UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Amendment No. 1
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 10, 2019
HERITAGE COMMERCE CORP
(Exact name of registrant as specified in its charter)
California |
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000-23877 |
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77-0469558 |
(State or other jurisdiction of |
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(Commission File Number) |
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(IRS Employer Identification No.) |
150 Almaden Boulevard, San Jose, California |
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95113 |
(Address of principal executive offices) |
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(Zip Code) |
Registrants telephone number, including area code: (408) 947-6900
Not Applicable
(Former name or former address, if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (See General Instruction A.2. below):
o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
Common Stock, No Par Value |
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HTBK |
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The Nasdaq Stock Market, LLC |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o
Heritage Commerce Corp (the Company) hereby amends its Current Report on Form 8-K dated October 10, 2019 and filed with the Securities and Exchange Commission on October 15, 2019 (the Current Report) to amend Item 9.01 to include required financial statements and pro forma financial information. In its Current Report on Form 8-K disclosing the Registrants acquisition of Presidio Bank, the Company indicated that it would file the necessary financial information not later than 71 days after the date on which the Current Report was required to be filed. Item 9.01 of the Current Report is hereby amended as follows:
Item 9.01 Financial Statements and Exhibits.
(a)(1) Audited Consolidated Financial Statements of Presidio Bank for the years ended December 31, 2018 and 2017 are incorporated by reference and are included in the Heritage Commerce Corp Registration Statement on Form S-4, originally filed on July 1, 2019, as amended on July 12, 2019.
(a)(2) Unaudited Consolidated Financial Statements of Presidio Bank as of June 30, 2019 and for the six months ended June 30, 2019 are filed as Exhibit 99.1.
(b)(1) Unaudited Pro Forma Combined Condensed Financial Information of Heritage Commerce Corp and Presidio Bank as of June 30, 2019 and for the six months ended June 30, 2019 and the year ended December 31, 2018 are filed as Exhibit 99.2.
(c) Not applicable.
(d) Exhibits.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: December 20, 2019 |
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Heritage Commerce Corp |
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| |
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|
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By: |
/s/ Lawrence D. McGovern |
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Lawrence D. McGovern |
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Executive Vice President and Chief Financial Officer |
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PRESIDIO BANK
BALANCE SHEETS (Unaudited)
(dollars in thousands, except share amounts) |
|
June 30, |
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December 31, |
| ||
ASSETS |
|
|
|
|
| ||
Cash and due from banks |
|
$ |
61,402 |
|
$ |
75,681 |
|
Available-for-sale investment securities, at fair value |
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48,523 |
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52,468 |
| ||
Held-to-maturity investment securities, at amortized cost |
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467 |
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570 |
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Federal Reserve Bank stock, at cost |
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2,039 |
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2,010 |
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Federal Home Loan Bank stock, at cost |
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3,713 |
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2,877 |
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Loans, less allowance for loan losses of $7,463 in June 30, 2019 and $7,439 in December 31, 2018 |
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690,610 |
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703,500 |
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Premises and equipment, net |
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2,063 |
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2,287 |
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Deferred tax assets, net |
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4,922 |
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3,922 |
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Bank owned life insurance |
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12,669 |
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12,507 |
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Accrued interest receivable and other assets |
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14,079 |
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6,613 |
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$ |
840,487 |
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$ |
862,435 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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|
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Deposits: |
|
|
|
|
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Non-interest bearing |
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$ |
307,648 |
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$ |
319,358 |
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Interest bearing |
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414,712 |
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439,360 |
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Total deposits |
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722,360 |
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758,718 |
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Subordinated debt, net |
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9,771 |
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9,749 |
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Accrued interest payable and other liabilities |
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12,382 |
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5,298 |
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Total liabilities |
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744,513 |
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773,765 |
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Shareholders equity: |
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|
|
|
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Preferred stockno par value; 10,000,000 shares authorized, none outstanding |
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|
|
|
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Common stockno par value; 30,000,000 shares authorized; 6,330,708 at June 30, 2019 and 6,236,001 at December 31, 2018 |
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69,109 |
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67,978 |
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Retained earnings |
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26,456 |
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20,693 |
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Accumulated other comprehensive income (loss), net of taxes |
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409 |
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(1 |
) | ||
Total shareholders equity |
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95,974 |
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88,670 |
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Total liabilities and shareholders equity |
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$ |
840,487 |
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$ |
862,435 |
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See accompanying notes to the unaudited financial statements.
PRESIDIO BANK
STATEMENTS OF INCOME (Unaudited)
|
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Six Months |
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(dollars in thousands, except share and per share amounts) |
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2019 |
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2018 |
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Interest and dividend income: |
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|
|
|
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Interest and fees on loans |
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$ |
19,344 |
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$ |
16,280 |
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Interest on due from banks and other overnight deposits |
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872 |
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1,071 |
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Interest on investment securities |
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817 |
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108 |
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Dividend income |
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161 |
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153 |
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Total interest and dividend income |
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21,194 |
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17,612 |
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Interest expense: |
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|
|
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Interest on deposits |
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1,583 |
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772 |
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Interest on subordinated debt |
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422 |
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422 |
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Interest on other borrowings |
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18 |
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Total interest expense |
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2,023 |
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1,194 |
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Net interest income |
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19,171 |
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16,418 |
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Provision for loan losses |
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24 |
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159 |
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Net interest income after provision for loan losses |
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19,147 |
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16,259 |
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Noninterest income: |
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|
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Service charges and fees |
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396 |
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434 |
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Other noninterest income |
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193 |
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194 |
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Total noninterest income |
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589 |
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628 |
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Noninterest expense: |
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|
|
|
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Salaries and employee benefits |
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6,952 |
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6,538 |
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Occupancy and equipment |
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1,294 |
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1,218 |
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Other |
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3,331 |
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2,556 |
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Total noninterest expenses |
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11,577 |
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10,312 |
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Income before income taxes |
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8,159 |
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6,575 |
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Provision for income taxes |
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2,396 |
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1,521 |
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Net income |
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$ |
5,763 |
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$ |
5,054 |
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Basic earnings per common share |
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$ |
0.91 |
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$ |
0.83 |
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Diluted earnings per share |
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$ |
0.88 |
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$ |
0.78 |
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Weighted average number of shares outstandingbasic |
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6,226,831 |
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6,043,764 |
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Weighted average number of shares outstandingdiluted |
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6,504,778 |
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6,414,071 |
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See accompanying notes to the unaudited financial statements.
PRESIDIO BANK
STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
|
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Six |
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(dollars in thousands) |
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2019 |
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2018 |
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Net Income |
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$ |
5,763 |
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$ |
5,054 |
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Other comprehensive income: |
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|
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Unrealized gains on available-for-sale securities: |
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|
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Unrealized holding gain (loss) arising during the period |
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580 |
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(147 |
) | ||
Income tax effect |
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(170 |
) |
34 |
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Other comprehensive income |
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410 |
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(113 |
) | ||
Comprehensive income |
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$ |
6,173 |
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$ |
4,941 |
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See accompanying notes to the unaudited financial statements.
PRESIDIO BANK
STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (Unaudited)
|
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Common Stock |
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(dollars in thousands) |
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Shares |
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Amount |
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Retained Earnings |
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Accumulated |
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Total |
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Balance, January 1, 2019 |
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6,236,001 |
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$ |
67,978 |
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$ |
20,693 |
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$ |
(1 |
) |
$ |
88,670 |
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Restricted stock awards granted |
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28,800 |
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Restricted stock units vested |
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7,544 |
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Restricted stock awards forfeited |
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(2,600 |
) |
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Restricted shares withheld to cover withholding taxes |
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(2,787 |
) |
(69 |
) |
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(69 |
) | ||||
Exercise of stock options |
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63,750 |
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626 |
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626 |
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Share-based compensation expense |
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574 |
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574 |
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Net income |
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|
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5,763 |
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5,763 |
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Other comprehensive income |
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|
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|
|
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410 |
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410 |
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Balance, June 30, 2019 |
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6,330,708 |
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$ |
69,109 |
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$ |
26,456 |
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$ |
409 |
|
$ |
95,974 |
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|
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Common Stock |
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|
|
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(dollars in thousands) |
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Shares |
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Amount |
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Retained Earnings |
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Accumulated |
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Total |
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Balance, January 1, 2018 |
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6,084,059 |
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$65,959 |
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$8,854 |
|
$ |
(51 |
) |
$ |
74,762 |
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Restricted stock awards granted |
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24,750 |
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|
|
|
|
|
|
|
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Restricted stock units vested |
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15,146 |
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|
|
|
|
|
|
|
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Restricted stock awards forfeited |
|
|
|
|
|
|
|
|
|
|
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Restricted shares withheld to cover withholding taxes |
|
(3,679 |
) |
(97 |
) |
|
|
|
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(97 |
) | ||
Exercise of stock options |
|
63,600 |
|
628 |
|
|
|
|
|
628 |
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Share-based compensation expense |
|
|
|
504 |
|
|
|
|
|
504 |
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Net income |
|
|
|
|
|
5,054 |
|
|
|
5,054 |
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Other comprehensive income |
|
|
|
|
|
|
|
(113 |
) |
(113 |
) | ||
Balance, June 30, 2018 |
|
6,183,876 |
|
$66,994 |
|
$13,908 |
|
$ |
(164 |
) |
$ |
80,738 |
|
See accompanying notes to the unaudited financial statements.
PRESIDIO BANK
STATEMENTS OF CASH FLOWS (Unaudited)
|
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Six Months |
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(dollars in thousands) |
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2019 |
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2018 |
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Cash flows from operating activities: |
|
|
|
|
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Net income |
|
$ |
5,763 |
|
$ |
5,054 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
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Amortization of premiums (discounts) on investment securities, net |
|
199 |
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(518 |
) | ||
Amortization of debt issuance costs |
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22 |
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22 |
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Amortization of tax credit investment |
|
214 |
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189 |
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Depreciation and amortization |
|
243 |
|
241 |
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Provision for loan losses |
|
24 |
|
159 |
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Provision for unfunded commitments |
|
(47 |
) |
112 |
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Deferred loan origination fees, net |
|
(124 |
) |
(22 |
) | ||
Share-based compensation expense |
|
574 |
|
504 |
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Deferred compensation expense |
|
134 |
|
322 |
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Deferred income tax (benefit) expense |
|
(1,170 |
) |
732 |
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Increase in surrender value of life insurance |
|
(162 |
) |
(165 |
) | ||
Increase in accrued interest receivable and other assets |
|
(7,680 |
) |
(2,859 |
) | ||
Increase (decrease) in accrued interest payable and other liabilities |
|
7,010 |
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(72 |
) | ||
Net cash provided by operating activities |
|
5,000 |
|
3,699 |
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Cash flows from investing activities: |
|
|
|
|
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Purchases of available-for-sale investment securities |
|
|
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(29,334 |
) | ||
Proceeds from principal payments on investment securities |
|
4,429 |
|
905 |
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Purchase of FRB stock |
|
(29 |
) |
(23 |
) | ||
Purchase of FHLB stock |
|
(836 |
) |
(189 |
) | ||
Net decrease (increase) in loans |
|
12,990 |
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(26,922 |
) | ||
Cash invested in low income housing fund |
|
(13 |
) |
(213 |
) | ||
Purchase of premises and equipment |
|
(19 |
) |
(78 |
) | ||
Net cash provided (used) in investing activities |
|
16,522 |
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(55,854 |
) | ||
Cash flows from financing activities: |
|
|
|
|
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Net (decrease) increase in demand, interest-bearing and savings deposits |
|
(50,279 |
) |
54,884 |
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Net increase (decrease) in time deposits |
|
13,921 |
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(1,571 |
) | ||
Cash paid for withholding of taxes on share-based awards |
|
(69 |
) |
(97 |
) | ||
Proceeds from the exercise of stock options |
|
626 |
|
628 |
| ||
Net cash (used in) provided by financing activities |
|
(35,801 |
) |
53,844 |
| ||
Increase (decrease) in cash and cash equivalents |
|
(14,279 |
) |
1,689 |
| ||
Cash and cash equivalents at beginning of period |
|
75,681 |
|
137,565 |
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Cash and cash equivalents at end of period |
|
$ |
61,402 |
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$ |
139,254 |
|
Supplemental disclosures of cash flow information: |
|
|
|
|
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Cash paid during the year for interest expense |
|
$ |
1,898 |
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$ |
1,194 |
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Cash paid during the year for taxes |
|
$ |
3,740 |
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$ |
2,740 |
|
Supplemental disclosures of noncash activities: |
|
|
|
|
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Lease liabilities arising from obtaining right-of-use assets |
|
$ |
8,226 |
|
$ |
|
|
See accompanying notes to the unaudited financial statements.
PRESIDIO BANK
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General: Presidio Bank (the Bank) is a state-chartered bank and a member of the Federal Reserve System (the Fed). The Bank is subject to regulation by the Fed, the California Department of Business Oversight (the DBO), and the Federal Deposit Insurance Corporation (the FDIC). The Banks deposits are insured by the FDIC up to applicable legal limits. The Bank is headquartered in San Francisco, California and also has branch offices in Walnut Creek, San Rafael, San Mateo and Palo Alto, California. The Bank provides traditional commercial banking services to its target market throughout Northern California, consisting of small to medium sized businesses, along with the owners and executives of those firms.
The unaudited financial statements of the Bank (the Bank) have been prepared pursuant to the rules and regulations for interim financial reporting. 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 audited financial statements and notes that are included elsewhere in this Form 8-K/A. The accounting and reporting policies of the Bank conform with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry. In managements opinion, all adjustments necessary for a fair presentation of these consolidated financial statements have been included and are of a normal and recurring nature.
Subsequent Events: Management has reviewed all events occurring from June 30, 2019 through December 20, 2019, the date the financial statements were available for issuance and no subsequent events occurred requiring accrual or disclosure except as follows:
Heritage Commerce Corp, the holding company (Heritage) for Heritage Bank of Commerce, completed the acquisition of the Bank, effective October 11, 2019.
Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. The allowance for loan losses and fair values of financial instruments are particularly subject to change.
Allowance for Loan Losses: The allowance for loan losses is an estimate of probable credit losses inherent in the Banks loan portfolio that have been incurred as of the balance-sheet date. The allowance is established through a provision for loan losses which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance after credit losses and loan growth. Credit exposures determined to be uncollectible are charged against the allowance. Cash received on previously charged off amounts is recorded as a recovery to the allowance. The policy for charging off loans and recording recoveries does not differ by portfolio segment or class of financing receivable. The overall allowance consists of two primary components, specific reserves related to loans individually evaluated for impairment and general reserves for inherent losses related to loans that are collectively evaluated for impairment.
The determination of the general reserve for loans that are collectively evaluated for impairment is based on estimates made by management, to include, but not limited to, consideration of historical losses by portfolio segment over the past 10 years, internal asset classifications, and qualitative factors to include economic trends in the Banks service areas, industry experience and trends, geographic concentrations, fair values, if any, securing these loans, the Banks underwriting policies, the character of the loan portfolio, and probable losses inherent in the portfolio taken as a whole.
PRESIDIO BANK
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS (Continued)
NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Bank maintains a separate allowance for each portfolio segment (loan type). These portfolio segments include commercial, construction and land development, commercial real estate, and consumer and other loans. The allowance for loan losses attributable to each portfolio segment, which includes both impaired loans and loans that are not impaired, is combined to determine the Banks overall allowance, which is included on the balance sheet.
Allowance for Credit Losses on Off-Balance-Sheet Credit Exposures: The Bank also maintains a separate allowance for off-balance-sheet commitments. Management estimates anticipated losses using historical data and utilization assumptions. The allowance for off-balance-sheet commitments is included in accrued interest payable and other liabilities on the balance sheet and totaled $623,000 at June 30, 2019, $669,000 at December 31, 2018, and $873,000 at June 30, 2018.
Earnings Per Share: Basic earnings per share, which excludes dilution, is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as stock options, result in the issuance of common stock which share in the earnings of the Bank. The treasury stock method is applied to determine the dilutive effect of stock options and restricted stock in computing diluted earnings per share. There were approximately 505,000 and 589,000 stock options outstanding at June 30, 2019 and 2018, respectively that were considered anti-dilutive because the assumed proceeds from exercise price, tax benefits and average future compensation were greater than the average market price of the Banks common stock.
Share-Based Compensation: The Bank has two share-based compensation plans, the Presidio Bank 2006 Stock Option Plan (the 2006 Plan) and the Presidio Bank 2016 Equity Incentive Plan (the 2016 Plan), which have been approved by its shareholders and permit the grant of stock options and restricted stock for up to 1,625,000 and 500,000 shares of the Banks common stock, respectively. The 2006 Plan expired on July 18, 2016 and as a result no future grants have been made under the 2006 Plan after that date. There were 232,000 shares available for future grant in the 2016 Plan at June 30, 2019.
Adoption of New Accounting Standards
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This update revises the model to assess how a lease should be classified and provides guidance for lessees and lessors, when presenting right-of-use assets and lease liabilities on the balance sheet. Under the new guidance, lessees will be required to recognize the following for all leases, with the exception of short-term leases, at the commencement date: (1) a lease liability, which is a lessees obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessees right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. This update became effective for the Bank on January 1, 2019.
In July 2018, the FASB issued supplementary ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which provides for an additional transition method allowing for a modified retrospective adoption approach where the guidance would only be applied to existing leases in effect at the adoption date and new leases going forward, with a cumulative effect adjustment to retained earnings as of the adoption date and additional required disclosures regarding leasing arrangements only for those periods after adoption. This update also allows lessors to not separate non-lease components from the associated lease component if certain conditions are met. The Bank has elected the practical expedients permitted by ASU 2018-11. The Bank adopted the new guidance on January 1, 2019.
At adoption, the Bank recorded operating lease right-of-use (ROU) assets and related liabilities of approximately $6 million. The adoption of this guidance did not have a material impact to its Statements of Income, Cash Flows, or Retained Earnings.
PRESIDIO BANK
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS (Continued)
NOTE 2INVESTMENT SECURITIES
The amortized cost and estimated fair value of available-for-sale investment securities as of the balance sheet dates were as follows:
Available-for-Sale
|
|
June 30, 2019 |
| ||||||||||
|
|
Amortized |
|
Gross |
|
Gross |
|
Estimated |
| ||||
|
|
(Dollars in thousands) |
| ||||||||||
Debt securities: |
|
|
|
|
|
|
|
|
| ||||
Mortgage-backed securitiesresidential |
|
$ |
33,116 |
|
$ |
516 |
|
$ |
(26 |
) |
$ |
33,606 |
|
Asset-backed securitiesstudent loan |
|
1,872 |
|
|
|
(21 |
) |
1,851 |
| ||||
Collateralized mortgage obligation-residential |
|
12,955 |
|
111 |
|
|
|
13,066 |
| ||||
|
|
$ |
47,943 |
|
$ |
627 |
|
$ |
(47 |
) |
$ |
48,523 |
|
|
|
December 31, 2018 |
| ||||||||||
|
|
Amortized |
|
Gross |
|
Gross |
|
Estimated |
| ||||
|
|
(Dollars in thousands) |
| ||||||||||
Debt securities: |
|
|
|
|
|
|
|
|
| ||||
Mortgage-backed securitiesresidential |
|
$ |
36,282 |
|
$ |
39 |
|
$ |
(103 |
) |
$ |
36,218 |
|
Asset-backed securitiesstudent loan |
|
2,112 |
|
|
|
(15 |
) |
2,097 |
| ||||
Collateralized mortgage obligation-residential |
|
14,075 |
|
78 |
|
|
|
14,153 |
| ||||
|
|
$ |
52,469 |
|
$ |
117 |
|
$ |
(118 |
) |
$ |
52,468 |
|
At June 30, 2019 and December 31, 2018, net unrealized gains (losses) on available-for-sale investment securities totaling $580,000 and ($1,000), respectively, were recorded net of related tax liabilities (benefits) of $170,000 and $362, respectively, as accumulated other comprehensive income within shareholders equity. A total of $29,334,000 available-for-sale residential securities were purchased in June 2018 consisted of five mortgage-based securities and one collateralized mortgage obligation security. There were no sales or transfers of available-for-sale investment securities during the six months ended June 30, 2019 and year ended December 31, 2018. At June 30, 2019 and December 31, 2018, there were no securities pledged to secure borrowing arrangements.
At June 30, 2019 and December 31, 2018, the residential mortgage-backed securities and residential collateralized mortgage obligation securities held by the Bank were issued by U.S. government-sponsored entities, Fannie Mae and Freddie Mac, institutions which the government has affirmed its commitment to support. At June 30, 2019 and December 31, 2018, the student loan asset-backed security held by the Bank was guaranteed by eligible guarantee agencies and reinsured by the U.S. Department of Education for at least 97% of defaulted principal and accrued interest. The structure of this security also incorporates other forms of credit enhancement. Because management believes the declines in the fair values of its residential mortgage-backed securities and student loan asset backed security are attributable to changes in interest rates and not credit quality, and because the Bank does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Bank does not consider these securities to be other-than-temporarily impaired at June 30, 2019 and December 31, 2018.
PRESIDIO BANK
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS (Continued)
NOTE 2INVESTMENT SECURITIES (Continued)
The following table summarizes available-for-sale investment securities in an unrealized loss position at June 30, 2019 and December 31, 2018.
|
|
Less Than 12 Months |
|
12 Months or More |
|
Total |
| ||||||||||||
June 30, 2019 |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
| ||||||
Mortgage-backed securitiesresidential |
|
$ |
|
|
$ |
|
|
$ |
2,408 |
|
$ |
(26 |
) |
$ |
2,408 |
|
$ |
(26 |
) |
Asset-backed securitiesstudent loan |
|
|
|
|
|
1,851 |
|
(21 |
) |
1,851 |
|
(21 |
) | ||||||
Collateralized mortgage obligation-residential |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Ending balance |
|
$ |
|
|
$ |
|
|
$ |
4,259 |
|
$ |
(47 |
) |
$ |
4,259 |
|
$ |
(47 |
) |
|
|
Less Than 12 Months |
|
12 Months or More |
|
Total |
| ||||||||||||
December 31, 2018 |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
| ||||||
Mortgage-backed securitiesresidential |
|
$ |
9,399 |
|
$ |
(15 |
) |
$ |
3,262 |
|
$ |
(88 |
) |
$ |
12,661 |
|
$ |
(103 |
) |
Asset-backed securitiesstudent loan |
|
|
|
|
|
2,097 |
|
(15 |
) |
2,097 |
|
(15 |
) | ||||||
Collateralized mortgage obligation-residential |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Ending balance |
|
$ |
9,399 |
|
$ |
(15 |
) |
$ |
5,359 |
|
$ |
(103 |
) |
$ |
14,758 |
|
$ |
(118 |
) |
Held-to-Maturity
The Bank held at amortized cost $467,453 and $570,018 of mortgage-backed held-to-maturity investment securities at June 30, 2019 and December 31, 2018, respectively, with estimated fair values substantially equivalent to amortized cost.
Held-to-maturity investment securities are recorded at amortized cost, adjusted for the amortization of premiums or accretion of discounts. There were no sales, calls or transfers of held-to-maturity investment securities for the six months ended June 30, 2019 and the year ended December 31, 2018. Held-to-maturity investment securities mature in 2024.
The estimated fair value of available-for-sale investment securities and amortized cost for held-to-maturity at June 30, 2019 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
Contractual Maturity |
| ||||||||||||||||||||||||||||
|
|
|
|
|
|
After One and |
|
After Five and |
|
|
|
|
|
Securities Not |
|
|
|
|
| ||||||||||||
|
|
Within One |
|
Within Five |
|
Within Ten |
|
After Ten |
|
Due at a Single |
|
|
|
|
| ||||||||||||||||
|
|
Year or Less |
|
Years |
|
Years |
|
Years |
|
Maturity Date |
|
Total |
| ||||||||||||||||||
|
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
Amount |
|
Yield |
|
Amount |
|
Yield |
| ||||||
Securities available-for-sale (at fair value): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Mortgage-backed securitiesresidential |
|
$ |
|
|
0.00 |
% |
$ |
2,064 |
|
1.34 |
% |
$ |
4,972 |
|
2.72 |
% |
$ |
26,570 |
|
3.12 |
% |
$ |
|
|
0.00 |
% |
$ |
33,606 |
|
2.95 |
% |
Asset-backed securitiesstudent loan |
|
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
1,851 |
|
3.18 |
% |
|
|
0.00 |
% |
1,851 |
|
3.18 |
% | ||||||
Collateralized mortgage obligationresidential |
|
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
13,066 |
|
2.85 |
% |
|
|
0.00 |
% |
13,066 |
|
2.85 |
% | ||||||
Total |
|
$ |
|
|
0.00 |
% |
$ |
2,064 |
|
1.34 |
% |
$ |
4,972 |
|
2.72 |
% |
$ |
41,487 |
|
3.04 |
% |
$ |
|
|
0.00 |
% |
$ |
48,523 |
|
2.93 |
% |
Securities held-to-maturity (at amortized cost): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Mortgage-backed securitiesresidential |
|
467 |
|
4.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
467 |
|
4.00 |
% | ||||||
Total |
|
$ |
467 |
|
4.00 |
% |
$ |
|
|
0.00 |
% |
$ |
|
|
0.00 |
% |
$ |
|
|
0.00 |
% |
$ |
|
|
0.00 |
% |
$ |
467 |
|
4.00 |
% |
PRESIDIO BANK
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS (Continued)
NOTE 3FAIR VALUE MEASUREMENTS
Fair Value Hierarchy: Assets and liabilities measured at fair value are grouped in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. Valuations within these levels are based upon:
Level 1Quoted market prices for identical instruments traded in active exchange markets.
Level 2Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable or can be corroborated by observable market data.
Level 3Model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect the Banks estimates of assumptions that market participants would use on pricing the asset or liability. Valuation techniques include management judgment and estimation which may be significant.
Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period.
Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings.
Because no market exists for a significant portion of the Banks financial instruments, fair value estimates are based on judgments regarding 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 fair values presented.
The following methods and assumptions were used to estimate the fair value of the following classes of financial instruments:
Cash and due from banks: The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.
Federal Funds Sold: The carrying amounts of Federal funds sold approximate fair values and are classified as Level 1.
Interest-bearing deposits in other financial institutions: The carrying amounts of interest-bearing deposits approximate fair values and are classified as Level 1.
Time certificates of deposits in other financial institutions: The carrying amounts of time certificates of deposits are estimated using a discounted cash flow 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.
Investment securities: For investment securities, fair values are based on quoted market prices, where available, and are classified as Level 1. If quoted market prices are not available, fair values are estimated using quoted market prices for similar securities and indications of value provided by brokers and are classified as Level 2.
PRESIDIO BANK
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS (Continued)
NOTE 3FAIR VALUE MEASUREMENTS (Continued)
Loans: Fair values of loans 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 on an exit price basis 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. The methods utilized to measure the fair value of loans at June 30, 2019 and December 31, 2018 represent an approximation of exit price, however, an actual exit price may differ.
Correspondent Bank stock: It is not practicable to determine the fair value of correspondent bank stock due to restrictions placed on its transferability.
Deposits: The fair values disclosed for demand deposits, including interest and non-interest demand accounts, savings, and certain types of money market accounts are, by definition, equal to the carrying amount at the reporting date resulting in a Level 1 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow 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. The methods utilized to measure the fair value of deposits at June 30, 2019 and December 31, 2018 represent an approximation of exit price, however, an actual exit price may differ.
Accrued interest receivable and payable: The carrying amounts of accrued interest approximate fair value and are considered to be linked in classification to the asset or liability for which they relate.
Commitments to extend credit and letters of credit: The fair values of commitments to extend credit and standby letters of credit are estimated using the fees currently charged to enter into similar agreements and are not significant and, therefore, not presented.
The estimated fair values of the Banks financial instruments for dates indicated are as follows:
|
|
Carrying |
|
Fair Value Measurements at Using: |
| |||||||||||
June 30, 2019 |
|
Amount |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
| |||||
|
|
(Dollars in thousands) |
| |||||||||||||
Financial assets: |
|
|
|
|
|
|
|
|
|
|
| |||||
Cash and cash equivalents |
|
$ |
61,402 |
|
$ |
61,402 |
|
$ |
|
|
$ |
|
|
$ |
61,402 |
|
Securities available-for-sale |
|
48,523 |
|
|
|
48,523 |
|
|
|
48,523 |
| |||||
Securities held-to-maturity |
|
467 |
|
|
|
|
|
467 |
|
467 |
| |||||
FRB and FHLB stock |
|
5,752 |
|
N/A |
|
N/A |
|
N/A |
|
N/A |
| |||||
Loans, gross |
|
699,059 |
|
|
|
|
|
694,616 |
|
694,616 |
| |||||
Accrued interest receivable |
|
2,305 |
|
|
|
135 |
|
2,170 |
|
2,305 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Deposits |
|
$ |
722,360 |
|
$ |
670,444 |
|
$ |
52,058 |
|
$ |
|
|
$ |
722,502 |
|
Subordinated debt, net |
|
9,771 |
|
|
|
|
|
9,772 |
|
9,772 |
| |||||
Accrued interest payable |
|
155 |
|
|
|
155 |
|
|
|
155 |
|
PRESIDIO BANK
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS (Continued)
NOTE 3FAIR VALUE MEASUREMENTS (Continued)
|
|
Carrying |
|
Fair Value Measurements at Using: |
| |||||||||||
December 31, 2018 |
|
Amount |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
| |||||
|
|
(Dollars in thousands) |
| |||||||||||||
Financial assets: |
|
|
|
|
|
|
|
|
|
|
| |||||
Cash and cash equivalents |
|
$ |
75,681 |
|
$ |
75,681 |
|
$ |
|
|
$ |
|
|
$ |
75,681 |
|
Securities available-for-sale |
|
52,468 |
|
|
|
52,468 |
|
|
|
52,468 |
| |||||
Securities held-to-maturity |
|
570 |
|
|
|
|
|
570 |
|
570 |
| |||||
FRB and FHLB stock |
|
4,887 |
|
N/A |
|
N/A |
|
N/A |
|
N/A |
| |||||
Loans, gross |
|
712,049 |
|
|
|
|
|
707,523 |
|
707,523 |
| |||||
Accrued interest receivable |
|
2,292 |
|
|
|
134 |
|
2,158 |
|
2,292 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Deposits |
|
$ |
758,718 |
|
$ |
720,722 |
|
$ |
38,097 |
|
$ |
|
|
$ |
758,819 |
|
Subordinated debt, net |
|
9,749 |
|
|
|
|
|
9,748 |
|
9,748 |
| |||||
Accrued interest payable |
|
30 |
|
|
|
30 |
|
|
|
30 |
|
The estimated fair values do not reflect any premium or discount that could result from offering the Banks entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.
Assets Recorded at Fair Value: The following tables present information about the Banks assets measured at fair value on a recurring and nonrecurring basis:
The Bank is required or permitted to record the following assets at fair value on a recurring basis.
Description |
|
Fair Value |
|
Level 1 |
|
Level 2 |
|
Level 3 |
| ||||
|
|
(Dollars in thousands) |
| ||||||||||
June 30, 2019 |
|
|
|
|
|
|
|
|
| ||||
Available-for-sale investment securities |
|
|
|
|
|
|
|
|
| ||||
Debt securities: |
|
|
|
|
|
|
|
|
| ||||
Mortgage backed securitiesResidential |
|
$ |
33,606 |
|
$ |
|
|
$ |
33,606 |
|
$ |
|
|
Asset backed securitiesStudent loans |
|
1,851 |
|
|
|
1,851 |
|
|
| ||||
Collateralized mortgage obligation-residential |
|
13,066 |
|
|
|
13,066 |
|
|
| ||||
Total assets measured at fair value on a recurring basis |
|
$ |
48,523 |
|
$ |
|
|
$ |
48,523 |
|
$ |
|
|
PRESIDIO BANK
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS (Continued)
NOTE 3FAIR VALUE MEASUREMENTS (Continued)
Description |
|
Fair Value |
|
Level 1 |
|
Level 2 |
|
Level 3 |
| ||||
|
|
(Dollars in thousands) |
| ||||||||||
December 31, 2018 |
|
|
|
|
|
|
|
|
| ||||
Available-for-sale investment securities |
|
|
|
|
|
|
|
|
| ||||
Debt securities: |
|
|
|
|
|
|
|
|
| ||||
Mortgage backed securitiesResidential |
|
$ |
36,218 |
|
$ |
|
|
$ |
36,218 |
|
$ |
|
|
Asset backed securitiesStudent loans |
|
2,097 |
|
|
|
2,097 |
|
|
| ||||
Collateralized mortgage obligation-residential |
|
14,153 |
|
|
|
14,153 |
|
|
| ||||
Total assets measured at fair value on a recurring basis |
|
$ |
52,468 |
|
$ |
|
|
$ |
52,468 |
|
$ |
|
|
Fair values for available-for-sale investment securities, which include debt securities of U.S. government-sponsored agencies and residential mortgage-backed securities, are based on quoted market prices for similar securities. There were no changes in the valuation techniques used at June 30, 2019 or December 31, 2018. During the periods ended June 30, 2019 and December 31, 2018, there were no transfers in or out of Levels 1, 2 or 3.
The Bank may be required, from time to time, to measure certain assets or liabilities at fair value on a non-recurring basis. These include assets that are measured at the lower of cost or market value that were recognized at fair value which was below cost at the reporting date. There were no assets measured at fair value on a non-recurring basis at June 30, 2019 and December 31, 2018.
PRESIDIO BANK
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS (Continued)
NOTE 4LOANS
Outstanding loans at June 30, 2019 and December 31, 2018 are summarized below:
(dollars in thousands) |
|
June 30, |
|
December 31, |
| ||
Commercial |
|
$ |
190,626 |
|
$ |
176,179 |
|
Construction and land development |
|
41,403 |
|
56,179 |
| ||
Commercial real estate |
|
330,747 |
|
328,668 |
| ||
Consumer and other |
|
136,283 |
|
151,023 |
| ||
|
|
699,059 |
|
712,049 |
| ||
Deferred loan origination fees, net |
|
(986 |
) |
(1,110 |
) | ||
Allowance for loan losses |
|
(7,463 |
) |
(7,439 |
) | ||
|
|
$ |
690,610 |
|
$ |
703,500 |
|
NOTE 5ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the six months ended June 30, 2019 and 2018, and the year ended December 31, 2018 were as follows:
|
|
Six Months |
|
Year Ended |
| |||||
(dollars in thousands) |
|
2019 |
|
2018 |
|
2018 |
| |||
Balance, beginning of period |
|
$ |
7,439 |
|
$ |
7,166 |
|
$ |
7,166 |
|
Provision for loan losses |
|
24 |
|
159 |
|
273 |
| |||
Charge-offs |
|
|
|
|
|
|
| |||
Recoveries |
|
|
|
|
|
|
| |||
Balance, end of period |
|
$ |
7,463 |
|
$ |
7,325 |
|
$ |
7,439 |
|
The following table shows the allocation of the allowance for loan losses for the periods ended June 30, 2019, December 31, 2018 and June 30, 2018 by portfolio segment and by impairment methodology:
June 30, 2019 |
|
Commercial |
|
Construction and |
|
Commercial |
|
Consumer |
|
Unallocated |
|
Total |
| ||||||
Allowance for Loan Losses |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Beginning balance |
|
$ |
1,879 |
|
$ |
897 |
|
$ |
3,078 |
|
$ |
1,585 |
|
$ |
|
|
$ |
7,439 |
|
Provision for loan losses |
|
66 |
|
(82 |
) |
86 |
|
(189 |
) |
143 |
|
24 |
| ||||||
Charge-offs |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Recoveries |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Ending balance |
|
$ |
1,945 |
|
$ |
815 |
|
3,164 |
|
$ |
1,396 |
|
$ |
143 |
|
$ |
7,463 |
| |
Ending balance: individually evaluated for impairment |
|
$ |
|
|
$ |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
| |
Ending balance: collectively evaluated for impairment |
|
$ |
1,945 |
|
$ |
815 |
|
$ |
3,164 |
|
$ |
1,396 |
|
$ |
143 |
|
$ |
7,463 |
|
Loans |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Ending balance |
|
$ |
190,626 |
|
$ |
41,403 |
|
$ |
330,747 |
|
$ |
136,283 |
|
|
|
$ |
699,059 |
| |
Ending balance: individually evaluated for impairment |
|
$ |
|
|
$ |
|
|
$ |
3,746 |
|
$ |
|
|
|
|
$ |
3,746 |
| |
Ending balance: collectively evaluated for impairment |
|
$ |
190,626 |
|
$ |
41,403 |
|
$ |
327,001 |
|
$ |
136,283 |
|
|
|
$ |
695,313 |
|
PRESIDIO BANK
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS (Continued)
NOTE 5ALLOWANCE FOR LOAN LOSSES (Continued)
December 31, 2018 |
|
Commercial |
|
Construction and |
|
Commercial |
|
Consumer |
|
Unallocated |
|
Total |
| ||||||
Allowance for Loan Losses |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Beginning balance |
|
$ |
2,524 |
|
$ |
703 |
|
$ |
2,582 |
|
$ |
1,215 |
|
$ |
142 |
|
$ |
7,166 |
|
Provision for loan losses |
|
(645 |
) |
194 |
|
496 |
|
370 |
|
(142 |
) |
273 |
| ||||||
Charge-offs |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Recoveries |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Ending balance |
|
$ |
1,879 |
|
$ |
897 |
|
$ |
3,078 |
|
$ |
1,585 |
|
$ |
|
|
$ |
7,439 |
|
Ending balance: individually evaluated for impairment |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Ending balance: collectively evaluated for impairment |
|
$ |
1,879 |
|
$ |
897 |
|
$ |
3,078 |
|
$ |
1,585 |
|
$ |
|
|
$ |
7,439 |
|
Loans |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Ending balance |
|
$ |
176,179 |
|
$ |
56,179 |
|
$ |
328,668 |
|
$ |
151,023 |
|
|
|
$ |
712,049 |
| |
Ending balance: individually evaluated for impairment |
|
$ |
|
|
$ |
|
|
$ |
3,746 |
|
$ |
|
|
|
|
$ |
3,746 |
| |
Ending balance: collectively evaluated for impairment |
|
$ |
176,179 |
|
$ |
56,179 |
|
$ |
324,922 |
|
$ |
151,023 |
|
|
|
$ |
708,303 |
|
June 30, 2018 |
|
Commercial |
|
Construction and |
|
Commercial |
|
Consumer |
|
Unallocated |
|
Total |
| ||||||
Allowance for Loan Losses |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Beginning balance |
|
$ |
2,524 |
|
$ |
703 |
|
$ |
2,582 |
|
$ |
1,215 |
|
$ |
142 |
|
$ |
7,166 |
|
Provision for loan losses |
|
(283 |
) |
161 |
|
297 |
|
(10 |
) |
(6 |
) |
159 |
| ||||||
Charge-offs |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Recoveries |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Ending balance |
|
$ |
2,241 |
|
$ |
864 |
|
$ |
2,879 |
|
$ |
1,205 |
|
$ |
136 |
|
$ |
7,325 |
|
Ending balance: individually evaluated for impairment |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Ending balance: collectively evaluated for impairment |
|
$ |
2,241 |
|
$ |
864 |
|
$ |
2,879 |
|
$ |
1,205 |
|
$ |
136 |
|
$ |
7,325 |
|
Loans |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Ending balance |
|
$ |
180,783 |
|
$ |
53,771 |
|
$ |
303,444 |
|
$ |
116,225 |
|
|
|
$ |
654,223 |
| |
Ending balance: individually evaluated for impairment |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
|
$ |
|
| |
Ending balance: collectively evaluated for impairment |
|
$ |
180,783 |
|
$ |
53,771 |
|
$ |
303,444 |
|
$ |
116,225 |
|
|
|
$ |
654,223 |
|
The following table shows the loan portfolio allocated by managements internal risk ratings at the dates indicated:
|
|
Credit Risk Profile by Internally Assigned Grade |
| |||||||||||||
June 30, 2019 |
|
Commercial |
|
Construction and |
|
Commercial Real Estate |
|
Consumer |
|
Total |
| |||||
Grade: |
|
|
|
|
|
|
|
|
|
|
| |||||
Pass |
|
$ |
185,539 |
|
$ |
38,576 |
|
$ |
309,332 |
|
$ |
135,668 |
|
$ |
669,115 |
|
Special Mention |
|
3,776 |
|
|
|
13,971 |
|
|
|
17,747 |
| |||||
Substandard |
|
1,311 |
|
2,827 |
|
7,444 |
|
615 |
|
12,197 |
| |||||
Total |
|
$ |
190,626 |
|
$ |
41,403 |
|
$ |
330,747 |
|
$ |
136,283 |
|
$ |
699,059 |
|
|
|
Credit Risk Profile by Internally Assigned Grade |
| |||||||||||||
December 31, 2018 |
|
Commercial |
|
Construction and |
|
Commercial Real Estate |
|
Consumer |
|
Total |
| |||||
Grade: |
|
|
|
|
|
|
|
|
|
|
| |||||
Pass |
|
$ |
163,793 |
|
$ |
55,416 |
|
$ |
309,353 |
|
$ |
149,535 |
|
$ |
678,097 |
|
Special Mention |
|
11,695 |
|
763 |
|
14,568 |
|
873 |
|
27,899 |
| |||||
Substandard |
|
691 |
|
|
|
4,747 |
|
615 |
|
6,053 |
| |||||
Total |
|
$ |
176,179 |
|
$ |
56,179 |
|
$ |
328,668 |
|
$ |
151,023 |
|
$ |
712,049 |
|
PRESIDIO BANK
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS (Continued)
NOTE 5ALLOWANCE FOR LOAN LOSSES (Continued)
The following table shows an aging analysis of the loan portfolio by the time past due at the dates indicated:
June 30, 2019 |
|
30 - 89 Days |
|
90 Days and |
|
Nonaccrual |
|
Total |
|
Current |
|
Total |
| ||||||
Commercial and real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Commercial |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
190,626 |
|
$ |
190,626 |
|
Construction and land development |
|
|
|
|
|
|
|
|
|
41,403 |
|
41,403 |
| ||||||
Commercial real estate |
|
|
|
|
|
3,746 |
|
3,746 |
|
327,001 |
|
330,747 |
| ||||||
Consumer and other |
|
|
|
|
|
|
|
|
|
136,283 |
|
136,283 |
| ||||||
Total |
|
$ |
|
|
$ |
|
|
$ |
3,746 |
|
$ |
3,746 |
|
$ |
695,313 |
|
$ |
699,059 |
|
December 31, 2018 |
|
30 - 89 Days |
|
90 Days and |
|
Nonaccrual |
|
Total |
|
Current |
|
Total |
| ||||||
Commercial: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Commercial |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
176,179 |
|
$ |
176,179 |
|
Construction and land development |
|
|
|
|
|
|
|
|
|
56,179 |
|
56,179 |
| ||||||
Commercial real estate |
|
|
|
|
|
3,746 |
|
3,746 |
|
324,922 |
|
328,668 |
| ||||||
Consumer and other |
|
|
|
|
|
|
|
|
|
151,023 |
|
151,023 |
| ||||||
Total |
|
$ |
|
|
$ |
|
|
$ |
3,746 |
|
$ |
3,746 |
|
$ |
708,303 |
|
$ |
712,049 |
|
As of June 30, 2019 and December 31, 2018 the Bank had one impaired Commercial Real Estate loan totaling $3,746,471 with no related allowance. The average recorded investment in impaired loans totaled $3,746,471 and $3,758,018 for the six months ended June 30, 2019 and the years ended December 31, 2018, respectively. There was no interest income recognized on impaired loans during the six months ended June 30, 2019 or the year ended December 31, 2018.
During the six months ended June 30, 2019 or the year ended December 31, 2018, the Bank had no loans modified as troubled debt restructurings for which there was a payment default within twelve months following the modification.
PRESIDIO BANK
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS (Continued)
NOTE 6INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following:
(dollars in thousands) |
|
June 30, |
|
December 31, |
| ||
Savings and money market |
|
$ |
268,411 |
|
$ |
285,245 |
|
Interest-bearing demand accounts |
|
94,385 |
|
116,120 |
| ||
Time, $100,000 or more |
|
50,552 |
|
36,553 |
| ||
Other time |
|
1,364 |
|
1,442 |
| ||
|
|
$ |
414,712 |
|
$ |
439,360 |
|
NOTE 7SHORT-TERM BORROWING ARRANGEMENTS
The Bank has unsecured federal funds lines of credit with two of its correspondent banks under which it can borrow up to an aggregate of $10,000,000. There were no borrowings outstanding under these arrangements at June 30, 2019 or December 31, 2018.
The Bank has a borrowing arrangement with the Federal Reserve Bank of San Francisco secured by certain of the Banks loans. At June 30, 2019, the amounts pledged and borrowing capacity under this arrangement totaled $63,911,265 and $58,933,176, respectively. At December 31, 2018, the amounts pledged and borrowing capacity under this arrangement totaled $82,183,372 and $56,781,192, respectively. There were no borrowings outstanding under this arrangement at June 30, 2019 or December 31, 2018.
The Bank has a borrowing arrangement with FHLB under which short-term and long-term advances are secured by the Banks loan portfolio. The Banks credit limit varies according to the amount and composition of loans pledged as collateral. At June 30, 2019, the loans pledged and borrowing capacity under such limits were approximately $271,907,269 and $162,290,830, respectively. At December 31, 2018, the loans pledged and borrowing capacity under such limits were approximately $274,272,219 and $172,586,292, respectively. There were no borrowings outstanding under this arrangement at June 30, 2019 and December 31, 2018.
During 2014 the Bank issued $10,000,000 of subordinated debentures in a private placement to accredited investors. The subordinated debentures mature on September 30, 2024. The subordinated debentures are redeemable in whole or in part, from time to time, upon the occurrence of specific events defined within the notes. The subordinated debentures are also redeemable in whole or in part, on or after the fifth anniversary of the effective date of issuance, at prices ranging from 101% to 103% of the principal amount outstanding. Debt issuance costs totaling $436,696 were recorded as a discount to par value and are being amortized over the term of the debt as additional interest expense. The unamortized balance of debt issuance costs totaled $229,263 and $251,099 at June 30, 2019 and December 31, 2018, respectively, and is recorded as part of the carrying amount of the subordinated debt. The subordinated debentures may be included in Tier 2 capital (with certain limitations applicable) under current regulatory guidelines and interpretations. The subordinated debentures have a fixed rate of interest equal to 8% and require quarterly interest-only payments until maturity.
PRESIDIO BANK
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS (Continued)
NOTE 8SHARE-BASED COMPENSATION
The Bank grants stock options, restricted stock awards and restricted stock units to employees, directors and advisory board members in exchange for services, pursuant to the shareholder approved 2006 Stock Option Plan and 2016 Equity Incentive Plan. During the six months ended June 30, 2019 the 2006 Stock Option Plan expired and has no shares available for future grant. The 2016 Equity Incentive Plan provides for 500,000 authorized shares at June 30, 2019 had 232,000 shares available for future grant. During the six months ended June 30, 2019, the Bank granted 28,800 shares of restricted stock awards and 9,040 shares of restricted stock units.
Stock Option Awards: A summary of option activity under the Plan for the quarter ended June 30, 2019 is presented below:
Options |
|
Shares |
|
Weighted |
|
Weighted |
|
Aggregate |
| ||
|
|
|
|
|
|
|
|
(in thousands) |
| ||
Outstanding at December 31, 2018 |
|
557,925 |
|
$ |
11.82 |
|
5.13 years |
|
$ |
5,319 |
|
Granted |
|
10,500 |
|
24.99 |
|
|
|
|
| ||
Forfeited |
|
|
|
|
|
|
|
|
| ||
Exercised |
|
(63,750 |
) |
9.82 |
|
|
|
|
| ||
Outstanding at June 30, 2019 |
|
504,675 |
|
$ |
12.34 |
|
4.94 years |
|
$ |
8,754 |
|
Exercisable at June 30, 2019 |
|
426,925 |
|
$ |
10.37 |
|
4.26 years |
|
$ |
8,247 |
|
Vested or expected to vest at June 30, 2019 |
|
504,675 |
|
$ |
12.34 |
|
4.94 years |
|
$ |
8,754 |
|
As of June 30, 2019 and December 31, 2018, the unrecognized compensation cost related to non-vested stock option awards totaled approximately $616,000 and $565,000, respectively. The unrecognized compensation cost at June 30, 2019 and December 31, 2018 is expected to be amortized on a straight-line basis over a weighted average period of 2.67 years and 2.84 years, respectively. The total fair value of the options vested was approximately $320,108 and $447,888, respectively for the year ended June 30, 2019 and December 31, 2018.
The following stock option information is for the year ended June 30, 2019:
Weighted average grant date fair value per share of options granted |
|
$ |
8.34 |
|
Significant fair value assumptions: |
|
|
| |
Expected term in years |
|
7.37 years |
| |
Expected annual volatility |
|
24.23 |
% | |
Risk-free interest rate |
|
2.32 |
% | |
Total compensation cost |
|
$ |
217,069 |
|
Restricted Stock Awards: Nonvested restricted stock of 70,188 and 68,625, respectively was outstanding at June 30, 2019 and December 31, 2018. Compensation cost associated with the restricted stock totaled $272,543 and $437,094, respectively for the six months ended June 30, 2019 and the year ended December 31, 2018. As of June 30, 2019 and December 31, 2018, the unrecognized compensation cost related to the nonvested restricted stock totaled approximately $1,271,000 and $986,000, respectively. The unrecognized compensation cost at June 30, 2019 and December 31, 2018 is expected to be amortized on a straight-line basis over a weighted average period of 2.74 years and 2.52 years, respectively.
Restricted Stock Units: Nonvested restricted stock units of 9,040 and 7,544 was outstanding at June 30, 2019 and December 31, 2018, respectively. Compensation cost associated with the restricted stock units totaled $99,161 and $199,850, respectively for the six months ended June 30, 2019 and the year ended December 31, 2018. As of June 30, 2019, the unrecognized compensation cost related to the nonvested restricted stock units totaled approximately $101,000. As of December 31, 2018, there was no unrecognized compension cost related to the nonvested restricted stock units. The unrecognized compensation cost at June 30, 2019 is expected to be amortized on a straight-line basis over a weighted average period of 0.50 years and will be adjusted for subsequent changes in estimated forfeitures.
PRESIDIO BANK
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS (Continued)
NOTE 9SHAREHOLDERS EQUITY
Dividends: Upon declaration by the Board of Directors, all shareholders of record will be entitled to receive dividends. The California Financial Code restricts the total dividend payment of any state banking association in any calendar year to the lesser of (1) the banks retained earnings or (2) the Banks net income for its last three fiscal years, less distributions made to shareholders during the same three-year period. At June 30, 2018 and December 31, 2018, $23,069,000 and $20,683,000 was free of such restrictions, respectively.
Regulatory Capital: The Bank is subject to certain regulatory capital requirements administered by FDIC. Failure to meet these 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 Banks financial statements.
Under capital adequacy guidelines, the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. These quantitative measures are established by regulation and require that minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets be maintained. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
As of January 1, 2019, the Bank along with other community banking organizations became subject to new capital requirements on January 1, 2019 and certain provisions of the new rules which were phased in beginning on January 1, 2016 and became fully phased in 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.
Quantitative measures established by regulation to help ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total, Tier 1 capital, and common equity Tier 1 capital to risk weighted assets, and of Tier 1 capital to average assets. As of June 30, 2019, and December 31, 2018, the most recent notification from the FDIC categorized the Bank as well capitalized under these guidelines. There are no conditions or events since that notification that management believes have changed the Banks category.
The Banks actual capital amounts and ratios are presented in the following table, together with capital adequacy requirements, under the Basel III regulatory requirements as of June 30, 2019, and December 31, 2018.
|
|
|
|
|
|
|
|
Required for |
| |||||||
|
|
|
|
|
|
To Be Well-Capitalized |
|
Capital |
| |||||||
|
|
|
|
|
|
Under Basel III PCA |
|
Adequacy |
| |||||||
|
|
Actual |
|
Requirements |
|
Under Basel III |
| |||||||||
As of June 30, 2019 |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
| |||
|
|
(Dollars in thousands) |
| |||||||||||||
Total Capital |
|
$ |
113,413 |
|
13.0 |
% |
$ |
87,328 |
|
10.0 |
% |
$ |
91,695 |
|
10.5 |
% |
(to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Tier 1 Capital |
|
$ |
95,556 |
|
10.9 |
% |
$ |
69,862 |
|
8.0 |
% |
$ |
74,229 |
|
8.5 |
% |
(to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Common Equity Tier 1 Capital |
|
$ |
95,556 |
|
10.9 |
% |
$ |
56,763 |
|
6.5 |
% |
$ |
61,130 |
|
7.0 |
% |
(to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Leverage |
|
$ |
95,556 |
|
10.9 |
% |
$ |
43,655 |
|
5.0 |
% |
$ |
34,924 |
|
4.0 |
% |
(to average assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Required for |
| |||||||
|
|
|
|
|
|
To Be Well-Capitalized |
|
Capital |
| |||||||
|
|
|
|
|
|
Under Basel III PCA |
|
Adequacy |
| |||||||
|
|
Actual |
|
Requirements |
|
Under Basel III |
| |||||||||
As of December 31, 2018 |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
| |||
|
|
(Dollars in thousands) |
| |||||||||||||
Total Capital |
|
$ |
106,519 |
|
12.1 |
% |
$ |
88,378 |
|
10.0 |
% |
$ |
92,794 |
|
10.5 |
% |
(to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Tier 1 Capital |
|
$ |
88,671 |
|
10.0 |
% |
$ |
70,703 |
|
8.0 |
% |
$ |
75,119 |
|
8.5 |
% |
(to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Common Equity Tier 1 Capital |
|
$ |
88,671 |
|
10.0 |
% |
$ |
57,446 |
|
6.5 |
% |
$ |
61,863 |
|
7.0 |
% |
(to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Leverage |
|
$ |
88,671 |
|
10.3 |
% |
$ |
42,855 |
|
5.0 |
% |
$ |
34,284 |
|
4.0 |
% |
(to average assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
PRESIDIO BANK
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS (Continued)
NOTE 10NONINTEREST EXPENSES
Other expenses for the six months ended June 30, 2019 and 2018 consisted of the following:
|
|
Six Months |
| ||||
(Dollars in thousands) |
|
2019 |
|
2018 |
| ||
Salaries and employee benefits |
|
$ |
6,952 |
|
$ |
6,538 |
|
Occupancy and equipment |
|
1,294 |
|
1,218 |
| ||
Data processing |
|
883 |
|
785 |
| ||
Regulatory and insurance |
|
217 |
|
259 |
| ||
Professional fees |
|
1,200 |
|
425 |
| ||
Advertising and promotions |
|
79 |
|
120 |
| ||
Stationery and supplies |
|
75 |
|
86 |
| ||
Travel and entertainment |
|
168 |
|
145 |
| ||
Correspondent bank charges |
|
64 |
|
62 |
| ||
Directors fees and share-based compensation |
|
344 |
|
255 |
| ||
Telephone |
|
117 |
|
105 |
| ||
Other |
|
184 |
|
314 |
| ||
|
|
$ |
11,577 |
|
$ |
10,312 |
|
NOTE 11REVENUE FROM CONTRACTS WITH CUSTOMERS
Service Charges on Deposit Accounts: The Bank earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Bank fulfills the customers request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Bank satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customers account balance.
The following table presented the Banks sources of noninterest income for the six months ended June 30, 2019 and 2018.
|
|
Six Months |
| ||||
(Dollars in thousands) |
|
2019 |
|
2018 |
| ||
Deposit service charges |
|
$ |
309 |
|
$ |
348 |
|
Other fees |
|
87 |
|
86 |
| ||
Total service charges and fees |
|
$ |
396 |
|
$ |
434 |
|
PRESIDIO BANK
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS (Continued)
NOTE 12LEASES
On January 1, 2019, Presidio adopted ASU 2016-02, Leases (Topic 842), using the modified retrospective approach under ASC 842. Presidios operating leases are real estate leases which are comprised of bank branches, and office spaces with remaining lease terms ranging from 1 to 8 years as of June 30, 2019.
At June 30, 2019, operating lease right-of-use (ROU) assets and related liabilities were $7.3 million and $8.2 million, respectively. At June 30, 2019, Presidio had no material short-term operating leases. Presidio defines short term operating lease liabilities as liabilities due in twelve months or less and long-term lease liabilities are defined as liabilities that are due in more than twelve months at the end of each reporting period. Presidio did not have any finance leases at June 30, 2019. During the six months ended June 30, 2019, Presidio extended one branch operating lease five years to January 31, 2025.
Operating lease ROU assets represent Presidios right to use the underlying asset during the lease term and operating lease liabilities represent Presidios obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using Presidios incremental borrowing rate at the lease commencement date. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term and is recorded in occupancy expense in the Statements of Income. Presidios occupancy expense also includes variable lease costs which are comprised of Presidios share of actual costs for utilities, common area maintenance, property taxes, and insurance that are not included in lease liabilities and are expensed as incurred.
Presidio uses its incremental borrowing rate to present value lease payments in to recognize an ROU asset and the related lease liability. Presidio uses the FHLB borrowing interest rate as its incremental borrowing rate at the given period.
The table below summarizes Presidios net lease cost:
|
|
Six months ended June 30, 2019 |
| |
|
|
(Dollars in thousands) |
| |
Operating lease cost |
|
$ |
844 |
|
|
|
|
| |
Variable lease cost |
|
21 |
| |
|
|
|
| |
Net lease cost |
|
$ |
865 |
|
Rent expense for the six months ended June 30, 2019 and June 30, 2018 was $865,000 and $857,000, respectively.
PRESIDIO BANK
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS (Continued)
The table below summarizes other information related to Presidios operating leases:
|
|
Six months ended June 30, |
| |
|
|
(Dollars in thousands) |
| |
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
| |
Operating cash flows from operating leases |
|
$ |
897 |
|
Right-of-use assets obtained in exchange for lease liabilities, net |
|
$ |
7,344 |
|
Weighted-average remaining lease term - operating leases |
|
5.7 years |
| |
Weighted-average discount rate - operating leases |
|
2.82 |
% |
The table below summarizes the maturity of remaining lease liabilities:
|
|
June 30, 2019 |
| |
|
|
(Dollars in thousands) |
| |
2019 |
|
$ |
916 |
|
2020 |
|
1,929 |
| |
2021 |
|
1,435 |
| |
2022 |
|
1,271 |
| |
2023 |
|
1,087 |
| |
2024 and thereafter |
|
2,308 |
| |
Total lease payments |
|
8,946 |
| |
Less: imputed interest |
|
731 |
| |
Total lease obligations |
|
$ |
8,215 |
|
As of June 30, 2019, Presidio did not have any additional operating lease commitments that have not yet commenced.
HERITAGE COMMERCE CORP AND PRESIDIO BANK
Unaudited Pro Forma Combined Condensed Financial Statements
As of and for the six months ended June 30, 2019 and the year ended December 31, 2018
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
Heritage Commerce Corp, the holding company (Heritage) for Heritage Bank of Commerce, completed the acquisition of Presidio Bank (Presidio) of San Francisco, California, effective October 11, 2019 (the acquisition date). The following unaudited pro forma combined condensed financial information and explanatory notes illustrate the effect of the merger on Heritages consolidated financial position and results of operations and its subsidiaries and of Presidio and its subsidiaries based upon the companies respective historical consolidated financial positions and results of operations under the acquisition method of accounting with Heritage treated as the acquirer. The unaudited pro forma combined condensed financial information has been derived from and should be read in conjunction with the historical consolidated financial statements and the related notes of Heritage and Presidio, which are incorporated by reference or provided elsewhere in this Form 8-K/A.
In accordance with generally accepted accounting principles in the United States of America, or GAAP, the assets and liabilities of Presidio will be recorded by Heritage at their estimated fair values as of the acquisition date. The unaudited pro forma combined condensed balance sheet as of June 30, 2019 gives effect to the merger, as if the transaction had occurred on June 30, 2019. The unaudited pro forma combined condensed income statement for the six months ended June 30, 2019 and the year ended December 31, 2018 assumes the merger took place on January 1, 2018.
The unaudited pro forma combined condensed financial information includes Heritages estimated adjustments to record assets and liabilities of Presidio at their respective fair values. These adjustments are subject to change depending on changes in interest rates and the components of assets and liabilities as of the acquisition date and as additional information becomes available and additional analyses are performed. The final amount and allocation of the purchase price will be determined after completion of further analyses to determine the fair value of Presidios tangible and identifiable intangible assets and liabilities as of the acquisition date. Increases or decreases in the estimated fair values of the net assets acquired as compared with the information shown in the unaudited pro forma combined condensed financial information may change the amount of the purchase price allocated to goodwill and other assets and liabilities and may impact Heritages statements of income due to adjustments in yield and/or amortization of the adjusted assets or liabilities. Any changes to Presidio shareholders equity, including results of operations from December 31, 2018 through the acquisition date, will also change the purchase price allocation, which may include the recording of a lower or higher amount of goodwill. The final adjustments may be materially different from the unaudited pro forma adjustments presented herein.
Heritage anticipates that the merger with Presidio will provide the combined company with financial benefits that include reduced combined operating expenses. The pro forma information, which is intended to illustrate the financial characteristics of the merger and the combined company under one set of assumptions, does not reflect the benefits of expected cost savings or opportunities to earn additional revenue, or all integration costs that may be incurred and, accordingly, should not be considered a prediction of future results. It also does not necessarily reflect what the historical results of the combined company would have been had our companies been combined during the period shown.
The pro forma shareholders equity and net income should not be considered indicative of the market value of Heritage common stock or the actual or future results of operations of Heritage for any period. Actual results may be materially different than the pro forma information presented.
The unaudited pro forma combined condensed financial statements included herein are presented for informational purposes only and do not necessarily reflect the financial results of the combined company had the companies actually been combined at the beginning of each period presented. As stated above, the adjustments included in these unaudited pro forma combined condensed financial statements are preliminary and maybe revised.
HERITAGE COMMERCE CORP AND PRESIDIO BANK
PRO FORMA COMBINED CONDENSED BALANCE SHEET (Unaudited)
|
|
June 30, 2019 |
| ||||||||||||
|
|
Heritage |
|
|
|
|
|
|
|
|
| ||||
|
|
Commerce |
|
Presidio |
|
|
|
|
|
Pro Forma |
| ||||
|
|
Corp |
|
Bank |
|
Adjustments |
|
|
|
Combined |
| ||||
|
|
(Dollars in thousands) |
| ||||||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
| ||||
Cash and due from banks |
|
$ |
36,301 |
|
$ |
13,389 |
|
$ |
|
|
|
|
$ |
49,690 |
|
Other investments and interest-bearing deposits in other financial institutions |
|
239,710 |
|
48,013 |
|
|
|
|
|
287,723 |
| ||||
Total cash and cash equivalents |
|
276,011 |
|
61,402 |
|
|
|
|
|
337,413 |
| ||||
Securities available-for-sale, at fair value |
|
383,156 |
|
48,523 |
|
|
|
|
|
431,679 |
| ||||
Securities held-to-maturity, at amortized cost |
|
351,399 |
|
467 |
|
|
|
|
|
351,866 |
| ||||
Loans held-for-sale - SBA, at lower of cost or fair value, including deferred costs |
|
5,202 |
|
|
|
|
|
|
|
5,202 |
| ||||
Loans, net of deferred fees |
|
1,877,767 |
|
698,073 |
|
(9,128 |
) |
(a) |
|
2,566,712 |
| ||||
Allowance for loan losses |
|
(26,631 |
) |
(7,463 |
) |
7,463 |
|
(b) |
|
(26,631 |
) | ||||
Loans, net |
|
1,851,136 |
|
690,610 |
|
(1,665 |
) |
|
|
2,540,081 |
| ||||
Federal Home Loan Bank and Federal Reserve Bank stock, at cost |
|
25,226 |
|
5,752 |
|
|
|
|
|
30,978 |
| ||||
Company owned life insurance |
|
62,522 |
|
12,669 |
|
|
|
|
|
75,191 |
| ||||
Premises and equipment, net |
|
6,975 |
|
2,063 |
|
|
|
|
|
9,038 |
| ||||
Goodwill |
|
83,753 |
|
|
|
81,015 |
|
(c) |
|
164,768 |
| ||||
Other intangible assets |
|
10,900 |
|
|
|
14,046 |
|
(d) |
|
24,946 |
| ||||
Accrued interest receivable and other assets |
|
51,751 |
|
19,001 |
|
(3,369 |
) |
(e) |
|
67,383 |
| ||||
Total assets |
|
$ |
3,108,031 |
|
$ |
840,487 |
|
$ |
90,027 |
|
|
|
$ |
4,038,545 |
|
Liabilities and Shareholders Equity |
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
| ||||
Deposits: |
|
|
|
|
|
|
|
|
|
|
| ||||
Demand, noninterest-bearing |
|
$ |
994,082 |
|
$ |
307,648 |
|
$ |
|
|
|
|
$ |
1,301,730 |
|
Demand, interest-bearing |
|
682,114 |
|
94,385 |
|
|
|
|
|
776,499 |
| ||||
Savings and money market |
|
788,832 |
|
268,411 |
|
|
|
|
|
1,057,243 |
| ||||
Time deposits |
|
141,870 |
|
51,010 |
|
(1 |
) |
(f) |
|
192,879 |
| ||||
CDARS - interest-bearing demand, money market and time deposits |
|
15,575 |
|
906 |
|
|
|
|
|
16,481 |
| ||||
Total deposits |
|
2,622,473 |
|
722,360 |
|
(1 |
) |
|
|
3,344,832 |
| ||||
Subordinated debt |
|
39,461 |
|
9,771 |
|
396 |
|
(g) |
|
49,628 |
| ||||
Other borrowings |
|
|
|
236 |
|
|
|
|
|
236 |
| ||||
Accrued interest payable and other liabilities |
|
57,989 |
|
12,156 |
|
|
|
|
|
70,145 |
| ||||
Total liabilities |
|
2,719,923 |
|
744,523 |
|
395 |
|
|
|
3,464,841 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Shareholders equity: |
|
|
|
|
|
|
|
|
|
|
| ||||
Preferred stock |
|
|
|
|
|
|
|
|
|
|
| ||||
Common stock |
|
302,305 |
|
69,109 |
|
116,487 |
|
(h) |
|
487,901 |
| ||||
Retained earnings |
|
92,105 |
|
26,446 |
|
(26,446 |
) |
(i) |
|
92,105 |
| ||||
Accumulated other comprehensive loss |
|
(6,302 |
) |
409 |
|
(409 |
) |
(j) |
|
(6,302 |
) | ||||
Total shareholders equity |
|
388,108 |
|
95,964 |
|
89,632 |
|
|
|
573,704 |
| ||||
Total liabilities and shareholders equity |
|
$ |
3,108,031 |
|
$ |
840,487 |
|
$ |
90,027 |
|
|
|
$ |
4,038,545 |
|
See Notes to Pro Forma Combined Condensed Consolidated Financial Statements
HERITAGE COMMERCE CORP AND PRESIDIO BANK
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME (Unaudited)
|
|
Six Months Ended June 30, 2019 |
| ||||||||||||
|
|
Heritage |
|
Presidio |
|
Adjustments |
|
|
|
Pro Forma |
| ||||
|
|
(Dollars in thousands, except per share amounts) |
| ||||||||||||
Interest income: |
|
|
|
|
|
|
|
|
|
|
| ||||
Loans, including fees |
|
$ |
54,058 |
|
$ |
19,344 |
|
$ |
819 |
|
(a) |
|
$ |
74,221 |
|
Securities, taxable |
|
8,645 |
|
817 |
|
|
|
|
|
9,462 |
| ||||
Securities, exempt from Federal tax |
|
1,094 |
|
|
|
|
|
|
|
1,094 |
| ||||
Other investments, interest-bearing deposits in other financial institutions and Federal funds sold |
|
3,141 |
|
1,033 |
|
|
|
|
|
4,174 |
| ||||
Total interest income |
|
66,938 |
|
21,194 |
|
819 |
|
|
|
88,951 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest expense: |
|
|
|
|
|
|
|
|
|
|
| ||||
Deposits |
|
3,831 |
|
1,583 |
|
|
|
|
|
5,414 |
| ||||
Subordinated debt |
|
1,148 |
|
422 |
|
(36 |
) |
(b) |
|
1,534 |
| ||||
Other borrowings |
|
1 |
|
18 |
|
|
|
|
|
19 |
| ||||
Total interest expense |
|
4,980 |
|
2,023 |
|
(36 |
) |
|
|
6,967 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net interest income before provision for loan losses |
|
61,958 |
|
19,171 |
|
855 |
|
|
|
81,984 |
| ||||
Provision (credit) for loan losses |
|
(1,801 |
) |
24 |
|
|
|
|
|
(1,777 |
) | ||||
Net interest income after provision for loan losses |
|
63,759 |
|
19,147 |
|
855 |
|
|
|
83,761 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
| ||||
Service charges and fees on deposit accounts |
|
2,338 |
|
396 |
|
|
|
|
|
2,734 |
| ||||
Increase in cash surrender value of life insurance |
|
663 |
|
162 |
|
|
|
|
|
825 |
| ||||
Gain on sales of securities |
|
548 |
|
|
|
|
|
|
|
548 |
| ||||
Servicing income |
|
341 |
|
|
|
|
|
|
|
341 |
| ||||
Gain on sales of SBA loans |
|
175 |
|
|
|
|
|
|
|
175 |
| ||||
Other |
|
1,168 |
|
31 |
|
|
|
|
|
1,199 |
| ||||
Total noninterest income |
|
5,233 |
|
589 |
|
|
|
|
|
5,822 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
| ||||
Salaries and employee benefits |
|
21,468 |
|
6,952 |
|
|
|
|
|
28,420 |
| ||||
Occupancy and equipment |
|
3,084 |
|
1,294 |
|
|
|
|
|
4,378 |
| ||||
Professional fees |
|
1,571 |
|
1,200 |
|
|
|
|
|
2,771 |
| ||||
Data processing |
|
1,411 |
|
883 |
|
|
|
|
|
2,294 |
| ||||
Software subscriptions |
|
1,145 |
|
|
|
|
|
|
|
1,145 |
| ||||
Amortization of intangible assets |
|
1,107 |
|
|
|
1,008 |
|
(c) |
|
2,115 |
| ||||
Insurance expense |
|
875 |
|
42 |
|
|
|
|
|
917 |
| ||||
Acquisition and integration related costs |
|
540 |
|
|
|
|
|
|
|
540 |
| ||||
Other |
|
5,162 |
|
1,206 |
|
|
|
|
|
6,368 |
| ||||
Total noninterest expense |
|
36,363 |
|
11,577 |
|
1,008 |
|
|
|
48,948 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Income before income taxes |
|
32,629 |
|
8,159 |
|
(153 |
) |
|
|
40,635 |
| ||||
Income tax expense |
|
9,130 |
|
2,396 |
|
(42 |
) |
(d) |
|
11,484 |
| ||||
Net income |
|
$ |
23,499 |
|
$ |
5,763 |
|
$ |
(111 |
) |
|
|
$ |
29,151 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
| ||||
Basic |
|
$ |
0.54 |
|
|
|
$ |
(0.04 |
) |
(e) |
|
$ |
0.50 |
| |
Diluted |
|
$ |
0.54 |
|
|
|
$ |
(0.05 |
) |
(e) |
|
$ |
0.49 |
| |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average common shares outstanding - basic |
|
43,155,360 |
|
|
|
15,684,064 |
|
(f) |
|
58,839,424 |
| ||||
Weighted average common shares outstanding - diluted |
|
43,695,117 |
|
|
|
15,684,064 |
|
(f) |
|
59,379,181 |
|
See Notes to Pro Forma Combined Condensed Consolidated Financial Statements
HERITAGE COMMERCE CORP AND PRESIDIO BANK
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME (Unaudited)
|
|
Year Ended December 31, 2018 |
| ||||||||||||
|
|
Heritage |
|
|
|
|
|
|
|
|
| ||||
|
|
Commerce |
|
Presidio |
|
|
|
|
|
Pro Forma |
| ||||
|
|
Corp |
|
Bank |
|
Adjustments |
|
|
|
Combined |
| ||||
|
|
(Dollars in thousands, except per share amounts) |
| ||||||||||||
Interest income: |
|
|
|
|
|
|
|
|
|
|
| ||||
Loans, including fees |
|
$ |
105,635 |
|
$ |
34,358 |
|
$ |
1,013 |
|
(a) |
|
$ |
141,006 |
|
Securities, taxable |
|
15,211 |
|
1,253 |
|
|
|
|
|
16,464 |
| ||||
Securities, exempt from Federal tax |
|
2,225 |
|
|
|
|
|
|
|
2,225 |
| ||||
Other investments, interest-bearing deposits in other financial institutions and Federal funds sold |
|
6,774 |
|
2,190 |
|
|
|
|
|
8,964 |
| ||||
Total interest income |
|
129,845 |
|
37,801 |
|
1,013 |
|
|
|
168,659 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest expense: |
|
|
|
|
|
|
|
|
|
|
| ||||
Deposits |
|
5,506 |
|
1,914 |
|
1 |
|
(b) |
|
7,421 |
| ||||
Subordinated debt |
|
2,314 |
|
844 |
|
(72 |
) |
(c) |
|
3,086 |
| ||||
Short-term borrowings |
|
2 |
|
|
|
|
|
|
|
2 |
| ||||
Total interest expense |
|
7,822 |
|
2,758 |
|
(71 |
) |
|
|
10,509 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net interest income before provision for loan losses |
|
122,023 |
|
35,043 |
|
1,084 |
|
|
|
158,150 |
| ||||
Provision for loan losses |
|
7,421 |
|
273 |
|
|
|
|
|
7,694 |
| ||||
Net interest income after provision for loan losses |
|
114,602 |
|
34,770 |
|
1,084 |
|
|
|
150,456 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
| ||||
Service charges and fees on deposit accounts |
|
4,113 |
|
852 |
|
|
|
|
|
4,965 |
| ||||
Increase in cash surrender value of life insurance |
|
1,045 |
|
329 |
|
|
|
|
|
1,374 |
| ||||
Servicing income |
|
709 |
|
|
|
|
|
|
|
709 |
| ||||
Gain on sales of SBA loans |
|
698 |
|
|
|
|
|
|
|
698 |
| ||||
Gain on sales of securities |
|
266 |
|
|
|
|
|
|
|
266 |
| ||||
Other |
|
2,743 |
|
40 |
|
|
|
|
|
2,783 |
| ||||
Total noninterest income |
|
9,574 |
|
1,221 |
|
|
|
|
|
10,795 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
| ||||
Salaries and employee benefits |
|
40,193 |
|
13,174 |
|
|
|
|
|
53,367 |
| ||||
Other acquisition and integration related costs |
|
5,598 |
|
|
|
|
|
|
|
5,598 |
| ||||
Occupancy and equipment |
|
5,411 |
|
2,450 |
|
|
|
|
|
7,861 |
| ||||
Severance and retention acquisition costs |
|
3,569 |
|
|
|
|
|
|
|
3,569 |
| ||||
Software subscriptions |
|
2,343 |
|
|
|
|
|
|
|
2,343 |
| ||||
Data processing |
|
1,978 |
|
1,592 |
|
|
|
|
|
3,570 |
| ||||
Professional fees |
|
1,969 |
|
731 |
|
|
|
|
|
2,700 |
| ||||
Amortization of intangible assets |
|
1,943 |
|
|
|
2,213 |
|
(d) |
|
4,156 |
| ||||
Insurance expense |
|
1,685 |
|
85 |
|
|
|
|
|
1,770 |
| ||||
Other |
|
10,832 |
|
2,236 |
|
|
|
|
|
13,068 |
| ||||
Total noninterest expense |
|
75,521 |
|
20,268 |
|
2,213 |
|
|
|
98,002 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Income before income taxes |
|
48,655 |
|
15,723 |
|
(1,129 |
) |
|
|
63,249 |
| ||||
Income tax expense |
|
13,324 |
|
3,894 |
|
(310 |
) |
(e) |
|
16,908 |
| ||||
Net income |
|
$ |
35,331 |
|
$ |
11,829 |
|
$ |
(819 |
) |
|
|
$ |
46,341 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
| ||||
Basic |
|
$ |
0.85 |
|
|
|
$ |
(0.04 |
) |
(f) |
|
$ |
0.81 |
| |
Diluted |
|
$ |
0.84 |
|
|
|
$ |
(0.04 |
) |
(f) |
|
$ |
0.80 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Weighted average common shares outstanding - basic |
|
41,469,211 |
|
|
|
15,684,064 |
|
(g) |
|
57,153,275 |
| ||||
Weighted average common shares outstanding - diluted |
|
42,182,939 |
|
|
|
15,684,064 |
|
(g) |
|
57,867,003 |
|
See Notes to Pro Forma Combined Condensed Consolidated Financial Statements
HERITAGE COMMERCE CORP AND PRESIDIO BANK
NOTES TO PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL INFORMATION
(Unaudited)
(1) Basis of Presentation
The unaudited pro forma combined condensed consolidated financial information and explanatory notes show the impact on the historical balance sheet and statements of income of Heritage resulting from the Presidio merger under the acquisition method of accounting as required by the Financial Accounting Standards Board (FASB) accounting guidance on business combinations. Acquisition accounting requires that the assets purchased, the liabilities assumed and non-controlling interest all be reported in the acquirers financial statements at their fair value, with any excess of purchase consideration over the net assets being reported as goodwill at the close of business on the transaction date. The unaudited pro forma combined condensed consolidated balance sheet combines the historical financial information of Heritage and Presidio as of June 30, 2019, and assumes that the merger was completed on that date. The unaudited pro forma combined condensed consolidated statements of income for the six months ended June 30, 2019 and for the year ended December 31, 2018 give effect to the Heritage and Presidio merger as if the transaction had been completed on January 1, 2018.
Since the transaction is being recorded using the acquisition method of accounting, all loans are recorded at fair value, including adjustments for credit quality, and no allowance for loan losses is carried over to Heritages balance sheet. In addition, certain nonrecurring costs associated with the merger such as potential severance, professional fees, legal fees and conversion-related expenditures are expensed as incurred and not reflected in the unaudited pro forma combined condensed consolidated statements of income.
While the recording of the acquired loans at their fair value will impact the prospective determination of the provision for loan losses and the allowance for loan losses, for purposes of the unaudited pro forma consolidated statements of income for the six months ended June 30, 2019, and for the year ended December 31, 2018, Heritage assumed no adjustments to the historical amount of Presidios provision for loan losses.
(2) Accounting Policies and Financial Statement Classifications
The accounting policies of Presidio are in the process of being reviewed in detail by Heritage. Upon completion of such review, conforming adjustments or financial statement reclassifications may be determined.
(3) Merger and Acquisition Integration Costs
In connection with the Presidio merger, the plan to integrate the operations of Presidio is still being developed. The specific details of the plan to integrate the operations of Heritage and Presidio will continue to be refined over the next several months, and will include assessing personnel, benefit plans, premises, equipment, and service contracts to determine where Heritage may take advantage of redundancies. Certain decisions arising from these assessments may involve involuntary termination of employees, vacating leased premises, changing information systems, canceling contracts with certain service providers, selling or otherwise disposing of certain premises, furniture and equipment, and re-assessing a possible deferred tax asset valuation allowance from a potential change in control for tax purposes. Heritage also expects to incur merger-related costs including professional fees, legal fees, system conversion costs and costs related to communications with customers and others. To the extent there are costs associated with these actions, the cost will be recorded based on the nature of the cost and the timing of these integration actions.
No such costs were considered in the accompanying unaudited pro forma combined condensed consolidated statements of income.
(4) Estimated Annual Cost Savings or Revenue Opportunities
While Heritage expects to realize cost savings from the Presidio merger, the pro forma information, although helpful in illustrating the financial characteristics of the combined company under one set of assumptions, does not reflect the benefits of expected cost savings, opportunities to earn additional revenue, the impact of restructuring and merger-related costs, or other factors that may result as a consequence of the merger and, accordingly, does not attempt to predict or suggest future results. Further, there can be no assurance the cost savings will be achieved in the amount, manner or timing currently contemplated.
(5) Pro Forma Adjustments to Combined Condensed Consolidated Balance Sheet at June 30, 2019
The following pro forma adjustments have been reflected in the unaudited pro forma combined condensed consolidated balance sheet at June 30, 2019. All adjustments are based on current assumptions and valuations, which are subject to change.
|
|
|
|
|
June 30, |
| ||
|
|
|
|
|
(Dollars in thousands) |
| ||
|
|
|
|
|
|
| ||
(a) |
Adjust the Presidio Bank loan portfolio to fair value |
|
|
|
$ |
(9,128 |
) | |
|
|
|
|
|
|
| ||
(b) |
Eliminate the Presidio Bank allowance for loan losses |
|
|
|
$ |
7,463 |
| |
|
|
|
|
|
|
| ||
(c) |
Goodwill created from the transaction: |
|
|
|
|
| ||
|
Assets acquired |
|
|
|
$ |
840,487 |
| |
|
Less: liabilities assumed |
|
|
|
(744,523 |
) | ||
|
Purchase accounting adjustments: |
|
|
|
|
| ||
|
Adjust the loan portfolio to fair value |
|
$ |
(9,128 |
) |
|
| |
|
Eliminate the Presidio Bank allowance for loan losses |
|
7,463 |
|
|
| ||
|
Core deposit intangible |
|
14,046 |
|
|
| ||
|
Adjust the leases to fair value |
|
(100 |
) |
|
| ||
|
Adjust the certificates of deposit to fair value |
|
1 |
|
|
| ||
|
Adjust the Presidio subordinated debt to fair value |
|
(396 |
) |
|
| ||
|
Total pre-tax adjustments |
|
11,886 |
|
|
| ||
|
Less: deferred income taxes |
|
(3,269 |
) |
|
| ||
|
Total after-tax adjustments |
|
|
|
8,617 |
| ||
|
Net assets acquired |
|
|
|
104,581 |
| ||
|
|
|
|
|
|
| ||
|
Purchase price |
|
|
|
$ |
185,596 |
| |
|
Less: net assets acquired |
|
|
|
(104,581 |
) | ||
|
Goodwill created from transaction |
|
|
|
$ |
81,015 |
| |
|
|
|
|
|
|
| ||
(d) |
Core deposit intangible asset created from the transaction |
|
|
|
$ |
14,046 |
| |
|
|
|
|
|
|
| ||
(e) |
Other assets adjustments: |
|
|
|
|
| ||
|
Above market leases |
|
|
|
$ |
(100 |
) | |
|
Deferred income taxes on purchase accounting adjustments |
|
|
|
(3,269 |
) | ||
|
Other assets adjustments |
|
|
|
$ |
(3,369 |
) | |
|
|
|
|
|
|
| ||
(f) |
Adjust the time deposits to fair value |
|
|
|
$ |
(1 |
) | |
|
|
|
|
|
|
| ||
(g) |
Adjust the Presidio Bank subordinated debt to fair value |
|
|
|
$ |
396 |
| |
|
|
|
|
|
|
| ||
(h) |
Common stock |
|
|
|
|
| ||
|
Eliminate Presidio Bank common stock |
|
|
|
$ |
(69,109 |
) | |
|
15,684,064 shares of Heritage Commerce Corp common stock issued to Presidio Bank shareholders and holders of restricted stock (Stock price = $11.36 on October 11, 2019, the effective date of the acquisition) |
|
|
|
178,171 |
| ||
|
Consideration for Presidio Bank stock options exchanged for Heritage |
|
|
|
|
| ||
|
Commerce Corp stock options |
|
|
|
7,425 |
| ||
|
Common stock adjustment |
|
|
|
$ |
116,487 |
| |
|
|
|
|
|
|
| ||
(i) |
Eliminate Presidio Bank retained earnings |
|
|
|
$ |
(26,446 |
) | |
|
|
|
|
|
|
| ||
(j) |
Eliminate Presidio Bank other comprehensive loss |
|
|
|
$ |
(409 |
) | |
(6) Pro Forma Adjustments to Combined Condensed Consolidated Statement of Income for the Six Months Ended June 30, 2019
The following pro forma adjustments have been reflected in the unaudited pro forma combined condensed consolidated statement of income for the six months ended June 30, 2019. All adjustments are based on current assumptions and valuations, which are subject to change.
|
|
|
For the Six Months Ended |
| |
|
|
|
June 30, 2019 |
| |
|
|
|
(Dollars in thousands) |
| |
(a) |
Loan fair value mark accretion |
|
$ |
819 |
|
|
|
|
|
| |
(b) |
Subordinated debt fair value mark accretion |
|
$ |
(36 |
) |
|
|
|
|
| |
(c) |
Amortization (accretion) of the intangible assets created from the transaction: |
|
|
| |
|
Core deposit intangible asset amortization |
|
$ |
1,022 |
|
|
Above market leases accretion |
|
(14 |
) | |
|
Total amortization (accretion) of the intangible assets created from the transaction |
|
$ |
1,008 |
|
|
|
|
|
| |
(d) |
Income tax expense on pre-tax adjustments |
|
$ |
(42 |
) |
|
|
|
|
| |
(e) |
Earnings per share adjustments: |
|
|
| |
|
Heritage Commerce Corp net income |
|
$ |
23,499 |
|
|
Presidio Bank net income |
|
5,763 |
| |
|
Adjustments to net income |
|
(111 |
) | |
|
Pro Forma Combined net income |
|
$ |
29,151 |
|
|
|
|
|
| |
|
Pro forma combined basic earnings per share |
|
$ |
0.50 |
|
|
Less Heritage Commerce Corp basic earnings per share |
|
0.54 |
| |
|
Adjustment to basic earnings per share |
|
$ |
(0.04 |
) |
|
|
|
|
| |
|
Pro forma combined diluted earnings per share |
|
$ |
0.49 |
|
|
Less Heritage Commerce Corp diluted earnings per share |
|
0.54 |
| |
|
Adjustment to diluted earnings per share |
|
$ |
(0.05 |
) |
|
|
|
|
| |
(f) |
Weighted average common shares outstanding for basic earnings per common share |
|
43,155,360 |
| |
|
Heritage Commerce Corp common stock issued to Presidio Bank shareholders |
|
15,684,064 |
| |
|
Shares used in computing basic earnings per common share |
|
58,839,424 |
| |
|
|
|
|
| |
|
Weighted average common shares outstanding for diluted earnings per common share |
|
43,695,117 |
| |
|
Heritage Commerce Corp common stock issued to Presidio Bank shareholders |
|
15,684,064 |
| |
|
Shares used in computing diluted earnings per common share |
|
59,379,181 |
|
(7) Pro Forma Adjustments to Combined Condensed Consolidated Statement of Income for the Year Ended December 31, 2018
The following pro forma adjustments have been reflected in the unaudited pro forma combined condensed consolidated statement of income for the year ended December 31, 2018. All adjustments are based on current assumptions and valuations, which are subject to change.
|
|
|
For the Year Ended |
| |
|
|
|
(Dollars in thousands) |
| |
(a) |
Loan fair value mark accretion |
|
$ |
1,013 |
|
|
|
|
|
| |
(b) |
Time deposits fair value mark amortization |
|
$ |
1 |
|
|
|
|
|
| |
(c) |
Subordinated debt fair value mark accretion |
|
$ |
(72 |
) |
|
|
|
|
| |
(d) |
Amortization (accretion) of the intangible assets created from the transaction: |
|
|
| |
|
Core deposit intangible asset amortization |
|
$ |
2,240 |
|
|
Above market leases accretion |
|
(27 |
) | |
|
Total amortization (accretion) of the intangible assets created from the transaction |
|
$ |
2,213 |
|
|
|
|
|
| |
(e) |
Income tax expense on pre-tax adjustments |
|
$ |
(310 |
) |
|
|
|
|
| |
(f) |
Earnings per share adjustments: |
|
|
| |
|
Heritage Commerce Corp net income |
|
$ |
35,331 |
|
|
Presidio Bank net income |
|
11,829 |
| |
|
Adjustments to net income |
|
(819 |
) | |
|
Pro Forma Combined net income |
|
$ |
46,341 |
|
|
|
|
|
| |
|
Pro forma combined basic earnings per share |
|
$ |
0.81 |
|
|
Less Heritage Commerce Corp basic earnings per share |
|
0.85 |
| |
|
Adjustment to basic earnings per share |
|
$ |
(0.04 |
) |
|
|
|
|
| |
|
Pro forma combined diluted earnings per share |
|
$ |
0.80 |
|
|
Less Heritage Commerce Corp diluted earnings per share |
|
0.84 |
| |
|
Adjustment to diluted earnings per share |
|
$ |
(0.04 |
) |
|
|
|
|
| |
(g) |
Weighted average common shares outstanding for basic earnings per common share |
|
41,469,211 |
| |
|
Heritage Commerce Corp common stock issued to Presidio Bank shareholders |
|
15,684,064 |
| |
|
Shares used in computing basic earnings per common share |
|
57,153,275 |
| |
|
|
|
|
| |
|
Weighted average common shares outstanding for diluted earnings per common share |
|
42,182,939 |
| |
|
Heritage Commerce Corp common stock issued to Presidio Bank shareholders |
|
15,684,064 |
| |
|
Shares used in computing diluted earnings per common share |
|
57,867,003 |
|