Heritage merce p(HTBK) - 2022 Q2 - Quarterly Report

Part I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements (unaudited) Presents Heritage Commerce Corp's unaudited consolidated financial statements, including balance sheets, income statements, and cash flows, with detailed accounting notes Consolidated Balance Sheets Total assets decreased to $5.36 billion at June 30, 2022, from $5.50 billion at December 31, 2021, driven by lower cash and deposits, while shareholders' equity slightly increased Consolidated Balance Sheet Highlights (Unaudited) | Balance Sheet Item | June 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :--- | :--- | :--- | | Total Cash and Cash Equivalents | $876,585 | $1,306,216 | | Total Securities (AFS & HTM) | $1,055,845 | $760,649 | | Loans, net | $3,036,962 | $3,044,036 | | Goodwill | $167,631 | $167,631 | | Total Assets | $5,356,841 | $5,499,409 | | Total Deposits | $4,613,644 | $4,759,412 | | Total Liabilities | $4,749,617 | $4,901,381 | | Total Shareholders' Equity | $607,224 | $598,028 | Consolidated Statements of Income Net income for Q2 2022 significantly increased to $14.8 million from $8.8 million in Q2 2021, driven by higher net interest income, with diluted EPS rising to $0.24 Consolidated Income Statement Highlights (Unaudited) | Metric (in thousands, except EPS) | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $41,879 | $34,876 | $80,100 | $69,834 | | Provision for (recapture of) credit losses | ($181) | ($493) | ($748) | ($2,005) | | Noninterest Income | $2,098 | $2,169 | $4,558 | $4,470 | | Noninterest Expense | $23,190 | $25,775 | $46,442 | $49,019 | | Net Income | $14,821 | $8,813 | $27,687 | $20,017 | | Diluted EPS | $0.24 | $0.15 | $0.45 | $0.33 | Notes to Unaudited Consolidated Financial Statements Provides detailed explanations of accounting policies and financial data, covering areas such as securities, loans, CECL, goodwill, income taxes, fair value, subordinated debt, capital, legal contingencies, and business segments - The Company operates through two segments: Banking and Factoring. The banking segment serves customers primarily in several California counties, while the factoring segment (Bay View Funding) provides working capital financing throughout the U.S[25] - The company adopted the Current Expected Credit Loss (CECL) model on January 1, 2020. The allowance for credit losses is estimated using a discounted cash flow model based on historical loss correlations with economic factors like California unemployment rate, GDP, and real estate indices[51][52] - On May 11, 2022, the Company issued $40 million in new 5.00% subordinated notes due 2032 and used the proceeds to redeem its existing $40 million of 5.25% subordinated notes due 2027 on June 1, 2022[117][119] - The Company is involved in several legal proceedings, including matters related to a former customer, DC Solar, and employee-related class action lawsuits concerning California labor code[132][133][134] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance and condition, highlighting increased net income driven by higher net interest income, expanded net interest margin, and lower noninterest expenses, alongside improved credit quality and strong capital ratios Executive Summary Net income significantly increased in Q2 2022 to $14.8 million with diluted EPS of $0.24, driven by a 20% rise in net interest income and an expanded net interest margin, alongside improved credit quality Key Performance Metrics | Metric | Q2 2022 | Q2 2021 | | :--- | :--- | :--- | | Net Income | $14.8 million | $8.8 million | | Diluted EPS | $0.24 | $0.15 | | Net Interest Income | $41.9 million | $34.9 million | | FTE Net Interest Margin | 3.38% | 3.00% | | Nonperforming Assets / Total Assets | 0.05% | 0.12% | - The bank had $8.2 million in outstanding Paycheck Protection Program (PPP) loan balances at June 30, 2022, down significantly from $286.5 million a year prior, as loans were forgiven[162][164] - Loans, excluding PPP and residential mortgages, grew 12% year-over-year to $2.626 billion at June 30, 2022[169] Results of Operations Results were driven by a 20% increase in net interest income to $41.9 million and an expanded FTE net interest margin of 3.38% in Q2 2022, alongside a 10% decrease in noninterest expense due to a non-recurring legal reserve Net Interest Income and Margin (FTE) | Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $41.9M | $34.9M | $80.1M | $69.8M | | Net Interest Margin | 3.38% | 3.00% | 3.21% | 3.10% | - Noninterest expense decreased by 10% in Q2 2022 compared to Q2 2021, primarily due to a $4.0 million reserve for litigation recorded in Q2 2021 that did not recur[201] - The effective income tax rate for Q2 2022 was 29.3%, up from 25.1% in Q2 2021. For H1 2022, the rate was 28.9% compared to 26.7% in H1 2021[205] Financial Condition Total assets were $5.36 billion at June 30, 2022, with significant growth in the securities portfolio and total loans increasing to $3.08 billion, while credit quality improved with nonperforming assets at 0.05% of total assets Loan Portfolio Composition (in millions) | Loan Category | June 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Commercial (ex-PPP) | $523.3 | $594.1 | | PPP loans | $8.2 | $88.7 | | CRE - owner occupied | $597.5 | $595.9 | | CRE - non-owner occupied | $993.6 | $902.3 | | Residential mortgages | $449.0 | $416.7 | | Total Loans | $3,083.8 | $3,090.8 | Credit Quality Indicators | Metric | June 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Nonperforming Assets (NPAs) | $2.7M | $3.7M | | NPAs as % of Total Assets | 0.05% | 0.07% | | Allowance for Credit Losses (ACLL) | $45.5M | $43.3M | | ACLL as % of Total Loans | 1.48% | 1.40% | - Total deposits decreased by $145.8 million (3%) from year-end 2021, primarily due to a $153.9 million decline in temporary deposits from two specific customers[214][288] Liquidity and Capital Resources The company maintains strong liquidity with over $900 million in FHLB and FRB borrowing lines, and capital ratios significantly exceed 'well-capitalized' minimums, including a 12.5% Common Equity Tier 1 ratio for the company - The company has substantial available liquidity, including a $175.7 million line with the FHLB and a $725.0 million line with the FRB as of June 30, 2022[297][298] Capital Ratios as of June 30, 2022 | Capital Ratio | Heritage Commerce Corp | Heritage Bank of Commerce | Well-Capitalized Guideline | | :--- | :--- | :--- | :--- | | Common Equity Tier 1 | 12.5% | 13.0% | 6.5% | | Tier 1 Capital | 12.5% | 13.0% | 8.0% | | Total Capital | 14.6% | 14.1% | 10.0% | | Tier 1 Leverage | 8.7% | 9.0% | 5.0% | - Tangible book value per share increased to $7.04 at June 30, 2022, from $6.91 at December 31, 2021[307] Market Risk The company manages interest rate risk through asset/liability strategies, with a +100 basis point rate shock estimated to increase net interest income by 5.7% and a -100 basis point shock to decrease it by 11.0% Net Interest Income Sensitivity Analysis (as of June 30, 2022) | Change in Interest Rates (bps) | Estimated Change in NII (Amount) | Estimated Change in NII (%) | | :--- | :--- | :--- | | +400 | $40,591,000 | 22.7% | | +200 | $20,241,000 | 11.3% | | +100 | $10,153,000 | 5.7% | | -100 | ($19,568,000) | (11.0)% | Item 3. Quantitative and Qualitative Disclosures About Market Risk Quantitative and qualitative disclosures regarding market risk are incorporated within Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations - Information regarding market risk is provided in the Management's Discussion and Analysis (MD&A) section of this report[319] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2022, with no material changes to internal controls over financial reporting during the quarter - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of June 30, 2022[320] - There were no material changes to internal controls over financial reporting during the second quarter of 2022[322] Part II. OTHER INFORMATION Item 1. Legal Proceedings Detailed information regarding ongoing legal proceedings is provided in Note 13 of the consolidated financial statements - For details on legal proceedings, refer to Note 13, "Commitments and Loss Contingencies," in the financial statements[325] Item 1A. Risk Factors A comprehensive discussion of risk factors affecting the company's business and financial results is available in the 2021 Annual Report on Form 10-K - A full discussion of risk factors is available in the company's 2021 Annual Report on Form 10-K[326] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds were reported during the period - None reported[327] Item 6. Exhibits Lists exhibits filed with the Form 10-Q, including corporate governance documents, CEO/CFO certifications, and XBRL data files - Exhibits filed include CEO/CFO certifications (31.1, 31.2, 32.1, 32.2) and XBRL interactive data files (101, 104)[328]