 |
|
|
3.39 |
% |
|
|
|
|
|
|
|
5,765 |
|
|
2.89 |
% |
U.S. Treasury |
|
|
4,039 |
|
|
0.40 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,039 |
|
|
0.40 |
% |
Municipalstaxable |
|
|
|
|
|
|
|
|
2,683 |
|
|
1.85 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
2,683 |
|
|
1.85 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
10,993 |
|
|
1.05 |
% |
$ |
132,334 |
|
|
2.55 |
% |
$ |
99,083 |
|
|
2.52 |
% |
$ |
15,000 |
|
|
5.95 |
% |
$ |
257,410 |
|
|
2.67 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held-to-maturity (at amortized cost): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipalstax exempt(1) |
|
$ |
3,705 |
|
|
5.80 |
% |
$ |
10,831 |
|
|
3.49 |
% |
$ |
36,303 |
|
|
4.00 |
% |
$ |
43,865 |
|
|
3.82 |
% |
$ |
94,704 |
|
|
3.93 |
% |
Agency mortgage-backed securities |
|
|
|
|
|
|
|
|
6,019 |
|
|
2.89 |
% |
|
|
|
|
|
|
|
10,281 |
|
|
3.22 |
% |
|
16,300 |
|
|
3.10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,705 |
|
|
5.80 |
% |
$ |
16,850 |
|
|
3.28 |
% |
$ |
36,303 |
|
|
4.00 |
% |
$ |
54,146 |
|
|
3.70 |
% |
$ |
111,004 |
|
|
3.81 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- (1)
- Reflects
tax equivalent yield based on a 35% tax rate.
The
securities portfolio is the second largest component of the Company's interest-earning assets, and the structure and composition of this portfolio is important to an analysis of the
financial condition of the Company. The portfolio serves the following purposes: (i) it provides a source of pledged assets for securing certain deposits and borrowed funds, as may be required
by law or by specific agreement with a depositor or lender; (ii) it provides liquidity to even out cash flows from the loan and deposit activities of customers; (iii) it can be used as
an interest rate risk management tool, since it provides a large base of assets, the maturity and interest rate characteristics of which can be changed more readily than the loan portfolio to better
match changes in the deposit base and other funding sources of the Company; and (iv) it is an alternative interest-earning use of funds when loan demand is weak or when deposits grow more
rapidly than loans.
The
Company's portfolio may include: (i) U.S. Treasury securities and U.S. Government sponsored entities' debt securities for liquidity and pledging; (ii) mortgage-backed
securities, which in many instances can also be used for pledging, and which generally enhance the yield of the portfolio;
(iii) municipal obligations, which provide tax free income and limited pledging potential; and (iv) single entity issue trust preferred securities, which generally enhance the yield on
the portfolio.
The
Company classifies its securities as either available-for-sale or held-to-maturity at the time of purchase. Accounting guidance requires available-for-sale securities to be marked to
fair value with an offset to accumulated other comprehensive income (loss), a component of shareholders' equity. Monthly adjustments are made to reflect changes in the fair value of the Company's
available-for-sale securities. The investment securities available-for-sale portfolio totaled $257.4 million at September 30, 2015, an increase of 34% from $191.7 million at
September 30, 2014, and an increase of 25% from
73
Table of Contents
$206.3 million
at December 31, 2014. At September 30, 2015, the Company's legacy securities available-for-sale portfolio was comprised of $152.2 million agency
mortgage-backed securities (all issued by U.S. Government sponsored entities), $36.6 million of corporate bonds, and $15.0 million of single entity issue trust preferred securities.
Additionally, the securities available-for-sale portfolio acquired from Focus was comprised of $30.0 million agency mortgage-backed securities, $11.1 million of U.S. Government agency
securities, $4.0 million U.S. Treasuries, $2.7 million of taxable municipal securities, and $5.8 million of tax-exempt municipal securities at September 30, 2015. The
pre-tax unrealized gain on securities available-for-sale at September 30, 2015 was $4.5 million, compared to a pre-tax unrealized gain on securities available-for-sale of
$3.3 million at September 30, 2014, and a pre-tax unrealized gain on securities available-for-sale of $4.8 million at December 31, 2014. During the fourth quarter of 2015,
the Company intends to invest some of the excess liquidity resulting from the Focus acquisition in investment securities.
The
investment securities held-to-maturity portfolio, at amortized cost, totaled $111.0 million at September 30, 2015, compared to $94.8 million at
September 30, 2014, and $95.4 million at December 31, 2014. At September 30, 2015, the Company's legacy securities held-to-maturity portfolio, at amortized cost was
comprised of $86.0 million of tax-exempt municipal bonds, and $16.3 million of agency mortgage-backed securities. Additionally, the securities held-to-maturity portfolio acquired from
Focus was comprised of $8.7 million tax-exempt municipal bonds at September 30, 2015. During the third quarter of 2015, the Company purchased $2.6 million of tax-exempt municipal
securities.
The
Company has not used interest rate swaps or other derivative instruments to hedge fixed rate loans or securities.
Loans
The Company's loans represent the largest portion of invested assets, substantially greater than the securities portfolio or any other
asset category, and the quality and diversification of the loan portfolio is an important consideration when reviewing the Company's financial condition.
Gross
loans, excluding loans held-for-sale, represented 59% of total assets at September 30, 2015, 66% at September 30, 2014, and 67% at December 31, 2014. The ratio
of loans to deposits decreased to 67.91% at September 30, 2015, from 76.73% at September 30, 2014, and decreased from 78.41% at December 31, 2014.
74
Table of Contents
Loan Distribution
The Loan Distribution table that follows sets forth the Company's gross loans, excluding loans held-for-sale, outstanding and the
percentage distribution in each category at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2015 |
|
September 30, 2014 |
|
December 31, 2014 |
|
|
|
Balance |
|
% of Total |
|
Balance |
|
% of Total |
|
Balance |
|
% of Total |
|
|
|
(Dollars in thousands)
|
|
Commercial |
|
$ |
554,169 |
|
|
42 |
% |
$ |
436,481 |
|
|
42 |
% |
$ |
462,403 |
|
|
43 |
% |
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and residential |
|
|
606,819 |
|
|
45 |
% |
|
464,991 |
|
|
45 |
% |
|
478,335 |
|
|
44 |
% |
Land and construction |
|
|
84,867 |
|
|
6 |
% |
|
53,064 |
|
|
5 |
% |
|
67,980 |
|
|
6 |
% |
Home equity |
|
|
74,624 |
|
|
6 |
% |
|
61,079 |
|
|
6 |
% |
|
61,644 |
|
|
6 |
% |
Consumer |
|
|
12,595 |
|
|
1 |
% |
|
14,609 |
|
|
2 |
% |
|
18,867 |
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
1,333,074 |
|
|
100 |
% |
|
1,030,224 |
|
|
100 |
% |
|
1,089,229 |
|
|
100 |
% |
Deferred loan (fees) costs, net |
|
|
(669 |
) |
|
|
|
|
(628 |
) |
|
|
|
|
(586 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, including deferred fees and costs |
|
|
1,332,405 |
|
|
100 |
% |
|
1,029,596 |
|
|
100 |
% |
|
1,088,643 |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
|
(18,737 |
) |
|
|
|
|
(18,541 |
) |
|
|
|
|
(18,379 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net |
|
$ |
1,313,668 |
|
|
|
|
$ |
1,011,055 |
|
|
|
|
$ |
1,070,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company's loan portfolio is concentrated in commercial loans, primarily manufacturing, wholesale, and services, and commercial real estate, with the remaining balance in land
development and construction, home equity and consumer loans. The Company does not have any concentrations by industry or group of industries in its loan portfolio, however, 57% of its gross loans
were secured by real property at September 30, 2015, and 56% at September 30, 2014, and December 31, 2014. While no specific industry concentration is considered significant, the
Company's bank lending operations are substantially located in areas that are dependent on the technology and real estate industries and their supporting companies.
The
Company has established concentration limits in its loan portfolio for commercial real estate loans, commercial loans, construction loans and unsecured lending, among others. All
loan types are within established limits. The Company uses underwriting guidelines to assess the borrowers' historical cash flow to determine debt service, and we further stress test the debt service
under higher interest rate scenarios. Financial and performance covenants are used in commercial lending to allow the Company to react to a borrower's deteriorating financial condition should that
occur.
The
Company's commercial loans are made for working capital, financing the purchase of equipment or for other business purposes. Commercial loans include loans with maturities ranging
from thirty days to one year and "term loans" with maturities normally ranging from one to five years. Short-term business loans are generally intended to finance current transactions and typically
provide for periodic principal payments, with interest payable monthly. Term loans normally provide for floating interest rates, with monthly payments of both principal and interest.
The
Company is an active participant in the SBA and U.S. Department of Agriculture guaranteed lending programs, and has been approved by the SBA as a lender under the Preferred Lender
Program. The Company regularly makes such guaranteed loans (collectively referred to as "SBA loans"). The guaranteed portion of these loans is typically sold in the secondary market depending on
market conditions. When the guaranteed portion of an SBA loan is sold the Company retains the servicing rights for the sold portion. During the third quarter and the nine months ended
September 30, 2015, loans were sold resulting in a gain on sale of SBA loans of $267,000 and $660,000, respectively.
75
Table of Contents
The Company's factoring receivables are from the operations of Bay View Funding whose primary business is purchasing and collecting factored receivables. Factored
receivables are receivables that have been transferred by the originating organization and typically have not been subject to previous collection efforts. These receivables are acquired from a variety
of companies, including but not limited to service providers, transportation companies, manufacturers, distributors, wholesalers, apparel companies, advertisers, and temporary staffing companies. The
portfolio of factored receivables totaled $42.3 million at September 30, 2015, compared to $40.0 million at December 31, 2014, and is included in the Company's commercial
loan portfolio.
As
of September 30, 2015, commercial and residential real estate mortgage loans of $606.8 million consist primarily of adjustable and fixed-rate loans secured by deeds of
trust on commercial and residential property. The real estate mortgage loans at September 30, 2015, consist of $274.0 million, or 45%, of commercial owner occupied properties,
$334.0 million, or 55%, of commercial investment properties, and ($1.2) million, or less than 1%, in residential, other properties and fair value adjustments. Properties securing the commercial
real estate mortgage loans are generally located in the Greater San Francisco Bay Area, the Company's primary market.
The
Company's commercial real estate loans consist primarily of loans based on the borrower's cash flow and are secured by deeds of trust on commercial and residential property to
provide a secondary source of repayment. The Company generally restricts real estate term loans to no more than 75% of the property's appraised value or the purchase price of the property during the
initial underwriting of the credit, depending on the type of property and its utilization. The Company offers both fixed and floating rate loans. Maturities on real estate mortgage loans are generally
between five and ten years (with amortization ranging from fifteen to twenty-five years and a balloon payment due at maturity); however, SBA and certain other real estate loans that can be sold in the
secondary market may be granted for longer maturities.
The
Company's land and construction loans are primarily to finance the development/construction of commercial and single family residential properties. The Company utilizes underwriting
guidelines to assess the likelihood of repayment from sources such as sale of the property or availability of permanent mortgage financing prior to making the construction loan. Construction loans are
provided only in our market area, and the Company has extensive controls for the disbursement process. Land and construction loans increased $31.8 million to $84.9 million, at
September 30, 2015, from $53.1 million, at September 30, 2014, primarily as a result of strong housing demand within the Company's lending area. Land and construction loans
increased $16.9 million at September 30, 2015, from $68.0 million at December 31, 2014.
The
Company makes home equity lines of credit available to its existing customers. Home equity lines of credit are underwritten initially with a maximum 75% loan to value ratio. Home
equity lines are reviewed semi-annually, with specific emphasis on loans with a loan to value ratio greater than 70%. The Company takes measures to work with customers to reduce line commitments and
minimize potential losses.
Additionally,
the Company makes consumer loans for the purpose of financing automobiles, various types of consumer goods, and other personal purposes. Consumer loans generally provide
for the monthly payment of principal and interest. Most of the Company's consumer loans are secured by the personal property being purchased or, in the instances of home equity loans or lines, real
property.
With
certain exceptions, state chartered banks are permitted to make extensions of credit to any one borrowing entity up to 15% of the bank's capital and reserves for unsecured loans and
up to 25% of the bank's capital and reserves for secured loans. For HBC, these lending limits were $39.6 million and $66.0 million at September 30, 2015, respectively.
76
Table of Contents
Loan Maturities
The following table presents the maturity distribution of the Company's loans (excluding loans held-for-sale) as of
September 30, 2015. The table shows the distribution of such loans between those loans with predetermined (fixed) interest rates and those with variable (floating) interest rates. Floating
rates generally fluctuate with changes in the prime rate as reflected in the Western Edition of The Wall Street Journal. As of September 30, 2015, approximately 56% of the Company's loan
portfolio consisted of floating interest rate loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in
One Year
or Less |
|
Over One
Year But
Less than
Five Years |
|
Over
Five Years |
|
Total |
|
|
|
(Dollars in thousands)
|
|
Commercial |
|
$ |
431,799 |
|
$ |
79,748 |
|
$ |
42,622 |
|
$ |
554,169 |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and residential |
|
|
75,201 |
|
|
264,270 |
|
|
267,348 |
|
|
606,819 |
|
Land and construction |
|
|
84,619 |
|
|
248 |
|
|
|
|
|
84,867 |
|
Home equity |
|
|
67,742 |
|
|
1,642 |
|
|
5,240 |
|
|
74,624 |
|
Consumer |
|
|
11,554 |
|
|
946 |
|
|
95 |
|
|
12,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
670,915 |
|
$ |
346,854 |
|
$ |
315,305 |
|
$ |
1,333,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans with variable interest rates |
|
$ |
614,545 |
|
$ |
91,503 |
|
$ |
37,920 |
|
$ |
743,968 |
|
Loans with fixed interest rates |
|
|
56,370 |
|
|
255,351 |
|
|
277,385 |
|
|
589,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
670,915 |
|
$ |
346,854 |
|
$ |
315,305 |
|
$ |
1,333,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Servicing
As of September 30, 2015 and 2014, $116.6 million and $133.9 million, respectively, in SBA loans were serviced by
the Company for others. Activity for loan servicing rights was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
Months Ended
September 30, |
|
For the Nine
Months Ended
September 30, |
|
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
|
|
(Dollars in thousands)
|
|
Beginning of period balance |
|
$ |
510 |
|
$ |
606 |
|
$ |
565 |
|
$ |
525 |
|
Additions |
|
|
1,993 |
|
|
69 |
|
|
2,084 |
|
|
293 |
|
Amortization |
|
|
(124 |
) |
|
(76 |
) |
|
(270 |
) |
|
(219 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period balance |
|
$ |
2,379 |
|
$ |
599 |
|
$ |
2,379 |
|
$ |
599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
increase in loan servicing rights for the three months and nine months ended September 30, 2015, compared to the same periods in 2014, was primarily due to the Focus
acquisition of $1.9 million at fair value. Loan servicing rights are included in accrued interest receivable and other assets on the unaudited consolidated balance sheets and reported net of
amortization. There was no valuation allowance as of September 30, 2015 and 2014, as the fair value of the assets was greater than the carrying value.
77
Table of Contents
Activity
for the I/O strip receivable was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
Months Ended
September 30, |
|
For the Nine
Months Ended
September 30, |
|
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
|
|
(Dollars in thousands)
|
|
Beginning of period balance |
|
$ |
1,441 |
|
$ |
1,633 |
|
$ |
1,481 |
|
$ |
1,647 |
|
Unrealized holding loss |
|
|
|
|
|
(28 |
) |
|
(40 |
) |
|
(42 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period balance |
|
$ |
1,441 |
|
$ |
1,605 |
|
$ |
1,441 |
|
$ |
1,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Quality
Financial institutions generally have a certain level of exposure to credit quality risk, and could potentially receive less than a
full return of principal and interest if a debtor becomes unable or unwilling to repay. Since loans are the most significant assets of the Company and generate the largest portion of its revenues, the
Company's management of credit quality risk is focused primarily on loan quality. Banks have generally suffered their most severe earnings declines as a result of customers' inability to generate
sufficient cash flow to service their debts and/or downturns in national and regional economies and declines in overall asset values including real estate. In addition, certain debt securities that
the Company may purchase have the potential of declining in value if the obligor's financial capacity to repay deteriorates.
The
Company's policies and procedures identify market segments, set goals for portfolio growth or contraction, and establish limits on industry and geographic credit concentrations. In
addition, these policies establish the Company's underwriting standards and the methods of monitoring ongoing credit quality. The Company's internal credit risk controls are centered in underwriting
practices, credit granting procedures, training, risk management techniques, and familiarity with loan customers as well as the relative diversity and geographic concentration of our loan portfolio.
The
Company's credit risk may also be affected by external factors such as the level of interest rates, employment, general economic conditions, real estate values, and trends in
particular industries or geographic markets. As an independent community bank serving a specific geographic area, the Company must contend with the unpredictable changes in the general California
market and, particularly, primary local markets. The Company's asset quality has suffered in the past from the impact of national and regional economic recessions, consumer bankruptcies, and depressed
real estate values.
Nonperforming
assets are comprised of the following: loans for which the Company is no longer accruing interest; restructured loans which have been current under six months; loans
90 days or more past due and still accruing interest (although they are generally placed on nonaccrual when they become 90 days past due, unless they are both well-secured and in the
process of collection); and foreclosed assets. Management's classification of a loan as "nonaccrual" is an indication that there is reasonable doubt as to the full recovery of principal or interest on
the loan. At that point, the Company stops accruing interest income, and reverses any uncollected interest that had been accrued as income. The Company begins recognizing interest income only as cash
interest payments are received and it has been determined the collection of all outstanding principal is not in doubt. The loans may or may not be collateralized, and collection efforts are pursued.
Loans may be restructured by management when a borrower has experienced some change in financial status causing an inability to meet the original repayment terms and where the Company believes the
borrower will eventually overcome those circumstances and make full restitution. Foreclosed assets consist of properties acquired by foreclosure or similar means that management is offering or will
offer for sale.
78
Table of Contents
The
following table summarizes the Company's nonperforming assets at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
December 31,
2014 |
|
|
|
2015 |
|
2014 |
|
|
|
(Dollars in thousands)
|
|
Nonaccrual loansheld-for-investment |
|
$ |
5,503 |
|
$ |
7,010 |
|
$ |
5,855 |
|
Restructured and loans over 90 days past due and still accruing |
|
|
|
|
|
200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans |
|
|
5,503 |
|
|
7,210 |
|
|
5,855 |
|
Foreclosed assets |
|
|
393 |
|
|
532 |
|
|
696 |
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets |
|
$ |
5,896 |
|
$ |
7,742 |
|
$ |
6,551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming assets as a percentage of loans plus foreclosed assets |
|
|
0.44 |
% |
|
0.75 |
% |
|
0.60 |
% |
Nonperforming assets as a percentage of total assets |
|
|
0.26 |
% |
|
0.50 |
% |
|
0.41 |
% |
The
following table presents nonperforming loans by class at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2015 |
|
December 31, 2014 |
|
|
|
Nonaccrual |
|
Restructured and
Loans Over 90 Days
Past Due and
Still Accruing |
|
Total |
|
Nonaccrual |
|
Restructured and
Loans Over 90 Days
Past Due and
Still Accruing |
|
Total |
|
|
|
(Dollars in thousands)
|
|
Commercial |
|
$ |
1,620 |
|
|
|
|
$ |
1,620 |
|
$ |
2,534 |
|
|
|
|
$ |
2,534 |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and residential |
|
|
3,075 |
|
|
|
|
|
3,075 |
|
|
1,651 |
|
|
|
|
|
1,651 |
|
Land and construction |
|
|
492 |
|
|
|
|
|
492 |
|
|
1,320 |
|
|
|
|
|
1,320 |
|
Home equity |
|
|
312 |
|
|
|
|
|
312 |
|
|
344 |
|
|
|
|
|
344 |
|
Consumer |
|
|
4 |
|
|
|
|
|
4 |
|
|
6 |
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,503 |
|
$ |
|
|
$ |
5,503 |
|
$ |
5,855 |
|
$ |
|
|
$ |
5,855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming
assets were $5.9 million, or 0.26% of total assets, at September 30, 2015, compared to $7.7 million, or 0.50% of total assets, at September 30,
2014, and $6.6 million, or 0.41% of total assets, at December 31, 2014. At September 30, 2015, $5.0 million of the NPAs were in the Company's legacy loan portfolio, and
$931,000 of the NPAs were in the Focus loan portfolio. Included in total nonperforming
assets were foreclosed assets of $393,000 at September 30, 2015, compared to $532,000 at September 30, 2014, and $696,000 at December 31, 2014.
The
following table provides a summary of the loan portfolio by loan type and credit quality classification at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2015 |
|
September 30, 2014 |
|
December 31, 2014 |
|
|
|
Nonclassified |
|
Classified* |
|
Total |
|
Nonclassified |
|
Classified* |
|
Total |
|
Nonclassified |
|
Classified* |
|
Total |
|
|
|
(Dollars in thousands)
|
|
Commercial |
|
$ |
543,879 |
|
$ |
10,290 |
|
$ |
554,169 |
|
$ |
428,372 |
|
$ |
8,109 |
|
$ |
436,481 |
|
$ |
455,767 |
|
$ |
6,636 |
|
$ |
462,403 |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and residential |
|
|
601,671 |
|
|
5,148 |
|
|
606,819 |
|
|
458,671 |
|
|
6,320 |
|
|
464,991 |
|
|
472,061 |
|
|
6,274 |
|
|
478,335 |
|
Land and construction |
|
|
84,375 |
|
|
492 |
|
|
84,867 |
|
|
51,408 |
|
|
1,656 |
|
|
53,064 |
|
|
66,660 |
|
|
1,320 |
|
|
67,980 |
|
Home equity |
|
|
73,286 |
|
|
1,338 |
|
|
74,624 |
|
|
59,945 |
|
|
1,134 |
|
|
61,079 |
|
|
60,736 |
|
|
908 |
|
|
61,644 |
|
Consumer |
|
|
12,279 |
|
|
316 |
|
|
12,595 |
|
|
14,252 |
|
|
357 |
|
|
14,609 |
|
|
18,518 |
|
|
349 |
|
|
18,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,315,490 |
|
$ |
17,584 |
|
$ |
1,333,074 |
|
$ |
1,012,648 |
|
$ |
17,576 |
|
$ |
1,030,224 |
|
$ |
1,073,742 |
|
$ |
15,487 |
|
$ |
1,089,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- *
- Classified
loans in the table above are gross of SBA guarantees.
79
Table of Contents
The
following provides a rollforward of troubled debt restructurings ("TDRs"):
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2015 |
|
|
|
Performing
TDRs |
|
Nonperforming
TDRs |
|
Total |
|
|
|
(Dollars in thousands)
|
|
Balance at January 1, 2015 |
|
$ |
167 |
|
$ |
916 |
|
$ |
1,083 |
|
Principal repayments/advances/upgrades |
|
|
16 |
|
|
(912 |
) |
|
(896 |
) |
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2015 |
|
$ |
183 |
|
$ |
4 |
|
$ |
187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2014 |
|
|
|
Performing
TDRs |
|
Nonperforming
TDRs |
|
Total |
|
|
|
(Dollars in thousands)
|
|
Balance at January 1, 2014 |
|
$ |
492 |
|
$ |
3,230 |
|
$ |
3,722 |
|
Principal repayments/advances/upgrades |
|
|
(262 |
) |
|
(1,792 |
) |
|
(2,054 |
) |
Net charge-offs |
|
|
(30 |
) |
|
|
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2014 |
|
$ |
200 |
|
$ |
1,438 |
|
$ |
1,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan Losses
The allowance for loan losses is an estimate of probable incurred losses in the loan portfolio. Loans are charged-off against the
allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance for loan losses. Management's methodology for
estimating the allowance balance consists of several key elements, which include specific allowances on individual impaired loans and the formula driven allowances on pools of loans with similar risk
characteristics. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged-off.
Specific
allowances are established for impaired loans. Management considers a loan to be impaired when it is probable that the Company will be unable to collect all amounts due
according to the original contractual terms of the loan agreement, including scheduled interest payments. Loans for which the terms have been modified with a concession granted, and for which the
borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. When a loan is considered to be impaired, the amount of impairment is measured
based on the fair value of the collateral less costs to sell if the loan is collateral dependent, or on the present value of expected future cash flows or values that are observable in the secondary
market. If the measure of the impaired loans is less than the investment in the loan, the deficiency will be charged off against the allowance for loan losses if the amount is a confirmed loss, or,
alternatively, a specific allocation within the allowance will be established. Loans that are considered impaired are specifically excluded from the formula portion of the allowance for loan losses
analysis.
The
estimated loss factors for pools of loans that are not impaired are based on determining the probability of default and loss given default for loans within each segment of the
portfolio, adjusted for significant factors that, in management's judgment, affect collectability as of the evaluation date. The Company's historical delinquency experience and loss experience are
utilized to determine the probability of default and loss given default for segments of the portfolio where the Company has experienced losses in the past. For segments of the portfolio where the
Company has no significant prior loss experience, the Company uses quantifiable observable industry data to determine the probability of default and loss given default.
80
Table of Contents
Loans
with a well-defined weakness, which are characterized by the distinct possibility that the Company will sustain a loss if the deficiencies are not corrected, are categorized as
"classified." Classified assets include all loans considered as substandard, substandard-nonaccrual, and doubtful and may result from problems specific to a borrower's business or from economic
downturns that affect the borrower's ability to repay or that cause a decline in the value of the underlying collateral (particularly real estate), and foreclosed assets. The principal balance of
classified assets, net of SBA guarantees, was $18.0 million at September 30, 2015, $17.7 million at September 30, 2014, and $16.0 million at December 31,
2014. At September 30, 2015, $10.3 million of the classified assets were in the Company's legacy loan portfolio, and $7.7 million of the classified assets were in the Focus loan
portfolio. Loans held-for-sale are carried at the lower of cost or estimated fair value, and are not allocated an allowance for loan losses.
It
is the policy of management to maintain the allowance for loan losses at a level adequate for risks inherent in the loan portfolio. On an ongoing basis, we have engaged an outside
firm to perform independent credit reviews of our loan portfolio. The Federal Reserve Board and the California Department of Business OversightDivision of Financial Institutions also
review the allowance for loan losses as an integral part of the examination process. Based on information currently available, management believes that the allowance for loan losses is adequate.
However, the loan portfolio can be adversely affected if California economic conditions and the real estate market in the Company's market area were to weaken. Also, any weakness of a prolonged nature
in the technology industry would have a negative impact on the local market. The effect of such events, although uncertain at this time, could result in an increase in the level of nonperforming loans
and increased loan losses, which could adversely affect the Company's future growth and profitability. No assurance of the ultimate level of credit losses can be given with any certainty.
The
following tables summarize the Company's loan loss experience, as well as provisions and charges to the allowance for loan losses and certain pertinent ratios for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2015 |
|
|
|
Commercial |
|
Real Estate |
|
Consumer |
|
Total |
|
|
|
(Dollars in thousands)
|
|
Balance, beginning of period |
|
$ |
11,193 |
|
$ |
7,450 |
|
$ |
114 |
|
$ |
18,757 |
|
Charge-offs |
|
|
(8 |
) |
|
|
|
|
(9 |
) |
|
(17 |
) |
Recoveries |
|
|
284 |
|
|
14 |
|
|
|
|
|
298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net recoveries |
|
|
276 |
|
|
14 |
|
|
(9 |
) |
|
281 |
|
Provision (credit) for loan losses |
|
|
(941 |
) |
|
672 |
|
|
(32 |
) |
|
(301 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
10,528 |
|
$ |
8,136 |
|
$ |
73 |
|
$ |
18,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RATIOS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized net charge-offs (recoveries) to average loans(1) |
|
|
0.09 |
% |
|
0.00 |
% |
|
0.00 |
% |
|
0.09 |
% |
Allowance for loan losses to total loans(1) |
|
|
0.79 |
% |
|
0.61 |
% |
|
0.01 |
% |
|
1.41 |
% |
Allowance for loan losses to nonperforming loans |
|
|
191.31 |
% |
|
147.85 |
% |
|
1.33 |
% |
|
340.49 |
% |
- (1)
- Average
loans and total loans exclude loans held-for-sale.
81
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2014 |
|
|
|
Commercial |
|
Real Estate |
|
Consumer |
|
Total |
|
|
|
(Dollars in thousands)
|
|
Balance, beginning of period |
|
$ |
11,454 |
|
$ |
7,069 |
|
$ |
69 |
|
$ |
18,592 |
|
Charge-offs |
|
|
(132 |
) |
|
|
|
|
(25 |
) |
|
(157 |
) |
Recoveries |
|
|
123 |
|
|
7 |
|
|
|
|
|
130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (charge-offs) recoveries |
|
|
(9 |
) |
|
7 |
|
|
(25 |
) |
|
(27 |
) |
Provision (credit) for loan losses |
|
|
163 |
|
|
(205 |
) |
|
18 |
|
|
(24 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
11,608 |
|
$ |
6,871 |
|
$ |
62 |
|
$ |
18,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RATIOS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized net charge-offs (recoveries) to average loans(1) |
|
|
0.00 |
% |
|
0.00 |
% |
|
0.01 |
% |
|
0.01 |
% |
Allowance for loan losses to total loans(1) |
|
|
1.12 |
% |
|
0.67 |
% |
|
0.01 |
% |
|
1.80 |
% |
Allowance for loan losses to nonperforming loans |
|
|
161.00 |
% |
|
95.30 |
% |
|
0.86 |
% |
|
257.16 |
% |
- (1)
- Average
loans and total loans exclude loans held-for-sale.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2015 |
|
|
|
Commercial |
|
Real Estate |
|
Consumer |
|
Total |
|
|
|
(Dollars in thousands)
|
|
Balance, beginning of period |
|
$ |
11,187 |
|
$ |
7,070 |
|
$ |
122 |
|
$ |
18,379 |
|
Charge-offs |
|
|
(229 |
) |
|
(2 |
) |
|
(9 |
) |
|
(240 |
) |
Recoveries |
|
|
766 |
|
|
141 |
|
|
30 |
|
|
937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (charge-offs) recoveries |
|
|
537 |
|
|
139 |
|
|
21 |
|
|
697 |
|
Provision (credit) for loan losses |
|
|
(1,196 |
) |
|
927 |
|
|
(70 |
) |
|
(339 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
10,528 |
|
$ |
8,136 |
|
$ |
73 |
|
$ |
18,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RATIOS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized net charge-offs (recoveries) to average loans(1) |
|
|
0.06 |
% |
|
0.02 |
% |
|
0.00 |
% |
|
0.08 |
% |
Allowance for loan losses to total loans(1) |
|
|
0.79 |
% |
|
0.61 |
% |
|
0.01 |
% |
|
1.41 |
% |
Allowance for loan losses to nonperforming loans |
|
|
191.31 |
% |
|
147.85 |
% |
|
1.33 |
% |
|
340.49 |
% |
- (1)
- Average
loans and total loans exclude loans held-for-sale.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2014 |
|
|
|
Commercial |
|
Real Estate |
|
Consumer |
|
Total |
|
|
|
(Dollars in thousands)
|
|
Balance, beginning of period |
|
$ |
12,533 |
|
$ |
6,548 |
|
$ |
83 |
|
$ |
19,164 |
|
Charge-offs |
|
|
(726 |
) |
|
|
|
|
(25 |
) |
|
(751 |
) |
Recoveries |
|
|
309 |
|
|
51 |
|
|
|
|
|
360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (charge-offs) recoveries |
|
|
(417 |
) |
|
51 |
|
|
(25 |
) |
|
(391 |
) |
Provision (credit) for loan losses |
|
|
(508 |
) |
|
272 |
|
|
4 |
|
|
(232 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
11,608 |
|
$ |
6,871 |
|
$ |
62 |
|
$ |
18,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RATIOS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized net charge-offs (recoveries) to average loans(1) |
|
|
0.04 |
% |
|
0.01 |
% |
|
0.01 |
% |
|
0.04 |
% |
Allowance for loan losses to total loans(1) |
|
|
1.12 |
% |
|
0.67 |
% |
|
0.01 |
% |
|
1.80 |
% |
Allowance for loan losses to nonperforming loans |
|
|
161.00 |
% |
|
95.30 |
% |
|
0.86 |
% |
|
257.16 |
% |
- (1)
- Average
loans and total loans exclude loans held-for-sale.
82
Table of Contents
There was credit provision for loan losses of $941,000 and $1.2 million in the commercial loan portfolio for the three months ended and nine months ended
September 30, 2015, respectively, primarily due to improvement in the performance of the Company's legacy commercial loan portfolio and a reduction of loans having a prior default history.
There was provision for loan losses of $672,000 and $927,000 in the real estate loan portfolio for the three months ended and nine months ended September 30, 2015, respectively, primarily due
to an increase in the balance of the Company's legacy real estate loan portfolio at higher valuations. There was no impact to the provision for loan losses from the Focus transaction for the three
months and nine months ended September 30, 2015.
The
following table provides a summary of the allocation of the allowance for loan losses by class at the dates indicated. The allocation presented should not be interpreted as an
indication that charges to the allowance for loan losses will be incurred in these amounts or proportions, or that the portion of the allowance allocated to each category represents the total amount
available for charge-offs that may occur within these classes.
Allocation of Allowance for Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
December 31,
2014 |
|
|
|
2015 |
|
2014 |
|
|
|
Allowance |
|
Percent
of Loans
in each
category
to total
loans |
|
Allowance |
|
Percent
of Loans
in each
category
to total
loans |
|
Allowance |
|
Percent
of Loans
in each
category
to total
loans |
|
|
|
(Dollars in thousands)
|
|
Commercial |
|
$ |
10,528 |
|
|
42 |
% |
$ |
11,608 |
|
|
42 |
% |
$ |
11,187 |
|
|
43 |
% |
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and residential |
|
|
5,094 |
|
|
45 |
% |
|
4,616 |
|
|
45 |
% |
|
4,707 |
|
|
44 |
% |
Land and construction |
|
|
1,571 |
|
|
6 |
% |
|
799 |
|
|
5 |
% |
|
1,048 |
|
|
6 |
% |
Home equity |
|
|
1,471 |
|
|
6 |
% |
|
1,456 |
|
|
6 |
% |
|
1,315 |
|
|
6 |
% |
Consumer |
|
|
73 |
|
|
1 |
% |
|
62 |
|
|
2 |
% |
|
122 |
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
18,737 |
|
|
100 |
% |
$ |
18,541 |
|
|
100 |
% |
$ |
18,379 |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
allowance for loan losses totaled $18.7 million, or 1.41% of total loans at September 30, 2015, compared to $18.5 million, or 1.80% of total loans at
September 30, 2014, and $18.4 million, or 1.69% of total loans at December 31, 2014. The allowance for loan losses to total loans decreased at September 30, 2015, compared
to September 30, 2014 and December 31, 2014, primarily due to the Focus acquisition, and an increase in the Company's legacy loan balances with no default histories, coupled with a
decrease in the Company's legacy nonperforming assets, improving the quality of the loan portfolio overall. The loans acquired from Focus are included in total loans; however, there is no allowance
for loan losses attributed to these loans at September 30, 2015 because they were marked to fair market value on acquisition, and included a fair value adjustment of $4.9 million at
September 30, 2015. Excluding the $162.9 million (at fair value) Focus loan portfolio, the ALLL to total loans was 1.60% at September 30, 2015. Loan charge-offs reflect the
realization of losses in the portfolio that were partially recognized previously through the provision for loan losses. The Company had net recoveries of $281,000, or 0.09% of average
loans, for the third quarter of 2015, compared to net charge-offs of $27,000, or 0.01% of average loans, for the third quarter of 2014, and net charge-offs of $56,000, or 0.02% of average loans, for
the fourth quarter of 2014.
The
allowance for loan losses related to the commercial portfolio decreased $659,000 at September 30, 2015 from December 31, 2014, as a result of a credit to the allowance
for loan losses of $1.2 million, partially offset by net recoveries of $537,000. The allowance for loan losses related to the
83
Table of Contents
real
estate portfolio increased $1.1 million at September 30, 2015 from December 31, 2014, as a result of a provision for loan losses of $927,000 and net recoveries of $139,000.
The increase in the allowance for loan losses was primarily due to an increase in the balance of real estate loans outstanding.
Goodwill and Other Intangible Assets
On November 1, 2014, estimated goodwill of $13.0 million resulted from the acquisition Bay View Funding. On
August 20, 2015 estimated goodwill of $31.9 million resulted from
the merger of Focus. Goodwill represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. The fair values of assets
acquired and liabilities assumed are subject to adjustment during the first twelve months after the acquisition date if additional information becomes available to indicate a more accurate or
appropriate value for an asset or liability. Total goodwill at September 30, 2015 was $44.9 million, which consisted of $13.0 million related to the Bay View Funding acquisition,
and $31.9 million related to the Focus acquisition.
Other
intangible assets were $8.9 million at September 30, 2015, compared to $3.3 million at December 31, 2014. Core deposit and customer relationship
intangible assets arising from the acquisition of Diablo Valley Bank in June 2007 were $559,000 at September 30, 2015 and $1.1 million at December 31, 2014, net of accumulated
amortization. The core deposit intangible asset arising from the acquisition of Focus was $6.2 million at September 30, 2015, net of accumulated amortization. A below market lease,
customer relationship and brokered relationship, and a non-compete agreement intangible assets arising from the acquisition of Bay View Funding in November 2014 were $2.0 million at
September 30, 2015 and $2.2 million at December 31, 2014, net of accumulated amortization.
Deposits
The composition and cost of the Company's deposit base are important components in analyzing the Company's net interest margin and
balance sheet liquidity characteristics, both of which are discussed in greater detail in other sections herein. The Company's liquidity is impacted by the volatility of deposits from the propensity
of that money to leave the institution for rate-related or other reasons. Deposits can be adversely affected if economic conditions weaken in California, and the Company's market area in particular.
Potentially, the most volatile deposits in a financial institution are jumbo certificates of deposit, meaning time deposits with balances that equal or exceed $250,000, as customers with balances of
that magnitude are typically more rate-sensitive than customers with smaller balances.
The
following table summarizes the distribution of deposits and the percentage of distribution in each category of deposits for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2015 |
|
September 30, 2014 |
|
December 31, 2014 |
|
|
|
Balance |
|
% to Total |
|
Balance |
|
% to Total |
|
Balance |
|
% to Total |
|
|
|
(Dollars in thousands)
|
|
Demand, noninterest-bearing |
|
$ |
758,440 |
|
|
39 |
% |
$ |
488,987 |
|
|
36 |
% |
$ |
517,662 |
|
|
37 |
% |
Demand, interest-bearing |
|
|
440,517 |
|
|
22 |
% |
|
223,121 |
|
|
17 |
% |
|
225,821 |
|
|
16 |
% |
Savings and money market |
|
|
490,572 |
|
|
25 |
% |
|
369,378 |
|
|
28 |
% |
|
384,644 |
|
|
28 |
% |
Time depositsunder $250 |
|
|
65,629 |
|
|
3 |
% |
|
56,848 |
|
|
4 |
% |
|
57,443 |
|
|
4 |
% |
Time deposits$250 and over |
|
|
174,700 |
|
|
9 |
% |
|
160,781 |
|
|
12 |
% |
|
163,452 |
|
|
12 |
% |
Time depositsbrokered |
|
|
24,150 |
|
|
1 |
% |
|
28,099 |
|
|
2 |
% |
|
28,116 |
|
|
2 |
% |
CDARSmoney market and time deposits |
|
|
8,015 |
|
|
1 |
% |
|
14,608 |
|
|
1 |
% |
|
11,248 |
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
1,962,023 |
|
|
100 |
% |
$ |
1,341,822 |
|
|
100 |
% |
$ |
1,388,386 |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84
Table of Contents
The
Company obtains deposits from a cross-section of the communities it serves. The Company's business is not generally seasonal in nature. Public funds were 5% of deposits at
September 30, 2015, and 8% at September 30, 2014, and 7% at December 31, 2014.
Total
deposits increased $620.2 million to $1.96 billion at September 30, 2015, compared to $1.34 billion at September 30, 2014, and increased
$573.6 million from $1.39 billion at December 31, 2014. Noninterest-bearing demand deposits increased $269.5 million at September 30, 2015 from September 30,
2014, and increased $240.8 million from December 31, 2014. Interest-bearing demand deposits increased $217.4 million at September 30, 2015 from September 30, 2014,
and increased $214.7 million from December 31, 2014. Brokered deposits decreased $3.9 million at September 30, 2015 from September 30, 2014, and decreased
$4.0 million from December 31, 2014. Deposits (excluding all time deposits and CDARS deposits) increased 608.0 million, or 56%, to $1.69 billion at September 30,
2015, from $1.10 billion at September 30, 2014 and increased $561.4 million, or 50%, from $1.13 billion at December 31, 2014. At September 30, 2015, total
deposits from Focus were $396.5 million, which was comprised of $125.3 million of noninterest-bearing demand deposits, $191.1 million of interest-bearing demand deposits,
$10.6 million of time deposits (under $250,000), and $11.9 million of time deposits ($250,000 and over).
At
September 30, 2015, the Company had $108.8 million (at fair value) of securities pledged for $98.0 million in certificates of deposits from the State of
California. At September 30, 2014, the Company had $109.5 million (at fair value) of securities pledged for $98.0 million in certificates of deposits from the State of California.
At December 31, 2014, the Company had $109.8 million (at fair value) of securities pledged for $98.0 million in certificates of deposits from the State of California.
CDARS
deposits were comprised of $2.9 million of money market accounts and $5.1 million of time deposits at September 30, 2015. CDARS deposits were comprised of
$7.0 million of money market accounts and $7.6 million of time deposits at September 30, 2014. CDARS deposits were comprised of $4.0 million of money market accounts and
$7.2 million of time deposits at December 31, 2014.
The
following table indicates the contractual maturity schedule of the Company's time deposits of $250,000 and over, and all CDARS time deposits and brokered deposits as of
September 30, 2015:
|
|
|
|
|
|
|
|
|
|
Balance |
|
% of Total |
|
|
|
(Dollars in thousands)
|
|
Three months or less |
|
$ |
131,410 |
|
|
64 |
% |
Over three months through six months |
|
|
33,886 |
|
|
16 |
% |
Over six months through twelve months |
|
|
32,099 |
|
|
16 |
% |
Over twelve months |
|
|
6,590 |
|
|
3 |
% |
|
|
|
|
|
|
|
|
Total |
|
$ |
203,986 |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company focuses primarily on providing and servicing business deposit accounts that are frequently over $250,000 in average balance per account. As a result, certain types of
business clients that the Company serves typically carry average deposits in excess of $250,000. The account activity for some account types and client types necessitates appropriate liquidity
management practices by the Company to help ensure its ability to fund deposit withdrawals.
85
Table of Contents
Return on Equity and Assets
The following table indicates the ratios for return on average assets and average equity, and average equity to average assets for the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
September 30, |
|
Nine Months
Ended
September 30, |
|
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
Annualized return on average assets |
|
|
0.70 |
% |
|
0.88 |
% |
|
0.92 |
% |
|
0.88 |
% |
Annualized return on average tangible assets |
|
|
0.71 |
% |
|
0.88 |
% |
|
0.93 |
% |
|
0.88 |
% |
Annualized return on average equity |
|
|
6.41 |
% |
|
7.46 |
% |
|
8.25 |
% |
|
7.34 |
% |
Annualized return on average tangible equity |
|
|
7.46 |
% |
|
7.51 |
% |
|
9.22 |
% |
|
7.40 |
% |
Dividend payout ratio(1) |
|
|
74.50 |
% |
|
46.66 |
% |
|
63.96 |
% |
|
42.30 |
% |
Average equity to average assets ratio |
|
|
10.95 |
% |
|
11.80 |
% |
|
11.17 |
% |
|
12.01 |
% |
- (1)
- Percentage
is calculated based on dividends paid on common stock and Series C Preferred Stock (on an as converted basis) divided by net income.
Off-Balance Sheet Arrangements
In the normal course of business, the Company makes commitments to extend credit to its customers as long as there are no violations of
any conditions established in the contractual arrangements. These commitments are obligations that represent a potential credit risk to the Company, but are not reflected on the Company's consolidated
balance sheets. Total unused commitments to extend credit were $579.0 million September 30, 2015, compared to $408.5 million at September 30, 2014, and
$439.3 million at December 31, 2014. Unused commitments represented 43% outstanding gross loans at September 30, 2015, and 40% of outstanding gross loans at September 30,
2014, and December 31, 2014.
The
effect on the Company's revenues, expenses, cash flows and liquidity from the unused portion of the commitments to provide credit cannot be reasonably predicted because there is no
certainty that lines of credit and letters of credit will ever be fully utilized. The following table presents the Company's commitments to extend credit for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
2015 |
|
2014 |
|
December 31, 2014 |
|
|
|
Fixed Rate |
|
Variable Rate |
|
Fixed Rate |
|
Variable Rate |
|
Fixed Rate |
|
Variable Rate |
|
|
|
(Dollars in thousands)
|
|
Unused lines of credit and commitments to make loans |
|
$ |
18,082 |
|
$ |
548,361 |
|
$ |
8,104 |
|
$ |
388,354 |
|
$ |
8,164 |
|
$ |
415,146 |
|
Standby letters of credit |
|
|
3,402 |
|
|
8,569 |
|
|
|
|
|
12,047 |
|
|
3,235 |
|
|
12,783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
21,484 |
|
$ |
556,930 |
|
$ |
8,104 |
|
$ |
400,401 |
|
$ |
11,399 |
|
$ |
427,929 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity and Asset/Liability Management
Liquidity refers to the Company's ability to maintain cash flows sufficient to fund operations and to meet obligations and other
commitments in a timely and cost effective fashion. At various times the Company requires funds to meet short-term cash requirements brought about by loan growth or deposit outflows, the purchase of
assets, or liability repayments. An integral part of the Company's ability to manage its liquidity position appropriately is the Company's large base of core deposits, which are generated by offering
traditional banking services in its service area and which have historically been a stable source of funds. To manage liquidity needs properly, cash inflows must be timed to
86
Table of Contents
coincide
with anticipated outflows or sufficient liquidity resources must be available to meet varying demands. The Company manages liquidity to be able to meet unexpected sudden changes in levels of
its assets or deposit liabilities without maintaining excessive amounts of balance sheet liquidity. Excess balance sheet liquidity can negatively impact the Company's interest margin. In order to meet
short-term liquidity needs the Company utilizes overnight Federal funds purchase arrangements and other borrowing arrangements with correspondent banks, solicits brokered deposits if cost effective
deposits are not available from local sources and maintains collateralized lines of credit with the FHLB and FRB. In addition, the Company can raise cash for temporary needs by selling securities
under agreements to repurchase and selling securities available-for-sale.
One
of the measures we analyze for liquidity is our loan to deposit ratio. Our loan to deposit ratio was 67.91% at September 30, 2015, compared to 76.73% at September 30,
2014, and 78.41% at December 31, 2014.
FHLB and FRB Borrowings and Available Lines of Credit
The Company has off-balance sheet liquidity in the form of Federal funds purchase arrangements with correspondent banks, including the
FHLB and FRB. The Company can borrow from the FHLB on a short-term (typically overnight) or long-term (over one year) basis. The Company had no overnight borrowings from the FHLB at
September 30, 2015, September 30, 2014 and December 31, 2014. The Company had $244.7 million of loans pledged to the FHLB as collateral on an available line of credit of
$143.0 million at September 30, 2015.
The
Company can also borrow from the FRB's discount window. The Company had $370.7 million of loans pledged to the FRB as collateral on an available line of credit of
$247.3 million at September 30, 2015, none of which was outstanding.
At
September 30, 2015, the Company had Federal funds purchase arrangements available of $55.0 million. There were no Federal funds purchased outstanding at
September 30, 2015, September 30, 2014, and December 31, 2014.
The
Company has a $5.0 million line of credit with a correspondent bank, of which $1.0 million was outstanding at September 30, 2015.
The
Company may also utilize securities sold under repurchase agreements to manage our liquidity position. There were no securities sold under agreements to repurchase at
September 30, 2015, June 30, 2014, and December 31, 2014.
The
following table summarizes the Company's borrowings under its Federal funds purchased, security repurchase arrangements and lines of credit for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
December 31,
2014 |
|
|
|
2015 |
|
2014 |
|
|
|
(Dollars in thousands)
|
|
Average balance year-to-date |
|
$ |
36 |
|
$ |
513 |
|
$ |
3,953 |
|
Average interest rate year-to-date |
|
|
0.36 |
% |
|
0.12 |
% |
|
3.06 |
% |
Maximum month-end balance during the year |
|
$ |
1,000 |
|
$ |
|
|
$ |
29,796 |
|
Average rate at period-end |
|
|
N/A |
|
|
N/A |
|
|
N/A |
|
Capital Resources
The Company uses a variety of measures to evaluate capital adequacy. Management reviews various capital measurements on a regular basis
and takes appropriate action to ensure that such measurements are within established internal and external guidelines. The external guidelines, which
87
Table of Contents
are
issued by the Federal Reserve Board and the FDIC, establish a risk-adjusted ratio relating capital to different categories of assets and off-balance sheet exposures.
Prompt Corrective Action Provisions
Federal law requires each banking agency to take "prompt corrective action" with respect to a depository institution if that
institution does not meet certain capital adequacy standards, including requiring the prompt submission of an acceptable capital restoration plan. Supervisory actions by the appropriate federal
banking regulator under the prompt corrective action rules generally depend upon an institution's classification within five capital categories as defined in the regulations. The relevant capital
measures are the capital ratio, the Tier 1 capital ratio, and the leverage ratio.
The
federal banking agencies have also adopted non-capital safety and soundness standards to assist examiners in identifying and addressing potential safety and soundness concerns before
capital becomes impaired. These include: operational and managerial standards relating to: (i) internal controls, information systems and internal audit systems; (ii) loan documentation;
(iii) credit underwriting; (iv) asset quality and growth; (v) earnings; (vi) risk management; and (vii) compensation and benefits.
Prior
to the implementation of the Basel III capital requirements on January 1, 2015, a depository institution's category of compliance under the prompt corrective action
regulations depended upon how its capital levels compared with various relevant capital measures and the other factors established by the regulations. A bank
was:
-
- "well capitalized" if the institution had a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital
ratio of 6.0% or greater, and a leverage ratio of 5.0% or greater, and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level
for any capital measure;
-
- "adequately capitalized" if the institution had a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based
capital ratio of 4.0% or greater, and a leverage ratio of 4.0% or greater (or 3.0% if the institution received the highest rating from its primary regulator) and was not "well capitalized";
-
- "undercapitalized" if the institution had a total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital
ratio of less than 4.0%, or a leverage ratio of less than 4.0% (or 3.0% if the institution received the highest rating from its primary regulator);
-
- "significantly undercapitalized" if the institution had a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based
capital ratio of less than 3.0%, or a leverage ratio of less than 3.0%; and
-
- "critically undercapitalized" if the institution's tangible equity is equal to or less than 2.0% of average quarterly tangible assets.
The
appropriate federal banking agency may, under certain circumstances, reclassify a well-capitalized insured depository institution as adequately capitalized. An institution may be
reclassified if the appropriate federal banking agency determines (after notice and opportunity for a hearing) that the institution is in an unsafe or unsound condition or deems the institution to be
engaging in an unsafe or unsound practice. The appropriate agency is also permitted to require an adequately capitalized or undercapitalized institution to comply with the supervisory provisions as if
the institution were in the next lower category (but not treat a significantly undercapitalized institution as critically undercapitalized) based on supervisory information other than the capital
levels of the institution.
88
Table of Contents
At each successively lower capital category, an insured bank is subject to increased restrictions on its operations. For example, a bank is generally prohibited
from paying management fees to any controlling persons or from making capital distributions if to do so would make the bank "undercapitalized." Asset growth and branching restrictions apply to
undercapitalized banks, which are required to submit written capital restoration plans meeting specified requirements (including a guarantee by the parent holding company, if any). "Significantly
undercapitalized" banks are subject to broad regulatory authority, including among other things, capital directives, forced mergers, restrictions on the rates of interest they may pay on deposits,
restrictions on asset growth and activities, and prohibitions on paying bonuses or increasing compensation to senior executive officers without FDIC approval. Even more severe restrictions apply to
"critically undercapitalized" banks. Most importantly, except under limited circumstances, not later than 90 days after an insured bank becomes critically undercapitalized the appropriate
federal banking agency is required to appoint a conservator or receiver for the bank.
Basel III Capital Requirements
In July 2013, the Federal banking regulators approved final rules to implement the revised capital adequacy standards of the Basel
Committee on Banking Supervision, commonly called Basel III, and to address relevant provisions of The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, as amended ("Dodd-Frank"). The
final rules strengthen the definition of regulatory capital, increases risk-based capital requirements, makes selected changes to the calculation of risk-weighted assets, and adjusts the prompt
corrective action thresholds. Community banking organizations, such as HCC and HBC, became subject to the new rules on January 1, 2015.
The
Basel III capital rules revised the current prompt corrective action requirements by (i) introducing a common equity Tier 1 capital ratio requirement at each level
(other than critically undercapitalized), with the required common equity Tier 1 capital ratio being 6.5% for well- capitalized status; (ii) increasing the minimum Tier 1 capital
ratio requirement for each category (other than critically undercapitalized), with the minimum Tier 1 capital ratio for well- capitalized status being 8.0% (as compared to the current 6.0%),
and (iii) eliminating the current provision that provides that a bank with a composite supervisory rating of 1 may have a 3.0% leverage ratio and still be adequately capitalized. The Basel III
capital rules do not change the total risk-based capital requirement for any prompt corrective action category.
There
are three categories of capital under the Basel III prompt corrective action guidelines: common equity Tier 1 capital, Tier 1 capital and Tier 2 capital. Our
common equity Tier 1 capital currently consists of total shareholders' equity (excluding accumulated other comprehensive income or loss), less Series C Preferred Stock, intangible assets
and disallowed deferred tax assets. Our Tier 1 capital currently consists of total shareholders' equity (excluding accumulated other comprehensive income or loss), less intangible assets and
disallowed deferred tax assets. Our Tier 2 capital includes the allowances for loan losses and off-balance sheet credit losses.
89
Table of Contents
The
following table summarizes risk-based capital, risk-weighted assets, and risk-based capital ratios of the consolidated Company under the Basel III requirements as of
September 30, 2015, and under the Basel I requirements as of September 30, 2014 and December 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
Under Basel III |
|
Under Basel I |
|
|
|
September 30,
2015 |
|
September 30,
2014 |
|
December 31,
2014 |
|
|
|
(Dollars in thousands)
|
|
Capital components: |
|
|
|
|
|
|
|
|
|
|
Common equity Tier 1 capital |
|
$ |
180,353 |
|
|
N/A |
|
|
N/A |
|
Additional Tier 1 capital |
|
|
17,367 |
|
|
N/A |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital |
|
|
197,720 |
|
$ |
179,563 |
|
$ |
169,278 |
|
Tier 2 capital |
|
|
19,480 |
|
|
16,043 |
|
|
16,790 |
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital |
|
$ |
217,200 |
|
$ |
195,606 |
|
$ |
186,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-weighted assets |
|
$ |
1,763,709 |
|
$ |
1,280,332 |
|
$ |
1,341,094 |
|
Average assets for capital purposes |
|
$ |
1,901,985 |
|
$ |
1,535,168 |
|
$ |
1,598,724 |
|
Capital ratios: |
|
|
|
|
|
|
|
|
|
|
Total risk-based capital |
|
|
12.3 |
% |
|
15.3 |
% |
|
13.9 |
% |
Tier 1 risk-based capital |
|
|
11.2 |
% |
|
14.0 |
% |
|
12.6 |
% |
Common equity Tier 1 risk-based capital |
|
|
10.2 |
% |
|
N/A |
|
|
N/A |
|
Leverage(1) |
|
|
10.4 |
% |
|
11.7 |
% |
|
10.6 |
% |
- (1)
- Tier 1
capital divided by quarterly average assets (excluding intangible assets and disallowed deferred tax assets).
The
following table summarizes risk based capital, risk weighted assets, and risk based capital ratios of HBC under the Basel III requirements as of September 30, 2015, and under
the Basel I requirements as of September 30, 2014 and December 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
Under Basel III |
|
Under Basel I |
|
|
|
September 30,
2015 |
|
September 30,
2014 |
|
December 31,
2014 |
|
|
|
(Dollars in thousands)
|
|
Capital components: |
|
|
|
|
|
|
|
|
|
|
Common equity Tier 1 capital |
|
$ |
194,039 |
|
|
N/A |
|
|
N/A |
|
Additional Tier 1 capital |
|
|
|
|
|
N/A |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital |
|
|
194,039 |
|
$ |
167,436 |
|
$ |
158,976 |
|
Tier 2 capital |
|
|
19,480 |
|
|
16,065 |
|
|
16,789 |
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital |
|
$ |
213,519 |
|
$ |
183,501 |
|
$ |
175,765 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-weighted assets |
|
$ |
1,760,434 |
|
$ |
1,282,159 |
|
$ |
1,340,949 |
|
Average assets for capital purposes |
|
$ |
1,900,304 |
|
$ |
1,536,812 |
|
$ |
1,599,173 |
|
Capital ratios: |
|
|
|
|
|
|
|
|
|
|
Total risk-based capital |
|
|
12.1 |
% |
|
14.3 |
% |
|
13.1 |
% |
Tier 1 risk-based capital |
|
|
11.0 |
% |
|
13.1 |
% |
|
11.9 |
% |
Common equity Tier 1 risk-based capital |
|
|
11.0 |
% |
|
N/A |
|
|
N/A |
|
Leverage(1) |
|
|
10.2 |
% |
|
10.9 |
% |
|
9.9 |
% |
- (1)
- Tier 1
capital divided by quarterly average assets (excluding intangible assets and disallowed deferred tax assets).
90
Table of Contents
The
following table presents the applicable well-capitalized regulatory guidelines and the standards for minimum capital adequacy requirements under the Basel III as of
September 30, 2015, and under Basel I as of September 30, 2014 and December 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under Basel III |
|
Under Basel I |
|
|
|
Transitional
Minimum
Regulatory
Requirement
Effective
January 1, 2015 |
|
Minimum
Regulatory
Requirement(1)
Effective
January 1, 2019 |
|
Well-capitalized
by Regulatory
Definition
Under FDICIA
Effective
January 1, 2015 |
|
Minimum
Regulatory
Requirements |
|
Well-Capitalized
Regulatory
Requirements |
|
Capital ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital |
|
|
8.00 |
% |
|
10.50 |
% |
|
10.00 |
% |
|
8.00 |
% |
|
10.00 |
% |
Tier 1 risk-based capital |
|
|
6.00 |
% |
|
8.50 |
% |
|
8.00 |
% |
|
4.00 |
% |
|
6.00 |
% |
Common equity Tier 1 risk-based capital |
|
|
4.50 |
% |
|
7.00 |
% |
|
6.50 |
% |
|
N/A |
|
|
N/A |
|
Leverage |
|
|
4.00 |
% |
|
4.00 |
% |
|
5.00 |
% |
|
4.00 |
% |
|
5.00 |
% |
- (1)
- Includes
2.5% capital conservation buffer.
At
September 30, 2015, the Company's and HBC's regulatory capital increased concurrent with average assets for capital purposes and risk-weighted assets due to the common stock
issued in the Focus transaction, net of normal fluctuations to regulatory capital from dividends, share based compensation, and net income.
At
September 30, 2015, the Company's and HBC's capital ratios exceed the highest regulatory capital requirement of "well-capitalized" under Basel III prompt corrective action
provisions. Quantitative measures established by regulation to help ensure capital adequacy require the Company and HBC to maintain minimum amounts and ratios of total risk-based capital,
Tier 1 capital, and common equity Tier 1 (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined). Management
believes that, as of September 30, 2015, September 30, 2014, and December 31, 2014, the Company and HBC met all capital adequacy guidelines to which they were subject. There are
no conditions or events since September 30, 2015, that management believes have changed the categorization of the Company or HBC as well-capitalized.
At
September 30, 2015, the Company had total shareholders' equity of $248.0 million, compared to $182.9 million at September 30, 2014, and
$184.4 million at December 31, 2014. The increase in total shareholders' equity at September 30, 2015 from September 30, 2014 and December 31, 2014 was primarily due
to the Focus acquisition and an increase in retained earnings. At September 30, 2015, total shareholders' equity included $19.5 million in preferred stock, $193.1 million in
common stock, $37.4 million in retained earnings, and ($2.0) million of accumulated other comprehensive loss.
The
accumulated other comprehensive loss was ($2.0) million at September 30, 2015, compared to accumulated other comprehensive loss of ($812,000) at September 30, 2014, and
an accumulated other comprehensive loss of ($1.9) million at December 31, 2014. The unrealized gain on securities available-for-sale included in accumulated other comprehensive loss was an
unrealized gain of $2.6 million, net of taxes, at September 30, 2015, compared to an unrealized gain of $1.9 million, net of taxes, at September 30, 2014, and an unrealized
gain of $2.8 million, net of taxes, at December 31, 2014. The components of accumulated other comprehensive loss, net of taxes, at September 30, 2015 include the following: an
unrealized gain on available-for-sale securities of $2.6 million; the remaining unamortized unrealized gain on securities available-for-sale transferred to held-to-maturity of $410,000; a split
dollar insurance contracts liability of ($2.1) million; a supplemental executive retirement plan liability of ($3.7) million; and an unrealized gain on interest-only strip from SBA loans of $836,000.
91
Table of Contents
Under
the new Basel III regulations the Company elected to exercise its one-time opt-out to exclude accumulated other comprehensive income from regulatory capital with the filing of its
regulatory reports for first quarter of 2015.
Series C Preferred Stock
On June 21, 2010, the Company issued to various institutional investors 21,004 shares of newly issued Series C Preferred
Stock. The Series C Preferred Stock is mandatorily convertible into 5,601,000 shares of common stock at a conversion price of $3.75 per share upon a subsequent transfer of the Series C
Preferred stock to third parties not affiliates with the holder in a widely dispersed offering. The Series C Preferred Stock is non-voting except in the case of certain transactions that would
affect the rights of the holders of the Series C Preferred Stock or applicable law. The holders of Series C Preferred Stock receive dividends on an as converted basis when dividends are
also declared for holders of common stock. The Series C Preferred Stock is not redeemable by the Company or by the holders and has a liquidation preference of $1,000 per share. The
Series C Preferred Stock ranks senior to the Company's common stock.
Market Risk
Market risk is the risk of loss of future earnings, fair values, or future cash flows that may result from changes in the price of a
financial instrument. The value of a financial instrument may change as a result of changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes
that affect market risk sensitive instruments. Market risk is attributed to all market risk sensitive financial instruments, including securities, loans, deposits and borrowings, as well as the
Company's role as a financial intermediary in customer-related transactions. The objective of market risk management is to avoid excessive exposure of the Company's earnings and equity to loss and to
reduce the volatility inherent in certain financial instruments.
Interest Rate Management
Market risk arises from changes in interest rates, exchange rates, commodity prices and equity prices. The Company's market risk
exposure is primarily that of interest rate risk, and it has established policies and procedures to monitor and limit earnings and balance sheet exposure to changes in interest rates. The Company does
not engage in the trading of financial instruments, nor does the Company have exposure to currency exchange rates.
The
principal objective of interest rate risk management (often referred to as "asset/liability management") is to manage the financial components of the Company in a manner that will
optimize the risk/reward equation for earnings and capital in relation to changing interest rates. The Company's exposure to market risk is reviewed on a regular basis by the Asset/Liability
Committee. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of
current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income.
Management realizes certain risks are inherent, and that the goal is to identify and manage the risks. Management uses two methodologies to manage interest rate risk: (i) a standard GAP
analysis; and (ii) an interest rate shock simulation model.
The
planning of asset and liability maturities is an integral part of the management of an institution's net interest margin. To the extent maturities of assets and liabilities do not
match in a changing interest rate environment, the net interest margin may change over time. Even with perfectly matched repricing of assets and liabilities, risks remain in the form of prepayment of
loans or securities or in the form of delays in the adjustment of rates of interest applying to either earning assets with floating rates or to interest bearing liabilities. The Company has generally
been able to control its
92
Table of Contents
exposure
to changing interest rates by maintaining primarily floating interest rate loans and a majority of its time certificates with relatively short maturities.
Interest
rate changes do not affect all categories of assets and liabilities equally or at the same time. Varying interest rate environments can create unexpected changes in prepayment
levels of assets and liabilities, which may have a significant effect on the net interest margin and are not reflected in the interest sensitivity analysis table. Because of these factors, an interest
sensitivity GAP report may not provide a complete assessment of the exposure to changes in interest rates.
The
Company uses modeling software for asset/liability management in order to simulate the effects of potential interest rate changes on the Company's net interest margin, and to
calculate the estimated fair values of the Company's financial instruments under different interest rate scenarios. The program imports current balances, interest rates, maturity dates and repricing
information for individual financial instruments, and incorporates assumptions on the characteristics of embedded options along with pricing and duration for new volumes to project the effects of a
given interest rate change on the Company's interest income and interest expense. Rate scenarios consisting of key rate and yield curve projections are run against the Company's investment, loan,
deposit and borrowed funds portfolios. These rate projections can be shocked (an immediate and parallel change in all base rates, up or down) and ramped (an incremental increase or decrease in rates
over a specified time period), based on current trends and econometric models or stable economic conditions (unchanged from current actual levels).
The
following table sets forth the estimated changes in the Company's annual net interest income that would result from the designated instantaneous parallel shift in interest rates
noted, as of September 30, 2015. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates,
loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease)
in Estimated Net
Interest Income |
|
|
|
Amount |
|
Percent |
|
|
|
(Dollars in thousands)
|
|
Change in Interest Rates (basis points) |
|
|
|
|
|
|
|
+400 |
|
$ |
95,530 |
|
|
35.4 |
% |
+300 |
|
$ |
89,467 |
|
|
26.8 |
% |
+200 |
|
$ |
83,305 |
|
|
18.1 |
% |
+100 |
|
$ |
76,989 |
|
|
9.1 |
% |
0 |
|
$ |
70,553 |
|
|
0.0 |
% |
100 |
|
$ |
(63,409 |
) |
|
10.1 |
% |
200 |
|
$ |
(55,631 |
) |
|
21.2 |
% |
This
data does not reflect any actions that we may undertake in response to changes in interest rates such as changes in rates paid on certain deposit accounts based on local competitive
factors, which could reduce the actual impact on net interest income.
As
with any method of gauging interest rate risk, there are certain shortcomings inherent to the methodology noted above. The model assumes interest rate changes are instantaneous
parallel shifts in the yield curve. In reality, rate changes are rarely instantaneous. The use of the simplifying assumption that short-term and long-term rates change by the same degree may also
misstate historic rate patterns, which rarely show parallel yield curve shifts. Further, the model assumes that certain assets and liabilities of similar maturity or period to repricing will react in
the same way to changes in rates. In reality, certain types of financial instruments may react in advance of changes in market rates, while the reaction of other types of financial instruments may lag
behind the change in general market rates.
93
Table of Contents
Additionally,
the methodology noted above does not reflect the full impact of annual and lifetime restrictions on changes in rates for certain assets, such as adjustable rate loans. When interest
rates change, actual loan prepayments and actual early withdrawals from certificates may deviate significantly from the assumptions used in the model. Finally, this methodology does not measure or
reflect the impact that higher rates may have on adjustable-rate loan clients' ability to service their debt. All of these factors are considered in monitoring the Company's exposure to interest rate
risk.
ITEM 3QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information concerning quantitative and qualitative disclosure or market risk called for by Item 305 of
Regulation S-K is included as part of Item 2 above.
ITEM 4CONTROLS AND PROCEDURES
Disclosure Control and Procedures
The Company has carried out an evaluation, under the supervision and with the participation of the Company's management, including the
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of September 30, 2015. As defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), disclosure controls and procedures are controls and procedures designed to reasonably assure that
information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported on a timely basis. Disclosure controls are also designed
to reasonably assure that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded the Company's disclosure controls were effective as of
September 30, 2015, the period covered by this report on Form 10-Q.
During
the three months ended September 30, 2015, there were no changes in our internal controls over financial reporting that materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.
94
Table of Contents
Part IIOTHER INFORMATION
ITEM 1LEGAL PROCEEDINGS
The Company is involved in certain legal actions arising from normal business activities. Management, based upon the advice of legal
counsel, believes the ultimate resolution of all pending legal actions will not have a material effect on the financial statements of the Company.
ITEM 1ARISK FACTORS
In addition to the other information set forth in this Report, you should carefully consider the other factors discussed in
Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2014, which could materially affect our business, financial condition
and/or operating results. Except as set forth below, there were no material changes from risk factors previously disclosed in our 2014 Annual Report on Form 10-K. The risk factors identified
below are in addition to those contained in any other cautionary statements, written or oral, which may be made or otherwise addressed in connection with a forward-looking statement or contained in
any of our subsequent filings with the Securities and Exchange Commission.
Risks Related to the Acquistion of Focus Business Bank
We may fail to realize the cost savings we have estimated for the integration of the business
operations and managements of the Company and Focus in an efficient manner.
The success of the acquisition of Focus by the Company completed on August 20, 2015 (the "Acquisition") will depend, in part, on
our ability to realize anticipated cost savings and to combine the businesses of the Company and Focus in a manner that permits growth opportunities to be realized and does not materially disrupt the
existing customer relationships of the Company or Focus, nor result in decreased revenues due to any loss of customers.
The
Company and Focus have operated independently. To realize the anticipated benefits of the Acquisition, the businesses of the Company and Focus must be successfully combined. While
management has taken existing leases and other contractual obligations into consideration in developing its estimate of cost savings, changes in transaction volumes, operating systems and procedures
and other factors may cause the actual cost savings to be different from these estimates. In addition, difficulties encountered in integrating our information systems could prevent us from realizing
some of the estimated cost savings. Such difficulties could also jeopardize customer relationships and cause a loss of deposits or loan customers and the revenue associated with those customers. It is
possible that the integration process could result in the loss of key employees, as well as the disruption of each company's ongoing businesses or inconsistencies in standards, controls, procedures
and policies,
any or all of which could adversely affect our ability to maintain relationships with customers and employees after the Acquisition or to achieve the anticipated benefits of the Acquistion.
Integration efforts will also divert management attention and resources. A failure to successfully navigate the complicated integration process could have an adverse effect on the combined companies.
If the combined company is not able to achieve these cost-savings objectives, the anticipated benefits of the Acquistion may not be realized fully or at all or may take longer to realize than
expected.
The failure of the Company's Loan Portfolios to Perform as Expected May Unfavorably Impact Us.
Our performance and prospects after the Acquisition are dependent to a significant extent on the performance of the combined loan
portfolios of the Company and Focus, and ultimately on the financial condition of our borrowers and other customers. The loan portfolios of the two banks differed to some extent in the types of
borrowers, industries and credits represented. In addition, there were differences in the documentation, classifications, underwriting and management of the portfolios. As a
95
Table of Contents
result,
our overall loan portfolio has a different risk profile than the loan portfolio of either the Company or Focus before the Acquisition. The performance of our loan portfolio will be adversely
affected if any of such factors are worse than anticipated. In addition, to the extent that customers of Focus are not retained by the Company, or additional expenses are incurred in retaining them,
there could be adverse effects on our future consolidated results of operations following the Acquisition. The anticipated benefits of the Acquisition are dependent, in part, on the extent to which
the revenues of Focus are maintained and enhanced.
ITEM 2UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4MINE SAFETY DISCLOSURES
None
ITEM 5OTHER INFORMATION
None
96
Table of Contents
ITEM 6EXHIBITS
|
|
|
|
Exhibit |
|
Description |
|
3.1 |
|
Heritage Commerce Corp Restated Articles of Incorporation, (incorporated by reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K filed on March 16, 2009) |
|
3.2 |
|
Certificate of Amendment of Articles of Incorporation of Heritage Commerce Corp as filed with the California Secretary of State on June 1, 2010 (incorporated by reference to Exhibit 3.2 to the Registrant's
Registration Statement on Form S-1 filed July 23, 2010). |
|
3.3 |
|
Heritage Commerce Corp Bylaws, as amended (incorporated by reference to the Registrant's Current Report on Form 8-K filed on June 28, 2013) |
|
4.1 |
|
Certificate of Determination for Series C Convertible Perpetual Preferred Stock (incorporated by reference to the Registrant's Current Report on Form 8-K filed on June 22, 2010) |
|
12.1 |
|
Calculation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges and Preferred Stock Dividends |
|
31.1 |
|
Certification of Registrant's Chief Executive Officer Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002 |
|
31.2 |
|
Certification of Registrant's Chief Financial Officer Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002 |
|
32.1 |
|
Certification of Registrant's Chief Executive Officer Pursuant To 18 U.S.C. Section 1350 |
|
32.2 |
|
Certification of Registrant's Chief Financial Officer Pursuant To 18 U.S.C. Section 1350 |
|
101.INS |
|
XBRL Instance Document, furnished herewith |
|
101.SCH |
|
XBRL Taxonomy Extension Schema Document, furnished herewith |
|
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase Document, furnished herewith |
|
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase Document, furnished herewith |
|
101.LAB |
|
XBRL Taxonomy Extension Label Linkbase Document, furnished herewith |
|
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase Document, furnished herewith |
97
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
Heritage Commerce Corp (Registrant) |
Date: November 6, 2015 |
|
/s/ WALTER T. KACZMAREK
Walter T. Kaczmarek Chief Executive Officer |
Date: November 6, 2015 |
|
/s/ LAWRENCE D. MCGOVERN
Lawrence D. McGovern Chief Financial Officer |
98
Table of Contents
EXHIBIT INDEX
|
|
|
Exhibit |
|
Description |
3.1 |
|
Heritage Commerce Corp Restated Articles of Incorporation, (incorporated by reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K filed on March 16, 2009) |
3.2 |
|
Certificate of Amendment of Articles of Incorporation of Heritage Commerce Corp as filed with the California Secretary of State on June 1, 2010 (incorporated by reference to Exhibit 3.2 to the Registrant's
Registration Statement on Form S-1 filed July 23, 2010). |
3.3 |
|
Heritage Commerce Corp Bylaws, as amended (incorporated by reference to the Registrant's Current Report on Form 8-K filed on June 28, 2013) |
4.1 |
|
Certificate of Determination for Series C Convertible Perpetual Preferred Stock (incorporated by reference to the Registrant's Current Report on Form 8-K filed on June 22, 2010) |
12.1 |
|
Calculation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges and Preferred Stock Dividends |
31.1 |
|
Certification of Registrant's Chief Executive Officer Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 |
|
Certification of Registrant's Chief Financial Officer Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1 |
|
Certification of Registrant's Chief Executive Officer Pursuant To 18 U.S.C. Section 1350 |
32.2 |
|
Certification of Registrant's Chief Financial Officer Pursuant To 18 U.S.C. Section 1350 |
101.INS |
|
XBRL Instance Document, herewith |
101.SCH |
|
XBRL Taxonomy Extension Schema Document, herewith |
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase Document, herewith |
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase Document, herewith |
101.LAB |
|
XBRL Taxonomy Extension Label Linkbase Document, herewith |
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase Document, herewith |
99
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Exhibit 12.1
CALCULATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
Year Ended December 31, |
|
|
|
2015 |
|
2014 |
|
2014 |
|
2013 |
|
2012 |
|
2011 |
|
|
|
(Dollars in thousands)
|
|
Earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
19,366 |
|
$ |
15,370 |
|
$ |
20,965 |
|
$ |
17,746 |
|
$ |
15,398 |
|
$ |
11,572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Charges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on deposits |
|
$ |
1,664 |
|
$ |
1,527 |
|
$ |
2,032 |
|
$ |
2,369 |
|
$ |
2,800 |
|
$ |
3,942 |
|
Interest on notes payable to subsidiary grantor trusts, repurchase agreements, and other borrowings |
|
|
|
|
|
1 |
|
|
121 |
|
|
231 |
|
|
1,387 |
|
|
1,933 |
|
Rent expense interest factor(1) |
|
|
761 |
|
|
670 |
|
|
897 |
|
|
906 |
|
|
912 |
|
|
922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed charges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Including interest on deposits |
|
$ |
2,425 |
|
$ |
2,198 |
|
$ |
3,050 |
|
$ |
3,506 |
|
$ |
5,099 |
|
$ |
6,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding interest on deposits |
|
$ |
761 |
|
$ |
671 |
|
$ |
1,018 |
|
$ |
1,137 |
|
$ |
2,299 |
|
$ |
2,855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of earnings (loss) to fixed charges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding interest on deposits |
|
|
26.45 |
|
|
23.92 |
|
|
21.59 |
|
|
16.61 |
|
|
7.70 |
|
|
5.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Including interest on deposits |
|
|
8.98 |
|
|
7.99 |
|
|
7.87 |
|
|
6.06 |
|
|
4.02 |
|
|
2.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- (1)
- This
amount is the portion of rent expense (generally one-third) deemed representative of the interest factor.
For
purposes of calculating the ratios of earnings to fixed charges and preferred stock dividends, earnings consist of income before income taxes and fixed charges. Fixed charges consist
of interest on subordinated debt, repurchase agreements and other borrowings, the proportion deemed representative of the interest factor within rent expense. These ratios are presented both including
and excluding interest on deposits.
CALCULATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
Year Ended December 31, |
|
|
|
2015 |
|
2014 |
|
2014 |
|
2013 |
|
2012 |
|
2011 |
|
|
|
(Dollars in thousands)
|
|
Earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
19,366 |
|
$ |
15,370 |
|
$ |
20,965 |
|
$ |
17,746 |
|
$ |
15,398 |
|
$ |
11,572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Charges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on deposits |
|
$ |
1,664 |
|
|
1,527 |
|
$ |
2,032 |
|
$ |
2,369 |
|
$ |
2,800 |
|
$ |
3,942 |
|
Interest on notes payable to subsidiary grantor trusts, repurchase agreements, and other borrowings |
|
|
|
|
|
1 |
|
|
121 |
|
|
231 |
|
|
1,387 |
|
|
1,933 |
|
Preferred stock dividends(1) |
|
|
1,344 |
|
|
728 |
|
|
1,008 |
|
|
336 |
|
|
373 |
|
|
1,939 |
|
Rent expense interest factor(2) |
|
|
761 |
|
|
670 |
|
|
897 |
|
|
906 |
|
|
912 |
|
|
922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed charges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Including interest on deposits |
|
$ |
3,769 |
|
$ |
2,926 |
|
$ |
4,058 |
|
$ |
3,842 |
|
$ |
5,472 |
|
$ |
8,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding interest on deposits |
|
$ |
2,105 |
|
$ |
1,399 |
|
$ |
2,026 |
|
$ |
1,473 |
|
$ |
2,672 |
|
$ |
4,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of earnings (loss) to fixed charges and preferred stock dividends: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding interest on deposits |
|
|
10.20 |
|
|
11.99 |
|
|
11.35 |
|
|
13.05 |
|
|
6.76 |
|
|
3.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Including interest on deposits |
|
|
6.14 |
|
|
6.25 |
|
|
6.17 |
|
|
5.62 |
|
|
3.81 |
|
|
2.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- (1)
- This
amount is the portion of rent expense (generally one-third) deemed representative of the interest factor.
For
purposes of calculating the ratios of earnings to fixed charges and preferred stock dividends, earnings consist of income before income taxes and fixed charges. Fixed charges consist
of interest on subordinated debt, repurchase agreements and other borrowings, the proportion deemed representative of the interest factor within rent expense, and preferred stock dividends. These
ratios are presented both including and excluding interest on deposits.
QuickLinks
CALCULATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
CALCULATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
QuickLinks
-- Click here to rapidly navigate through this document
Exhibit 31.1
CERTIFICATION UNDER SECTION 302 OF THE SARBANES OXLEY ACT OF 2002
REGARDING THE QUARTERLY REPORT ON FORM 10 Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2015
I,
Walter T. Kaczmarek, certify that:
- 1.
- I
have reviewed this Quarterly Report on Form 10-Q for the Quarter Ended September 30, 2015 of Heritage Commerce Corp;
- 2.
- Based
on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
- 3.
- Based
on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
- 4.
- The
registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
- (a)
- Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
- (b)
- Designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
- (c)
- Evaluated
the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
- (d)
- Disclosed
in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over
financial reporting; and
- 5.
- The
registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
- (a)
- All
significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and report financial information; and
- (b)
- Any
fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over
financial reporting.
Date:
November 6, 2015
|
|
|
|
|
/s/ WALTER T. KACZMAREK
Walter T. Kaczmarek Chief Executive Officer |
QuickLinks
CERTIFICATION UNDER SECTION 302 OF THE SARBANES OXLEY ACT OF 2002 REGARDING THE QUARTERLY REPORT ON FORM 10 Q FOR THE QUARTER ENDED SEPTEMBER 30, 2015
QuickLinks
-- Click here to rapidly navigate through this document
Exhibit 31.2
CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
REGARDING THE QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2015
I,
Lawrence D. McGovern, certify that:
- 1.
- I
have reviewed this Quarterly Report on Form 10-Q for the Quarter Ended September 30, 2015 of Heritage Commerce Corp;
- 2.
- Based
on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
- 3.
- Based
on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
- 4.
- The
registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
- (a)
- Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
- (b)
- Designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
- (c)
- Evaluated
the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
- (d)
- Disclosed
in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over
financial reporting; and
- 5.
- The
registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
- (a)
- All
significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and report financial information; and
- (b)
- Any
fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over
financial reporting.
Date:
November 6, 2015
|
|
|
|
|
/s/ LAWRENCE D. MCGOVERN
Lawrence D. McGovern Chief Financial Officer |
QuickLinks
CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 REGARDING THE QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2015
QuickLinks
-- Click here to rapidly navigate through this document
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
REGARDING THE QUARTERLY REPORT ON FORM
10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2015
In connection with the Quarterly Report of Heritage Commerce Corp (the "Company") on Form 10-Q for the period ended
September 30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Walter T. Kaczmarek, Chief Executive Officer of the Company, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
- (1)
- The
Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
- (2)
- The
information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date:
November 6, 2015
|
|
|
|
|
/s/ WALTER T. KACZMAREK
Walter T. Kaczmarek Chief Executive Officer |
QuickLinks
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 REGARDING THE QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30,
2015
QuickLinks
-- Click here to rapidly navigate through this document
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
REGARDING THE QUARTERLY REPORT ON FORM
10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2015
In connection with the Quarterly Report of Heritage Commerce Corp (the "Company") on Form 10-Q for the period ended
September 30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Lawrence D. McGovern, Chief Financial Officer of the Company, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
- (1)
- The
Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
- (2)
- The
information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date:
November 6, 2015
|
|
|
|
|
/s/ LAWRENCE D. MCGOVERN
Lawrence D. McGovern Chief Financial Officer |
QuickLinks
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 REGARDING THE QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30,
2015
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