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TABLE OF CONTENTS
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE) | ||
ý |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended Mach 31, 2016 |
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OR |
||
o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
Commission file number 000-23877
Heritage Commerce Corp
(Exact name of Registrant as Specified in its Charter)
California (State or Other Jurisdiction of Incorporation or Organization) |
77-0469558 (I.R.S. Employer Identification No.) |
|
150 Almaden Boulevard, San Jose, California (Address of Principal Executive Offices) |
95113 (Zip Code) |
(408) 947-6900
(Registrant's Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ý NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ý NO o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer ý | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO ý
The Registrant had 32,170,920 shares of Common Stock outstanding on April 28, 2016.
HERITAGE COMMERCE CORP
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
2
Cautionary Note Regarding Forward-Looking Statements
This Report on Form 10-Q contains various statements that may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended, Rule 3b-6 promulgated thereunder and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward- looking. These forward-looking statements often can be, but are not always, identified by the use of words such as "assume," "expect," "intend," "plan," "project," "believe," "estimate," "predict," "anticipate," "may," "might," "should," "could," "goal," "potential" and similar expressions. We base these forward-looking statements on our current expectations and projections about future events, our assumptions regarding these events and our knowledge of facts at the time the statements are made. These statements include statements relating to our projected growth, anticipated future financial performance, and management's long-term performance goals, as well as statements relating to the anticipated effects on results of operations and financial condition.
These forward-looking statements are subject to various risks and uncertainties that may be outside our control and our actual results could differ materially from our projected results. In addition, our past results of operations do not necessarily indicate our future results. The forward-looking statements could be affected by many factors, including but not limited to:
3
We are not able to predict all the factors that may affect future results. You should not place undue reliance on any forward looking statement, which speaks only as of the date of this Report on Form 10-Q. Except as required by applicable laws or regulations, we do not undertake any obligation to update or revise any forward looking statement, whether as a result of new information, future events or otherwise.
4
ITEM 1CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
HERITAGE COMMERCE CORP
CONSOLIDATED BALANCE SHEETS (Unaudited)
|
March 31, 2016 |
December 31, 2015 |
|||||
---|---|---|---|---|---|---|---|
|
(Dollars in thousands) |
||||||
Assets |
|||||||
Cash and due from banks |
$ | 25,573 | $ | 24,112 | |||
Interest-bearing deposits in other financial institutions |
117,562 | 319,980 | |||||
| | | | | | | |
Total cash and cash equivalents |
143,135 | 344,092 | |||||
Securities available-for-sale, at fair value |
448,540 |
385,079 |
|||||
Securities held-to-maturity, at amortized cost (fair value of $187,047 at March 31, 2016 and $109,821 at December 31, 2015) |
185,165 | 109,311 | |||||
Loans held-for-saleSBA, at lower of cost or fair value, including deferred costs |
2,389 | 7,297 | |||||
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 | |||||
Federal Home Loan Bank and Federal Reserve Bank stock and other investments, at cost |
12,702 | 12,694 | |||||
Company owned life insurance |
60,470 | 60,021 | |||||
Premises and equipment, net |
7,625 | 7,773 | |||||
Goodwill |
45,664 | 45,664 | |||||
Other intangible assets |
8,126 | 8,518 | |||||
Accrued interest receivable and other assets |
37,711 | 41,340 | |||||
| | | | | | | |
Total assets |
$ | 2,327,333 | $ | 2,361,579 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Liabilities and Shareholders' Equity |
|||||||
Liabilities: |
|||||||
Deposits: |
|||||||
Demand, noninterest-bearing |
$ | 768,525 | $ | 821,405 | |||
Demand, interest-bearing |
506,272 | 496,278 | |||||
Savings and money market |
493,275 | 496,843 | |||||
Time deposits-under $250 |
61,595 | 62,026 | |||||
Time deposits-$250 and over |
179,048 | 160,815 | |||||
Time deposits-brokered |
11,829 | 17,825 | |||||
CDARSmoney market and time deposits |
8,192 | 7,583 | |||||
| | | | | | | |
Total deposits |
2,028,736 | 2,062,775 | |||||
Short-term borrowings |
| 3,000 | |||||
Accrued interest payable and other liabilities |
46,938 | 50,368 | |||||
| | | | | | | |
Total liabilities |
2,075,674 | 2,116,143 | |||||
Shareholders' equity: |
|||||||
Preferred stock, no par value; 10,000,000 shares authorized |
|||||||
Series C convertible perpetual preferred stock, 21,004 shares issued and outstanding at March 31, 2016 and December 31, 2015 (liquidation preference of $21,004 at March 31, 2016 and December 31, 2015) |
19,519 | 19,519 | |||||
Common stock, no par value; 60,000,000 shares authorized; 32,170,920 shares issued and outstanding at March 31, 2016 and 32,113,479 shares issued and outstanding at December 31, 2015 |
194,153 | 193,364 | |||||
Retained earnings |
41,485 | 38,773 | |||||
Accumulated other comprehensive loss |
(3,498 | ) | (6,220 | ) | |||
| | | | | | | |
Total shareholders' equity |
251,659 | 245,436 | |||||
| | | | | | | |
Total liabilities and shareholders' equity |
$ | 2,327,333 | $ | 2,361,579 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
See notes to unaudited consolidated financial statements
5
HERITAGE COMMERCE CORP
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2016 | 2015 | |||||
|
(Dollars in thousands, except per share data) |
||||||
Interest income: |
|||||||
Loans, including fees |
$ | 19,188 | $ | 15,004 | |||
Securities, taxable |
2,774 | 1,604 | |||||
Securities, exempt from Federal tax |
579 | 506 | |||||
Other investments and interest-bearing deposits in other financial institutions |
521 | 252 | |||||
| | | | | | | |
Total interest income |
23,062 | 17,366 | |||||
| | | | | | | |
Interest expense: |
|||||||
Deposits |
747 | 508 | |||||
Short-term borrowings |
11 | | |||||
| | | | | | | |
Total interest expense |
758 | 508 | |||||
| | | | | | | |
Net interest income before provision for loan losses |
22,304 | 16,858 | |||||
Provision (credit) for loan losses |
401 | (60 | ) | ||||
| | | | | | | |
Net interest income after provision for loan losses |
21,903 | 16,918 | |||||
| | | | | | | |
Noninterest income: |
|||||||
Service charges and fees on deposit accounts |
767 | 623 | |||||
Increase in cash surrender value of life insurance |
449 | 400 | |||||
Servicing income |
371 | 306 | |||||
Gain on sales of SBA loans |
305 | 207 | |||||
Gain on sales of securities |
180 | | |||||
Other |
542 | 390 | |||||
| | | | | | | |
Total noninterest income |
2,614 | 1,926 | |||||
| | | | | | | |
Noninterest expense: |
|||||||
Salaries and employee benefits |
8,947 | 8,042 | |||||
Occupancy and equipment |
1,085 | 1,045 | |||||
Professional fees |
825 | 95 | |||||
Other |
3,828 | 3,094 | |||||
| | | | | | | |
Total noninterest expense |
14,685 | 12,276 | |||||
| | | | | | | |
Income before income taxes |
9,832 | 6,568 | |||||
Income tax expense |
3,726 | 2,430 | |||||
| | | | | | | |
Net income |
6,106 | 4,138 | |||||
Dividends on preferred stock |
(504 | ) | (448 | ) | |||
| | | | | | | |
Net income available to common shareholders |
$ | 5,602 | $ | 3,690 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Earnings per common share: |
|||||||
Basic |
$ | 0.16 | $ | 0.13 | |||
Diluted |
$ | 0.16 | $ | 0.13 |
See notes to unaudited consolidated financial statements
6
HERITAGE COMMERCE CORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
|
For the Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2016 | 2015 | |||||
|
(Dollars in thousands) |
||||||
Net income |
$ | 6,106 | $ | 4,138 | |||
Other comprehensive income: |
|||||||
Change in net unrealized holding gains on available-for-sale securities and I/O strips |
4,839 | 888 | |||||
Deferred income taxes |
(2,032 | ) | (374 | ) | |||
Change in net unamortized unrealized gain on securities available-for-sale that were reclassified to securities held-to-maturity |
(14 | ) | (14 | ) | |||
Deferred income taxes |
6 | 6 | |||||
Reclassification adjustment for gains on sales of securities realized in income |
(180 | ) | | ||||
Deferred income taxes |
75 | | |||||
| | | | | | | |
Change in unrealized gains on securities and I/O strips, net of deferred income taxes |
2,694 | 506 | |||||
| | | | | | | |
Change in net pension and other benefit plan liabilities adjustment |
48 | 48 | |||||
Deferred income taxes |
(20 | ) | (20 | ) | |||
| | | | | | | |
Change in pension and other benefit plan liabilities net of deferred income taxes |
28 | 28 | |||||
| | | | | | | |
Other comprehensive income |
2,722 | 534 | |||||
| | | | | | | |
Total comprehensive income |
$ | 8,828 | $ | 4,672 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
See notes to unaudited consolidated financial statements
7
HERITAGE COMMERCE CORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
|
Three Months Ended March 31, 2016 and 2015 | |||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
|
|
|
Accumulated Other Comprehensive Income / (Loss) |
|
|||||||||||||||
|
Preferred Stock | Common Stock | |
|
||||||||||||||||||
|
Retained Earnings |
Total Shareholders' Equity |
||||||||||||||||||||
|
Shares | Amount | Shares | Amount | ||||||||||||||||||
|
(Dollars in thousands, except share data) |
|||||||||||||||||||||
Balance, January 1, 2015 |
21,004 | $ | 19,519 | 26,503,505 | $ | 133,676 | $ | 33,014 | $ | (1,851 | ) | $ | 184,358 | |||||||||
Net income |
| | | | 4,138 | | 4,138 | |||||||||||||||
Other comprehensive income |
| | | | | 534 | 534 | |||||||||||||||
Amortization of restricted stock awards, net of forfeitures and taxes |
| | | (14 | ) | | | (14 | ) | |||||||||||||
Cash dividend declared $0.08 per share |
| | | | (2,569 | ) | | (2,569 | ) | |||||||||||||
Stock option expense, net of forfeitures and taxes |
| | | 224 | | | 224 | |||||||||||||||
Stock options exercised |
| | 19,234 | 106 | | | 106 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Balance, March 31, 2015 |
21,004 | $ | 19,519 | 26,522,739 | $ | 133,992 | $ | 34,583 | $ | (1,317 | ) | $ | 186,777 | |||||||||
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Balance, January 1, 2016 |
21,004 |
$ |
19,519 |
32,113,479 |
$ |
193,364 |
$ |
38,773 |
$ |
(6,220 |
) |
$ |
245,436 |
|||||||||
Net income |
| | | | 6,106 | | 6,106 | |||||||||||||||
Other comprehensive income |
| | | | | 2,722 | 2,722 | |||||||||||||||
Amortization of restricted stock awards, net of forfeitures and taxes |
| | | 186 | | | 186 | |||||||||||||||
Cash dividend declared $0.09 per share |
| | | | (3,394 | ) | | (3,394 | ) | |||||||||||||
Stock option expense, net of forfeitures and taxes |
| | | 245 | | | 245 | |||||||||||||||
Stock options exercised |
| | 57,441 | 358 | | | 358 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Balance, March 31, 2016 |
21,004 | $ | 19,519 | 32,170,920 | $ | 194,153 | $ | 41,485 | $ | (3,498 | ) | $ | 251,659 | |||||||||
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
See notes to unaudited consolidated financial statements
8
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
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
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
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
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
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
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 | ) | |||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
15
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
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
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
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
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
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
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
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
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
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
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 | |||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
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
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
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
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
HERITAGE COMMERCE CORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2016
(Unaudited)
(7) Goodwill and Other Intangible Assets
Goodwill
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.
Other Intangible Assets
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
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
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
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
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
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
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
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
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 |
Discount adjustment for differences between comparable sales |
Less than 1% |
||||
Real estate: |
|
|
|
||||||
Commercial and residential |
$ |
482 |
Market |
Discount adjustment for differences between comparable sales |
0% to 3% (3%) |
||||
Land and construction |
$ |
213 |
Market |
Discount adjustment for differences between comparable sales |
Less than 1% |
||||
Home equity |
$ |
361 |
Market |
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 |
Discount adjustment for differences between comparable sales |
0% to 5% (5%) |
||||
Real estate: |
|
|
|
||||||
Commercial and residential |
$ |
503 |
Market |
Discount adjustment for differences between comparable sales |
0% to 3% (3%) |
||||
Land and construction |
$ |
219 |
Market |
Discount adjustment for differences between comparable sales |
Less than 1% |
||||
Home equity |
$ |
647 |
Market |
Discount adjustment for differences between comparable sales |
0% to 2% (2%) |
38
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
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
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
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
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
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) |
|
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
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) |
|
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
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
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
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 |
48
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 |
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
ITEM 2MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information about the results of operations, financial condition, liquidity, and capital resources of Heritage Commerce Corp (the "Company" or "HCC"), its wholly-owned subsidiary, Heritage Bank of Commerce ("HBC"), and HBC's wholly-owned subsidiary, CSNK Working Capital Finance Corp, a California Corporation, dba Bay View Funding ("Bay View Funding"). This information is intended to facilitate the understanding and assessment of significant changes and trends related to our financial condition and the results of operations. This discussion and analysis should be read in conjunction with our consolidated financial statements and the accompanying notes presented elsewhere in this report. Unless we state otherwise or the context indicates otherwise, references to the "Company," "Heritage," "we," "us," and "our," in this Report on Form 10-Q refer to Heritage Commerce Corp and its subsidiaries.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are discussed in our Form 10-K for the year ended December 31, 2015. There are no changes to these policies as of March 31, 2016.
EXECUTIVE SUMMARY
This summary is intended to identify the most important matters on which management focuses when it evaluates the financial condition and performance of the Company. When evaluating financial condition and performance, management looks at certain key metrics and measures. The Company's evaluation includes comparisons with peer group financial institutions and its own performance objectives established in the internal planning process.
The primary activity of the Company is commercial banking. The Company's operations are located entirely in the southern and eastern regions of the general San Francisco Bay Area of California in the counties of Santa Clara, Alameda, Contra Costa, and San Benito. The largest city in this area is San Jose and the Company's market includes the headquarters of a number of technology based companies in the region known commonly as Silicon Valley. The Company's customers are primarily closely held businesses and professionals.
Performance Overview
For the three months ended March 31, 2016, net income was $6.1 million, or $0.16 per average diluted common share, compared to $4.1 million, or $0.13 per average diluted common share, for the three months ended March 31, 2015. The Company's annualized return on average tangible assets was 1.07% and annualized return on average tangible equity was 12.62% for the three months ended March 31, 2016, compared to 1.04% and 9.89%, respectively, for the three months ended March 31, 2015.
Bay View Funding Acquisition
On November 1, 2014, the Company acquired Bay View Funding, by purchasing all of the outstanding common stock from the stockholders of Bay View Funding for an aggregate purchase price of $22.52 million. Bay View Funding became a wholly owned subsidiary of HBC. Based in Santa Clara, California, Bay View Funding, provides business essential working capital factoring financing to various industries throughout the United States. Bay View Funding's results of operations have been included
50
in the Company's results beginning November 1, 2014. The following table reflects selected financial information for Bay View Funding at or for the periods indicated:
|
For the Three Months Ended | ||||||
---|---|---|---|---|---|---|---|
|
March 31, 2016 | March 31, 2015 | |||||
|
(Dollars in thousands) |
||||||
Total factored receivables at period end |
$ | 41,949 | $ | 44,554 | |||
Average factored receivables during the period |
$ | 39,794 | $ | 40,889 | |||
Total full time equivalent employees at period end |
39 | 35 |
Focus Business Bank Merger
On August 20, 2015, the Company completed the merger of HBC with Focus for an aggregate transaction value of $66.6 million. Shareholders of Focus received a fixed exchange ratio at closing of 1.8235 shares of the Company's common stock for each share of Focus common stock. The Company issued 5,456,713 shares of the Company's common stock to Focus shareholders for a total value of $58.3 million based on the Company's closing stock price of $10.68 on August 20, 2015. In addition, the Company paid cash to the Focus holders of in-the-money stock options totaling $8.3 million.
The Focus acquisition added total assets, at fair value, of approximately $438.8 million, $174.8 million in loans (including loans held-for-sale), at fair value, and $405.1 million in deposits, at fair value, at August 20, 2015. Focus's results of operations have been included in the Company's results of operations beginning August 21, 2015.
First Quarter 2016 Highlights
The following are major factors that impacted the Company's results of operations:
51
loan interest income from the Focus transaction, and an increase in the average balance of investment securities.
The following are important factors in understanding our current financial condition and liquidity position:
52
was $18.6 million, or 1.68% of total loans, representing 275.57% of nonperforming loans. The allowance for loan losses at December 31, 2015 was $18.9 million, or 1.39% of total loans, representing 296.74% of nonperforming loans.
CAPITAL RATIOS
|
Heritage Commerce Corp |
Heritage Bank of Commerce |
Well-capitalized Financial Institution Basel III Regulatory Guidelines |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
Total Risk-Based |
12.4 | % | 12.3 | % | 10.0 | % | ||||
Tier 1 Risk-Based |
11.3 | % | 11.2 | % | 8.0 | % | ||||
Common Equity Tier 1 Risk-Based |
10.2 | % | 11.2 | % | 6.5 | % | ||||
Leverage |
8.8 | % | 8.7 | % | 5.0 | % |
Deposits
The composition and cost of the Company's deposit base are important in analyzing the Company's net interest margin and balance sheet liquidity characteristics. Except for brokered time deposits, the Company's depositors are generally located in its primary market area. Depending on loan demand and other funding requirements, the Company also obtains deposits from wholesale sources including deposit brokers. HBC is a member of the Certificate of Deposit Account Registry Service ("CDARS") program. The CDARS program allows customers with deposits in excess of FDIC insured limits to obtain coverage on time deposits through a network of banks within the CDARS program. Deposits gathered through this program are considered brokered deposits under regulatory guidelines. The Company has a policy to monitor all deposits that may be sensitive to interest rate changes to help assure that liquidity risk does not become excessive due to concentrations.
Total deposits increased $605.1 million, or 43%, to $2.03 billion at March 31, 2016, compared to $1.42 billion at March 31, 2015, which included an increase of $244.9 million, or 17%, in the Company's legacy deposit portfolio, and $360.2 million from the Focus deposit portfolio. Total deposits decreased $34.0 million, or 2%, at March 31, 2016, compared to $2.06 billion at December 31, 2015, primarily due to decreases in noninterest-bearing demand deposits and brokered deposits.
The Company had $11.8 million in brokered deposits at March 31, 2016, compared to $28.1 million at March 31, 2015 and and $17.8 million at December 31, 2015. Deposits from title insurance companies, escrow accounts and real estate exchange facilitators was $35.0 million at
53
March 31, 2016, compared to $15.1 million at March 31, 2015, and $49.1 million at December 31, 2015. Certificates of deposit from the State of California totaled $98.0 million at March 31, 2016, and March 31, 2015 and $78.0 million at December 31, 2015.
Liquidity
Our liquidity position refers to our ability to maintain cash flows sufficient to fund operations and to meet obligations and other commitments in a timely fashion. At March 31, 2016, we had $143.1 million in cash and cash equivalents and approximately $499.7 million in available borrowing capacity from various sources including the Federal Home Loan Bank ("FHLB"), the Federal Reserve Bank of San Francisco ("FRB"), Federal funds facilities with several financial institutions, and line of credit with a correspondent bank. The Company also had $476.2 million at fair value in unpledged securities available at March 31, 2016. Our loan to deposit ratio was 68.78% at March 31, 2016, compared to 77.41% at March 31, 2015, and 65.87% at December 31, 2015.
Lending
Our lending business originates principally through our branch offices located in our primary markets. In addition, Bay View Funding provides factoring financing throughout the United States. Total loans, excluding loans-held-for sale, increased $293.3 million, or 27%, to $1.40 billion at March 31, 2016, compared to $1.10 billion at March 31, 2015, which included an increase of $162.2 million, or 15%, in the Company's legacy loan portfolio, and $131.1 million from the Focus loan portfolio. Loans increased $36.5 million, or 3%, at March 31, 2016, compared to $1.36 billion at December 31, 2015. The loan portfolio remains well-diversified with C&I loans accounting for 42% of the loan portfolio at March 31, 2016, which included $41.9 million of factored receivables at Bay View Funding. Commercial and residential real estate loans accounted for 44% of the total loan portfolio. Consumer and home equity loans accounted for 7% of total loans, and land and construction loans accounted for the remaining 7% of total loans at March 31, 2016.
Net Interest Income
The management of interest income and expense is fundamental to the performance of the Company. Net interest income, the difference between interest income and interest expense, is the largest component of the Company's total revenue. Management closely monitors both total net interest income and the net interest margin (net interest income divided by average earning assets). Net interest income increased 32% to $22.3 million for the first quarter of 2016, compared to $16.9 million for the first quarter of 2015. The increase in the net interest income for the first quarter ended March 31, 2016, compared to the same period in 2015, was primarily due to loans acquired in the Focus acquisition, organic growth in the loan portfolio, the accretion of the loan purchase discount into loan interest income from the Focus transaction, and an increase in the average balance of investment securities.
The Company through its asset and liability policies and practices seeks to maximize net interest income without exposing the Company to an excessive level of interest rate risk. Interest rate risk is managed by monitoring the pricing, maturity and repricing options of all classes of interest bearing assets and liabilities. This is discussed in more detail under "Liquidity and Asset/Liability Management." In addition, we believe there are measures and initiatives we can take to improve the net interest margin, including increasing loan rates, adding floors on floating rate loans, reducing nonperforming assets, managing deposit interest rates, and reducing higher cost deposits.
The net interest margin is also adversely impacted by the reversal of interest on nonaccrual loans and the reinvestment of loan payoffs into lower yielding investment securities and other short-term investments.
54
Management of Credit Risk
We continue to proactively identify, quantify, and manage our problem loans. Early identification of problem loans and potential future losses helps enable us to resolve credit issues with potentially less risk and ultimate losses. We maintain an allowance for loan losses in an amount that we believe is adequate to absorb probable incurred losses in the portfolio. While we strive to carefully manage and monitor credit quality and to identify loans that may be deteriorating, circumstances can change at any time for loans included in the portfolio that may result in future losses, that as of the date of the financial statements have not yet been identified as potential problem loans. Through established credit practices, we adjust the allowance for loan losses accordingly. However, because future events are uncertain, there may be loans that will deteriorate, some of which could occur in an accelerated time-frame. As a result, future additions to the allowance for loan losses may be necessary. Because the loan portfolio contains a number of commercial loans, commercial real estate, construction and land development loans with relatively large balances, deterioration in the credit quality of one or more of these loans may require a significant increase to the allowance for loan losses. Future additions to the allowance may also be required based on changes in the financial condition of borrowers. Additionally, Federal and state banking regulators, as an integral part of their supervisory function, periodically review our allowance for loan losses. These regulatory agencies may require us to recognize further loan loss provisions or charge-offs based upon their judgments, which may be different from ours. Any increase in the allowance for loan losses would have an adverse effect, which may be material, on our financial condition and results of operation.
Further discussion of the management of credit risk appears under "Provision for Loan Losses" and "Allowance for Loan Losses."
Noninterest Income
While net interest income remains the largest single component of total revenues, noninterest income is an important component. A portion of the Company's noninterest income is associated with its SBA lending activity, consisting of gains on the sale of loans sold in the secondary market and servicing income from loans sold with servicing retained. Other sources of noninterest income include loan servicing fees, service charges and fees, cash surrender value from company owned life insurance policies, and gains on the sale of securities.
Noninterest Expense
Management considers the control of operating expenses to be a critical element of the Company's performance. Noninterest expense for the first quarter of 2016 was $14.7 million, compared to $12.3 million for the first quarter of 2015. The increase in noninterest expense in the first quarter of 2016, compared to the first quarter of 2015, was primarily due to additional employees and amortization of core deposit intangibles from the Focus acquisition.
Capital Management
As part of its asset and liability management process, the Company continually assesses its capital position to take into consideration growth, expected earnings, risk profile and potential corporate activities that it may choose to pursue.
RESULTS OF OPERATIONS
The Company earns income from two primary sources. The first is net interest income, which is interest income generated by earning assets less interest expense on interest-bearing liabilities. The second is noninterest income, which primarily consists of gains on the sale of loans, loan servicing fees, customer service charges and fees, the increase in cash surrender value of life insurance, and gains on
55
the sale of securities. The majority of the Company's noninterest expenses are operating costs that relate to providing a full range of banking and lending services to our customers.
Net Interest Income and Net Interest Margin
The level of net interest income depends on several factors in combination, including yields on earning assets, the cost of interest-bearing liabilities, the relative volumes of earning assets and interest-bearing liabilities, and the mix of products which comprise the Company's earning assets, deposits, and other interest-bearing liabilities. To maintain its net interest margin the Company must manage the relationship between interest earned and paid.
56
The following Distribution, Rate and Yield table presents the average amounts outstanding for the major categories of the Company's balance sheet, the average interest rates earned or paid thereon, and the resulting net interest margin on average interest earning assets for the periods indicated. Average balances are based on daily averages.
Distribution, Rate and Yield
|
For the Three Months Ended March 31, 2016 |
For the Three Months Ended March 31, 2015 |
|||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
NET INTEREST INCOME AND NET INTEREST MARGIN |
Average Balance |
Interest Income/ Expense |
Average Yield/ Rate |
Average Balance |
Interest Income/ Expense |
Average Yield/ Rate |
|||||||||||||
|
(Dollars in thousands) |
||||||||||||||||||
Assets: |
|||||||||||||||||||
Loans, gross(1) |
$ | 1,368,596 | $ | 19,188 | 5.64 | % | $ | 1,065,836 | $ | 15,004 | 5.71 | % | |||||||
Securitiestaxable |
480,515 | 2,774 | 2.32 | % | 219,853 | 1,604 | 2.96 | % | |||||||||||
Securitiesexempt from Fedral tax(2) |
93,121 | 891 | 3.85 | % | 79,872 | 779 | 3.96 | % | |||||||||||
Federal funds sold and interest-bearing deposits in other financial institutions |
215,231 | 521 | 0.97 | % | 150,723 | 252 | 0.68 | % | |||||||||||
| | | | | | | | | | | | | | | | | | | |
Total interest earning assets(2) |
2,157,463 | 23,374 | 4.36 | % | 1,516,284 | 17,639 | 4.72 | % | |||||||||||
| | | | | | | | | | | | | | | | | | | |
Cash and due from banks |
32,949 | 27,338 | |||||||||||||||||
Premises and equipment, net |
7,754 | 7,403 | |||||||||||||||||
Intangible assets |
54,043 | 15,917 | |||||||||||||||||
Other assets |
97,015 | 67,981 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | |
Total assets |
$ | 2,349,224 | $ | 1,634,923 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Liabilities and shareholders' equity: |
|||||||||||||||||||
Deposits: |
|||||||||||||||||||
Demand, noninterest-bearing |
$ | 776,999 | $ | 530,552 | |||||||||||||||
Demand, interest-bearing |
501,952 |
236 |
0.19 |
% |
231,453 |
100 |
0.18 |
% |
|||||||||||
Savings and money market |
498,622 | 272 | 0.22 | % | 382,015 | 185 | 0.20 | % | |||||||||||
Time depositsunder $100 |
23,287 | 17 | 0.29 | % | 19,680 | 15 | 0.31 | % | |||||||||||
Time deposits$100 and over |
207,113 | 190 | 0.37 | % | 200,947 | 151 | 0.30 | % | |||||||||||
Time depositsbrokered |
14,825 | 30 | 0.81 | % | 28,117 | 55 | 0.79 | % | |||||||||||
CDARSmoney market and time deposits |
8,100 | 2 | 0.10 | % | 10,872 | 2 | 0.07 | % | |||||||||||
| | | | | | | | | | | | | | | | | | | |
Total interest-bearing deposits |
1,253,899 | 747 | 0.24 | % | 873,084 | 508 | 0.24 | % | |||||||||||
| | | | | | | | | | | | | | | | | | | |
Total deposits |
2,030,898 | 747 | 0.15 | % | 1,403,636 | 508 | 0.15 | % | |||||||||||
Short-term borrowings |
1,748 |
11 |
2.53 |
% |
51 |
|
0.00 |
% |
|||||||||||
| | | | | | | | | | | | | | | | | | | |
Total interest-bearing liabilities |
1,255,647 | 758 | 0.24 | % | 873,135 | 508 | 0.24 | % | |||||||||||
| | | | | | | | | | | | | | | | | | | |
Total interest-bearing liabilities and demand, noninterest-bearing / cost of funds |
2,032,646 | 758 | 0.15 | % | 1,403,687 | 508 | 0.15 | % | |||||||||||
Other liabilities |
67,878 | 45,616 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | |
Total liabilities |
2,100,524 | 1,449,303 | |||||||||||||||||
Shareholders' equity |
248,700 | 185,620 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | |
Total liabilities and shareholders' equity |
$ | 2,349,224 | $ | 1,634,923 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
|
|||||||||||||||||||
| | | | | | | | | | | | | | | | | | | |
Net interest income(2) / margin |
22,616 | 4.22 | % | 17,131 | 4.58 | % | |||||||||||||
Less tax equivalent adjustment(2) |
(312 | ) | (273 | ) | |||||||||||||||
| | | | | | | | | | | | | | | | | | | |
Net interest income |
$ | 22,304 | $ | 16,858 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
57
Volume and Rate Variances
The Volume and Rate Variances table below sets forth the dollar difference in interest earned and paid for each major category of interest-earning assets and interest-bearing liabilities for the noted periods, and the amount of such change attributable to changes in average balances (volume) or changes in average interest rates. Volume variances are equal to the increase or decrease in the average balance times the prior period rate, and rate variances are equal to the increase or decrease in the average rate times the prior period average balance. Variances attributable to both rate and volume changes are equal to the change in rate times the change in average balance and are included below in the average volume column.
|
Three Months Ended March 31, 2016 vs. 2015 Increase (Decrease) Due to Change In: |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Average Volume |
Average Rate |
Net Change |
|||||||
|
(Dollars in thousands) |
|||||||||
Income from interest earning assets: |
||||||||||
Loans, gross |
$ | 4,242 | $ | (58 | ) | $ | 4,184 | |||
Securitiestaxable |
1,506 | (336 | ) | 1,170 | ||||||
Securitiestax exempt(1) |
126 | (14 | ) | 112 | ||||||
Federal funds sold and interest-bearing deposits in other financial institutions |
157 | 112 | 269 | |||||||
| | | | | | | | | | |
Total interest income from interest earnings assets(1) |
6,031 | (296 | ) | 5,735 | ||||||
| | | | | | | | | | |
Expense on interest-bearing liabilities: |
||||||||||
Demand, interest-bearing |
127 | 9 | 136 | |||||||
Savings and money market |
63 | 24 | 87 | |||||||
Time depositsunder $100 |
3 | (1 | ) | 2 | ||||||
Time deposits$100 and over |
5 | 34 | 39 | |||||||
Time depositsbrokered |
(27 | ) | 2 | (25 | ) | |||||
CDARSmoney market and time deposits |
(1 | ) | 1 | | ||||||
Short-term borrowings |
11 | | 11 | |||||||
| | | | | | | | | | |
Total interest expense on interest-bearing liabilities |
181 | 69 | 250 | |||||||
| | | | | | | | | | |
Net interest income(1) |
$ | 5,850 | $ | (365 | ) | 5,485 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Less tax equivalent adjustment(1) |
(39 | ) | ||||||||
| | | | | | | | | | |
Net interest income |
$ | 5,446 | ||||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
The Company's net interest margin (FTE), expressed as a percentage of average earning assets, was 4.22% for the first quarter of 2016, compared to 4.58% for the first quarter of 2015. The decline in the net interest margin from the first quarter of 2015 was primarily due to higher average balances of lower yielding excess funds at the Federal Reserve Bank and interest-bearing deposits in other financial institutions, and lower yields on securities. This was partially offset by the accretion of the loan purchase discount into loan interest income from the Focus transaction for the first quarter of 2016. The accretion of the loan purchase discount into loan interest income from the Focus transaction was $518,000 for the first quarter of 2016. The total purchase discount on non-impaired loans from the Focus loan portfolio was $4.6 million as of the acquisition date, of which $1.9 million has been accreted into loan interest income from August 21, 2015 through March 31, 2016.
58
The yield on the loan portfolio was 5.64% for the first quarter of 2016, compared to 5.71% for the first quarter of 2015. The decrease in the yield on the loan portfolio for the first quarter of 2016, compared to the first quarter of 2015, primarily reflects a decrease in the proportion of loans in the higher yielding Bay View Funding factored receivables portfolio relative to the addition of the Focus loans and growth in the Company's legacy portfolio, partially offset by the accretion of the loan purchase discount into loan interest income from the Focus transaction. Excluding the accretion of the loan purchase discount and the Bay View Funding factored receivables portfolio, the yield on the loan portfolio was 4.78% for the first quarter of 2016, compared to 4.73% for the first quarter of 2015.
Net interest income increased 32% to $22.3 million for the first quarter of 2016, compared to $16.9 million for the first quarter of 2015, primarily due to loans acquired in the Focus acquisition, organic growth in the loan portfolio, the accretion of the loan purchase discount into loan interest income from the Focus transaction, and an increase in the average balance of investment securities.
A majority of the Company's earning assets are variable-rate loans that re-price when the Company's prime lending rate is changed, compared to a large base of core deposits that are generally slower to re-price. This causes the Company's balance sheet to be asset-sensitive, which means that all else being equal, the Company's net interest margin will be lower during periods when short-term interest rates are falling and higher when rates are rising.
Provision for Loan Losses
Credit risk is inherent in the business of making loans. The Company establishes an allowance for loan losses through charges to earnings, which are presented in the statements of income as the provision for loan losses. Specifically identifiable and quantifiable known losses are promptly charged off against the allowance. The provision for loan losses is determined by conducting a quarterly evaluation of the adequacy of the Company's allowance for loan losses and charging the shortfall or excess, if any, to the current quarter's expense. This has the effect of creating variability in the amount and frequency of charges to the Company's earnings. The provision for loan losses and level of allowance for each period are dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management's assessment of the quality of the loan portfolio, the valuation of problem loans and the general economic conditions in the Company's market area.
There was a a $401,000 provision for loan losses for the first quarter of 2016, compared to a credit provision for loan losses of $60,000 for the first quarter of 2015. The allowance for loan losses related to the commercial loan portfolio increased $531,000 at March 31, 2016 from December 31, 2015, as a result of a provision for loan losses of $616,000, and net charge-offs of $85,000. The increase in the allowance for loan losses in the Company's commercial loan portfolio was primarily due to an increase in commercial loans outstanding. The allowance for loan losses related to the real estate portfolio remained relatively flat at $8.1 million at March 31, 2016, compared to December 31, 2015, as a result of a credit provision for loan losses of $224,000, and net recoveries of $216,000.
The allowance for loan losses totaled $19.5 million, or 1.39% of total loans at March 31, 2016, compared to $18.6 million, or 1.68% of total loans at March 31, 2015, and $18.9 million, or 1.39% of total loans at December 31, 2015. The allowance for loan losses to total loans decreased at March 31, 2016, compared to March 31, 2015, primarily due to the impact of the Focus loan portfolio, which was marked to fair value on the acquisition date. Net recoveries totaled $131,000 for the first quarter of 2016, compared to $235,000 for the first quarter of 2015, and net charge-offs of $182,000 for the fourth quarter of 2015. The allowance for loan losses to total nonperforming loans was 465.06% at March 31, 2016, compared to 275.57% at March 31, 2015, and 296.74% at December 31, 2015. Provisions for loan losses are charged to operations to bring the allowance for loan losses to a level deemed appropriate by the Company based on the factors discussed under "Allowance for Loan Losses".
59
Noninterest Income
The following table sets forth the various components of the Company's noninterest income for the periods indicated:
|
For the Three Months Ended March 31, |
Increase (decrease) 2016 versus 2015 |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2016 | 2015 | Amount | Percent | |||||||||
|
(Dollars in thousands) |
||||||||||||
Service charges and fees on deposit accounts |
$ | 767 | $ | 623 | $ | 144 | 23 | % | |||||
Increase in cash surrender value of life insurance |
449 | 400 | 49 | 12 | % | ||||||||
Servicing income |
371 | 306 | 65 | 21 | % | ||||||||
Gain on sales of SBA loans |
305 | 207 | 98 | 47 | % | ||||||||
Gain on sales of securities |
180 | | 180 | N/A | |||||||||
Other |
542 | 390 | 152 | 39 | % | ||||||||
| | | | | | | | | | | | | |
Total noninterest income |
$ | 2,614 | $ | 1,926 | $ | 688 | 36 | % | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Noninterest income increased to $2.6 million for the first quarter of 2016, compared to $1.9 million for the first quarter of 2015, primarily due to an $180,000 gain on sales of securities,a higher gain on sales of SBA loans, and higher service charges and fees on deposit accounts in the first quarter of 2016.
Historically, a significant percentage of the Company's noninterest income has been associated with its SBA lending activity, as gains on the sale of loans sold in the secondary market and servicing income from loans sold with servicing rights retained. For the three months ended March 31, 2016, SBA loan sales resulted in an $305,000 gain, compared to a $207,000 gain on sale of SBA loans for the three months ended March 31, 2015.
The servicing assets that result from the sales of SBA loans with servicing retained are amortized over the expected term of the loans using a method approximating the interest method. Servicing income generally declines as the respective loans are repaid.
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, |
Increase (decrease) 2016 versus 2015 |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2016 | 2015 | Amount | Percent | |||||||||
|
(Dollars in thousands) |
||||||||||||
Salaries and employee benefits |
$ | 8,947 | $ | 8,042 | $ | 905 | 11 | % | |||||
Occupancy and equipment |
1,085 | 1,045 | 40 | 4 | % | ||||||||
Professional fees |
825 | 95 | 730 | 768 | % | ||||||||
Data processing |
400 | 303 | 97 | 32 | % | ||||||||
Software subscriptions |
341 | 327 | 14 | 4 | % | ||||||||
FDIC deposit insurance premiums |
331 | 239 | 92 | 38 | % | ||||||||
Insurance expense |
299 | 291 | 8 | 3 | % | ||||||||
Foreclosed assets |
2 | (170 | ) | 172 | 101 | % | |||||||
Other |
2,455 | 2,104 | 351 | 17 | % | ||||||||
| | | | | | | | | | | | | |
Total noninterest expense |
$ | 14,685 | $ | 12,276 | $ | 2,409 | 20 | % | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
60
The following table indicates the percentage of noninterest expense in each category for the periods indicated:
Noninterest Expense by Category
|
For the Three Months Ended March 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2016 | Percent of Total |
2015 | Percent of Total |
|||||||||
|
(Dollars in thousands) |
||||||||||||
Salaries and employee benefits |
$ | 8,947 | 61 | % | $ | 8,042 | 65 | % | |||||
Occupancy and equipment |
1,085 | 7 | % | 1,045 | 9 | % | |||||||
Professional fees |
825 | 6 | % | 95 | 1 | % | |||||||
Data processing |
400 | 3 | % | 303 | 2 | % | |||||||
Software subscriptions |
341 | 2 | % | 327 | 3 | % | |||||||
FDIC deposit insurance premiums |
331 | 2 | % | 239 | 2 | % | |||||||
Insurance expense |
299 | 2 | % | 291 | 2 | % | |||||||
Foreclosed assets |
2 | 0 | % | (170 | ) | 1 | % | ||||||
Other |
2,455 | 17 | % | 2,104 | 17 | % | |||||||
| | | | | | | | | | | | | |
Total noninterest expense |
$ | 14,685 | 100 | % | $ | 12,276 | 100 | % | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Total noninterest expense for the first quarter of 2016 increased to $14.7 million, from $12.3 million for the first quarter of 2015. The increase in noninterest expense for the three months ended March 31, 2016, was primarily due to additional employees and amortization of core deposit intangibles from the Focus acquisition in the first quarter of 2016, and the significant reduction of legal expenses, that are included in professional fees, on two problem loans that were paid off in the first quarter of 2015. Full time equivalent employees were 260, 251, and 260 at March 31, 2016, March 31, 2015, and December 31, 2015, respectively.
In the normal course of business, the Company becomes a party to financial instruments with off-balance sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit in the form of loans, or through commercial or standby letters of credit, and financial guarantees. These instruments represent varying degrees of exposure to risk in excess of the amounts included in the accompanying condensed consolidated balance sheets. The Company calculates an off-balance sheet credit risk reserve for all unfunded commitments.
Income Tax Expense
The Company computes its provision for income taxes on a monthly basis. The effective tax rate is determined by applying the Company's statutory income tax rates to pre-tax book income as adjusted for permanent differences between pre-tax book income and actual taxable income. These permanent differences include, but are not limited to, increases in the cash surrender value of life insurance policies, interest on tax-exempt securities, certain expenses that are not allowed as tax deductions, and tax credits.
The Company's Federal and state income tax expense for the quarter ended March 31, 2016 was $3.7 million compared to $2.4 million for the quareter ended March 31, 2015. The following table shows the Company's effective income tax rates for the periods indicated:
|
For the Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2015 | 2015 | |||||
Effective income tax rate |
37.9 | % | 37.0 | % |
61
The difference in the effective tax rate compared to the combined Federal and state statutory tax rate of 42% is primarily the result of tax exempt securities, the Company's investment in life insurance policies whose earnings are not subject to taxes, tax credits related to investments in low income housing limited partnerships, and Enterprise Zone hiring credits.
The Company adopted the proportional amortization method of accounting for its low income housing investments in the third quarter of 2014. The low income housing investment losses, net of the tax benefits received, are included in income tax expense for all periods reflected on the consolidated income statements.
Some items of income and expense are recognized in different years for tax purposes than when applying generally accepted accounting principles leading to timing differences between the Company's actual tax liability, and the amount accrued for this liability based on book income. These temporary differences comprise the "deferred" portion of the Company's tax expense or benefit, which is accumulated on the Company's books as a deferred tax asset or deferred tax liability until such time as they reverse.
Realization of the Company's deferred tax assets is primarily dependent upon the Company generating sufficient future taxable income to obtain benefit from the reversal of net deductible temporary differences and utilization of tax credit carryforwards and the net operating loss carryforwards for Federal and California state income tax purposes. The amount of deferred tax assets considered realizable is subject to adjustment in future periods based on estimates of future taxable income. Under generally accepted accounting principles a valuation allowance is required to be recognized if it is "more likely than not" that the deferred tax assets will not be realized. The determination of the realizability of the deferred tax assets is highly subjective and dependent upon judgment concerning management's evaluation of both positive and negative evidence, including forecasts of future income, cumulative losses, applicable tax planning strategies, and assessments of current and future economic and business conditions.
The Company had net deferred tax assets of $18.7 million at March 31, 2016, and $22.2 million at December 31, 2015. 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.
Business Segment Information
The following presents the Company's operating segments. Transactions between segments consist primarily of borrowed funds. Intersegment interest expense is allocated to the Factoring segment based on the Company's prime rate and funding costs. The provision for loan loss is allocated based on the segment's allowance for loan loss determination which considers the effects of charge-offs. Noninterest income and expense directly attributable to a segment are assigned to it. Taxes are paid on a consolidated basis and allocated for segment purposes. The Factoring segment includes only factoring
62
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 |
|
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 |
Banking. Our banking segment's net income increased to $5.5 million for the three months ended March 31, 2016 compared to net income of $3.5 million for the three months ended March 31, 2015.
63
Net interest income increased to $19.7 million for the three months ended March 31, 2016, compared to $14.1 million for the three months ended March 31, 2015. The increase in net interest income for the three months ended March 31, 2016, compared to the three months ended March 31, 2015, was primarily as a result of the Focus acquisition and organic growth in the loan portfolio and core deposits. The provision for loan losses was $387,000 for the three months ended March 31, 2016, compared to a credit provision for loan losses of $58,000 for the three months ended March 31, 2015. The increase in the provision for loan losses was primarily due to an increase in loan balances in the banking segment's commercial loan portfolio. Noninterest income increased to $2.4 million for the three months ended March 31, 2016, compared to $1.8 million for the three months ended March 31, 2015, mainly as result of higher gains on sales of securities, gains on sales of SBA loans, and service charges and fees on deposit accounts. Noninterest expense was $13.1 million for the three months ended March 31, 2016, compared to $10.5 million for the three months ended March 31, 2015. The increase in noninterest expense for the three months ended March 31, 2016, was primarily due to additional operating costs of Focus.
Factoring. Bay View Funding's primary business operation is purchasing and collecting factored receivables. Factored receivables are receivables that have been transferred by the originating organization and typically have not been subject to previous collection efforts. In a factoring transaction, Bay View Funding directly purchases the receivables generated by its clients at a discount to their face value. The transactions are structured to provide the clients with immediate working capital when there is a mismatch between payments to the client for a good or service and the incurrence of operating costs required to provide for such good or service. The average life of the factored receivables is 33 days. The balance of the purchased receivables as of March 31, 2016 and 2015 was $41.9 million and $44.6 million, respectively. Bay View Funding's net income remained relatively flat at $573,000 for the three months ended March 31, 2016, compared to $629,000 for the three months ended March 31, 2015. Net interest income was $2.6 million for the three months ended March 31, 2016, compared to $2.8 million for the three months ended March 31, 2015. The decrease in net interest income for the three months ended March 31, 2016, compared to the three months ended March 31, 2015, was primarily a result of a lower volume of orginations and lower yields on the factored receivables portfolio, partially offset by a lower cost of funds for the three months ended March 31, 2016. The provision for loan losses was $14,000, for the three months ended March 31, 2016, compared to a credit provision for loan losses of $2,000 for the three months ended March 31, 2015. Noninterest income increased to $202,000 for the three months ended March 31, 2016, compared to $134,000 for the three months ended March 31, 2015. Noninterest expense decreased to $1.6 million for the three months ended March 31, 2016, compared to $1.8 million at March 31, 2015, primarily due to lower brokered fees and credit report expense for the three months ended March 31, 2016.
FINANCIAL CONDITION
As of March 31, 2016, total assets increased to $2.33 billion, compared to $1.65 billion at March 31, 2015, and $2.36 billion at December 31, 2015. Securities available-for-sale (at fair value) were $448.5 million March 31, 2016, an increase of 123% from $200.8 million at March 31, 2015, and an increase of 16% from $385.1 million at December 31, 2015. Securities held-to-maturity (at amortized cost) were $185.2 million at March 31, 2016, an increase of 96% from $94.6 million at March 31, 2015, and an increase of 69% from $109.3 million at December 31, 2015. Total loans, excluding loans held for sale, increased $293.3 million, or 27%, to $1.40 billion at March 31, 2016, compared to $1.10 billion at March 31, 2015, which included an increase of $162.2 million, or 15%, in the Company's legacy loan portfolio, and $131.1 million from the Focus loan portfolio. Loans increased $36.5 million, or 3%, at March 31, 2016, compared to $1.36 billion at December 31, 2015.
64
Total deposits increased $605.1 million, or 43%, to $2.03 billion at March 31, 2016, compared to $1.42 billion at March 31, 2015, which included an increase of $244.9 million, or 17%, in the Company's legacy deposit portfolio, and $360.2 million from the Focus deposit portfolio. Total deposits decreased $34.0 million, or 2%, at March 31, 2016, compared to $2.06 billion at December 31, 2015, primarily due to decreases in noninterest-bearing demand deposits and brokered deposits. Deposits (excluding all time deposits and CDARS deposits) increased $601.8 million, or 52%, to $1.77 billion at March 31, 2016, from $1.17 billion at March 31, 2015, and decreased $46.5 million, or 3%, from $1.81 billion at December 31, 2015.
Securities Portfolio
The following table reflects the balances for each category of securities at the dates indicated:
|
March 31, | |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
December 31, 2015 |
|||||||||
|
2016 | 2015 | ||||||||
|
(Dollars in thousands) |
|||||||||
Securities available-for-sale (at fair value): |
||||||||||
Agency mortgage-backed securities |
$ | 392,753 | $ | 148,047 | $ | 324,230 | ||||
U.S. Treasury |
30,332 | | 30,003 | |||||||
Trust preferred securities |
15,225 | 15,544 | 15,132 | |||||||
U.S. Government sponsored entities |
9,181 | | 9,041 | |||||||
Corporate bonds |
1,049 | 37,177 | 6,673 | |||||||
| | | | | | | | | | |
Total |
$ | 448,540 | $ | 200,768 | $ | 385,079 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Securities held-to-maturity (at amortized cost): |
||||||||||
MunicipalsTax Exempt |
$ | 92,589 | $ | 79,855 | $ | 93,518 | ||||
Agency mortgage-backed securities |
92,576 | 14,733 | 15,793 | |||||||
| | | | | | | | | | |
Total |
$ | 185,165 | $ | 94,588 | $ | 109,311 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
65
The following table summarizes the weighted average life and weighted average yields of securities at March 31, 2016:
|
Within One Year or Less |
After One and Within Five Years |
After Five and Within Ten Years |
After Ten Years | Total | ||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | |||||||||||||||||||||
|
(Dollars in thousands) |
||||||||||||||||||||||||||||||
Securities available-for-sale (at fair value): |
|||||||||||||||||||||||||||||||
Agency mortgage-backed securities |
$ | | | $ | 124,801 | 2.51 | % | $ | 267,952 | 2.29 | % | $ | | | $ | 392,753 | 2.36 | % | |||||||||||||
U.S. Treasury |
4,297 | 0.75 | % | 26,035 | 1.22 | % | | | | | 30,332 | 1.15 | % | ||||||||||||||||||
Trust preferred securities |
| | | | | | 15,225 | 5.95 | % | 15,225 | 5.95 | % | |||||||||||||||||||
U.S. Government sponsored entities |
2,000 | 0.66 | % | 7,181 | 1.60 | % | | | | | 9,181 | 1.39 | % | ||||||||||||||||||
Corporate bonds |
| | 1,049 | 4.46 | % | | | | | 1,049 | 4.46 | % | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total |
$ | 6,297 | 0.72 | % | $ | 159,066 | 2.27 | % | $ | 267,952 | 2.29 | % | $ | 15,225 | 5.95 | % | $ | 448,540 | 2.39 | % | |||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Securities held-to-maturity (at amortized cost): |
|||||||||||||||||||||||||||||||
MunicipalsTax Exempt(1) |
$ | 2,404 | 3.06 | % | $ | 31,202 | 3.73 | % | $ | 45,232 | 3.99 | % | $ | 13,751 | 3.78 | % | $ | 92,589 | 3.85 | % | |||||||||||
Agency mortgage-backed securities |
| | 26,444 | 1.58 | % | 54,611 | 2.12 | % | 11,521 | 3.26 | % | 92,576 | 2.11 | % | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total |
$ | 2,404 | 3.06 | % | $ | 57,646 | 2.75 | % | $ | 99,843 | 2.97 | % | $ | 25,272 | 3.54 | % | $ | 185,165 | 2.98 | % | |||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The securities portfolio is the second largest component of the Company's interest-earning assets, and the structure and composition of this portfolio is important to an analysis of the financial condition of the Company. The portfolio serves the following purposes: (i) it provides a source of pledged assets for securing certain deposits and borrowed funds, as may be required by law or by specific agreement with a depositor or lender; (ii) it provides liquidity to even out cash flows from the loan and deposit activities of customers; (iii) it can be used as an interest rate risk management tool, since it provides a large base of assets, the maturity and interest rate characteristics of which can be changed more readily than the loan portfolio to better match changes in the deposit base and other funding sources of the Company; and (iv) it is an alternative interest-earning use of funds when loan demand is weak or when deposits grow more rapidly than loans.
The Company's portfolio may include: (i) U.S. Treasury securities and U.S. Government sponsored entities' debt securities for liquidity and pledging; (ii) mortgage-backed securities, which in many instances can also be used for pledging, and which generally enhance the yield of the portfolio; (iii) municipal obligations, which provide tax free income and limited pledging potential; and (iv) single entity issue trust preferred securities, which generally enhance the yield on the portfolio.
The Company classifies its securities as either available-for-sale or held-to-maturity at the time of purchase. Accounting guidance requires available-for-sale securities to be marked to fair value with an offset to accumulated other comprehensive income (loss), a component of shareholders' equity. Monthly adjustments are made to reflect changes in the fair value of the Company's available-for-sale securities.
The investment securities available-for-sale portfolio totaled $448.5 million at March 31, 2016, an increase of 123% from $200.8 million at March 31, 2015, and an increase of 16% from $385.1 million at December 31, 2015. At March 31, 2016, the Company's securities available-for-sale portfolio was comprised of $392.8 million agency mortgage-backed securities (all issued by U.S. Government
66
sponsored entities), $30.3 million of U.S. Treasuries, $15.2 million of single entity issue trust preferred securities, $9.2 million of U.S. Government agency securities, and $1.0 million of corporate bonds. The pre-tax unrealized gain on securities available-for-sale at March 31, 2016 was $5.2 million, compared to a pre-tax unrealized gain on securities available-for-sale of $5.7 million at March 31, 2015, and a pre-tax unrealized gain on securities available-for-sale of $501,000 at December 31, 2015.
The Company received gross proceeds of $5.6 million on corporate securities available-for-sale it sold during the first quarter of 2016 with a book value totaling $5.4 million, resulting in a gain on sale of securities of $180,000. During the first quarter of 2016, the Company purchased $75.8 million of investment securities available-for-sale, which consisted of $51.8 million of Federal Home Loan Mortgage Corporation ("FHLMC") securities, with an average book yield of 1.96%, and $24.0 million of Federal National Mortgage Association ("FNMA") securities, with an average book yield of 1.95%.
At March 31, 2016, investment securities held-to-maturity totaled $185.2 million, compared to $94.6 million at March 31, 2015, and $109.3 million at December 31, 2015. At March 31, 2016, the Company's securities held-to-maturity portfolio, at amortized cost, was comprised of $92.6 million tax-exempt municipal bonds, and $92.6 million agency mortgage-backed securities.
During the first quarter of 2016, the Company purchased $78.7 million Government National Mortgage Association ("GNMA") securities held-to-maturity, with an average book yield of 1.85%.
The Company has not used interest rate swaps or other derivative instruments to hedge fixed rate loans or securities.
Loans
The Company's loans represent the largest portion of invested assets, substantially greater than the securities portfolio or any other asset category, and the quality and diversification of the loan portfolio is an important consideration when reviewing the Company's financial condition.
Gross loans, excluding loans held-for-sale, represented 60% of total assets at March 31, 2016, represented 67% at March 31, 2015, and represented 58% at December 31, 2015. The ratio of loans to deposits was 68.78% at March 31, 2016, compared to 77.41% at March 31, 2015, and increased from 65.87% at December 31, 2015.
67
Loan Distribution
The Loan Distribution table that follows sets forth the Company's gross loans, excluding loans held-for-sale, outstanding and the percentage distribution in each category at the dates indicated:
|
March 31, 2016 | March 31, 2015 | December 31, 2015 | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Balance | % of Total | Balance | % of Total | Balance | % of Total | |||||||||||||
|
(Dollars in thousands) |
||||||||||||||||||
Commercial |
$ | 592,128 | 42 | % | $ | 458,498 | 42 | % | $ | 556,522 | 41 | % | |||||||
Real estate: |
|||||||||||||||||||
Commercial and residential |
616,821 | 44 | % | 487,475 | 44 | % | 625,665 | 46 | % | ||||||||||
Land and construction |
95,547 | 7 | % | 74,972 | 7 | % | 84,428 | 6 | % | ||||||||||
Home equity |
74,993 | 6 | % | 65,243 | 6 | % | 76,833 | 6 | % | ||||||||||
Consumer |
16,476 | 1 | % | 16,200 | 1 | % | 16,010 | 1 | % | ||||||||||
| | | | | | | | | | | | | | | | | | | |
Total loans |
1,395,965 | 100 | % | 1,102,388 | 100 | % | 1,359,458 | 100 | % | ||||||||||
Deferred loan (fees) costs, net |
(701 | ) | | (397 | ) | | (742 | ) | | ||||||||||
| | | | | | | | | | | | | | | | | | | |
Loans, including deferred fees and costs |
1,395,264 | 100 | % | 1,101,991 | 100 | % | 1,358,716 | 100 | % | ||||||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Allowance for loan losses |
(19,458 | ) | (18,554 | ) | (18,926 | ) | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
Loans, net |
$ | 1,375,806 | $ | 1,083,437 | $ | 1,339,790 | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
The Company's loan portfolio is concentrated in commercial loans, primarily manufacturing, wholesale, and services, and commercial real estate, with the remaining balance in land development and construction, home equity and consumer loans. The Company does not have any concentrations by industry or group of industries in its loan portfolio, however, 57% of its gross loans were secured by real property at March 31, 2016, compared to 57% at March 31, 2015, and 58% at December 31, 2015. While no specific industry concentration is considered significant, the Company's bank lending operations are substantially located in areas that are dependent on the technology and real estate industries and their supporting companies.
The Company has established concentration limits in its loan portfolio for commercial real estate loans, commercial loans, construction loans and unsecured lending, among others. All loan types are within established limits. The Company uses underwriting guidelines to assess the borrowers' historical cash flow to determine debt service, and we further stress test the debt service under higher interest rate scenarios. Financial and performance covenants are used in commercial lending to allow the Company to react to a borrower's deteriorating financial condition should that occur.
The Company's commercial loans are made for working capital, financing the purchase of equipment or for other business purposes. Commercial loans include loans with maturities ranging from thirty days to one year and "term loans" with maturities normally ranging from one to five years. Short-term business loans are generally intended to finance current transactions and typically provide for periodic principal payments, with interest payable monthly. Term loans normally provide for floating interest rates, with monthly payments of both principal and interest.
The Company is an active participant in the SBA and U.S. Department of Agriculture guaranteed lending programs, and has been approved by the SBA as a lender under the Preferred Lender Program. The Company regularly makes such guaranteed loans (collectively referred to as "SBA loans"). The guaranteed portion of these loans is typically sold in the secondary market depending on market conditions. When the guaranteed portion of an SBA loan is sold the Company retains the servicing rights for the sold portion. During the three months ended March 31, 2016, loans were sold resulting in a gain on sales of SBA loans of $305,000, compared to a gain on sales of SBA loans of $207,000 for the three months ended March 31, 2015.
68
The Company's factoring receivables are from the operations of Bay View Funding whose primary business is purchasing and collecting factored receivables. Factored receivables are receivables that have been transferred by the originating organization and typically have not been subject to previous collection efforts. These receivables are acquired from a variety of companies, including but not limited to service providers, transportation companies, manufacturers, distributors, wholesalers, apparel companies, advertisers, and temporary staffing companies. The portfolio of factored receivables is included in the Company's commercial loan portfolio.
As of March 31, 2016, commercial and residential real estate mortgage loans of $616.8 million consist primarily of adjustable and fixed-rate loans secured by deeds of trust on commercial and residential property. The real estate mortgage loans at March 31, 2016, consist of $261.8 million, or 42%, of commercial owner occupied properties, $355.0 million, or 58%, of commercial investment properties. Properties securing the commercial real estate mortgage loans are generally located in the Greater San Francisco Bay Area, the Company's primary market.
The Company's commercial real estate loans consist primarily of loans based on the borrower's cash flow and are secured by deeds of trust on commercial and residential property to provide a secondary source of repayment. The Company generally restricts real estate term loans to no more than 75% of the property's appraised value or the purchase price of the property during the initial underwriting of the credit, depending on the type of property and its utilization. The Company offers both fixed and floating rate loans. Maturities on real estate mortgage loans are generally between five and ten years (with amortization ranging from fifteen to twenty-five years and a balloon payment due at maturity); however, SBA and certain other real estate loans that can be sold in the secondary market may be granted for longer maturities.
The Company's land and construction loans are primarily to finance the development/construction of commercial and single family residential properties. The Company utilizes underwriting guidelines to assess the likelihood of repayment from sources such as sale of the property or availability of permanent mortgage financing prior to making the construction loan. Construction loans are provided only in our market area, and the Company has extensive controls for the disbursement process. Land and construction loans increased $20.6 million to $95.6 million, at March 31, 2016, from $75.0 million, at March 31, 2015, primarily as a result of strong housing demand within the Company's lending area. Land and construction loans increased $11.2 million at March 31, 2016, from $84.4 million at December 31, 2015.
The Company makes home equity lines of credit available to its existing customers. Home equity lines of credit are underwritten initially with a maximum 75% loan to value ratio. Home equity lines are reviewed semi-annually, with specific emphasis on loans with a loan to value ratio greater than 70%. The Company takes measures to work with customers to reduce line commitments and minimize potential losses.
Additionally, the Company makes consumer loans for the purpose of financing automobiles, various types of consumer goods, and other personal purposes. Consumer loans generally provide for the monthly payment of principal and interest. Most of the Company's consumer loans are secured by the personal property being purchased or, in the instances of home equity loans or lines, real property.
With certain exceptions, state chartered banks are permitted to make extensions of credit to any one borrowing entity up to 15% of the bank's capital and reserves for unsecured loans and up to 25% of the bank's capital and reserves for secured loans. For HBC, these lending limits were $40.4 million and $67.3 million at March 31, 2016, respectively.
69
Loan Maturities
The following table presents the maturity distribution of the Company's loans (excluding loans held-for-sale) as of March 31, 2016. The table shows the distribution of such loans between those loans with predetermined (fixed) interest rates and those with variable (floating) interest rates. Floating rates generally fluctuate with changes in the prime rate as reflected in the Western Edition of The Wall Street Journal. As of March 31, 2016, approximately 56% of the Company's loan portfolio consisted of floating interest rate loans.
|
Due in One Year or Less |
Over One Year But Less than Five Years |
Over Five Years |
Total | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(Dollars in thousands) |
||||||||||||
Commercial |
$ | 496,830 | $ | 79,737 | $ | 15,561 | $ | 592,128 | |||||
Real estate: |
|||||||||||||
Commercial and residential |
76,951 | 262,394 | 277,476 | 616,821 | |||||||||
Land and construction |
95,299 | 248 | | 95,547 | |||||||||
Home equity |
70,023 | 1,355 | 3,615 | 74,993 | |||||||||
Consumer |
15,248 | 1,137 | 91 | 16,476 | |||||||||
| | | | | | | | | | | | | |
Loans |
$ | 754,351 | $ | 344,871 | $ | 296,743 | $ | 1,395,965 | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Loans with variable interest rates |
$ | 688,021 | $ | 76,984 | $ | 9,920 | $ | 774,925 | |||||
Loans with fixed interest rates |
66,330 | 267,887 | 286,823 | 621,040 | |||||||||
| | | | | | | | | | | | | |
Loans |
$ | 754,351 | $ | 344,871 | $ | 296,743 | $ | 1,395,965 | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Loan Servicing
As of March 31, 2016 and 2015, $176.2 million and $120.4 million, respectively, in SBA loans were serviced by the Company for others. Activity for loan servicing rights was as follows:
|
For the Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2016 | 2015 | |||||
|
(Dollars in thousands) |
||||||
Beginning of period balance |
$ | 2,209 | $ | 565 | |||
Additions |
93 | 45 | |||||
Amortization |
(139 | ) | (76 | ) | |||
| | | | | | | |
End of period balance |
$ | 2,163 | $ | 534 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
The increase in loan servicing rights for the three months ended March 31, 2016, compared to the same period in 2015, was primarily due to the Focus acquisition of $1.9 million in August, 2015. Loan servicing rights are included in accrued interest receivable and other assets on the unaudited consolidated balance sheets and reported net of amortization. There was no valuation allowance as of March 31, 2016 and 2015, as the fair value of the assets was greater than the carrying value.
70
Activity for the I/O strip receivable was as follows:
|
For the Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2016 | 2015 | |||||
|
(Dollars in thousands) |
||||||
Beginning of period balance |
$ | 1,367 | $ | 1,481 | |||
Unrealized holding gain |
2 | 11 | |||||
| | | | | | | |
End of period balance |
$ | 1,369 | $ | 1,492 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Credit Quality
Financial institutions generally have a certain level of exposure to credit quality risk, and could potentially receive less than a full return of principal and interest if a debtor becomes unable or unwilling to repay. Since loans are the most significant assets of the Company and generate the largest portion of its revenues, the Company's management of credit quality risk is focused primarily on loan quality. Banks have generally suffered their most severe earnings declines as a result of customers' inability to generate sufficient cash flow to service their debts and/or downturns in national and regional economies and declines in overall asset values including real estate. In addition, certain debt securities that the Company may purchase have the potential of declining in value if the obligor's financial capacity to repay deteriorates.
The Company's policies and procedures identify market segments, set goals for portfolio growth or contraction, and establish limits on industry and geographic credit concentrations. In addition, these policies establish the Company's underwriting standards and the methods of monitoring ongoing credit quality. The Company's internal credit risk controls are centered in underwriting practices, credit granting procedures, training, risk management techniques, and familiarity with loan customers as well as the relative diversity and geographic concentration of our loan portfolio.
The Company's credit risk may also be affected by external factors such as the level of interest rates, employment, general economic conditions, real estate values, and trends in particular industries or geographic markets. As an independent community bank serving a specific geographic area, the Company must contend with the unpredictable changes in the general California market and, particularly, primary local markets. The Company's asset quality has suffered in the past from the impact of national and regional economic recessions, consumer bankruptcies, and depressed real estate values.
Nonperforming assets are comprised of the following: loans for which the Company is no longer accruing interest; restructured loans which have been current under six months; loans 90 days or more past due and still accruing interest (although they are generally placed on nonaccrual when they become 90 days past due, unless they are both well-secured and in the process of collection); and foreclosed assets. Management's classification of a loan as "nonaccrual" is an indication that there is reasonable doubt as to the full recovery of principal or interest on the loan. At that point, the Company stops accruing interest income, and reverses any uncollected interest that had been accrued as income. The Company begins recognizing interest income only as cash interest payments are received and it has been determined the collection of all outstanding principal is not in doubt. The loans may or may not be collateralized, and collection efforts are pursued. Loans may be restructured by management when a borrower has experienced some change in financial status causing an inability to meet the original repayment terms and where the Company believes the borrower will eventually overcome those circumstances and make full restitution. Foreclosed assets consist of properties acquired by foreclosure or similar means that management is offering or will offer for sale.
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The following table summarizes the Company's nonperforming assets at the dates indicated:
|
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 | |||||||
Foreclosed assets |
386 | 1,716 | 364 | |||||||
| | | | | | | | | | |
Total nonperforming assets |
$ | 4,570 | $ | 8,449 | $ | 6,742 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Nonperforming assets as a percentage of loans plus foreclosed assets |
0.33 | % | 0.77 | % | 0.50 | % | ||||
Nonperforming assets as a percentage of total assets |
0.20 | % | 0.51 | % | 0.29 | % |
The following table presents nonperforming loans by class at the dates 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 | |||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Nonperforming assets were $4.6 million, or 0.20% of total assets, at March 31, 2016, compared to $8.4 million, or 0.51% of total assets, at March 31, 2015, and $6.7 million, or 0.29% of total assets, at December 31, 2015. Included in total nonperforming assets were foreclosed assets of $386,000 at March 31, 2016, compared to $1.7 million at March 31, 2015, and $364,000 at December 31, 2015.
Loans with a well-defined weakness, which are characterized by the distinct possibility that the Company will sustain a loss if the deficiencies are not corrected, are categorized as "classified." Classified loans include all loans considered as substandard, substandard-nonaccrual, and doubtful and may result from problems specific to a borrower's business or from economic downturns that affect the borrower's ability to repay or that cause a decline in the value of the underlying collateral (particularly real estate), and foreclosed assets. The principal balance of classified loans, was $21.0 million at March 31, 2016, $15.1 million at March 31, 2015, and $18.6 million at December 31, 2015. There were no loans held-for-sale included in classified loans at March 31, 2016, March 31, 2015, and December 31, 2015. Loans held-for-sale are carried at the lower of cost or estimated fair value, and are not allocated an allowance for loan losses.
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The following table provides a summary of the loan portfolio by loan type and credit quality classification at the dates indicated:
|
March 31, 2016 | March 31, 2015 | December 31, 2015 | |||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Nonclassified | Classified* | Total | Nonclassified | Classified* | Total | Nonclassified | Classified* | Total | |||||||||||||||||||
|
(Dollars in thousands) |
|||||||||||||||||||||||||||
Commercial |
$ | 580,826 | $ | 11,302 | $ | 592,128 | $ | 451,598 | $ | 6,900 | $ | 458,498 | $ | 547,536 | $ | 8,986 | $ | 556,522 | ||||||||||
Real estate: |
||||||||||||||||||||||||||||
Commercial and residential |
608,771 | 8,050 | 616,821 | 481,767 | 5,708 | 487,475 | 617,865 | 7,800 | 625,665 | |||||||||||||||||||
Land and construction |
95,334 | 213 | 95,547 | 73,682 | 1,290 | 74,972 | 84,209 | 219 | 84,428 | |||||||||||||||||||
Home equity |
73,889 | 1,104 | 74,993 | 64,347 | 896 | 65,243 | 75,511 | 1,322 | 76,833 | |||||||||||||||||||
Consumer |
16,183 | 293 | 16,476 | 15,862 | 338 | 16,200 | 15,705 | 305 | 16,010 | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total |
$ | 1,375,003 | $ | 20,962 | $ | 1,395,965 | $ | 1,087,256 | $ | 15,132 | $ | 1,102,388 | $ | 1,340,826 | $ | 18,632 | $ | 1,359,458 | ||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The following provides a rollforward of troubled debt restructurings ("TDRs"):
|
Three Months Ended March 31, 2016 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Performing TDRs |
Nonperforming TDRs |
Total | |||||||
|
(Dollars in thousands) |
|||||||||
Balance at January 1, 2016 |
$ | 149 | $ | 4 | $ | 153 | ||||
Principal repayments |
(4 | ) | (1 | ) | (5 | ) | ||||
| | | | | | | | | | |
Balance at March 31, 2016 |
$ | 145 | $ | 3 | $ | 148 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
|
Three Months Ended March 31, 2015 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Performing TDRs |
Nonperforming TDRs |
Total | |||||||
|
(Dollars in thousands) |
|||||||||
Balance at January 1, 2015 |
$ | 167 | $ | 916 | $ | 1,083 | ||||
Principal repayments |
(4 | ) | (45 | ) | (49 | ) | ||||
| | | | | | | | | | |
Balance at March 31, 2015 |
$ | 163 | $ | 871 | $ | 1,034 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Allowance for Loan Losses
The allowance for loan losses is an estimate of probable incurred losses in the loan portfolio. Loans are charged-off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance for loan losses. Management's methodology for estimating the allowance balance consists of several key elements, which include specific allowances on individual impaired loans and the formula driven allowances on pools of loans with similar risk characteristics. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged-off.
Specific allowances are established for impaired loans. Management considers a loan to be impaired when it is probable that the Company will be unable to collect all amounts due according to the original contractual terms of the loan agreement, including scheduled interest payments. Loans for which the terms have been modified with a concession granted, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. When a loan is considered to be impaired, the amount of impairment is measured based on the fair value of the collateral less costs to sell if the loan is collateral dependent, or on the present value of
73
expected future cash flows or values that are observable in the secondary market. If the measure of the impaired loans is less than the investment in the loan, the deficiency will be charged off against the allowance for loan losses if the amount is a confirmed loss, or, alternatively, a specific allocation within the allowance will be established. Loans that are considered impaired are specifically excluded from the formula portion of the allowance for loan losses analysis.
The estimated loss factors for pools of loans that are not impaired are based on determining the probability of default and loss given default for loans within each segment of the portfolio, adjusted for significant factors that, in management's judgment, affect collectability as of the evaluation date. The Company's historical delinquency experience and loss experience are utilized to determine the probability of default and loss given default for segments of the portfolio where the Company has experienced losses in the past. For segments of the portfolio where the Company has no significant prior loss experience, the Company uses quantifiable observable industry data to determine the probability of default and loss given default.
It is the policy of management to maintain the allowance for loan losses at a level adequate for risks inherent in the loan portfolio. On an ongoing basis, we have engaged an outside firm to perform independent credit reviews of our loan portfolio. The Federal Reserve Board and the California Department of Business OversightDivision of Financial Institutions also review the allowance for loan losses as an integral part of the examination process. Based on information currently available, management believes that the allowance for loan losses is adequate. However, the loan portfolio can be adversely affected if California economic conditions and the real estate market in the Company's market area were to weaken. Also, any weakness of a prolonged nature in the technology industry would have a negative impact on the local market. The effect of such events, although uncertain at this time, could result in an increase in the level of nonperforming loans and increased loan losses, which could adversely affect the Company's future growth and profitability. No assurance of the ultimate level of credit losses can be given with any certainty.
74
The following tables summarize the Company's loan loss experience, as well as provisions and charges to the allowance for loan losses and certain pertinent ratios for the periods indicated:
|
Three Months Ended 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 | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
RATIOS: |
|||||||||||||
Annualized net charge-offs (recoveries) to average loans(1) |
0.02 | % | 0.06 | % | 0.00 | % | 0.04 | % | |||||
Allowance for loan losses to total loans(1) |
0.80 | % | 0.58 | % | 0.01 | % | 1.39 | % | |||||
Allowance for loan losses to nonperforming loans |
269.58 | % | 192.83 | % | 2.65 | % | 465.06 | % |
|
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 | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
RATIOS: |
|||||||||||||
Annualized net charge-offs (recoveries) to average loans(1) |
0.09 | % | 0.00 | % | 0.00 | % | 0.09 | % | |||||
Allowance for loan losses to total loans(1) |
0.98 | % | 0.69 | % | 0.01 | % | 1.68 | % | |||||
Allowance for loan losses to nonperforming loans |
161.24 | % | 112.19 | % | 2.14 | % | 275.57 | % |
The following table provides a summary of the allocation of the allowance for loan losses by class at the dates indicated. The allocation presented should not be interpreted as an indication that charges to the allowance for loan losses will be incurred in these amounts or proportions, or that the portion of the allowance allocated to each category represents the total amount available for charge-offs that may occur within these classes.
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Allocation of Allowance for Loan Losses
|
March 31, | |
|
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
December 31, 2015 |
||||||||||||||||||
|
2016 | 2015 | |||||||||||||||||
|
Allowance | Percent of Loans in each category to total loans |
Allowance | Percent of Loans in each category to total loans |
Allowance | Percent of Loans in each category to total loans |
|||||||||||||
|
(Dollars in thousands) |
||||||||||||||||||
Commercial |
$ | 11,279 | 42 | % | $ | 10,856 | 42 | % | $ | 10,748 | 41 | % | |||||||
Real estate: |
|||||||||||||||||||
Commercial and residential |
4,900 | 44 | % | 5,063 | 44 | % | 4,980 | 46 | % | ||||||||||
Land and construction |
1,630 | 7 | % | 1,137 | 7 | % | 1,504 | 6 | % | ||||||||||
Home equity |
1,538 | 6 | % | 1,354 | 6 | % | 1,592 | 6 | % | ||||||||||
Consumer |
111 | 1 | % | 144 | 1 | % | 102 | 1 | % | ||||||||||
| | | | | | | | | | | | | | | | | | | |
Total |
$ | 19,458 | 100 | % | $ | 18,554 | 100 | % | $ | 18,926 | 100 | % | |||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
The allowance for loan losses totaled $19.5 million, or 1.39% of total loans at March 31, 2016, compared to $18.6 million, or 1.68% of total loans at March 31, 2015, and $18.9 million, or 1.39% of total loans at December 31, 2015. The allowance for loan losses to total loans decreased at March 31, 2016, compared to March 31, 2015, primarily due to the Focus acquisition, and an increase in the Company's legacy loan balances with no default histories, coupled with a decrease in the Company's legacy nonperforming assets, improving the quality of the loan portfolio overall. The Company had net recoveries of $131,000, or 0.04% of average loans, for the first quarter of 2016, compared to net recoveries of $235,000, or 0.09% of average loans, for the first quarter of 2015, and net recoveries of $515,000, or 0.04% of average loans, for the fourth quarter of 2015.
The allowance for loan losses related to the commercial portfolio increased $531,000 at March 31, 2016 from December 31, 2015, as a result of a provision to the allowance for loan losses of $616,000, partially offset by net charge-offs of $85,000. The increase in the allowance for loan losses in the Company's commercial loan portfolio was primarily due to an increase in commercial loans outstanding. The allowance for loan losses related to the real estate portfolio decreased $8,000 at March 31, 2016 from December 31, 2015, as a result of a credit provision for loan losses of $224,000 and net recoveries of $216,000.
Goodwill and Other Intangible Assets
On November 1, 2014, estimated goodwill of $13.0 million resulted from the acquisition Bay View Funding. On August 20, 2015, estimated goodwill of $32.6 million resulted from the merger of Focus. Goodwill represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. The fair values of assets acquired and liabilities assumed are subject to adjustment during the first twelve months after the acquisition date if additional information becomes available to indicate a more accurate or appropriate value for an asset or liability. Total goodwill at March 31, 2016 and December 31, 2015 was $45.6 million, which was consisted of $13.0 million related to the Bay View Funding acquisition, and $32.6 million related to the Focus acquisition.
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
76
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 Company's equity exceeded its reported book value of equity at November 30, 2015. As such, no impairment was indicated and no further testing was required.
Other intangible assets were $8.1 million at March 31, 2016, compared to $8.5 million at December 31, 2015. Core deposit and customer relationship intangible assets arising from the acquisition of Diablo Valley Bank in June 2007 were $515,000 at March 31, 2016 and $621,000 at December 31, 2015, net of accumulated amortization. The core deposit intangible asset arising from the acquisition of Focus was $5.8 million at March 31, 2016 and $6.0 million at December 31, 2105, net of accumulated amortization. A below market lease, customer relationship and brokered relationship, and a non-compete agreement intangible assets arising from the acquisition of Bay View Funding in November 2014 were $1.8 million at March 31, 2016 and $1.9 million at December 31, 2015, net of accumulated amortization.
Deposits
The composition and cost of the Company's deposit base are important components in analyzing the Company's net interest margin and balance sheet liquidity characteristics, both of which are discussed in greater detail in other sections herein. The Company's liquidity is impacted by the volatility of deposits from the propensity of that money to leave the institution for rate-related or other reasons. Deposits can be adversely affected if economic conditions weaken in California, and the Company's market area in particular. Potentially, the most volatile deposits in a financial institution are jumbo certificates of deposit, meaning time deposits with balances that equal or exceed $250,000, as customers with balances of that magnitude are typically more rate-sensitive than customers with smaller balances.
The following table summarizes the distribution of deposits and the percentage of distribution in each category of deposits for the periods indicated:
|
March 31, 2016 | March 31, 2015 | December 31, 2015 | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Balance | % to Total | Balance | % to Total | Balance | % to Total | |||||||||||||
|
(Dollars in thousands) |
||||||||||||||||||
Demand, noninterest-bearing |
$ | 768,525 | 38 | % | $ | 544,339 | 38 | % | $ | 821,405 | 40 | % | |||||||
Demand, interest-bearing |
506,272 | 25 | % | 241,477 | 17 | % | 496,278 | 24 | % | ||||||||||
Savings and money market |
493,275 | 24 | % | 380,486 | 27 | % | 496,843 | 24 | % | ||||||||||
Time depositsunder $250 |
61,595 | 3 | % | 54,497 | 4 | % | 62,026 | 3 | % | ||||||||||
Time deposits$250 and over |
179,048 | 9 | % | 164,316 | 11 | % | 160,815 | 8 | % | ||||||||||
Time depositsbrokered |
11,829 | 1 | % | 28,126 | 2 | % | 17,825 | 1 | % | ||||||||||
CDARSmoney market and time deposits |
8,192 | 0 | % | 10,408 | 1 | % | 7,583 | 0 | % | ||||||||||
| | | | | | | | | | | | | | | | | | | |
Total deposits |
$ | 2,028,736 | 100 | % | $ | 1,423,649 | 100 | % | $ | 2,062,775 | 100 | % | |||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
The Company obtains deposits from a cross-section of the communities it serves. The Company's business is not generally seasonal in nature. Public funds were 5% of deposits at March 31, 2016, and 7% at March 31, 2015, and 4% at December 31, 2015.
77
Total deposits increased $605.1 million, or 43%, to $2.03 billion at March 31, 2016, compared to $1.42 billion at March 31, 2015, which included an increase of $244.9 million, or 17%, in the Company's legacy deposit portfolio, and $360.2 million from the Focus deposit portfolio. Total deposits decreased $34.0 million, or 2%, at March 31, 2016, compared to $2.06 billion at December 31, 2015, primarily due to decreases in noninterest-bearing demand deposits and brokered deposits. Noninterest-bearing demand deposits increased $224.2 million at March 31, 2016 from March 31, 2015, and decreased $52.9 million from December 31, 2015. Interest-bearing demand deposits increased $264.8 million at March 31, 2016 from March 31, 2015, and increased $10.0 million from December 31, 2015. Brokered deposits decreased $16.3 million at March 31, 2016 from March 31, 2015, and decreased $6.0 million from December 31, 2015. Deposits (excluding all time deposits and CDARS deposits) increased $601.8 million, or 52%, to $1.77 billion at March 31, 2016, from $1.17 billion at March 31, 2015 and decreased $46.5 million, or 3%, from $1.81 billion at December 31, 2015.
At March 31, 2016, the Company had $115.2 million (at fair value) of securities pledged for $98.0 million in certificates of deposits from the State of California. At March 31, 2015, the Company had $108.6 million (at fair value) of securities pledged for $98.0 million in certificates of deposits from the State of California. At December 31, 2015, the Company had $93.0 million (at fair value) of securities pledged for $78.0 million in certificates of deposits from the State of California.
CDARS deposits were comprised of $4.1 million of money market accounts and $4.1 million of time deposits at March 31, 2016. CDARS deposits were comprised of $3.9 million of money market accounts and $6.5 million of time deposits at March 31, 2015. CDARS deposits were comprised of $3.4 million of money market accounts and $4.2 million of time deposits at December 31, 2015.
The following table indicates the contractual maturity schedule of the Company's time deposits of $250,000 and over, and all CDARS time deposits and brokered deposits as of March 31, 2016:
|
Balance | % of Total | |||||
---|---|---|---|---|---|---|---|
|
(Dollars in thousands) |
||||||
Three months or less |
$ | 135,208 | 69 | % | |||
Over three months through six months |
21,241 | 11 | % | ||||
Over six months through twelve months |
31,286 | 16 | % | ||||
Over twelve months |
7,208 | 4 | % | ||||
| | | | | | | |
Total |
$ | 194,943 | 100 | % | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
The Company focuses primarily on providing and servicing business deposit accounts that are frequently over $250,000 in average balance per account. As a result, certain types of business clients that the Company serves typically carry average deposits in excess of $250,000. The account activity for some account types and client types necessitates appropriate liquidity management practices by the Company to help ensure its ability to fund deposit withdrawals.
78
Return on Equity and Assets
The following table indicates the ratios for return on average assets and average equity, and average equity to average assets for the periods indicated:
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2016 | 2015 | |||||
Annualized return on average assets |
1.05 | % | 1.03 | % | |||
Annualized return on average tangible assets |
1.07 | % | 1.04 | % | |||
Annualized return on average equity |
9.87 | % | 9.04 | % | |||
Annualized return on average tangible equity |
12.62 | % | 9.89 | % | |||
Average equity to average assets ratio |
10.59 | % | 11.35 | % |
Off-Balance Sheet Arrangements
In the normal course of business, the Company makes commitments to extend credit to its customers as long as there are no violations of any conditions established in the contractual arrangements. These commitments are obligations that represent a potential credit risk to the Company, but are not reflected on the Company's consolidated balance sheets. Total unused commitments to extend credit were $567.0 million March 31, 2016, compared to $475.5 million March 31, 2015, and $573.7 million at December 31, 2015. Unused commitments represented 41% outstanding gross loans at March 31, 2016, and 43% of outstanding gross loans at March 31, 2015, and 42% at December 31, 2015.
The effect on the Company's revenues, expenses, cash flows and liquidity from the unused portion of the commitments to provide credit cannot be reasonably predicted because there is no certainty that lines of credit and letters of credit will ever be fully utilized. The following table presents the Company's commitments to extend credit for the periods indicated:
|
March 31, | |
|
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
December 31, 2015 |
||||||||||||||||||
|
2016 | 2015 | |||||||||||||||||
|
Fixed Rate | Variable Rate | Fixed Rate | Variable Rate | Fixed Rate | Variable Rate | |||||||||||||
|
(Dollars in thousands) |
||||||||||||||||||
Unused lines of credit and commitments to make loans |
$ | 18,648 | $ | 533,876 | $ | 12,215 | $ | 445,914 | $ | 16,917 | $ | 539,897 | |||||||
Standby letters of credit |
3,377 | 11,112 | 3,235 | 14,088 | 3,402 | 13,458 | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
|
$ | 22,025 | $ | 544,988 | $ | 15,450 | $ | 460,002 | $ | 20,319 | $ | 553,355 | |||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Liquidity and Asset/Liability Management
Liquidity refers to the Company's ability to maintain cash flows sufficient to fund operations and to meet obligations and other commitments in a timely and cost effective fashion. At various times the Company requires funds to meet short-term cash requirements brought about by loan growth or deposit outflows, the purchase of assets, or liability repayments. An integral part of the Company's ability to manage its liquidity position appropriately is the Company's large base of core deposits, which are generated by offering traditional banking services in its service area and which have historically been a stable source of funds. To manage liquidity needs properly, cash inflows must be timed to coincide with anticipated outflows or sufficient liquidity resources must be available to meet varying demands. The Company manages liquidity to be able to meet unexpected sudden changes in levels of its assets or deposit liabilities without maintaining excessive amounts of balance sheet liquidity. Excess balance sheet liquidity can negatively impact the Company's interest margin. In order to meet
79
short-term liquidity needs the Company utilizes overnight Federal funds purchase arrangements and other borrowing arrangements with correspondent banks, solicits brokered deposits if cost effective deposits are not available from local sources and maintains collateralized lines of credit with the FHLB and FRB. In addition, the Company can raise cash for temporary needs by selling securities under agreements to repurchase and selling securities available-for-sale.
One of the measures we analyze for liquidity is our loan to deposit ratio. Our loan to deposit ratio was 68.78% at March 31, 2016, compared to 77.41% at March 31, 2015, and 65.87% at December 31, 2015.
FHLB and FRB Borrowings and Available Lines of Credit
The Company has off-balance sheet liquidity in the form of Federal funds purchase arrangements with correspondent banks, including the FHLB and FRB. The Company can borrow from the FHLB on a short-term (typically overnight) or long-term (over one year) basis. The Company had no overnight borrowings from the FHLB at March 31, 2016, March 31, 2015 and December 31, 2015. The Company had $242.3 million of loans pledged to the FHLB as collateral on an available line of credit of $198.9 million at March 31, 2016.
The Company can also borrow from the FRB's discount window. The Company had $399.4 million of loans pledged to the FRB as collateral on an available line of credit of $240.8 million at March 31, 2016, none of which was outstanding.
At March 31, 2016, the Company had Federal funds purchase arrangements available of $55.0 million. There were no Federal funds purchased outstanding at March 31, 2016, March 31, 2015, and December 31, 2015.
The Company has a $5.0 million line of credit with a correspondent bank, of which none was outstanding at March 31, 2016.
The Company may also utilize securities sold under repurchase agreements to manage our liquidity position. There were no securities sold under agreements to repurchase at March 31, 2016, March 31, 2015, and December 31, 2015.
The following table summarizes the Company's borrowings under its Federal funds purchased, security repurchase arrangements and lines of credit for the periods indicated:
|
March 31, | |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
December 31, 2015 |
|||||||||
|
2016 | 2015 | ||||||||
|
(Dollars in thousands) |
|||||||||
Average balance year-to-date |
$ | 1,681 | $ | | $ | 578 | ||||
Average interest rate year-to-date |
2.57 | % | N/A | 3.14 | % | |||||
Maximum month-end balance during the quarter |
$ | 3,000 | $ | | $ | 3,000 | ||||
Average rate at period-end |
N/A | N/A | 3.00 | % |
Capital Resources
The Company uses a variety of measures to evaluate capital adequacy. Management reviews various capital The Company uses a variety of measures to evaluate capital adequacy. Management reviews various capital measurements on a regular basis and takes appropriate action to ensure that such measurements are within established internal and external guidelines. The external guidelines, which are issued by the Federal Reserve and the FDIC, establish a risk-adjusted ratio relating capital to different categories of assets and off-balance sheet exposures.
80
The following table summarizes risk-based capital, risk-weighted assets, and risk-based capital ratios of the consolidated Company under the Basel III requirements as of March 31, 2016, March, 31, 2015 and December 31, 2015:
|
March 31, 2016 |
March 31, 2015 |
December 31, 2015 |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(Dollars in thousands) |
|||||||||
Capital components: |
||||||||||
Common equity Tier 1 capital |
$ | 182,623 | $ | 151,187 | $ | 181,222 | ||||
Additional Tier 1 capital |
18,757 | 18,452 | 18,077 | |||||||
| | | | | | | | | | |
Tier 1 capital |
201,380 | 169,639 | 199,299 | |||||||
Tier 2 capital |
20,198 | 18,763 | 19,616 | |||||||
| | | | | | | | | | |
Total risk-based capital |
$ | 221,578 | $ | 188,402 | $ | 218,915 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Risk-weighted assets |
$ |
1,787,065 |
$ |
1,453,457 |
$ |
1,750,515 |
||||
Average assets for capital purposes |
$ | 2,291,772 | $ | 1,610,714 | $ | 2,322,940 | ||||
Capital ratios: |
||||||||||
Total risk-based capital |
12.4 | % | 13.0 | % | 12.5 | % | ||||
Tier 1 risk-based capital |
11.3 | % | 11.7 | % | 11.4 | % | ||||
Common equity Tier 1 risk-based capital |
10.2 | % | 10.4 | % | 10.4 | % | ||||
Leverage(1) |
8.8 | % | 10.5 | % | 8.6 | % |
The following table summarizes risk based capital, risk weighted assets, and risk based capital ratios of HBC under the Basel III requirements as of March 31, 2016, March, 31, 2015 and December 31, 2015:
|
March 31, 2016 |
March 31, 2015 |
December 31, 2015 |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
|
(Dollars in thousands) |
|||||||||
Capital components: |
||||||||||
Common equity Tier 1 capital |
$ | 199,952 | $ | 160,165 | $ | 200,327 | ||||
Additional Tier 1 capital |
| | | |||||||
| | | | | | | | | | |
Tier 1 capital |
199,952 | 160,165 | 200,327 | |||||||
Tier 2 capital |
20,198 | 18,745 | 19,616 | |||||||
| | | | | | | | | | |
Total risk-based capital |
$ | 220,150 | $ | 178,910 | $ | 219,943 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Risk-weighted assets |
$ |
1,787,168 |
$ |
1,452,011 |
$ |
1,750,222 |
||||
Average assets for capital purposes |
$ | 2,291,486 | $ | 1,609,047 | $ | 2,322,232 | ||||
Capital ratios: |
||||||||||
Total risk-based capital |
12.3 | % | 12.3 | % | 12.6 | % | ||||
Tier 1 risk-based capital |
11.2 | % | 11.0 | % | 11.4 | % | ||||
Common equity Tier 1 risk-based capital |
11.2 | % | 11.0 | % | 11.4 | % | ||||
Leverage(1) |
8.7 | % | 10.0 | % | 8.6 | % |
81
The following table presents the applicable well-capitalized regulatory guidelines and the standards for minimum capital adequacy requirements under the Basel III:
|
Transitional Minimum Regulatory Requirement(1) Effective January 1, 2016 |
Minimum Regulatory Requirement(2) Effective January 1, 2019 |
Well-capitalized by Regulatory Definition Under FDICIA |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
Capital Ratios |
||||||||||
Total Risk-Based |
8.625 | % | 10.5 | % | 10.0 | % | ||||
Tier 1 Risk-Based |
6.625 | % | 8.5 | % | 8.0 | % | ||||
Common Equity Tier 1 Risk-based |
5.125 | % | 7.0 | % | 6.5 | % | ||||
Leverage |
4.000 | % | 4.0 | % | 5.0 | % |
The Basel III capital rules introduce a new "capital conservation buffer," for banking organizations to maintain a common equity Tier 1 ratio more than 2.5% above these minimum risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of common equity Tier 1 to risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. The implementation of the capital conservation buffer was phased in beginning 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).
At March 31, 2016, the Company's and HBC's regulatory capital increased, compared to March 31, 2015, concurrent with average assets for capital purposes and risk-weighted assets due to the common stock issued in the Focus transaction, net of normal fluctuations to regulatory capital from dividends, share based compensation, and net income. During the first quarter of 2016, HBC upstreamed a $6.0 million dividend to HCC.
At March 31, 2016, the Company's consolidated capital ratio exceeded regulatory guidelines and HBC's capital ratios exceed the highest regulatory capital requirement of "well-capitalized" under Basel III prompt corrective action provisions. Quantitative measures established by regulation to help ensure capital adequacy require the Company and HBC to maintain minimum amounts and ratios of total risk-based capital, Tier 1 capital, and common equity Tier 1 (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined). Management believes that, as of March 31, 2016, March 31, 2015, and December 31, 2015, the Company and HBC met all capital adequacy guidelines to which they were subject. There are no conditions or events since March 31, 2016, that management believes have changed the categorization of the Company or HBC as well-capitalized.
At March 31, 2016, the Company had total shareholders' equity of $251.7 million, compared to $186.8 million at March 31, 2015, and $245.4 million at December 31, 2015. The increase in total shareholders' equity at March 31, 2016 from March 31, 2015 was primarily due to the Focus acquisition and an increase in retained earnings. At March 31, 2016, total shareholders' equity included $19.5 million in preferred stock, $194.2 million in common stock, $41.5 million in retained earnings, and ($3.5) million of accumulated other comprehensive loss.
82
The accumulated other comprehensive loss was ($3.5) million at March 31, 2016, compared to accumulated other comprehensive loss of ($1.3) million at March 31, 2015, and an accumulated other comprehensive loss of ($6.2) million at December 31, 2015. The unrealized gain on securities available-for-sale, net of taxes, included in accumulated other comprehensive loss was an unrealized gain of $3.0 million, at March 31, 2016, compared to an unrealized gain of $3.3 million, at March 31, 2015, and an unrealized gain of $296,000, at December 31, 2015. The components of accumulated other comprehensive loss, net of taxes, at March 31, 2016 include the following: an unrealized gain on available-for-sale securities of $3.0 million; the remaining unamortized unrealized gain on securities available-for-sale transferred to held-to-maturity of $394,000; a split dollar insurance contracts liability of ($3.6) million; a supplemental executive retirement plan liability of ($4.1) million; and an unrealized gain on interest-only strip from SBA loans of $795,000.
Series C Preferred Stock
On June 21, 2010, the Company issued to various institutional investors 21,004 shares of newly issued Series C Preferred Stock. The Series C Preferred Stock is mandatorily convertible into 5,601,000 shares of common stock at a conversion price of $3.75 per share upon a subsequent transfer of the Series C Preferred stock to third parties not affiliates with the holder in a widely dispersed offering. The Series C Preferred Stock is non-voting except in the case of certain transactions that would affect the rights of the holders of the Series C Preferred Stock or applicable law. The holders of Series C Preferred Stock receive dividends on an as converted basis when dividends are also declared for holders of common stock. The Series C Preferred Stock is not redeemable by the Company or by the holders and has a liquidation preference of $1,000 per share. The Series C Preferred Stock ranks senior to the Company's common stock.
The book value per common share was $7.22 at March 31, 2016, compared to $6.31 at March 31, 2015, and $7.03 at December 31, 2015. The tangible book value per common share was $5.54 at March 31, 2016, compared to $5.70 at March 31, 2015, and $5.35 at December 31, 2015. On a full conversion of the Series C Preferred stock into common stock at March 31, 2016, March 31, 2015, and December 31, 2015: (i) the book value per common share would have been reduced to $6.66, $5.81, $6.51, respectively; and (ii) the tangible book value per common share would have been reduced to $5.24, $5.31, $5.07, respectively. A reduction in the book value per share and tangible book value per share upon full conversion would result primarily because of the 5,601,000 additional shares of common stock issued for the conversion of the 21,004 shares of Series C Preferred 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.
Market Risk
Market risk is the risk of loss of future earnings, fair values, or future cash flows that may result from changes in the price of a financial instrument. The value of a financial instrument may change as a result of changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market risk sensitive instruments. Market risk is attributed to all market risk sensitive financial instruments, including securities, loans, deposits and borrowings, as well as the Company's role as a financial intermediary in customer-related transactions. The objective of market risk management is to avoid excessive exposure of the Company's earnings and equity to loss and to reduce the volatility inherent in certain financial instruments.
83
Interest Rate Management
Market risk arises from changes in interest rates, exchange rates, commodity prices and equity prices. The Company's market risk exposure is primarily that of interest rate risk, and it has established policies and procedures to monitor and limit earnings and balance sheet exposure to changes in interest rates. The Company does not engage in the trading of financial instruments, nor does the Company have exposure to currency exchange rates.
The principal objective of interest rate risk management (often referred to as "asset/liability management") is to manage the financial components of the Company in a manner that will optimize the risk/reward equation for earnings and capital in relation to changing interest rates. The Company's exposure to market risk is reviewed on a regular basis by the Asset/Liability Committee. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income. Management realizes certain risks are inherent, and that the goal is to identify and manage the risks. Management uses two methodologies to manage interest rate risk: (i) a standard GAP analysis; and (ii) an interest rate shock simulation model.
The planning of asset and liability maturities is an integral part of the management of an institution's net interest margin. To the extent maturities of assets and liabilities do not match in a changing interest rate environment, the net interest margin may change over time. Even with perfectly matched repricing of assets and liabilities, risks remain in the form of prepayment of loans or securities or in the form of delays in the adjustment of rates of interest applying to either earning assets with floating rates or to interest bearing liabilities. The Company has generally been able to control its exposure to changing interest rates by maintaining primarily floating interest rate loans and a majority of its time certificates with relatively short maturities.
Interest rate changes do not affect all categories of assets and liabilities equally or at the same time. Varying interest rate environments can create unexpected changes in prepayment levels of assets and liabilities, which may have a significant effect on the net interest margin and are not reflected in the interest sensitivity analysis table. Because of these factors, an interest sensitivity GAP report may not provide a complete assessment of the exposure to changes in interest rates.
The Company uses modeling software for asset/liability management in order to simulate the effects of potential interest rate changes on the Company's net interest margin, and to calculate the estimated fair values of the Company's financial instruments under different interest rate scenarios. The program imports current balances, interest rates, maturity dates and repricing information for individual financial instruments, and incorporates assumptions on the characteristics of embedded options along with pricing and duration for new volumes to project the effects of a given interest rate change on the Company's interest income and interest expense. Rate scenarios consisting of key rate and yield curve projections are run against the Company's investment, loan, deposit and borrowed funds portfolios. These rate projections can be shocked (an immediate and parallel change in all base rates, up or down) and ramped (an incremental increase or decrease in rates over a specified time period), based on current trends and econometric models or stable economic conditions (unchanged from current actual levels).
The following table sets forth the estimated changes in the Company's annual net interest income that would result from the designated instantaneous parallel shift in interest rates noted, as of March 31, 2016. Computations of prospective effects of hypothetical interest rate changes are based on
84
numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.
|
Increase/(Decrease) in Estimated Net Interest Income |
||||||
---|---|---|---|---|---|---|---|
|
Amount | Percent | |||||
|
(Dollars in thousands) |
||||||
Change in Interest Rates (basis points) |
|||||||
+400 |
$ | 17,972 | 23.2 | % | |||
+300 |
$ | 13,713 | 17.7 | % | |||
+200 |
$ | 9,444 | 12.2 | % | |||
+100 |
$ | 4,933 | 6.4 | % | |||
0 |
$ | | 0.0 | % | |||
100 |
$ | (8,556 | ) | 11.0 | % | ||
200 |
$ | (17,238 | ) | 22.2 | % |
This data does not reflect any actions that we may undertake in response to changes in interest rates such as changes in rates paid on certain deposit accounts based on local competitive factors, which could reduce the actual impact on net interest income.
As with any method of gauging interest rate risk, there are certain shortcomings inherent to the methodology noted above. The model assumes interest rate changes are instantaneous parallel shifts in the yield curve. In reality, rate changes are rarely instantaneous. The use of the simplifying assumption that short-term and long-term rates change by the same degree may also misstate historic rate patterns, which rarely show parallel yield curve shifts. Further, the model assumes that certain assets and liabilities of similar maturity or period to repricing will react in the same way to changes in rates. In reality, certain types of financial instruments may react in advance of changes in market rates, while the reaction of other types of financial instruments may lag behind the change in general market rates. Additionally, the methodology noted above does not reflect the full impact of annual and lifetime restrictions on changes in rates for certain assets, such as adjustable rate loans. When interest rates change, actual loan prepayments and actual early withdrawals from certificates may deviate significantly from the assumptions used in the model. Finally, this methodology does not measure or reflect the impact that higher rates may have on adjustable-rate loan clients' ability to service their debt. All of these factors are considered in monitoring the Company's exposure to interest rate risk.
ITEM 3QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information concerning quantitative and qualitative disclosure or market risk called for by Item 305 of Regulation S-K is included as part of Item 2 above.
ITEM 4CONTROLS AND PROCEDURES
Disclosure Control and Procedures
The Company has carried out an evaluation, under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of March 31, 2016. As defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), disclosure controls and procedures are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported on a timely basis. Disclosure controls are also designed to reasonably assure that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to
85
allow timely decisions regarding required disclosure. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded the Company's disclosure controls were effective as March 31, 2016, the period covered by this report on Form 10-Q.
During the three months ended March 31, 2016, there were no changes in our internal controls over financial reporting that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
86
The Company is involved in certain legal actions arising from normal business activities. Management, based upon the advice of legal counsel, believes the ultimate resolution of all pending legal actions will not have a material effect on the financial statements of the Company.
In addition to the other information set forth in this Report, you should carefully consider the other factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2015, which could materially affect our business, financial condition and/or operating results. There were no material changes from risk factors previously disclosed in our 2015 Annual Report on Form 10-K. The risk factors identified are in addition to those contained in any other cautionary statements, written or oral, which may be or otherwise addressed in connection with a forward-looking statement or contained in any of our subsequent filings with the Securities and Exchange Commission.
ITEM 2UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4MINE SAFETY DISCLOSURES
None
None
87
Exhibit | Description | ||
---|---|---|---|
3.1 | Heritage Commerce Corp Restated Articles of Incorporation, (incorporated by reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K filed on March 4, 2010) | ||
3.2 |
Certificate of Amendment of Articles of Incorporation of Heritage Commerce Corp as filed with the California Secretary of State on June 1, 2010 (incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-1 filed July 23, 2010). |
||
3.3 |
Heritage Commerce Corp Bylaws, as amended (incorporated by reference to the Registrant's Current Report on Form 8-K filed on June 28, 2013) |
||
4.1 |
Certificate of Determination for Series C Convertible Perpetual Preferred Stock (incorporated by reference to the Registrant's Current Report on Form 8-K filed on June 22, 2010) |
||
12.1 |
Calculation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges and Preferred Stock Dividends |
||
31.1 |
Certification of Registrant's Chief Executive Officer Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002 |
||
31.2 |
Certification of Registrant's Chief Financial Officer Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002 |
||
32.1 |
Certification of Registrant's Chief Executive Officer Pursuant To 18 U.S.C. Section 1350 |
||
32.2 |
Certification of Registrant's Chief Financial Officer Pursuant To 18 U.S.C. Section 1350 |
||
101.INS |
XBRL Instance Document, furnished herewith |
||
101.SCH |
XBRL Taxonomy Extension Schema Document, furnished herewith |
||
101.CAL |
XBRL Taxonomy Extension Calculation Linkbase Document, furnished herewith |
||
101.DEF |
XBRL Taxonomy Extension Definition Linkbase Document, furnished herewith |
||
101.LAB |
XBRL Taxonomy Extension Label Linkbase Document, furnished herewith |
||
101.PRE |
XBRL Taxonomy Extension Presentation Linkbase Document, furnished herewith |
88
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Heritage Commerce Corp (Registrant) | ||
Date: May 6, 2016 |
/s/ WALTER T. KACZMAREK Walter T. Kaczmarek Chief Executive Officer |
|
Date: May 6, 2016 |
/s/ LAWRENCE D. MCGOVERN Lawrence D. McGovern Chief Financial Officer |
89
Exhibit | Description | ||
---|---|---|---|
3.1 | Heritage Commerce Corp Restated Articles of Incorporation, (incorporated by reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K filed on March 4, 2010) | ||
3.2 |
Certificate of Amendment of Articles of Incorporation of Heritage Commerce Corp as filed with the California Secretary of State on June 1, 2010 (incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-1 filed July 23, 2010). |
||
3.3 |
Heritage Commerce Corp Bylaws, as amended (incorporated by reference to the Registrant's Current Report on Form 8-K filed on June 28, 2013) |
||
4.1 |
Certificate of Determination for Series C Convertible Perpetual Preferred Stock (incorporated by reference to the Registrant's Current Report on Form 8-K filed on June 22, 2010) |
||
12.1 |
Calculation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges and Preferred Stock Dividends |
||
31.1 |
Certification of Registrant's Chief Executive Officer Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002 |
||
31.2 |
Certification of Registrant's Chief Financial Officer Pursuant To Section 302 of the Sarbanes-Oxley Act of 2002 |
||
32.1 |
Certification of Registrant's Chief Executive Officer Pursuant To 18 U.S.C. Section 1350 |
||
32.2 |
Certification of Registrant's Chief Financial Officer Pursuant To 18 U.S.C. Section 1350 |
||
101.INS |
XBRL Instance Document, herewith |
||
101.SCH |
XBRL Taxonomy Extension Schema Document, herewith |
||
101.CAL |
XBRL Taxonomy Extension Calculation Linkbase Document, herewith |
||
101.DEF |
XBRL Taxonomy Extension Definition Linkbase Document, herewith |
||
101.LAB |
XBRL Taxonomy Extension Label Linkbase Document, herewith |
||
101.PRE |
XBRL Taxonomy Extension Presentation Linkbase Document, herewith |
90
CALCULATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
|
Three Months Ended March 31, |
Year Ended December 31, | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2016 | 2015 | 2015 | 2014 | 2013 | 2012 | |||||||||||||
|
(Dollars in thousands) |
||||||||||||||||||
Earnings: |
|||||||||||||||||||
Income before income taxes |
$ | 9,832 | $ | 6,568 | $ | 26,601 | $ | 20,965 | $ | 17,746 | $ | 15,398 | |||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Fixed Charges: |
|||||||||||||||||||
Interest on deposits |
$ | 747 | $ | 508 | $ | 2,403 | $ | 2,032 | $ | 2,369 | $ | 2,800 | |||||||
Interest on notes payable to subsidiary grantor trusts, repurchase agreements, and other borrowings |
11 | | 19 | 121 | 231 | 1,387 | |||||||||||||
Rent expense interest factor(1) |
240 | 237 | 999 | 897 | 906 | 912 | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
Total fixed charges: |
|||||||||||||||||||
Including interest on deposits |
$ | 998 | $ | 745 | $ | 3,421 | $ | 3,050 | $ | 3,506 | $ | 5,099 | |||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Excluding interest on deposits |
$ | 251 | $ | 237 | $ | 1,018 | $ | 1,018 | $ | 1,137 | $ | 2,299 | |||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Ratio of earnings (loss) to fixed charges: |
|||||||||||||||||||
Excluding interest on deposits |
40.24 | 28.67 | 27.13 | 21.59 | 16.61 | 7.70 | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Including interest on deposits |
10.86 | 9.81 | 8.78 | 7.87 | 6.06 | 4.02 | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
For purposes of calculating the ratios of earnings to fixed charges and preferred stock dividends, earnings consist of income before income taxes and fixed charges. Fixed charges consist of interest on subordinated debt, repurchase agreements and other borrowings, the proportion deemed representative of the interest factor within rent expense. These ratios are presented both including and excluding interest on deposits.
CALCULATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS
|
Three Months Ended March 31, |
Year Ended December 31, | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2016 | 2015 | 2015 | 2014 | 2013 | 2012 | |||||||||||||
|
(Dollars in thousands) |
||||||||||||||||||
Earnings: |
|||||||||||||||||||
Income before income taxes |
$ | 9,832 | $ | 6,568 | $ | 26,601 | $ | 20,965 | $ | 17,746 | $ | 15,398 | |||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Fixed Charges: |
|||||||||||||||||||
Interest on deposits |
$ | 747 | $ | 508 | $ | 2,403 | $ | 2,032 | $ | 2,369 | $ | 2,800 | |||||||
Interest on notes payable to subsidiary grantor trusts, repurchase agreements, and other borrowings |
11 | | 19 | 121 | 231 | 1,387 | |||||||||||||
Preferred stock dividends |
504 | 448 | 1,792 | 1,008 | 336 | 373 | |||||||||||||
Rent expense interest factor(1) |
240 | 237 | 999 | 897 | 906 | 912 | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
Total fixed charges: |
|||||||||||||||||||
Including interest on deposits |
$ | 1,502 | $ | 1,193 | $ | 5,213 | $ | 4,058 | $ | 3,842 | $ | 5,472 | |||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Excluding interest on deposits |
$ | 755 | $ | 685 | $ | 2,810 | $ | 2,026 | $ | 1,473 | $ | 2,672 | |||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Ratio of earnings (loss) to fixed charges and preferred stock dividends: |
|||||||||||||||||||
Excluding interest on deposits |
14.03 | 10.58 | 10.47 | 11.35 | 13.05 | 6.76 | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Including interest on deposits |
7.55 | 6.50 | 6.10 | 6.17 | 5.62 | 3.81 | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
For purposes of calculating the ratios of earnings to fixed charges and preferred stock dividends, earnings consist of income before income taxes and fixed charges. Fixed charges consist of interest on subordinated debt, repurchase agreements and other borrowings, the proportion deemed representative of the interest factor within rent expense, and preferred stock dividends. These ratios are presented both including and excluding interest on deposits.
CERTIFICATION UNDER SECTION 302 OF THE SARBANES OXLEY ACT OF 2002
REGARDING THE QUARTERLY REPORT ON FORM 10 Q
FOR THE QUARTER ENDED MARCH 31, 2016
I, Walter T. Kaczmarek, certify that:
Date: May 6, 2016
/s/ WALTER T. KACZMAREK Walter T. Kaczmarek Chief Executive Officer |
CERTIFICATION UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
REGARDING THE QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2016
I, Lawrence D. McGovern, certify that:
Date: May 6, 2016
/s/ LAWRENCE D. MCGOVERN Lawrence D. McGovern Chief Financial Officer |
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
REGARDING THE QUARTERLY REPORT ON FORM
10-Q
FOR THE QUARTER ENDED MARCH 31, 2016
In connection with the Quarterly Report of Heritage Commerce Corp (the "Company") on Form 10-Q for the period ended March 31, 2016 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Walter T. Kaczmarek, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
Date:
May 6, 2016
/s/ WALTER T. KACZMAREK Walter T. Kaczmarek Chief Executive Officer |
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
REGARDING THE QUARTERLY REPORT ON FORM
10-Q
FOR THE QUARTER ENDED MARCH 31, 2016
In connection with the Quarterly Report of Heritage Commerce Corp (the "Company") on Form 10-Q for the period ended March 31, 2016 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Lawrence D. McGovern, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
Date:
May 6, 2016
/s/ LAWRENCE D. MCGOVERN Lawrence D. McGovern Chief Financial Officer |
Document and Entity Information - shares |
3 Months Ended | |
---|---|---|
Mar. 31, 2016 |
Apr. 28, 2016 |
|
Document and Entity Information [Abstract] | ||
Entity Registrant Name | HERITAGE COMMERCE CORP | |
Entity Central Index Key | 0001053352 | |
Document Type | 10-Q | |
Document Period End Date | Mar. 31, 2016 | |
Amendment Flag | false | |
Current Fiscal Year End Date | --12-31 | |
Entity Current Reporting Status | Yes | |
Entity Filer Category | Accelerated Filer | |
Entity Common Stock, Shares Outstanding | 32,170,920 | |
Document Fiscal Year Focus | 2016 | |
Document Fiscal Period Focus | Q1 |
CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($) $ in Thousands |
Mar. 31, 2016 |
Dec. 31, 2015 |
---|---|---|
Securities held-to-maturity | ||
Securities held-to-maturity, fair value (in dollars) | $ 187,047 | $ 109,821 |
Preferred stock | ||
Preferred stock, par value (in dollars per share) | $ 0 | $ 0 |
Preferred stock, shares authorized | 10,000,000 | 10,000,000 |
Preferred stock, shares issued | 21,004 | 21,004 |
Preferred stock, outstanding (in shares) | 21,004 | 21,004 |
Preferred stock, liquidation preference (in dollars) | $ 21,004 | $ 21,004 |
Common stock | ||
Common stock, par value (in dollars per share) | $ 0 | $ 0 |
Common stock, shares authorized | 60,000,000 | 60,000,000 |
Common stock, shares issued | 32,170,920 | 32,113,479 |
Common stock, shares outstanding | 32,170,920 | 32,113,479 |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - USD ($) $ in Thousands |
3 Months Ended | |
---|---|---|
Mar. 31, 2016 |
Mar. 31, 2015 |
|
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | ||
Net income | $ 6,106 | $ 4,138 |
Other comprehensive income: | ||
Change in net unrealized holding gains on available-for-sale securities and I/O strips | 4,839 | 888 |
Deferred income taxes | (2,032) | (374) |
Change in net unamortized unrealized gain on securities available-for-sale that were reclassified to securities held-to-maturity | (14) | (14) |
Deferred income taxes | 6 | 6 |
Reclassification adjustment for gains on sale of securities realized in income | (180) | |
Deferred income taxes | 75 | |
Change in unrealized gains on securities and I/O strips, net of deferred income taxes | 2,694 | 506 |
Change in net pension and other benefit plan liability adjustment | 48 | 48 |
Deferred income taxes | (20) | (20) |
Change in pension and other benefit plan liability net of deferred income taxes | 28 | 28 |
Other comprehensive income | 2,722 | 534 |
Total comprehensive income | $ 8,828 | $ 4,672 |
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Parenthetical) - $ / shares |
3 Months Ended | |
---|---|---|
Mar. 31, 2016 |
Mar. 31, 2015 |
|
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY | ||
Cash dividend declared per share (in dollars per share) | $ 0.09 | $ 0.08 |
Basis of Presentation |
3 Months Ended |
---|---|
Mar. 31, 2016 | |
Basis of Presentation | |
Basis of Presentation |
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. 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 Instruments—Recognition 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. 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, Compensation—Stock 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.
|
Earnings Per Share |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Earnings Per Share | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Earnings Per Share |
2) Earnings Per Share Basic earnings per common share is computed by dividing net income, less dividends and discount accretion on preferred stock, by the weighted average common shares outstanding. The Series C Preferred Stock participates in the earnings of the Company and, therefore, the shares issued on the conversion of the Series C Preferred Stock are considered outstanding under the two class method of computing basic earnings per common share during periods of earnings. Diluted earnings per share reflect potential dilution from outstanding stock options using the treasury stock method. A reconciliation of these factors used in computing basic and diluted earnings per common share is as follows:
|
Accumulated Other Comprehensive Income (Loss) (''AOCI'') |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accumulated Other Comprehensive Income (Loss) ("AOCI") | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accumulated Other Comprehensive Income (Loss) ("AOCI") |
3) Accumulated Other Comprehensive Income (Loss) ("AOCI") The following table reflects the changes in AOCI by component for the periods indicated:
|
Securities |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Securities | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Securities |
4) Securities The amortized cost and estimated fair value of securities at March 31, 2016 and December 31, 2015 were as follows:
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:
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 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:
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.
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Loans |
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Loans |
5) Loans Loans were as follows for the periods indicated:
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. Changes in the allowance for loan losses were as follows for the periods indicated:
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:
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:
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. 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.
The following tables present interest recognized and cash-basis interest earned on impaired loans for the periods indicated:
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:
The following table presents the nonperforming loans by class for the periods indicated:
The following tables present the aging of past due loans by class for the periods indicated:
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. 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:
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. 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.
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Business Combinations |
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. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.
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 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:
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.
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Goodwill and Other Intangible Assets |
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Goodwill and Other Intangible Assets |
(7) Goodwill and Other Intangible Assets Goodwill 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. Other Intangible Assets 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. Estimated amortization expense for 2016 and each of the next five years following 2016:
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.
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Income Taxes |
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Income Taxes |
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 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:
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.
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Benefit Plans |
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Benefit Plans |
9) Benefit Plans Supplemental Retirement Plan The Company has a supplemental retirement plan (the "Plan") covering some current and some former key employees and directors. The Plan is a nonqualified defined benefit plan. Benefits are unsecured as there are no Plan assets. The following table presents the amount of periodic cost recognized for the periods indicated:
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:
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Equity |
3 Months Ended |
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Equity |
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.
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Fair Value |
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Fair Value |
11) Fair Value Accounting guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value: Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data (for example, interest rates and yield curves observable at commonly quoted intervals, prepayment speeds, credit risks, and default rates). Level 3: Significant unobservable inputs that reflect a reporting entity's own assumptions about the assumptions that market participants would use in pricing an asset or liability. Financial Assets and Liabilities Measured on a Recurring Basis The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2 inputs). 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).
There were no transfers between Level 1 and Level 2 during the period for assets measured at fair value on a recurring basis. Assets and Liabilities Measured on a Non-Recurring Basis The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. The appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Foreclosed assets are valued at the time the loan is foreclosed upon and the asset is transferred to foreclosed assets. The fair value is based primarily on third party appraisals, less costs to sell. The appraisals may utilize a single valuation approach or a combination of approaches including the comparable sales and income approach. Adjustments are routinely made in the appraisal process by the 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.
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:
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. 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:
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:
The carrying amounts and estimated fair values of the Company's financial instruments at December 31, 2015:
The methods and assumptions, not previously discussed, used to estimate the fair value are described as follows: Cash and Cash Equivalents The carrying amounts of cash on hand, noninterest and interest bearing due from bank accounts, and Fed funds sold approximate fair values and are classified as Level 1. Loans The fair value of loans held-for-sale is estimated based upon binding contracts and quotes from third parties resulting in a Level 2 classification. Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price. 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.
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Equity Plan |
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Equity Plan |
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:
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:
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.
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Capital Requirements |
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Capital Requirements |
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 mandatory—and possibly additional discretionary—actions 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. 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.
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.
HCC is dependent upon dividends from HBC. Under California General Corporation Law, the holders of common stock are entitled to receive dividends when and as declared by the Board of Directors, out of funds legally available. The California Financial Code provides that a state licensed bank may not make a cash distribution to its shareholders in excess of the lesser of the following: (i) the bank's retained earnings; or (ii) the bank's net income for its last three fiscal years, less the amount of any distributions made by the bank to its shareholders during such period. However, a bank, with the prior approval of the Commissioner of the California Department of Business Oversight—Division 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.
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Loss Contingencies |
3 Months Ended |
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Mar. 31, 2016 | |
Loss Contingencies | |
Loss Contingencies |
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.
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Noninterest Expense |
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Noninterest Expense |
15) Noninterest Expense The following table sets forth the various components of the Company's noninterest expense for the periods indicated:
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Business Segment Information |
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Business Segment Information |
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 originated by Bay View Funding, which has been included in the results of operations since the acquisition on November 1, 2014.
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Subsequent Events |
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Mar. 31, 2016 | |
Subsequent Events | |
Subsequent Events |
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.
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Basis of Presentation (Policies) |
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Mar. 31, 2016 | |
Basis of Presentation | |
Basis of Presentation |
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.
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Reclassifications |
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.
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Adoption of New Accounting Standards |
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 Instruments—Recognition 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. 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, Compensation—Stock 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.
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Earning Per Share (Tables) |
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Schedule of reconciliation of factors used in computing basic and diluted earnings per common share |
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Accumulated Other Comprehensive Income (Loss) (''AOCI'') (Tables) |
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Accumulated Other Comprehensive Income (Loss) ("AOCI") | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of changes in AOCI by component |
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Schedule of reclassifications out of AOCI into net income |
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Securities (Tables) |
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Securities | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of amortized cost and estimated fair value of securities |
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Schedule of securities with unrealized losses |
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Schedule of proceeds from sales of securities and the resulting gains and losses |
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Schedule of amortized cost and estimated fair values of securities, by contractual maturity |
The amortized cost and estimated fair values of securities as of March 31, 2016, are shown by contractual maturity below.
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Loans (Tables) |
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Loans | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of loans |
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Schedule of changes in allowance for loan losses |
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Schedule of balance in allowance for loan losses and recorded investment in loans by portfolio segment, based on impairment method |
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Schedule of carrying amount of purchased credit impaired loans |
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Schedule of loans held-for-investment individually evaluated for impairment by class of loans |
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Schedule of average impaired loans with interest recognized and cash-basis interest earned on impaired loans |
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Schedule of nonperforming loans |
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Schedule of nonperforming loans by class |
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Schedule of aging of past due loans by class of loans |
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Summary of loan portfolio by loan type and credit quality classification |
|
Business Combinations (Tables) - Focus Business Bank |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mar. 31, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Business Combinations | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of the estimated fair values of the assets acquired and liabilities assumed |
|
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Summary of consideration paid |
|
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Schedule of unaudited pro forma combined consolidated financial statements and related adjustments |
|
Goodwill and Other Intangible Assets (Tables) |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mar. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Goodwill and Other Intangible Assets | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of estimated amortization expense |
|
Income Taxes (Tables) |
3 Months Ended | ||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mar. 31, 2016 | |||||||||||||||||||||||||||||||||
Income Taxes | |||||||||||||||||||||||||||||||||
Summary of carrying amount of income tax housing investment |
|
Benefit Plans (Tables) |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mar. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Supplemental Retirement Plan | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Benefit plans | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of components of net periodic benefit cost |
|
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Split-Dollar Life Insurance Benefit Plan | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Benefit plans | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of components of net periodic benefit cost |
|
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Schedule of change in projected benefit obligation |
|
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Schedule of amounts recognized in accumulated other comprehensive loss |
|
Fair Value (Tables) |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mar. 31, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of financial assets and liabilities measured on a recurring basis |
|
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Schedule of assets and liabilities measured on a non-recurring basis |
|
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Schedule of impaired loans held-for-investment and impaired loans held-for-investment carried at fair value |
|
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Schedule of quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis |
|
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Schedule of carrying amounts and estimated fair values of financial instruments |
The carrying amounts and estimated fair values of financial instruments at March 31, 2016 are as follows:
The carrying amounts and estimated fair values of the Company's financial instruments at December 31, 2015:
|
Equity Plan (Tables) |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mar. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity Plan | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of stock option activity under the equity plans |
|
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Schedule of restricted stock activity under the equity plans |
|
Capital Requirements (Tables) |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Capital Requirements | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of actual capital and required amounts and ratios |
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HBC (Wholly-owned Subsidiary) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Capital Requirements | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of actual capital and required amounts and ratios |
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Noninterest Expense (Tables) |
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Noninterest Expense | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of noninterest expense |
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Business Segment Information (Tables) |
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Business Segment Reporting | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of information by operating segment |
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Basis of Presentation (Details) |
3 Months Ended |
---|---|
Mar. 31, 2016
segment
customer
| |
Segment Reporting | |
Number of customers accounting for more than 10 percent of revenue for HBC or the Company | customer | 0 |
Number of operating segments | segment | 2 |
Earnings Per Share (Details) - USD ($) $ / shares in Units, $ in Thousands |
3 Months Ended | |
---|---|---|
Mar. 31, 2016 |
Mar. 31, 2015 |
|
Reconciliation of factors used in computing basic and diluted earnings per common share | ||
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 (in shares) | 32,125,716 | 26,509,723 |
Dilutive effect of stock options outstanding, using the treasury stock method (in shares) | 251,777 | 170,530 |
Shares used in computing diluted earnings per common share (in shares) | 32,377,493 | 26,680,253 |
Basic earnings per share (in dollars per share) | $ 0.16 | $ 0.13 |
Diluted earnings per share (in dollars per share) | $ 0.16 | $ 0.13 |
Securities - Amortized Cost and Estimated Fair Value of Securities - Securities Held-to-maturity (Details) - USD ($) $ in Thousands |
Mar. 31, 2016 |
Dec. 31, 2015 |
---|---|---|
Securities held-to-maturity: | ||
Amortized Cost | $ 185,165 | $ 109,311 |
Gross Unrealized Gains | 2,387 | 1,541 |
Gross Unrealized Losses | (505) | (1,031) |
Securities held-to-maturity | 187,047 | 109,821 |
Municipals - tax exempt | ||
Securities held-to-maturity: | ||
Amortized Cost | 92,589 | 93,518 |
Gross Unrealized Gains | 2,091 | 1,517 |
Gross Unrealized Losses | (458) | (863) |
Securities held-to-maturity | 94,222 | 94,172 |
Agency mortgage-backed securities | ||
Securities held-to-maturity: | ||
Amortized Cost | 92,576 | 15,793 |
Gross Unrealized Gains | 296 | 24 |
Gross Unrealized Losses | (47) | (168) |
Securities held-to-maturity | $ 92,825 | $ 15,649 |
Securities - Securities with Unrealized Losses at Year End - Securities Held-to-maturity (Details) - USD ($) $ in Thousands |
Mar. 31, 2016 |
Dec. 31, 2015 |
---|---|---|
Held-to-maturity, Fair Value | ||
Less Than 12 Months | $ 9,348 | $ 17,072 |
12 Months or More | 22,348 | 28,821 |
Total | 31,696 | 45,893 |
Held-to-maturity, Unrealized Losses | ||
Less Than 12 Months | (38) | (167) |
12 Months or More | (467) | (864) |
Total | (505) | (1,031) |
Municipals - tax exempt | ||
Held-to-maturity, Fair Value | ||
Less Than 12 Months | 2,051 | 9,920 |
12 Months or More | 18,643 | 24,412 |
Total | 20,694 | 34,332 |
Held-to-maturity, Unrealized Losses | ||
Less Than 12 Months | (24) | (78) |
12 Months or More | (434) | (785) |
Total | (458) | (863) |
Agency mortgage-backed securities | ||
Held-to-maturity, Fair Value | ||
Less Than 12 Months | 7,297 | 7,152 |
12 Months or More | 3,705 | 4,409 |
Total | 11,002 | 11,561 |
Held-to-maturity, Unrealized Losses | ||
Less Than 12 Months | (14) | (89) |
12 Months or More | (33) | (79) |
Total | $ (47) | $ (168) |
Securities - Additional Information (Details) $ in Thousands |
3 Months Ended | |
---|---|---|
Mar. 31, 2016
USD ($)
security
|
Dec. 31, 2015
USD ($)
security
|
|
Additional Information | ||
Holdings of securities as percentage of shareholders' equity, considered as threshold for disclosure purpose | 10.00% | |
The number of holdings of securities of any one issuer other than the U.S. Government and its sponsored entities | 0 | |
Number of securities held | 475 | 460 |
Number of available for sale securities held | 199 | 193 |
Number of held to maturity securities held | 276 | 267 |
Number of securities with fair values below amortized cost | 72 | 193 |
Total unrealized loss for securities 12 months or more | $ | $ 481 | $ 910 |
Securities - Proceeds from Sales of Securities and the Resulting Gains and Losses (Details) $ in Thousands |
3 Months Ended |
---|---|
Mar. 31, 2016
USD ($)
| |
Proceeds from Sales of Securities and the Resulting Gains and Losses | |
Proceeds | $ 5,598 |
Gross gains | $ 180 |
Securities - Amortized Cost and Fair Value of Debt Securities by Contractual Maturity - Securities Available-for-sale (Details) - USD ($) $ in Thousands |
Mar. 31, 2016 |
Dec. 31, 2015 |
---|---|---|
Available-for-sale, Amortized Cost | ||
Due after 3 months through one year | $ 6,290 | |
Due after one through five years | 33,810 | |
Due after ten years | 15,000 | |
Agency mortgage-backed securities | 388,282 | |
Total | 443,382 | |
Available-for-sale, Estimated Fair Value | ||
Due after 3 months through one year | 6,297 | |
Due after one through five years | 34,265 | |
Due after ten years | 15,225 | |
Agency mortgage-backed securities | 392,753 | |
Estimated Fair Value | $ 448,540 | $ 385,079 |
Securities - Amortized Cost and Fair Value of Debt Securities by Contractual Maturity - Securities Held-to-maturity (Details) - USD ($) $ in Thousands |
Mar. 31, 2016 |
Dec. 31, 2015 |
---|---|---|
Held-to-maturity, Amortized Cost | ||
Due less than 3 months | $ 612 | |
Due after 3 months through one year | 1,039 | |
Due after one through five years | 5,239 | |
Due after five through ten years | 14,726 | |
Due after ten years | 70,973 | |
Agency mortgage-backed securities | 92,576 | |
Total | 185,165 | $ 109,311 |
Held-to-maturity, Estimated Fair Value | ||
Due less than 3 months | 614 | |
Due after 3 months through one year | 1,045 | |
Due after one through five years | 5,319 | |
Due after five through ten years | 15,533 | |
Due after ten years | 71,711 | |
Agency mortgage-backed securities | 92,825 | |
Estimated Fair Value | $ 187,047 | $ 109,821 |
Loans - Purchased Credit Impaired Loans - Tabular Information (Details) - USD ($) $ in Thousands |
Mar. 31, 2016 |
Dec. 31, 2015 |
---|---|---|
Purchased Credit Impaired Loans | ||
Carrying amount, net of discount of $575,000 and $639,000 at March 31, 2016 and December 31, 2015, respectively | $ 245 | $ 237 |
Acquired with deteriorated impaired credit quality | ||
Purchased Credit Impaired Loans | ||
Commercial | 820 | 876 |
Outstanding balance | 820 | 876 |
Discount | 575 | 639 |
Carrying amount, net of discount of $575,000 and $639,000 at March 31, 2016 and December 31, 2015, respectively | $ 245 | $ 237 |
Loans - Purchased Credit Impaired Loans - Allowance for Loan Losses (Details) - USD ($) $ in Thousands |
3 Months Ended | 12 Months Ended |
---|---|---|
Mar. 31, 2016 |
Dec. 31, 2015 |
|
Acquired with deteriorated impaired credit quality | ||
Purchased Credit Impaired Loans | ||
Reversal of allowance for loan losses | $ 0 | $ 0 |
Loans - Nonperforming Loans (Details) - USD ($) $ in Thousands |
Mar. 31, 2016 |
Dec. 31, 2015 |
Mar. 31, 2015 |
---|---|---|---|
Loans | |||
Nonaccrual loans - held-for-investment | $ 4,184 | $ 4,716 | $ 6,733 |
Restructured and loans over 90 days past due and still accruing | 1,662 | ||
Total nonperforming loans | 4,184 | 6,378 | 6,733 |
Other restructured loans | 145 | 149 | 163 |
Total | $ 4,329 | $ 6,527 | $ 6,896 |
Loans - Nonperforming Loans by Class (Details) - USD ($) $ in Thousands |
Mar. 31, 2016 |
Dec. 31, 2015 |
Mar. 31, 2015 |
---|---|---|---|
Nonperforming Loans by Class | |||
Nonaccrual | $ 4,184 | $ 4,716 | $ 6,733 |
Restructured and Loans Over 90 Days Past Due and Still Accruing | 1,662 | ||
Total | 4,184 | 6,378 | $ 6,733 |
Commercial | |||
Nonperforming Loans by Class | |||
Nonaccrual | 290 | 724 | |
Restructured and Loans Over 90 Days Past Due and Still Accruing | 1,378 | ||
Total | 290 | 2,102 | |
Consumer | |||
Nonperforming Loans by Class | |||
Nonaccrual | 3 | 4 | |
Total | 3 | 4 | |
Commercial and residential | Real estate | |||
Nonperforming Loans by Class | |||
Nonaccrual | 2,910 | 2,992 | |
Total | 2,910 | 2,992 | |
Land and construction | Real estate | |||
Nonperforming Loans by Class | |||
Nonaccrual | 213 | 219 | |
Total | 213 | 219 | |
Home equity | Real estate | |||
Nonperforming Loans by Class | |||
Nonaccrual | 768 | 777 | |
Restructured and Loans Over 90 Days Past Due and Still Accruing | 284 | ||
Total | $ 768 | $ 1,061 |
Loans - Aging of Past Due Loans by Class of Loans - Additional Information (Details) - USD ($) $ in Thousands |
Mar. 31, 2016 |
Dec. 31, 2015 |
Mar. 31, 2015 |
---|---|---|---|
Aging of Past Due Loans by Class of Loans | |||
Past due loans 30 day or greater | $ 5,100 | $ 5,754 | |
Nonaccrual | 4,184 | 4,716 | $ 6,733 |
30 days or greater past due | |||
Aging of Past Due Loans by Class of Loans | |||
Past due loans 30 day or greater | 509 | 591 | |
Less than 30 days past due | |||
Aging of Past Due Loans by Class of Loans | |||
Nonaccrual | $ 3,675 | $ 4,125 |
Loans - Credit Quality Indicators (Details) - USD ($) $ in Thousands |
3 Months Ended | |
---|---|---|
Mar. 31, 2016 |
Dec. 31, 2015 |
|
Credit Quality Indicators | ||
Balance to report | $ 1,375,806 | $ 1,339,790 |
Loan classified as loss | ||
Credit Quality Indicators | ||
Recovery value | 0 | |
Balance to report | $ 0 | $ 0 |
Loans - Troubled Debt Restructurings (Details) - USD ($) $ in Thousands |
3 Months Ended | 12 Months Ended |
---|---|---|
Mar. 31, 2016 |
Dec. 31, 2015 |
|
Loans | ||
Recorded investment of troubled debt restructurings | $ 148 | $ 153 |
Troubled debt restructurings, nonaccrual loans | 3 | 4 |
Troubled debt restructurings, accruing loans | 145 | 149 |
Specific reserves | 2 | 3 |
Additional amount of loan classified as a troubled debt restructurings | $ 0 | $ 0 |
Loans - Troubled Debt Restructurings by Class (Details) - contract |
3 Months Ended | |
---|---|---|
Mar. 31, 2016 |
Mar. 31, 2015 |
|
Loans | ||
Number of Contracts | 0 | 0 |
Loans - Defaults on Troubled Debt Restructurings (Details) - item |
3 Months Ended | |
---|---|---|
Mar. 31, 2016 |
Mar. 31, 2015 |
|
Loans | ||
Default period contractually past due under modified terms (in days) | 30 days | |
Number of defaults on troubled debt restructurings | 0 | 0 |
Period of consecutive payments (in months) | 6 months |
Business Combinations - Bay View Funding and Focus Business Bank - Consideration Paid (Details) $ / shares in Units, $ in Thousands |
Aug. 20, 2015
USD ($)
$ / shares
shares
|
Nov. 01, 2014
USD ($)
|
---|---|---|
BVF/CSNK | ||
Consideration Paid | ||
Total consideration | $ 22,520 | |
Focus Business Bank | ||
Consideration Paid | ||
Total consideration | $ 66,558 | |
Fixed exchange ratio of company's common stock | 1.8235 | |
Shares issued in acquisition | shares | 5,456,713 | |
Common stock issued to acquire Focus Business Bank | $ 58,278 | |
Stock price (in dollars per share) | $ / shares | $ 10.68 | |
Purchase consideration paid in cash | $ 8,280 |
Business Combinations - Focus Business Bank - Acquisition and Integration Costs (Details) - USD ($) $ in Thousands |
3 Months Ended | 12 Months Ended |
---|---|---|
Mar. 31, 2015 |
Dec. 31, 2015 |
|
Focus Business Bank | ||
Acquisition and Integration Costs | ||
Pre-tax severance, retention, acquisition and integration costs | $ 119 | $ 6,398 |
Business Combinations - Focus Business Bank - Estimated Fair Values of the Assets Acquired and Liabilities Assumed (Details) - USD ($) $ in Thousands |
Mar. 31, 2016 |
Dec. 31, 2015 |
Aug. 20, 2015 |
Mar. 31, 2015 |
---|---|---|---|---|
Assets acquired: | ||||
Goodwill | $ 45,664 | $ 45,664 | $ 13,054 | |
Focus Business Bank | ||||
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 assumed: | ||||
Deposits | 405,123 | |||
Other liabilities | 5,981 | |||
Total liabilities | 411,104 | |||
Net assets acquired | $ 66,558 |
Business Combinations - Focus Business Bank - Consideration Paid Summary (Details) - Focus Business Bank $ / shares in Units, $ in Thousands |
Aug. 20, 2015
USD ($)
$ / shares
|
---|---|
Consideration Paid | |
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 |
Stock price (in dollars per share) | $ / shares | $ 10.68 |
Business Combinations - Focus Business Bank - Pro Forma Information (Details) $ / shares in Units, $ in Thousands |
3 Months Ended |
---|---|
Mar. 31, 2015
USD ($)
$ / shares
| |
Pro Forma Information | |
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 share - basic (in dollars per share) | $ / shares | $ 0.13 |
Net income per share - diluted (in dollars per share) | $ / shares | $ 0.13 |
Goodwill and Other Intangible Assets - Goodwill (Details) - USD ($) $ in Thousands |
3 Months Ended | |||
---|---|---|---|---|
Mar. 31, 2016 |
Dec. 31, 2015 |
Aug. 20, 2015 |
Mar. 31, 2015 |
|
Goodwill | ||||
Goodwill | $ 45,664 | $ 45,664 | $ 13,054 | |
BVF/CSNK | ||||
Goodwill | ||||
Goodwill acquired | 13,044 | |||
Focus Business Bank | ||||
Goodwill | ||||
Goodwill | $ 32,620 | |||
Goodwill acquired | $ 32,620 |
Goodwill and Other Intangible Assets - Estimated Amortization Expense (Details) $ in Thousands |
Mar. 31, 2016
USD ($)
|
---|---|
Estimated Amortization Expense | |
2016 | $ 1,567 |
2017 | 1,361 |
2018 | 965 |
2019 | 924 |
2020 | 906 |
2021 | 786 |
Total | 6,509 |
Diablo Valley Bank | Core deposit | |
Estimated Amortization Expense | |
2016 | 427 |
2017 | 195 |
Total | 622 |
Focus Business Bank | Core deposit | |
Estimated Amortization Expense | |
2016 | 831 |
2017 | 875 |
2018 | 775 |
2019 | 734 |
2020 | 716 |
2021 | 596 |
Total | 4,527 |
BVF/CSNK | Below market-value lease | |
Estimated Amortization Expense | |
2016 | 36 |
2017 | 31 |
Total | 67 |
BVF/CSNK | Customer relationship and brokered relationship | |
Estimated Amortization Expense | |
2016 | 190 |
2017 | 190 |
2018 | 190 |
2019 | 190 |
2020 | 190 |
2021 | 190 |
Total | 1,140 |
BVF/CSNK | Non-compete agreements | |
Estimated Amortization Expense | |
2016 | 83 |
2017 | 70 |
Total | $ 153 |
Goodwill and Other Intangible Assets - Impairment of Intangible Assets (Details) - USD ($) $ in Thousands |
3 Months Ended | 12 Months Ended |
---|---|---|
Mar. 31, 2016 |
Dec. 31, 2015 |
|
Impairment of Intangible Assets | ||
Impairment of intangible assets | $ 0 | $ 0 |
Income Taxes - Liability for Uncertain Tax Positions (Details) $ in Thousands |
3 Months Ended |
---|---|
Mar. 31, 2016
USD ($)
| |
Income Taxes | |
Reserve for income taxes, net of Federal benefit for uncertain tax positions | $ 270 |
Income Taxes - Net Deferred Tax Assets (Details) - USD ($) $ in Thousands |
Mar. 31, 2016 |
Dec. 31, 2015 |
---|---|---|
Net deferred tax assets | ||
Net deferred tax assets | $ 18,690 | $ 22,218 |
Income Taxes - Carry Amounts of the Low Income Housing Investments (Details) - USD ($) $ in Thousands |
Mar. 31, 2016 |
Dec. 31, 2015 |
---|---|---|
Income Taxes | ||
Low income housing investments | $ 4,235 | $ 4,304 |
Income Taxes - Future Commitments of the Low Income Housing Investments (Details) - Low income housing investments - USD ($) $ in Thousands |
Mar. 31, 2016 |
Dec. 31, 2015 |
---|---|---|
Future Commitments | ||
Future commitments | $ 845 | $ 1,271 |
2016 | 123 | |
2017 | 14 | |
2018 through 2023 | $ 708 |
Income Taxes - Components of Low Income Housing Investment (Details) - USD ($) $ in Thousands |
3 Months Ended | |
---|---|---|
Mar. 31, 2016 |
Mar. 31, 2015 |
|
Income Taxes | ||
Low income housing tax credits | $ 111 | $ 172 |
Low income housing investment losses | $ 117 | $ 229 |
Benefit Plans - Defined Benefit Plans - Nonqualified Defined Benefit Pension Plan (Details) $ in Thousands |
Mar. 31, 2016
USD ($)
|
---|---|
Supplemental Retirement Plan | |
Supplemental Retirement Plan | |
Plan assets associated with the plan | $ 0 |
Benefit Plans - Defined Benefit Plans - Components of Pension Cost (Details) - USD ($) $ in Thousands |
3 Months Ended | 12 Months Ended | |
---|---|---|---|
Mar. 31, 2016 |
Mar. 31, 2015 |
Dec. 31, 2015 |
|
Supplemental Retirement Plan | |||
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 | |||
Components of Net Periodic Benefit Cost | |||
Amortization of prior transition obligation | (13) | (12) | |
Interest cost | 62 | 50 | $ 169 |
Net periodic benefit cost | $ 49 | $ 38 |
Benefit Plans - Defined Benefit Plans - Change in Projected Benefit Obligation (Details) - Split-Dollar Life Insurance Benefit Plan - USD ($) $ in Thousands |
3 Months Ended | 12 Months Ended | |
---|---|---|---|
Mar. 31, 2016 |
Mar. 31, 2015 |
Dec. 31, 2015 |
|
Change in Projected Benefit Obligation | |||
Projected benefit obligation at beginning of year | $ 6,215 | $ 4,641 | $ 4,641 |
Interest cost | 62 | $ 50 | 169 |
Amortization of net actuarial loss | 1,405 | ||
Projected benefit obligation at end of year | $ 6,277 | $ 6,215 |
Benefit Plans - Defined Benefit Plans - Amounts Recognized in Accumulated Other Comprehensive Loss (Details) - Split-Dollar Life Insurance Benefit Plan - USD ($) $ in Thousands |
Mar. 31, 2016 |
Dec. 31, 2015 |
---|---|---|
Amounts Recognized in Accumulated Other Comprehensive Loss | ||
Net actuarial loss | $ 2,183 | $ 2,147 |
Prior transition obligation | 1,395 | 1,418 |
Accumulated other comprehensive loss | $ 3,578 | $ 3,565 |
Equity (Details) - Series C convertible perpetual preferred stock |
Jun. 21, 2010
$ / shares
shares
|
Mar. 31, 2016
stockholder
|
---|---|---|
Series C Preferred Stock | ||
Preferred stock, shares issued | shares | 21,004 | |
Conversion price (in dollars per share) | $ / shares | $ 3.75 | |
Number of common stock into which preferred stock are convertible (in shares) | shares | 5,601,000 | |
Liquidation preference (in dollars per share) | $ / shares | $ 1,000 | |
Number of holders who obtained approval from Federal Reserve | stockholder | 1 |
Fair Value - Impaired Loans Held-for-investment - Tabular Disclosure (Details) - USD ($) $ in Thousands |
Mar. 31, 2016 |
Dec. 31, 2015 |
---|---|---|
Impaired Loans Held-for-investment | ||
Impaired loans held-for-investment | $ 4,329 | $ 6,527 |
Portion carried at fair value | ||
Impaired Loans Held-for-investment | ||
Impaired loans held-for-investment | 1,312 | 2,988 |
Specific valuation allowance | (113) | (286) |
Impaired loans held-for-investment carried at fair value, net | 1,199 | 2,702 |
Portion carried at cost | ||
Impaired Loans Held-for-investment | ||
Impaired loans held-for-investment | $ 3,017 | $ 3,539 |
Fair Value - Impaired Loans Held-for-investment - Additional Disclosures (Details) - USD ($) $ in Thousands |
3 Months Ended | 12 Months Ended |
---|---|---|
Mar. 31, 2016 |
Dec. 31, 2015 |
|
Impaired Loans Held-for-investment | ||
Impaired loans held-for-investment | $ 4,329 | $ 6,527 |
Additional provision (credit) for loan losses | 2 | 156 |
Valuation allowance on foreclosed assets | 0 | 0 |
Partial charge-offs | 0 | |
Portion carried at fair value | ||
Impaired Loans Held-for-investment | ||
Impaired loans held-for-investment | 1,312 | 2,988 |
Specific valuation allowance | 113 | 286 |
Portion carried at cost | ||
Impaired Loans Held-for-investment | ||
Impaired loans held-for-investment | 3,017 | 3,539 |
Carrying amount | ||
Impaired Loans Held-for-investment | ||
Foreclosed assets | $ 386 | $ 364 |
Equity Plan - General Disclosures (Details) |
3 Months Ended |
---|---|
Mar. 31, 2016
shares
| |
2013 Plan | |
Equity Plan | |
Number of shares available for future grants | 940,985 |
Options | |
Equity Plan | |
Vesting period | 4 years |
Options | Maximum | |
Equity Plan | |
Expiration term | 10 years |
Equity Plan - Unrecognized Compensation Cost - Nonvested Stock Options (Details) - Options $ in Thousands |
3 Months Ended |
---|---|
Mar. 31, 2016
USD ($)
| |
Unrecognized Compensation Cost | |
Total unrecognized compensation cost related to nonvested stock options granted | $ 1,597 |
Expected weighted-average period for recognition of compensation costs related to nonvested stock options | 2 years 3 months 22 days |
Equity Plan - Restricted Stock Activity (Details) - Restricted stock |
3 Months Ended |
---|---|
Mar. 31, 2016
$ / shares
shares
| |
Number of Shares | |
Nonvested shares at the beginning of the period (in shares) | shares | 167,605 |
Vested (in shares) | shares | (5,000) |
Nonvested shares at the end of the period (in shares) | shares | 162,605 |
Weighted Average Grant Date Fair Value | |
Nonvested shares at the beginning of the period (in dollars per share) | $ / shares | $ 9.28 |
Vested (in dollars per share) | $ / shares | 8.30 |
Nonvested shares at the end of the period (in dollars per share) | $ / shares | $ 9.31 |
Equity Plan - Unrecognized Compensation Cost - Nonvested Restricted Stock Awards (Details) - Restricted stock $ in Thousands |
3 Months Ended |
---|---|
Mar. 31, 2016
USD ($)
| |
Unrecognized Compensation Cost | |
Total unrecognized compensation cost related to nonvested restricted stock awards | $ 1,255 |
Expected weighted-average period for recognition of compensation costs related to nonvested restricted stock awards | 2 years 11 months 1 day |
Capital Requirements - General Information (Details) |
3 Months Ended |
---|---|
Mar. 31, 2016 | |
Capital Requirements | |
Capital conservation buffer (as a percent) | 0.625% |
Phase-in period (in years) | 4 years |
Capital conservation buffer, end rate after annual increases (as a percent) | 2.50% |
HBC (Wholly-owned Subsidiary) | |
Capital Requirements | |
Capital conservation buffer (as a percent) | 0.625% |
Phase-in period (in years) | 4 years |
Capital conservation buffer, end rate after annual increases (as a percent) | 2.50% |
Capital Requirements - Dividends to Parent (Details) - HCC (Parent) - USD ($) $ in Thousands |
3 Months Ended | |
---|---|---|
Mar. 31, 2016 |
Jan. 01, 2016 |
|
Cash dividend | ||
Cash dividend available | $ 16,361 | |
Dividends paid to parent company | $ 6,000 |
Loss Contingencies (Details) |
3 Months Ended |
---|---|
Mar. 31, 2016
complaint
| |
Loss Contingencies | |
Number of complaints set for trial in the future | 1 |
Number of complaints in pleading and in mid-discovery | 3 |
Number of complaint in mid-discovery | 1 |
Noninterest Expense (Details) - USD ($) $ in Thousands |
3 Months Ended | |
---|---|---|
Mar. 31, 2016 |
Mar. 31, 2015 |
|
Noninterest Expense | ||
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 |
Business Segment Information - Business Segments (Details) |
3 Months Ended |
---|---|
Mar. 31, 2016
segment
| |
Business Segment Information | |
Number of business segments | 2 |
Subsequent Event (Details) - $ / shares |
3 Months Ended | ||
---|---|---|---|
Apr. 28, 2016 |
Mar. 31, 2016 |
Mar. 31, 2015 |
|
Subsequent event | |||
Quarterly cash dividends declared to holders of common stock | $ 0.09 | $ 0.08 | |
Subsequent events | |||
Subsequent event | |||
Quarterly cash dividends declared to holders of common stock | $ 0.09 | ||
Subsequent events | Series C convertible perpetual preferred stock | |||
Subsequent event | |||
Quarterly cash dividends declared to holders of Series C preferred stock (on an as converted basis) | $ 0.09 |
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