HERITAGE COMMERCE CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2016
|
|
2015
|
|
|
|
(Dollars in thousands)
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,106
|
|
$
|
4,138
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
Amortization of discounts and premiums on securities
|
|
|
667
|
|
|
293
|
|
Gain on sale of securities available-for-sale
|
|
|
(180
|
)
|
|
|
|
Gain on sale of SBA loans
|
|
|
(305
|
)
|
|
(207
|
)
|
Proceeds from SBA loans originated for sale
|
|
|
4,927
|
|
|
2,345
|
|
SBA loans originated for sale
|
|
|
(2,505
|
)
|
|
(2,356
|
)
|
Provision (credit) for loan losses
|
|
|
401
|
|
|
(60
|
)
|
Increase in cash surrender value of life insurance
|
|
|
(449
|
)
|
|
(400
|
)
|
Depreciation and amortization
|
|
|
169
|
|
|
186
|
|
Amortization of intangible assets
|
|
|
392
|
|
|
189
|
|
Gain on sale of foreclosed assets, net
|
|
|
|
|
|
(124
|
)
|
Stock option expense, net
|
|
|
245
|
|
|
224
|
|
Amortization of restricted stock awards, net
|
|
|
186
|
|
|
(14
|
)
|
Effect of changes in:
|
|
|
|
|
|
|
|
Accrued interest receivable and other assets
|
|
|
1,700
|
|
|
(1,074
|
)
|
Accrued interest payable and other liabilities
|
|
|
(3,387
|
)
|
|
(1,841
|
)
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
7,967
|
|
|
1,299
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Purchase of securities available-for-sale
|
|
|
(75,803
|
)
|
|
|
|
Purchase of securities held-to-maturity
|
|
|
(78,680
|
)
|
|
|
|
Maturities/paydowns/calls of securities available-for-sale
|
|
|
11,075
|
|
|
6,204
|
|
Maturities/paydowns/calls of securities held-to-maturity
|
|
|
2,665
|
|
|
720
|
|
Proceeds from sale of securities available-for-sale
|
|
|
5,598
|
|
|
|
|
Net change in loans
|
|
|
(33,675
|
)
|
|
(11,877
|
)
|
Change in Federal Home Loan Bank and Federal Reserve Bank stock and other investments
|
|
|
(8
|
)
|
|
(20
|
)
|
Purchase of premises and equipment
|
|
|
(21
|
)
|
|
(75
|
)
|
Proceeds from sale of foreclosed assets
|
|
|
|
|
|
322
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(168,849
|
)
|
|
(4,726
|
)
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Net change in deposits
|
|
|
(34,039
|
)
|
|
35,263
|
|
Exercise of stock options
|
|
|
358
|
|
|
106
|
|
Repayment of short-term borrowings
|
|
|
(3,000
|
)
|
|
|
|
Payment of cash dividends
|
|
|
(3,394
|
)
|
|
(2,569
|
)
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(40,075
|
)
|
|
32,800
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(200,957
|
)
|
|
29,373
|
|
Cash and cash equivalents, beginning of period
|
|
|
344,092
|
|
|
122,403
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
143,135
|
|
$
|
151,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
741
|
|
$
|
487
|
|
Income taxes paid
|
|
|
1,375
|
|
|
1,000
|
|
Supplemental schedule of non-cash investing activity:
|
|
|
|
|
|
|
|
Transfer of loans held for sale to loan portfolio
|
|
|
2,791
|
|
|
|
|
Loans transferred to foreclosed assets
|
|
|
49
|
|
|
1,236
|
|
See notes to unaudited consolidated financial statements
9
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(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, 2015.
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.
The
Company acquired 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. Bay View Funding 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 results 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 months ended March 31, 2016 are not necessarily indicative of the results expected for any subsequent period or for the entire year ending
December 31, 2016.
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.
10
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2016
(Unaudited)
1) Basis of Presentation (Continued)
Adoption of New Accounting Standards
In September 2015, the FASB issued ASU No. 2015-16,
Simplifying the Accounting for Measurement Period
Adjustment.
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 the adjustment amounts are determined. The amendments in this update
require that the acquirer's 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 Company has evaluated the adoption of the new guidance and has determined it did not have a material impact on the consolidated financial statements.
Newly Issued, but not yet Effective Accounting Standards
In January 2016, the FASB issued ASU No. 2016-01,
Financial InstrumentsRecognition and
Measurement of Financial Assets and Liabilities
. The new guidance is intended to improve the recognition and measurement of financial instruments by requiring: equity
investments (other than equity method or consolidation) to be measured at fair value with changes in fair value recognized in net income; public business entities to use the exit price notion when
measuring the fair value of financial instruments for disclosure purposes; separate presentation of financial assets and financial liabilities by measurement category and form of financial assets
(i.e. securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; eliminating the requirement to disclose the fair value of financial
instruments measured at amortized cost for organizations that are not public business entities; eliminating the requirement for non-public business entities to disclose the method(s) and significant
assumptions used to estimate the fair value that is to be required to be disclosed for financial instruments measured at amortized cost on the balance sheet; and requiring a reporting organization to
present separately in other comprehensive income the portion of the total change in fair value of a liability resulting from the change in the instrument-specific credit risk (also referred to as "own
credit") when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The new guidance is effective for public business
entities for fiscal years beginning after December 15, 2017. 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.
In
February 2016, the FASB issued ASU No. 2016-02,
Leases
. The standard requires a lessee to recognize assets and liabilities on
the balance sheet for leases with lease terms greater than 12 months.
11
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2016
(Unaudited)
1) Basis of Presentation (Continued)
A
lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset
for the lease term. When measuring assets and liabilities arising from a lease, a lessee (and a lessor) should include
payments to be made in optional periods only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease. Similarly, optional
payments to purchase the underlying asset should be included in the measurement of lease assets and lease liabilities only if the lessee is reasonably certain to exercise that purchase option.
Reasonably
certain
is a high threshold that is consistent with and intended to be applied in the same way as the
reasonably
assured
threshold in the previous leases guidance. In addition, also consistent with the previous leases guidance, a lessee (and a lessor) should exclude most variable lease
payments in measuring lease assets and lease liabilities, other than those that depend on an index or a rate or are in substance fixed payments. For leases with a term of 12 months or less, a
lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease
expense for such leases generally on a straight-line basis over the lease term. The new guidance is effective for fiscal years, and interim periods within those years, beginning after
December 15, 2018, and early adoption is permitted. We are currently evaluating the impact of adopting the new guidance on our consolidated financial statements.
In
March 2016, the FASB issued ASU No. 2016-09,
CompensationStock Compensation
:
Improvements
to Employee Share-Based Payment Accounting
. The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax
impact, classification on the statement of cash flows and forfeitures. All excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) should be
recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An
entity also should recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. Excess tax benefits should be classified along with other income tax
cash flows as an operating activity. An entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for
forfeitures when they occur. The threshold to qualify for equity classification permits withholding up to the maximum statutory tax rates in the applicable jurisdictions. Cash paid by an employer when
directly withholding shares for tax withholding purposes should be classified as a financing activity. A nonpublic entity can make an accounting policy election to apply a practical expedient to
estimate the expected term for all awards with performance or service conditions that meet certain conditions. A nonpublic entity can make a one-time accounting policy election to switch from
measuring all liability-classified awards at fair value to intrinsic value. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15,
2016, and early adoption is permitted. We are currently evaluating the impact of adopting the new guidance on our consolidated financial statements.
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
12
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2016
(Unaudited)
2) Earnings Per Share (Continued)
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 March 31,
|
|
|
|
2016
|
|
2015
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
Net income available to common shareholders
|
|
$
|
5,602
|
|
$
|
3,690
|
|
Less: undistributed earnings allocated to Series C Preferred Stock
|
|
|
(403
|
)
|
|
(274
|
)
|
|
|
|
|
|
|
|
|
Distributed and undistributed earnings allocated to common shareholders
|
|
$
|
5,199
|
|
$
|
3,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding for basic earnings per common share
|
|
|
32,125,716
|
|
|
26,509,723
|
|
Dilutive effect of stock options oustanding, using the the treasury stock method
|
|
|
251,777
|
|
|
170,530
|
|
|
|
|
|
|
|
|
|
Shares used in computing diluted earnings per common share
|
|
|
32,377,493
|
|
|
26,680,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.16
|
|
$
|
0.13
|
|
Diluted earnings per share
|
|
$
|
0.16
|
|
$
|
0.13
|
|
13
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2016
(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 March 31, 2016 and 2015
|
|
|
|
Unrealized
Gains 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, 2016, net of taxes
|
|
$
|
1,090
|
|
$
|
403
|
|
$
|
(7,713
|
)
|
$
|
(6,220
|
)
|
Other comprehensive income before reclassification, net of taxes
|
|
|
2,807
|
|
|
|
|
|
|
|
|
2,807
|
|
Amounts reclassified from other comprehensive income (loss), net of taxes
|
|
|
(105
|
)
|
|
(8
|
)
|
|
28
|
|
|
(85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current period other comprensive income, net of taxes
|
|
|
2,702
|
|
|
(8
|
)
|
|
28
|
|
|
2,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance March 31, 2016, net of taxes
|
|
$
|
3,792
|
|
$
|
395
|
|
$
|
(7,685
|
)
|
$
|
(3,498
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance January 1, 2015, net of taxes
|
|
$
|
3,666
|
|
$
|
435
|
|
$
|
(5,952
|
)
|
$
|
(1,851
|
)
|
Other comprehensive income (loss) before reclassification, net of taxes
|
|
|
514
|
|
|
|
|
|
(21
|
)
|
|
493
|
|
Amounts reclassified from other comprehensive income (loss), net of taxes
|
|
|
|
|
|
(8
|
)
|
|
49
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current period other comprehensive income (loss), net of
taxes
|
|
|
514
|
|
|
(8
|
)
|
|
28
|
|
|
534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance March 31, 2015, net of taxes
|
|
$
|
4,180
|
|
$
|
427
|
|
$
|
(5,924
|
)
|
$
|
(1,317
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2016
(Unaudited)
3) Accumulated Other Comprehensive Income (Loss) ("AOCI") (Continued)
|
|
|
|
|
|
|
|
|
|
|
Amounts
Reclassified
from AOCI(1)
For the Three
Months Ended
March 31,
|
|
|
|
|
Affected Line Item Where
Net Income is Presented
|
Details About AOCI Components
|
|
2016
|
|
2015
|
|
|
(Dollars in thousands)
|
|
|
Unrealized gains on available-for-sale securities and I/O strips
|
|
$
|
180
|
|
$
|
|
|
Realized gains on sale of securities
|
|
|
|
(75
|
)
|
|
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
105
|
|
|
|
|
Net of tax
|
|
|
|
|
|
|
|
|
|
Amortization of unrealized gain on securities available-for-sale that were reclassified to securities held-to-maturity
|
|
|
14
|
|
|
14
|
|
Interest income on taxable securities
|
|
|
|
(6
|
)
|
|
(6
|
)
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
8
|
|
Net of tax
|
|
|
|
|
|
|
|
|
|
Amortization of defined benefit pension plan items
|
|
|
|
|
|
|
|
|
Prior transition obligation
|
|
|
13
|
|
|
12
|
|
|
Actuarial losses
|
|
|
(60
|
)
|
|
(96
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(47
|
)
|
|
(84
|
)
|
Salaries and employee benefits
|
|
|
|
19
|
|
|
35
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
(28
|
)
|
|
(49
|
)
|
Net of tax
|
|
|
|
|
|
|
|
|
|
Total reclassification for the period
|
|
$
|
85
|
|
$
|
(41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
This
AOCI component is included in the computation of net periodic benefit cost (see Note 9Benefit Plans) and includes split-dollar life
insurance benefit plan.
15
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2016
(Unaudited)
4) Securities
The amortized cost and estimated fair value of securities at March 31, 2016 and December 31, 2015 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair
Value
|
|
|
|
(Dollars in thousands)
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities
|
|
$
|
388,282
|
|
$
|
4,543
|
|
$
|
(72
|
)
|
$
|
392,753
|
|
U.S. Treasury
|
|
|
30,054
|
|
|
278
|
|
|
|
|
|
30,332
|
|
Trust preferred securities
|
|
|
15,000
|
|
|
225
|
|
|
|
|
|
15,225
|
|
U.S. Government sponsored entities
|
|
|
9,041
|
|
|
140
|
|
|
|
|
|
9,181
|
|
Corporate bonds
|
|
|
1,005
|
|
|
44
|
|
|
|
|
|
1,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
443,382
|
|
$
|
5,230
|
|
$
|
(72
|
)
|
$
|
448,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipalstax exempt
|
|
$
|
92,589
|
|
$
|
2,091
|
|
$
|
(458
|
)
|
$
|
94,222
|
|
Agency mortgage-backed securities
|
|
|
92,576
|
|
|
296
|
|
|
(47
|
)
|
|
92,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
185,165
|
|
$
|
2,387
|
|
$
|
(505
|
)
|
$
|
187,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair
Value
|
|
|
|
(Dollars in thousands)
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities
|
|
$
|
324,077
|
|
$
|
2,457
|
|
$
|
(2,304
|
)
|
$
|
324,230
|
|
U.S. Treasury
|
|
|
30,047
|
|
|
|
|
|
(44
|
)
|
|
30,003
|
|
Trust preferred securities
|
|
|
15,000
|
|
|
132
|
|
|
|
|
|
15,132
|
|
U.S. Government sponsored entities
|
|
|
9,042
|
|
|
13
|
|
|
(14
|
)
|
|
9,041
|
|
Corporate bonds
|
|
|
6,412
|
|
|
261
|
|
|
|
|
|
6,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
384,578
|
|
$
|
2,863
|
|
$
|
(2,362
|
)
|
$
|
385,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipalstax exempt
|
|
$
|
93,518
|
|
$
|
1,517
|
|
$
|
(863
|
)
|
$
|
94,172
|
|
Agency mortgage-backed securities
|
|
|
15,793
|
|
|
24
|
|
|
(168
|
)
|
|
15,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
109,311
|
|
$
|
1,541
|
|
$
|
(1,031
|
)
|
$
|
109,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2016
(Unaudited)
4) Securities (Continued)
Securities
with unrealized losses at March 31, 2016 and December 31, 2015, 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
|
|
March 31, 2016
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
|
|
(Dollars in thousands)
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities
|
|
$
|
57,940
|
|
$
|
(58
|
)
|
$
|
4,182
|
|
$
|
(14
|
)
|
$
|
62,122
|
|
$
|
(72
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
57,940
|
|
$
|
(58
|
)
|
$
|
4,182
|
|
$
|
(14
|
)
|
$
|
62,122
|
|
$
|
(72
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MunicipalsTax Exempt
|
|
$
|
2,051
|
|
$
|
(24
|
)
|
$
|
18,643
|
|
$
|
(434
|
)
|
$
|
20,694
|
|
$
|
(458
|
)
|
Agency mortgage-backed securities
|
|
|
7,297
|
|
|
(14
|
)
|
|
3,705
|
|
|
(33
|
)
|
|
11,002
|
|
|
(47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,348
|
|
$
|
(38
|
)
|
$
|
22,348
|
|
$
|
(467
|
)
|
$
|
31,696
|
|
$
|
(505
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
12 Months or More
|
|
Total
|
|
December 31, 2015
|
|
Fair
Value
|
|
Unrealized
(Losses)
|
|
Fair
Value
|
|
Unrealized
(Losses)
|
|
Fair
Value
|
|
Unrealized
(Losses)
|
|
|
|
(Dollars in thousands)
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities
|
|
$
|
241,067
|
|
$
|
(2,258
|
)
|
$
|
2,165
|
|
$
|
(46
|
)
|
$
|
243,232
|
|
$
|
(2,304
|
)
|
U.S. Treasury
|
|
|
30,003
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
30,003
|
|
|
(44
|
)
|
U.S. Government sponsored entities
|
|
|
4,980
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
4,980
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
276,050
|
|
$
|
(2,316
|
)
|
$
|
2,165
|
|
$
|
(46
|
)
|
$
|
278,215
|
|
$
|
(2,362
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MunicipalsTax Exempt
|
|
$
|
9,920
|
|
$
|
(78
|
)
|
$
|
24,412
|
|
$
|
(785
|
)
|
$
|
34,332
|
|
$
|
(863
|
)
|
Agency mortgage-backed securities
|
|
|
7,152
|
|
|
(89
|
)
|
|
4,409
|
|
|
(79
|
)
|
|
11,561
|
|
|
(168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
17,072
|
|
$
|
(167
|
)
|
$
|
28,821
|
|
$
|
(864
|
)
|
$
|
45,893
|
|
$
|
(1,031
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
March 31, 2016, the Company held 475 securities (199 available-for-sale and 276 held-to-maturity), of which 72 had fair values below amortized cost. At March 31, 2016, there were
$4,182,000 of agency mortgage-backed securities available-for-sale, $18,643,000 of municipal bonds held-to-maturity, and $3,705,000 of agency mortgage-backed securities held-to-maturity carried with
an unrealized loss for 12 months or more. The total unrealized loss for securities 12 months or more was $481,000 at March 31, 2016. 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
17
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2016
(Unaudited)
4) Securities (Continued)
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 March 31, 2016.
At
December 31, 2015, the Company held 460 securities (193 available-for-sale and 267 held-to-maturity), of which 193 had fair values below amortized cost. At December 31,
2015, there were $2,165,000 of agency mortgage-backed securities available-for-sale, $4,409,000 of agency mortgage-backed securities held-to-maturity and $24,412,000 of municipals bonds
held-to-maturity carried with an unrealized loss for 12 months or greater. The total unrealized loss for securities 12 months or greater was $910,000 at December 31, 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 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, 2015.
The
proceeds from sales of securities and the resulting gains and losses were as follows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
March 31,
|
|
|
|
2016
|
|
2015
|
|
|
|
(Dollars in thousands)
|
|
Proceeds
|
|
$
|
5,598
|
|
$
|
|
|
Gross gains
|
|
|
180
|
|
|
|
|
Gross losses
|
|
|
|
|
|
|
|
The
amortized cost and estimated fair values of securities as of March 31, 2016, 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
|
|
$
|
6,290
|
|
$
|
6,297
|
|
Due after one through five years
|
|
|
33,810
|
|
|
34,265
|
|
Due after ten years
|
|
|
15,000
|
|
|
15,225
|
|
Agency mortgage-backed securities
|
|
|
388,282
|
|
|
392,753
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
443,382
|
|
$
|
448,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2016
(Unaudited)
4) Securities (Continued)
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
|
|
|
|
Amortized Cost
|
|
Estimated Fair Value
|
|
|
|
(Dollars in thousands)
|
|
Due less than 3 months
|
|
$
|
612
|
|
$
|
614
|
|
Due after 3 months through one year
|
|
|
1,039
|
|
|
1,045
|
|
Due after one through five years
|
|
|
5,239
|
|
|
5,319
|
|
Due after five through ten years
|
|
|
14,726
|
|
|
15,533
|
|
Due after ten years
|
|
|
70,973
|
|
|
71,711
|
|
Agency mortgage-backed securities
|
|
|
92,576
|
|
|
92,825
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
185,165
|
|
$
|
187,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5) Loans
Loans were as follows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
December 31,
2015
|
|
|
|
(Dollars in thousands)
|
|
Loans held-for-investment:
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
592,128
|
|
$
|
556,522
|
|
Real estate:
|
|
|
|
|
|
|
|
Commercial and residential
|
|
|
616,821
|
|
|
625,665
|
|
Land and construction
|
|
|
95,547
|
|
|
84,428
|
|
Home equity
|
|
|
74,993
|
|
|
76,833
|
|
Consumer
|
|
|
16,476
|
|
|
16,010
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
1,395,965
|
|
|
1,359,458
|
|
Deferred loan origination fees, net
|
|
|
(701
|
)
|
|
(742
|
)
|
|
|
|
|
|
|
|
|
Loans, net of deferred fees
|
|
|
1,395,264
|
|
|
1,358,716
|
|
Allowance for loan losses
|
|
|
(19,458
|
)
|
|
(18,926
|
)
|
|
|
|
|
|
|
|
|
Loans, net
|
|
$
|
1,375,806
|
|
$
|
1,339,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
March 31, 2016 and December 31, 2015, total net loans included in the table above include $130,860,000, and $141,343,000, respectively, of the loans acquired in the
Focus transaction that were not purchased credit impaired loans.
19
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2016
(Unaudited)
5) Loans (Continued)
Changes
in the allowance for loan losses were as follows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
|
|
Commercial
|
|
Real Estate
|
|
Consumer
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Balance, beginning of period
|
|
$
|
10,748
|
|
$
|
8,076
|
|
$
|
102
|
|
$
|
18,926
|
|
Charge-offs
|
|
|
(117
|
)
|
|
|
|
|
|
|
|
(117
|
)
|
Recoveries
|
|
|
32
|
|
|
216
|
|
|
|
|
|
248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (charge-offs) recoveries
|
|
|
(85
|
)
|
|
216
|
|
|
|
|
|
131
|
|
Provision (credit) for loan losses
|
|
|
616
|
|
|
(224
|
)
|
|
9
|
|
|
401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
11,279
|
|
$
|
8,068
|
|
$
|
111
|
|
$
|
19,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2015
|
|
|
|
Commercial
|
|
Real Estate
|
|
Consumer
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Balance, beginning of period
|
|
$
|
11,187
|
|
$
|
7,070
|
|
$
|
122
|
|
$
|
18,379
|
|
Charge-offs
|
|
|
(212
|
)
|
|
(2
|
)
|
|
|
|
|
(214
|
)
|
Recoveries
|
|
|
436
|
|
|
13
|
|
|
|
|
|
449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net recoveries
|
|
|
224
|
|
|
11
|
|
|
|
|
|
235
|
|
Provision (credit) for loan losses
|
|
|
(555
|
)
|
|
473
|
|
|
22
|
|
|
(60
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
10,856
|
|
$
|
7,554
|
|
$
|
144
|
|
$
|
18,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
|
Commercial
|
|
Real Estate
|
|
Consumer
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
2
|
|
$
|
111
|
|
$
|
|
|
$
|
113
|
|
Collectively evaluated for impairment
|
|
|
11,277
|
|
|
7,957
|
|
|
111
|
|
|
19,345
|
|
Acquired with deterioriated credit quality
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance balance
|
|
$
|
11,279
|
|
$
|
8,068
|
|
$
|
111
|
|
$
|
19,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
190
|
|
$
|
3,891
|
|
$
|
3
|
|
$
|
4,084
|
|
Collectively evaluated for impairment
|
|
|
591,693
|
|
|
783,470
|
|
|
16,473
|
|
|
1,391,636
|
|
Acquired with deterioriated credit quality
|
|
|
245
|
|
|
|
|
|
|
|
|
245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loan balance
|
|
$
|
592,128
|
|
$
|
787,361
|
|
$
|
16,476
|
|
$
|
1,395,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2016
(Unaudited)
5) Loans (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Commercial
|
|
Real Estate
|
|
Consumer
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
174
|
|
$
|
112
|
|
$
|
|
|
$
|
286
|
|
Collectively evaluated for impairment
|
|
|
10,574
|
|
|
7,964
|
|
|
102
|
|
|
18,640
|
|
Acquired with deterioriated credit quality
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance balance
|
|
$
|
10,748
|
|
$
|
8,076
|
|
$
|
102
|
|
$
|
18,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
2,014
|
|
$
|
4,272
|
|
$
|
4
|
|
$
|
6,290
|
|
Collectively evaluated for impairment
|
|
|
554,271
|
|
|
782,654
|
|
|
16,006
|
|
|
1,352,931
|
|
Acquired with deterioriated credit quality
|
|
|
237
|
|
|
|
|
|
|
|
|
237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loan balance
|
|
$
|
556,522
|
|
$
|
786,926
|
|
$
|
16,010
|
|
$
|
1,359,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased Credit Impaired Loans:
The Company has purchased loans, for which there was, at acquisition, evidence of impaired credit quality since origination and it was
probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of these loans is as follows:
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
December 31,
2015
|
|
|
|
(Dollars in thousands)
|
|
Commercial
|
|
$
|
820
|
|
$
|
876
|
|
Outstanding balance
|
|
$
|
820
|
|
$
|
876
|
|
Carrying amount, net of discount of $575,000 and $639,000 at March 31, 2016 and December 31, 2015, respectively
|
|
$
|
245
|
|
$
|
237
|
|
The
Company did not increase the allowance for loan losses for the purchased credit impaired loans listed above during the first three months of 2016 or during 2015. No allowance for
loan losses were reversed during the first three months of 2016 or during 2015.
21
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2016
(Unaudited)
5) Loans (Continued)
For these purchased credit impaired loans, the Company cannot reasonably estimate the cash flows expected to be collected on the loans and therefore has continued to account for those
loans using the cost recovery method of income recognition. As such, no portion of a purchase discount adjustment has been determined to meet the definition of an accretable yield adjustment on those
loans accounted for using the cost recovery method. If, in the future, cash flows from the borrowers can be reasonably estimated, a portion of the purchase discount would be allocated to an accretable
yield adjustment based upon the present value of the future estimated cash flows versus the current carrying value of the loan and the accretable yield portion would be recognized as interest income
over the remaining life of the loan. Until such accretable yield can be calculated, under the cost recovery method of income recognition, all payments will be used to reduce the carrying value of the
loan and no income will be recognized on the loan until the carrying value is reduced to zero. Any loan accounted for under the cost recovery method is also still included as a nonaccrual loan.
The
following table presents loans held-for-investment individually evaluated for impairment by class of loans as of March 31, 2016 and December 31, 2015. 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 March 31, 2016 and December 31, 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
|
|
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
|
|
$
|
290
|
|
$
|
290
|
|
$
|
|
|
$
|
745
|
|
$
|
745
|
|
$
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and residential
|
|
|
3,769
|
|
|
2,910
|
|
|
|
|
|
3,851
|
|
|
2,992
|
|
|
|
|
Land and construction
|
|
|
231
|
|
|
213
|
|
|
|
|
|
237
|
|
|
219
|
|
|
|
|
Home Equity
|
|
|
296
|
|
|
296
|
|
|
|
|
|
302
|
|
|
302
|
|
|
|
|
Consumer
|
|
|
3
|
|
|
3
|
|
|
|
|
|
4
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total with no related allowance recorded
|
|
|
4,589
|
|
|
3,712
|
|
|
|
|
|
5,139
|
|
|
4,262
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
145
|
|
|
145
|
|
|
2
|
|
|
1,506
|
|
|
1,506
|
|
|
174
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home Equity
|
|
|
472
|
|
|
472
|
|
|
111
|
|
|
759
|
|
|
759
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total with an allowance recorded
|
|
|
617
|
|
|
617
|
|
|
113
|
|
|
2,265
|
|
|
2,265
|
|
|
286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,206
|
|
$
|
4,329
|
|
$
|
113
|
|
$
|
7,404
|
|
$
|
6,527
|
|
$
|
286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2016
(Unaudited)
5) Loans (Continued)
The
following tables present interest recognized and cash-basis interest earned on impaired loans for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
|
|
|
|
Real Estate
|
|
|
|
|
|
|
|
Commercial
|
|
Commercial
and Residential
|
|
Land and
Construction
|
|
Home
Equity
|
|
Consumer
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Average of impaired loans during the period
|
|
$
|
1,343
|
|
$
|
2,951
|
|
$
|
216
|
|
$
|
914
|
|
$
|
4
|
|
$
|
5,428
|
|
Interest income during impairment
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Cash-basis interest earned
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2015
|
|
|
|
|
|
Real Estate
|
|
|
|
|
|
|
|
Commercial
|
|
Commercial
and Residential
|
|
Land and
Construction
|
|
Home
Equity
|
|
Consumer
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Average of impaired loans during the period
|
|
$
|
1,907
|
|
$
|
2,901
|
|
$
|
1,305
|
|
$
|
341
|
|
$
|
5
|
|
$
|
6,459
|
|
Interest income during impairment
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
December 31,
2015
|
|
|
|
2016
|
|
2015
|
|
|
|
(Dollars in thousands)
|
|
Nonaccrual loansheld-for-investment
|
|
$
|
4,184
|
|
$
|
6,733
|
|
$
|
4,716
|
|
Restructured and loans over 90 days past due and still accruing
|
|
|
|
|
|
|
|
|
1,662
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
|
4,184
|
|
|
6,733
|
|
|
6,378
|
|
Other restructured loans
|
|
|
145
|
|
|
163
|
|
|
149
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans, excluding loans held-for-sale
|
|
$
|
4,329
|
|
$
|
6,896
|
|
$
|
6,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2016
(Unaudited)
5) Loans (Continued)
The
following table presents the nonperforming loans by class for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
|
|
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
|
|
$
|
290
|
|
$
|
|
|
$
|
290
|
|
$
|
724
|
|
$
|
1,378
|
|
$
|
2,102
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and residential
|
|
|
2,910
|
|
|
|
|
|
2,910
|
|
|
2,992
|
|
|
|
|
|
2,992
|
|
Land and construction
|
|
|
213
|
|
|
|
|
|
213
|
|
|
219
|
|
|
|
|
|
219
|
|
Home equity
|
|
|
768
|
|
|
|
|
|
768
|
|
|
777
|
|
|
284
|
|
|
1,061
|
|
Consumer
|
|
|
3
|
|
|
|
|
|
3
|
|
|
4
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,184
|
|
$
|
|
|
$
|
4,184
|
|
$
|
4,716
|
|
$
|
1,662
|
|
$
|
6,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following tables present the aging of past due loans by class for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
|
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
|
|
$
|
2,906
|
|
$
|
796
|
|
$
|
|
|
$
|
3,702
|
|
$
|
588,426
|
|
$
|
592,128
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and residential
|
|
|
|
|
|
889
|
|
|
|
|
|
889
|
|
|
615,932
|
|
|
616,821
|
|
Land and construction
|
|
|
|
|
|
|
|
|
213
|
|
|
213
|
|
|
95,334
|
|
|
95,547
|
|
Home equity
|
|
|
1
|
|
|
295
|
|
|
|
|
|
296
|
|
|
74,697
|
|
|
74,993
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,476
|
|
|
16,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,907
|
|
$
|
1,980
|
|
$
|
213
|
|
$
|
5,100
|
|
$
|
1,390,865
|
|
$
|
1,395,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 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
|
|
$
|
3,285
|
|
$
|
262
|
|
$
|
1,704
|
|
$
|
5,251
|
|
$
|
551,271
|
|
$
|
556,522
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
625,665
|
|
|
625,665
|
|
Land and construction
|
|
|
219
|
|
|
|
|
|
|
|
|
219
|
|
|
84,209
|
|
|
84,428
|
|
Home equity
|
|
|
|
|
|
|
|
|
284
|
|
|
284
|
|
|
76,549
|
|
|
76,833
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,010
|
|
|
16,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,504
|
|
$
|
262
|
|
$
|
1,988
|
|
$
|
5,754
|
|
$
|
1,353,704
|
|
$
|
1,359,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2016
(Unaudited)
5) Loans (Continued)
Past
due loans 30 days or greater totaled $5,100,000 and $5,754,000 at March 31, 2016 and December 31, 2015, respectively, of which $509,000 and $591,000 were on
nonaccrual. At March 31, 2016, there were also $3,675,000 loans less than 30 days past due included in nonaccrual loans held for investment. At December 31, 2015, there were also
$4,125,000 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.
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.
25
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2016
(Unaudited)
5) Loans (Continued)
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 March 31, 2016 and December 31, 2015.
The
following table provides a summary of the loan portfolio by loan type and credit quality classification at period end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
|
|
Nonclassified
|
|
Classified*
|
|
Total
|
|
Nonclassified
|
|
Classified*
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Commercial
|
|
$
|
580,826
|
|
$
|
11,302
|
|
$
|
592,128
|
|
$
|
547,536
|
|
$
|
8,986
|
|
$
|
556,522
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and residential
|
|
|
608,771
|
|
|
8,050
|
|
|
616,821
|
|
|
617,865
|
|
|
7,800
|
|
|
625,665
|
|
Land and construction
|
|
|
95,334
|
|
|
213
|
|
|
95,547
|
|
|
84,209
|
|
|
219
|
|
|
84,428
|
|
Home equity
|
|
|
73,889
|
|
|
1,104
|
|
|
74,993
|
|
|
75,511
|
|
|
1,322
|
|
|
76,833
|
|
Consumer
|
|
|
16,183
|
|
|
293
|
|
|
16,476
|
|
|
15,705
|
|
|
305
|
|
|
16,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,375,003
|
|
$
|
20,962
|
|
$
|
1,395,965
|
|
$
|
1,340,826
|
|
$
|
18,632
|
|
$
|
1,359,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
*
-
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 March 31, 2016 was $148,000, which included $3,000 of nonaccrual loans and $145,000 of accruing loans. The book balance of
troubled debt restructurings at December 31, 2015 was $153,000, which included $4,000 of nonaccrual loans and $149,000 of accruing loans. Approximately $2,000 and $3,000 in specific reserves
were established with respect to these loans as of March 31, 2016 and December 31, 2015, respectively. As of March 31, 2016 and December 31, 2015, the Company had no
additional amounts committed on any loan classified as a troubled debt restructuring.
26
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2016
(Unaudited)
5) Loans (Continued)
There were no new loans modified as troubled debt restructurings during the three month periods ended March 31, 2016 and 2015.
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 month periods ended March 31, 2016 and 2015.
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 November 1, 2014, HBC acquired all of the outstanding common stock from the stockholders of BVF/CSNK Acquisition Corp., a
Delaware corporation for an aggregate purchase price of $22,520,000. CSNK Working Capital Finance Corp. dba Bay View Funding ("Bay View Funding") its wholly-owned subsidiary 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. As of
December 31, 2015, adjustments to the fair value of assets acquired and liabilities assumed in the Bay View Funding transaction were complete.
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.
Focus's
results of operations have been included in the Company's results of operations beginning August 21, 2015. Pre-tax severance, retention, acquisition and integration costs
totaled $119,000 for the first three months of 2015, and $6,398,000 for the year ended December 31, 2015.
27
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2016
(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.
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Assets acquired:
|
|
|
|
|
Cash and cash item
|
|
$
|
5,651
|
|
Federal funds sold and deposits in other financial institutions
|
|
|
168,415
|
|
Securities available-for-sale
|
|
|
53,940
|
|
Securities held-to-maturity
|
|
|
8,665
|
|
Loans held-for-sale
|
|
|
4,416
|
|
Net loans
|
|
|
170,353
|
|
Goodwill
|
|
|
32,620
|
|
Core deposit intangible asset
|
|
|
6,285
|
|
Corporate owned life insurance
|
|
|
7,067
|
|
Other assets, net
|
|
|
20,250
|
|
|
|
|
|
|
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
$819,000, which represents 72.9% 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 $170,048,000 and $174,660,000 respectively, on the date of acquisition. As of the acquisition date, the purchase discount on these nonimpaired
loans totaled $4,612,000, which represents 2.6% of their gross outstanding principal balances.
Goodwill
of $32,620,000 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
28
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2016
(Unaudited)
6) Business Combinations (Continued)
value
for an asset or liability. The loans with a fair value of $170,353,000 and $1,758,000 of income tax attributes, on the acquisition date, 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
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, 2015, 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 March 31, 2015
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
Net interest income
|
|
$
|
20,092
|
|
Provision for loan losses
|
|
|
(10
|
)
|
Noninterest income
|
|
|
3,102
|
|
Noninterest expense
|
|
|
15,418
|
|
|
|
|
|
|
Income before income taxes
|
|
|
7,786
|
|
Income tax expense
|
|
|
2,923
|
|
|
|
|
|
|
Net income
|
|
$
|
4,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per sharebasic
|
|
$
|
0.13
|
|
Net income per sharediluted
|
|
$
|
0.13
|
|
29
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2016
(Unaudited)
(7) Goodwill and Other Intangible Assets
At March 31, 2016, the carrying value of goodwill was $45,664,000, which included $13,044,000 of goodwill related to its
acquisition of Bay View Funding and $32,620,000 from its acquisition of Focus. During the fourth quarter of 2015, adjustments were made to the purchase price allocations for the Focus transaction that
affected the amounts allocated to goodwill and other assets.
Goodwill
impairment exists when a reporting unit's carrying value exceeds its fair value, which is determined through a qualitative assessment whether it is more likely than not that the
fair value of equity of the reporting unit exceeds the carrying value ("Step Zero"). If the qualitative assessment indicates it is more likely than not that the fair value of equity of a reporting
unit is less than book value, than a quantitative two-step impairment test is required. Step 1 includes the determination of the carrying value of the Company's single reporting unit, including the
existing goodwill and intangible assets, and estimating the fair value of the reporting unit. If the carrying amount of a reporting unit exceeds its fair value, the Company is required to perform a
second step to the impairment test. Step 2 requires that the implied fair value of the reporting unit goodwill be compared to the carrying amount of that goodwill. If the carrying amount of the
reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to that excess.
The
Company completed its annual impairment analysis on the goodwill as of November 30, 2015 with the assistance of an independent valuation firm. Based on the Step Zero
qualitative analysis performed, the Company determined that it is more likely than not that the fair value of the reporting unit exceeded its reported book value of equity at November 30, 2015.
As such, no impairment was indicated and no further testing was required.
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 $4,810,000 and $4,703,000 at March 31, 2016 and December 31, 2015, respectively.
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 $496,000 and $288,000 at March 31, 2016 and December 31, 2015, respectively.
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 $437,000 and $360,000 at March 31, 2016 and December 31, 2015, respectfully.
30
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2016
(Unaudited)
(7) Goodwill and Other Intangible Assets (Continued)
Estimated
amortization expense for 2016 and each of the next five years following 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bay View Funding
|
|
|
|
Year
|
|
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)
|
|
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
|
|
2021
|
|
|
|
|
|
596
|
|
|
|
|
|
190
|
|
|
|
|
|
786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
622
|
|
$
|
4,527
|
|
$
|
67
|
|
$
|
1,140
|
|
$
|
153
|
|
$
|
6,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 March 31, 2016 and December 31, 2015.
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.
Under
generally accepted accounting principles, a valuation allowance is required if it is "more likely than not" 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 Standards Codification (ASC) 740-10 Accounting for
31
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2016
(Unaudited)
8) Income Taxes (Continued)
Uncertainty
in Income Taxes, the Company estimated the need for a reserve for income taxes of $270,000, net of Federal benefit, for uncertain state income tax positions of Bay View Funding as of
March 31, 2016. The Company does not expect this amount to significantly increase or decrease in the next twelve months.
The
Company had net deferred tax assets of $18,690,000, and $22,218,000, at March 31, 2016, and December 31, 2015, 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 March 31, 2016 and December 31, 2015 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 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 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
March 31, 2016 and December 31, 2015:
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
December 31,
2015
|
|
|
|
(Dollars in thousands)
|
|
Low income housing investments
|
|
$
|
4,235
|
|
$
|
4,304
|
|
Future commitments
|
|
$
|
845
|
|
$
|
1,271
|
|
The
Company expects $123,000 of the future commitments to be paid in 2016, $14,000 in 2017, and $708,000 in 2018 through 2023.
For
tax purposes, the Company had low income housing tax credits of $111,000 and $172,000 for the three months ended March 31, 2016 and March 31, 2015, respectively, and
low income housing investment losses of $117,000 and $229,000, 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
32
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2016
(Unaudited)
9) Benefit Plans (Continued)
unsecured
as there are no Plan assets. The following table presents the amount of periodic cost recognized for the periods indicated:
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
March 31,
|
|
|
|
2016
|
|
2015
|
|
|
|
(Dollars in thousands)
|
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
133
|
|
$
|
216
|
|
Interest cost
|
|
|
259
|
|
|
221
|
|
Amortization of net actuarial loss
|
|
|
60
|
|
|
96
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
452
|
|
$
|
533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Split-Dollar Life Insurance Benefit Plan
The Company maintains life insurance policies for some current and some 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:
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
December 31,
2015
|
|
|
|
(Dollars in thousands)
|
|
Change in projected benefit obligation:
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year
|
|
$
|
6,215
|
|
$
|
4,641
|
|
Interest cost
|
|
|
62
|
|
|
169
|
|
Amortization of net actuarial loss
|
|
|
|
|
|
1,405
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at end of period
|
|
$
|
6,277
|
|
$
|
6,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
December 31,
2015
|
|
|
|
(Dollars in thousands)
|
|
Net actuarial loss
|
|
$
|
2,183
|
|
$
|
2,147
|
|
Prior transition obligation
|
|
|
1,395
|
|
|
1,418
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
$
|
3,578
|
|
$
|
3,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2016
(Unaudited)
9) Benefit Plans (Continued)
|
|
|
|
|
|
|
|
|
|
For the Three
Months
Ended
March 31,
|
|
|
|
2016
|
|
2015
|
|
|
|
(Dollars in thousands)
|
|
Amortization of prior transition obligation
|
|
$
|
(13
|
)
|
$
|
(12
|
)
|
Interest cost
|
|
|
62
|
|
|
50
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
49
|
|
$
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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.
The
holders of the Series C Preferred Stock have applied or intend to apply to the Federal Reserve for approval to exchange the 21,004 shares of Series C Preferred Stock
for 5,601,000 common stock (the as converted equivalent). The Company has indicated to the holders that if such approval is obtained the Company would agree to enter into an exchange agreement to
effect the exchange. One of the holders has obtained approval from the Federal Reserve. There is no assurance the other holder will obtain approval from the Federal Reserve.
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
34
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2016
(Unaudited)
11) Fair Value (Continued)
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).
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 March 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities
|
|
$
|
392,753
|
|
|
|
|
$
|
392,753
|
|
|
|
|
U.S. Treasury
|
|
$
|
30,332
|
|
$
|
30,332
|
|
$
|
|
|
|
|
|
Trust preferred securities
|
|
$
|
15,225
|
|
|
|
|
$
|
15,225
|
|
|
|
|
U.S. Government sponsored entities
|
|
$
|
9,181
|
|
|
|
|
$
|
9,181
|
|
|
|
|
Corporate bonds
|
|
$
|
1,049
|
|
|
|
|
$
|
1,049
|
|
|
|
|
I/O strip receivables
|
|
$
|
1,369
|
|
|
|
|
$
|
1,369
|
|
|
|
|
Assets at December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities
|
|
$
|
324,230
|
|
|
|
|
$
|
324,230
|
|
|
|
|
U.S. Treasury
|
|
$
|
30,003
|
|
$
|
30,003
|
|
$
|
|
|
|
|
|
Trust preferred securities
|
|
$
|
15,132
|
|
|
|
|
$
|
15,132
|
|
|
|
|
U.S. Government sponsored entities
|
|
$
|
9,041
|
|
|
|
|
$
|
9,041
|
|
|
|
|
Corporate bonds
|
|
$
|
6,673
|
|
|
|
|
$
|
6,673
|
|
|
|
|
I/O strip receivables
|
|
$
|
1,367
|
|
|
|
|
$
|
1,367
|
|
|
|
|
There
were no transfers between Level 1 and Level 2 during the period for assets measured at fair value on a recurring basis.
35
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2016
(Unaudited)
11) Fair Value (Continued)
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
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 March 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loansheld-for-investment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
143
|
|
|
|
|
|
|
|
$
|
143
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and residential
|
|
|
482
|
|
|
|
|
|
|
|
|
482
|
|
Land and construction
|
|
|
213
|
|
|
|
|
|
|
|
|
213
|
|
Home equity
|
|
|
361
|
|
|
|
|
|
|
|
|
361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,199
|
|
|
|
|
|
|
|
$
|
1,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loansheld-for-investment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,333
|
|
|
|
|
|
|
|
$
|
1,333
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and residential
|
|
|
503
|
|
|
|
|
|
|
|
|
503
|
|
Land and construction
|
|
|
219
|
|
|
|
|
|
|
|
|
219
|
|
Home equity
|
|
|
647
|
|
|
|
|
|
|
|
|
647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,702
|
|
|
|
|
|
|
|
$
|
2,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2016
(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:
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
December 31,
2015
|
|
|
|
(Dollars in thousands)
|
|
Impaired loans held-for-investment:
|
|
|
|
|
|
|
|
Book value of impaired loans held-for-investment carried at fair value
|
|
$
|
1,312
|
|
$
|
2,988
|
|
Book value of impaired loans held-for-investment carried at cost
|
|
|
3,017
|
|
|
3,539
|
|
|
|
|
|
|
|
|
|
Total impaired loans held-for-investment
|
|
$
|
4,329
|
|
$
|
6,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans held-for-investment carried at fair value:
|
|
|
|
|
|
|
|
Book value of impaired loans held-for-investment carried at fair value
|
|
$
|
1,312
|
|
$
|
2,988
|
|
Specific valuation allowance
|
|
|
(113
|
)
|
|
(286
|
)
|
|
|
|
|
|
|
|
|
Impaired loans held-for-investment carried at fair value, net
|
|
$
|
1,199
|
|
$
|
2,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans held-for-investment which are measured primarily for impairment using the fair value of the collateral were $4,329,000 at March 31, 2016. In addition, these loans
had a specific valuation allowance of $113,000 at March 31, 2016. Impaired loans held-for-investment totaling $1,312,000 at March 31, 2016, were carried at fair value as a result of the
aforementioned partial charge-offs and specific valuation allowances at period-end. The remaining $3,017,000 of impaired loans were carried at cost at March 31, 2016, 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 three months of 2016 on impaired loans held-for-investment
carried at fair value at March 31, 2016 resulted in an additional provision for loan losses of $2,000.
At
March 31, 2016, foreclosed assets had a carrying amount of $386,000, with no valuation allowance at March 31, 2016.
Impaired
loans held-for-investment were $6,527,000 at December 31, 2015. There were no partial charge-offs at December 31, 2015. In addition, these loans had a specific
valuation allowance of $286,000 at December 31, 2015. Impaired loans held-for-investment totaling $2,988,000 at December 31, 2015 were carried at fair value as a result of the
aforementioned partial charge-offs and specific valuation allowances at year-end. The remaining $3,539,000 of impaired loans were carried at cost at December 31, 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 2015 on impaired loans held-for-investment carried at fair value at
December 31, 2015 resulted in an additional provision for loan losses of $156,000.
At
December 31, 2015, foreclosed assets had a carrying amount of $364,000, with no valuation allowance at December 31, 2015.
37
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2016
(Unaudited)
11) Fair Value (Continued)
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:
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
Fair
Value
|
|
Valuation
Techniques
|
|
Unobservable Inputs
|
|
Range
(Weighted
Average)
|
|
|
(Dollars in thousands)
|
Impaired loansheld-for-investment:
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
143
|
|
Market
Approach
|
|
Discount adjustment for differences between comparable sales
|
|
Less than 1%
|
Real estate:
|
|
|
|
|
|
|
|
|
|
Commercial and residential
|
|
$
|
482
|
|
Market
Approach
|
|
Discount adjustment for differences between comparable sales
|
|
0% to 3% (3%)
|
Land and construction
|
|
$
|
213
|
|
Market
Approach
|
|
Discount adjustment for differences between comparable sales
|
|
Less than 1%
|
Home equity
|
|
$
|
361
|
|
Market
Approach
|
|
Discount adjustment for differences between comparable sales
|
|
0% to 3% (3%)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
Fair
Value
|
|
Valuation
Techniques
|
|
Unobservable Inputs
|
|
Range
(Weighted
Average)
|
|
|
(Dollars in thousands)
|
Impaired loansheld-for-investment:
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,333
|
|
Market
Approach
|
|
Discount adjustment for differences between comparable sales
|
|
0% to 5% (5%)
|
Real estate:
|
|
|
|
|
|
|
|
|
|
Commercial and residential
|
|
$
|
503
|
|
Market
Approach
|
|
Discount adjustment for differences between comparable sales
|
|
0% to 3% (3%)
|
Land and construction
|
|
$
|
219
|
|
Market
Approach
|
|
Discount adjustment for differences between comparable sales
|
|
Less than 1%
|
Home equity
|
|
$
|
647
|
|
Market
Approach
|
|
Discount adjustment for differences between comparable sales
|
|
0% to 2% (2%)
|
38
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2016
(Unaudited)
11) Fair Value (Continued)
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 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 March 31, 2016 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
|
|
$
|
143,135
|
|
$
|
143,135
|
|
$
|
|
|
$
|
|
|
$
|
143,135
|
|
Securities available-for-sale
|
|
|
448,540
|
|
|
30,332
|
|
|
418,208
|
|
|
|
|
|
448,540
|
|
Securities held-to-maturity
|
|
|
185,165
|
|
|
|
|
|
187,047
|
|
|
|
|
|
187,047
|
|
Loans (including loans held-for-sale), net
|
|
|
1,378,195
|
|
|
|
|
|
2,389
|
|
|
1,374,562
|
|
|
1,376,951
|
|
FHLB and FRB stock
|
|
|
12,702
|
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
Accrued interest receivable
|
|
|
6,681
|
|
|
83
|
|
|
2,216
|
|
|
4,382
|
|
|
6,681
|
|
I/O strips receivables
|
|
|
1,369
|
|
|
|
|
|
1,369
|
|
|
|
|
|
1,369
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
$
|
256,538
|
|
$
|
|
|
$
|
256,842
|
|
$
|
|
|
$
|
256,842
|
|
Other deposits
|
|
|
1,772,198
|
|
|
|
|
|
1,772,198
|
|
|
|
|
|
1,772,198
|
|
Accrued interest payable
|
|
|
188
|
|
|
|
|
|
188
|
|
|
|
|
|
188
|
|
39
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2016
(Unaudited)
11) Fair Value (Continued)
The
carrying amounts and estimated fair values of the Company's financial instruments at December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
344,092
|
|
$
|
344,092
|
|
$
|
|
|
$
|
|
|
$
|
344,092
|
|
Securities available-for-sale
|
|
|
385,079
|
|
|
30,003
|
|
|
355,076
|
|
|
|
|
|
385,079
|
|
Securities held-to-maturity
|
|
|
109,311
|
|
|
|
|
|
109,821
|
|
|
|
|
|
109,821
|
|
Loans (including loans held-for-sale), net
|
|
|
1,347,087
|
|
|
|
|
|
7,297
|
|
|
1,337,939
|
|
|
1,345,236
|
|
FHLB stock, FRB stock, and other investments
|
|
|
12,694
|
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
Accrued interest receivable
|
|
|
5,924
|
|
|
14
|
|
|
1,640
|
|
|
4,270
|
|
|
5,924
|
|
I/O strips receivables
|
|
|
1,367
|
|
|
|
|
|
1,367
|
|
|
|
|
|
1,367
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
$
|
244,861
|
|
$
|
|
|
$
|
245,279
|
|
$
|
|
|
$
|
245,279
|
|
Other deposits
|
|
|
1,817,914
|
|
|
|
|
|
1,817,914
|
|
|
|
|
|
1,817,914
|
|
Short-term borrowings
|
|
|
3,000
|
|
|
|
|
|
3,000
|
|
|
|
|
|
3,000
|
|
Accrued interest payable
|
|
|
170
|
|
|
|
|
|
170
|
|
|
|
|
|
170
|
|
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
40
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2016
(Unaudited)
11) Fair Value (Continued)
cost
or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.
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.
41
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2016
(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 three months ended March 31, 2016, the Company did not grant shares of nonqualified stock options and restricted stock. There
were 940,985 shares available for the issuance of equity awards under the 2013 Plan as of March 31, 2016.
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, 2016
|
|
|
1,775,027
|
|
$
|
10.62
|
|
|
|
|
|
|
|
Exercised
|
|
|
(57,441
|
)
|
$
|
6.24
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(12,000
|
)
|
$
|
22.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2016
|
|
|
1,705,586
|
|
$
|
10.68
|
|
|
5.6
|
|
$
|
3,622,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest
|
|
|
1,620,307
|
|
|
|
|
|
5.6
|
|
$
|
3,441,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2016
|
|
|
1,255,734
|
|
|
|
|
|
4.6
|
|
$
|
2,878,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of March 31, 2016, there was $1,597,000 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 2.31 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, 2016
|
|
|
167,605
|
|
$
|
9.28
|
|
Vested
|
|
|
(5,000
|
)
|
$
|
8.30
|
|
|
|
|
|
|
|
|
|
Nonvested shares at March 31, 2016
|
|
|
162,605
|
|
$
|
9.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of March 31, 2016, there was $1,255,000 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 2.92 years.
42
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2016
(Unaudited)
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. The implementation of the capital conservation
buffer began on January 1, 2016 at 0.625% and will be phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on
January 1, 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 March 31, 2016.
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 March 31, 2016 and December 31, 2015, the Company and HBC met all capital adequacy guidelines to which they were subject.
43
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2016
(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
March 31, 2016, and December 31, 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
Required For Capital
Adequacy Purposes
Under Basel III
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio(1)
|
|
|
|
(Dollars in thousands)
|
|
As of March 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital
|
|
$
|
221,578
|
|
|
12.4
|
%
|
$
|
154,134
|
|
|
8.625
|
%
|
(to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Capital
|
|
$
|
201,380
|
|
|
11.3
|
%
|
$
|
118,393
|
|
|
6.625
|
%
|
(to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Tier 1 Capital
|
|
$
|
182,623
|
|
|
10.2
|
%
|
$
|
91,587
|
|
|
5.125
|
%
|
(to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Capital
|
|
$
|
201,380
|
|
|
8.8
|
%
|
$
|
91,671
|
|
|
4.000
|
%
|
(to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Includes
0.625% capital conservation buffer, effective January 1, 2016, except the Tier 1 Capital to average assets ratio.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
Required For
Capital Adequacy
Purposes Under
Basel III
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
|
(Dollars in thousands)
|
|
As of December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital
|
|
$
|
218,915
|
|
|
12.5
|
%
|
$
|
140,041
|
|
|
8.0
|
%
|
(to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Capital
|
|
$
|
199,299
|
|
|
11.4
|
%
|
$
|
105,031
|
|
|
6.0
|
%
|
(to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Tier 1 Capital
|
|
$
|
181,221
|
|
|
10.4
|
%
|
$
|
78,773
|
|
|
4.5
|
%
|
(to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Capital
|
|
$
|
199,299
|
|
|
8.6
|
%
|
$
|
92,918
|
|
|
4.0
|
%
|
(to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2016
(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
March 31, 2016, and December 31, 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
To Be
Well-Capitalized
Under Basel III
Regulatory
Requirements
|
|
Required For
Capital Adequacy
Purposes Under
Basel III
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio(1)
|
|
|
|
(Dollars in thousands)
|
|
As of March 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital
|
|
$
|
220,150
|
|
|
12.3
|
%
|
$
|
178,717
|
|
|
10.0
|
%
|
$
|
154,143
|
|
|
8.625
|
%
|
(to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Capital
|
|
$
|
199,952
|
|
|
11.2
|
%
|
$
|
142,973
|
|
|
8.0
|
%
|
$
|
118,400
|
|
|
6.625
|
%
|
(to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Tier 1 Capital
|
|
$
|
199,952
|
|
|
11.2
|
%
|
$
|
116,166
|
|
|
6.5
|
%
|
$
|
91,592
|
|
|
5.125
|
%
|
(to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Capital
|
|
$
|
199,952
|
|
|
8.7
|
%
|
$
|
114,574
|
|
|
5.0
|
%
|
$
|
91,659
|
|
|
4.000
|
%
|
(to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Includes
0.625% capital conservation buffer, effective January 1, 2016, except the Tier 1 Capital to average assets ratio.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital
|
|
$
|
219,943
|
|
|
12.6
|
%
|
$
|
175,022
|
|
|
10.0
|
%
|
$
|
140,018
|
|
|
8.0
|
%
|
(to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Capital
|
|
$
|
200,327
|
|
|
11.4
|
%
|
$
|
140,018
|
|
|
8.0
|
%
|
$
|
105,013
|
|
|
6.0
|
%
|
(to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Tier 1 Capital
|
|
$
|
200,327
|
|
|
11.4
|
%
|
$
|
113,764
|
|
|
6.5
|
%
|
$
|
78,760
|
|
|
4.5
|
%
|
(to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Capital
|
|
$
|
200,327
|
|
|
8.6
|
%
|
$
|
116,112
|
|
|
5.0
|
%
|
$
|
92,889
|
|
|
4.0
|
%
|
(to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
45
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2016
(Unaudited)
13) Capital Requirements (Continued)
with
the prior approval of the Commissioner of the California Department of Business 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 March 31, 2016 HBC would not be required to obtain regulatory approval, and the amount available for cash divideneds is $16,361,000. Similar
restrictions applied to the amount and sum of loan advances and other transfers of funds from HBC to the parent company. During the first quarter of 2016, HBC upstreamed a $6.0 million dividend
to HCC.
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. One complaint composed of numerous claims has been set for trial in late 2016. Three of the remaining complaints are in the pleading stage and in mid-discovery. One other complaint is in
mid-discovery. As to all claims, 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.
46
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2016
(Unaudited)
15) 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 March 31,
|
|
|
|
2016
|
|
2015
|
|
|
|
(Dollars in thousands)
|
|
Salaries and employee benefits
|
|
$
|
8,947
|
|
$
|
8,042
|
|
Occupancy and equipment
|
|
|
1,085
|
|
|
1,045
|
|
Professional fees
|
|
|
825
|
|
|
95
|
|
Data processing
|
|
|
400
|
|
|
303
|
|
Software subscriptions
|
|
|
341
|
|
|
327
|
|
FDIC deposit insurance premiums
|
|
|
331
|
|
|
239
|
|
Insurance expense
|
|
|
299
|
|
|
291
|
|
Foreclosed assets
|
|
|
2
|
|
|
(170
|
)
|
Other
|
|
|
2,455
|
|
|
2,104
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
$
|
14,685
|
|
$
|
12,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16) 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
47
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2016
(Unaudited)
16) 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 Theee Months Ended
March 31, 2016
|
|
|
|
Banking(1)
|
|
Factoring
|
|
Consolidated
|
|
|
|
(Dollars in thousands)
|
|
Interest income
|
|
$
|
20,208
|
|
$
|
2,854
|
|
$
|
23,062
|
|
Intersegment interest allocations
|
|
|
245
|
|
|
(245
|
)
|
|
|
|
Total interest expense
|
|
|
758
|
|
|
|
|
|
758
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
19,695
|
|
|
2,609
|
|
|
22,304
|
|
Provision for loan losses
|
|
|
387
|
|
|
14
|
|
|
401
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision
|
|
|
19,308
|
|
|
2,595
|
|
|
21,903
|
|
Noninterest income
|
|
|
2,412
|
|
|
202
|
|
|
2,614
|
|
Noninterest expense
|
|
|
13,052
|
|
|
1,633
|
|
|
14,685
|
|
Intersegment expense allocations
|
|
|
175
|
|
|
(175
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
8,843
|
|
|
989
|
|
|
9,832
|
|
Income tax expense
|
|
|
3,310
|
|
|
416
|
|
|
3,726
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,533
|
|
$
|
573
|
|
$
|
6,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,271,411
|
|
$
|
55,922
|
|
$
|
2,327,333
|
|
Loans, net of deferred fees
|
|
$
|
1,353,315
|
|
$
|
41,949
|
|
$
|
1,395,264
|
|
Goodwill
|
|
$
|
32,620
|
|
$
|
13,044
|
|
$
|
45,664
|
|
-
(1)
-
Includes
the holding company's results of operations
48
Table of Contents
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2016
(Unaudited)
16) Business Segment Information (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
March 31, 2015
|
|
|
|
Banking(1)
|
|
Factoring
|
|
Consolidated
|
|
|
|
(Dollars in thousands)
|
|
Interest income
|
|
$
|
14,304
|
|
$
|
3,062
|
|
$
|
17,366
|
|
Intersegment interest allocations
|
|
|
268
|
|
|
(268
|
)
|
|
|
|
Total interest expense
|
|
|
508
|
|
|
|
|
|
508
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
14,064
|
|
|
2,794
|
|
|
16,858
|
|
Provision (credit) for loan losses
|
|
|
(58
|
)
|
|
(2
|
)
|
|
(60
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision
|
|
|
14,122
|
|
|
2,796
|
|
|
16,918
|
|
Noninterest income
|
|
|
1,792
|
|
|
134
|
|
|
1,926
|
|
Noninterest expense
|
|
|
10,506
|
|
|
1,770
|
|
|
12,276
|
|
Intersegment expense allocations
|
|
|
75
|
|
|
(75
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
5,483
|
|
|
1,085
|
|
|
6,568
|
|
Income tax expense
|
|
|
1,974
|
|
|
456
|
|
|
2,430
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,509
|
|
$
|
629
|
|
$
|
4,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,593,176
|
|
$
|
59,711
|
|
$
|
1,652,887
|
|
Loans, net of deferred fees
|
|
$
|
1,057,437
|
|
$
|
44,554
|
|
$
|
1,101,991
|
|
Goodwill
|
|
$
|
|
|
$
|
13,054
|
|
$
|
13,054
|
|
-
(1)
-
Includes
the holding company's results of operations
17) Subsequent Events
On April 28, 2016, the Company announced that its Board of Directors declared a $0.09 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 May 25, 2016, to shareholders of record on May 10, 2016.
49
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