UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1999
Or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transitional period from to
Commission File No. 000-23877
HERITAGE COMMERCE CORP
(Exact name of registrant as specified in its charter)
California 77-0469558
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 Almaden Blvd., San Jose, California 95113
(Address of principal executive offices) (Zip Code)
(408) 947-6900
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
The Registrant had 5,594,669 shares of Common Stock outstanding on
August 13, 1999.
<PAGE>
HERITAGE COMMERCE CORP AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
Table of Contents
Part I - Financial Information Page
Item 1. Condensed Consolidated Statements of Financial Condition
At June 30, 1999 and December 31, 1998 1
Condensed Consolidated Statements of Income
For the three months ended June 30, 1999 and 1998 2
Condensed Consolidated Statements of Cash Flows
For the three months ended June 30, 1999 and 1998 3
Condensed Consolidated Notes to Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Part II - Other Information
Item 1. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
<PAGE>
<TABLE>
<CAPTION>
HERITAGE COMMERCE CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition
ASSETS
June 30, 1999 December 31, 1998
(Unaudited)
<S> <C> <C>
Cash and due from banks $ 21,098,000 $ 18,039,000
Federal funds sold 59,120,000 28,600,000
Total cash and cash equivalents 80,218,000 46,639,000
Securities available-for-sale,
at fair value 31,631,000 50,249,000
Securities held-to-maturity,
at amortized cost
(fair value of $13,783,000 and
$27,240,000, respectively) 13,856,000 26,544,000
Loan held for sale, at fair value 11,675,000 33,079,000
Loans 245,336,000 236,307,000
Allowance for loan losses (4,337,000) (3,825,000)
Loans, net 240,999,000 232,482,000
Premises and equipment, net 3,103,000 3,238,000
Accrued interest receivable and other assets 12,593,000 7,240,000
Other investments 9,140,000 5,460,000
TOTAL $ 403,215,000 $ 404,931,000
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits
Demand, noninterest bearing $ 124,160,000 $ 120,854,000
Demand, interest bearing 9,171,000 9,035,000
Savings and money market 129,095,000 131,518,000
Time deposits, under $100,000 38,785,000 29,793,000
Time deposits, $100,000 and over 63,381,000 58,847,000
Total deposits 364,592,000 350,047,000
Deposits held for sale --- 18,911,000
Accrued interest payable
and other liabilities 7,150,000 5,276,000
Total liabilities 371,742,000 374,234,000
Commitments and contingencies
Shareholders' equity:
Preferred Stock, 10,000,000 shares
authorized; none outstanding --- ---
Common Stock, no par value;
30,000,000 shares authorized;
Shares issued and outstanding:
5,592,184 at June 30, 1999 and
5,554,552 at December 31, 1998 29,642,000 29,418,000
Accumulated other comprehensive
(loss) income, net of taxes (92,000) 658,000
Retained Earnings 1,923,000 621,000
Total shareholders' equity 31,473,000 30,697,000
TOTAL $ 403,215,000 $ 404,931,000
See notes to condensed consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HERITAGE COMMERCE CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Income (Unaudited)
<S> <C> <C> <C> <C>
Three months ended June 30, Six months ended June 30,
1999 1998 1999 1998
Interest income:
Loans, including fees $ 6,218,000 $ 4,206,000 $ 12,249,000 $ 7,756,000
Securities, taxable 450,000 1,380,000 1,075,000 2,613,000
Securities, non-taxable 146,000 168,000 319,000 288,000
Federal funds sold 311,000 295,000 647,000 512,000
Total interest income 7,125,000 6,049,000 14,290,000 11,169,000
Interest expense:
Deposits 2,211,000 1,667,000 4,371,000 3,009,000
Other --- --- 11,000 ---
Total interest expense 2,211,000 1,667,000 4,382,000 3,009,000
Net interest income before provision
for loan losses 4,914,000 4,382,000 9,908,000 8,160,000
Provision for loan losses 484,000 350,000 1,127,000 510,000
Net interest income after provision
for loan losses 4,430,000 4,032,000 8,781,000 7,650,000
Other income:
Gain on sale of loans held-for-sale 84,000 49,000 250,000 50,000
Gain on sale of securities available-for-sale 233,000 49,000 1,004,000 67,000
Service charges and other fees 73,000 48,000 142,000 98,000
Other investment income 49,000 57,000 128,000 109,000
Other income 248,000 40,000 387,000 50,000
Total other income 687,000 243,000 1,911,000 374,000
Other expenses:
Salaries and employee benefits 2,542,000 1,790,000 4,963,000 3,370,000
Client services 135,000 559,000 797,000 919,000
Furniture and equipment 283,000 183,000 580,000 353,000
Advertising and promotion 227,000 189,000 376,000 369,000
Occupancy 261,000 191,000 493,000 342,000
Professional fees 75,000 149,000 245,000 313,000
Loan origination costs 140,000 114,000 257,000 195,000
Stationery & supplies 56,000 53,000 135,000 108,000
Telephone expense 54,000 35,000 104,000 81,000
Software subscriptions 60,000 14,000 84,000 30,000
Other 330,000 185,000 717,000 400,000
Total other expenses 4,163,000 3,462,000 8,751,000 6,480,000
Net income before income taxes 954,000 813,000 1,941,000 1,544,000
Income taxes 280,000 283,000 640,000 561,000
Net income $ 674,000 $ 530,000 $ 1,301,000 $ 983,000
Earnings per share:
Basic $ 0.12 $ 0.11 $ 0.23 $ 0.19
Diluted $ 0.11 $ 0.09 $ 0.20 $ 0.16
See notes to condensed consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HERITAGE COMMERCE CORP
Condensed Consolidated Statements of Cash Flows (Unaudited)
<S> <C> <C>
Six Months ended June 30,
1999 1998
Cash flows from operating activities:
Net income $ 1,301,000 $ 913,000
Adjustments to reconcile net income to
net cash used by operating activities:
Depreciation and amortization 414,000 271,000
Provision for loan losses 1,127,000 510,000
Gain on sale of securities available-for-sale (1,004,000) (67,000)
Net amortization of premiums/accretion
of discounts (234,000) 37,000
Proceeds from sales of loans 4,785,000 (33,000)
Originations of loans held for sale --- (2,157,000)
Maturities of loans held for sale --- 67,000
Increase in accrued interest receivable
and other assets (5,502,000) (861,000)
Decrease in accrued interest payable and
other liabilities 2,367,000 225,000
Net cash provided by (used by)
operating activities 3,254,000 (1,095,000)
Cash flows from investing activities:
Net decrease (increase) in loans 6,975,000 (39,290,000)
Purchases of investment securities
available-for-sale (26,334,000) (23,971,000)
Maturities of investment securities
available-for-sale 7,005,000 7,513,000
Sales of investment securities
available-for-sale 49,512,000 2,067,000
Purchases of investment securities
held-to-maturity --- (7,014,000)
Maturities of investment securities
held-to-maturity 1,115,000 5,311,000
Purchases of corporate owned life insurance (3,528,000) (809,000)
Capital expenditures (278,000) (1,235,000)
Net cash provided by (used by)
investing activities 34,467,000 (57,428,000)
Cash flows from financing activities:
Net (decrease) increase in deposits (4,366,000) 80,673,000
Proceeds from exercise of stock options 224,000 ---
Net cash (used by) provided by
financing activities (4,142,000) 80,673,000
Net increase in cash and cash equivalents 33,579,000 22,150,000
Cash and cash equivalents,
beginning of period 46,639,000 43,185,000
Cash and cash equivalents, end of period $ 80,218,000 $ 65,335,000
Other cash flow information:
Interest paid in cash $ 4,786,000 $ 2,876,000
Income taxes paid in cash $ 1,710,000 $ 521,000
See notes to condensed consolidated financial statements
</TABLE>
<PAGE>
HERITAGE COMMERCE CORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 1999
(Unaudited)
1) Basis of Presentation
The unaudited condensed consolidated financial statements of Heritage
Commerce Corp and its wholly owned subsidiaries, Heritage Bank of Commerce
and Heritage Bank East Bay, have been prepared pursuant to the rules and
regulations for reporting on Form 10-Q. Accordingly, certain information and
notes required by generally accepted accounting principles for complete
financial statements are not included herein. The interim statements should
be read in conjunction with the financial statements and notes thereto
included in the Company's Form 10-K Annual Report for the year ended
December 31, 1998.
In the Company's opinion, all adjustments necessary for a fair
presentation of these condensed consolidated financial statements have been
included and are of a normal and recurring nature. Certain reclassifications
have been made to prior year amounts to conform to current year presentation.
The results for the three months and six months ended June 30, 1999 are
not necessarily indicative of the results expected for any subsequent period
or for the entire year ending December 31, 1999.
2) Share and Per Share Amounts
Earnings per common share (basic) are calculated based on the weighted
average number of shares outstanding during the period. Earnings per common
and common equivalent share (diluted) are calculated based on the weighted
average number of shares outstanding during the period, plus equivalent
shares representing the dilutive effect of stock options using the treasuring
stock method. All share numbers have been restated for the stock split in
February, 1999. Reconciliation of weighted average shares used in computing
earnings per share are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three months end June 30, Six months ended June 30,
1999 1998 1999 1998
Weighted average common shares outstanding 5,582,308 4,943,844 5,569,613 5,242,516
Diluted effect of stock options outstanding 781,801 736,325 817,744 728,853
Shares used in computing diluted earnings per share 6,364,109 5,680,169 6,387,357 5,971,369
</TABLE>
3) Adoption of FAS 133
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133 , "Accounting for Derivative
Instruments and Hedging Activities." The Company adopted the provisions of
SFAS No. 133 effective February 1, 1999. Because of the Company's minimal
use of derivatives, the adoption of SFAS No. 133 did not significantly impact
the Company's earnings or financial position. As allowed by SFAS No. 133 the
Company transferred approximately $11.67 million of certain securities from
the held-to-maturity to available-for-sale classification. The realized and
unrealized gains on the securities transferred were not material to the
Company.
<PAGE>
4) Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which requires that an enterprise report and display, by major
components and as a single total, the change in its net assets during the
period from non-owner sources. This Statement is effective for fiscal years
beginning after December 15, 1997. The adoption of this Statement in the
second quarter of 1999 resulted in a change in the financial statement
presentation, but did not have an impact on the Company's consolidated
financial position, results of operations or cash flows. Certain amounts in
the prior period have been reclassified to conform to the current
presentation under SFAS No. 130. Total comprehensive income for the three
months ended June 30, 1999 and 1998 was $357,000 and $623,000, respectively.
Total comprehensive income for the six months ended June 30, 1999 and 1998
was $551,000 and $1,111,000, respectively.
The following is a summary of the components of accumulated other
comprehensive income:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
For the Three Months Ended For the Six Months Ended
June 30, 1999 June 30, 1998 June 30,1999 June 30,1998
Net Income $ 674,000 $ 530,000 $ 1,301,000 $ 983,000
Other comprehensive income, net of tax:
Net unrealized gain (loss) on securities
available-for-sale during the period (84,000) 142,000 254,000 195,000
Less: reclassification adjustment for realized
gains on available-for-sale securities
included in net income during the period (233,000) (49,000) (1,004,000) (67,000)
Other comprehensive income (loss) (317,000) 93,000 (750,000) 128,000
Comprehensive income $ 357,000 $ 623,000 $ 551,000 $ 1,111,000
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Net income for the quarter and six months ended June 30, 1999 was $674,000
and $1,301,000, or $0.11 and $0.20 per diluted share, as compared to net
income of $530,000 and $983,000, or $0.09 and $0.16 per diluted share, for
the same period in 1998. The increase was attributable to growth in the
level of average earning assets overall, and of loans in particular, funded
by new deposits at favorable weighted average rates of interest. Return on
average assets annualized for the first six months of 1999 and 1998 was 0.72%
and 0.69%. Annualized return on average equity for the first six months of
1999 was 8.41%, compared to 8.65% for the first six months of 1998.
Average interest earning assets for the quarter and six months ended June 30,
1999 were up $51,861,000 and $73,479,000, or 19% and 28% over 1998, with much
of the increase primarily attributable to growth in loans. The average rate
earned on loans in the second quarter and six months of 1999 was 9.72% and
9.79%, compared to 10.98% and 10.87% in the second quarter and six months of
1998. The average rate on earning assets was 8.65% and 8.67% for the quarter
and six months ended June 30, 1999, compared to 8.71% and 8.71% for the
quarter and six months ended June 30, 1998.
Average interest bearing liabilities increased $47,481,000 and $65,831,000,
or 27% and 40% from three months and six months ended June 30, 1998 to the
same periods in 1999, with the increase attributable to growth in interest
bearing demand deposits, money market accounts, growth in time deposits of
$100,000 or more, and growth in time deposits in support of the internet
credit card program. The average rate paid on interest bearing liabilities
increased to 3.92% and 3.85% from 3.74% and 3.70% at the three and six months
ended June 30, 1999 and 1998, respectively. The Company's net interest
margin was 5.97% and 6.02% in the second quarter and six months ended June
30, 1999, compared with 6.31% and 6.36% in the second quarter and the six
months ended June 30, 1998.
The Company's non-performing assets increased to $1,776,000 at June 30,
1999 from zero at June 30, 1998, due to local market conditions and the
increase in size of the loan portfolio.
Shareholders' equity increased $776,000 to $31,473,000, or 7.81% of
assets, at June 30, 1999, from $30,697,000 or 7.58% of assets, at December
31, 1998. The Company's Tier 1 and total risk-based capital ratios were
9.8% and 11.1% at June 30, 1999, compared to 9.2% and 10.4%, respectively,
at December 31, 1998, and 11.5% and 13.0%, respectively, at June 30, 1998.
Due to the overall growth in total assets, more specifically the growth in
the loan portfolio, the Company's leverage capital ratio stood at 8.6% at
June 30, 1999. This compares with a leverage ratio of 9.0% at December 31,
1998 and 7.2% at June 30, 1998.
<PAGE>
RESULTS OF OPERATIONS
Net Interest Income and Net Interest Margin
The following table presents the Company's average balance sheet, net
interest income and the resultant yields for the periods presented:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
For the Three Months Ended For the Three Months Ended
June 30, 1999 June 30, 1998
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
Assets:
Loans, gross $ 256,633 $ 6,218 9.72% $ 153,643 $ 4,206 10.98%
Investments securities 46,845 596 5.10% 102,986 1,548 6.03%
Federal funds sold 26,937 311 4.63% 21,925 295 5.40%
Total interest earning assets $ 330,415 $ 7,125 8.65% $ 278,554 $ 6,049 8.71%
Cash and due from banks 15,420 21,644
Premises and equipment, net 3,136 2,813
Other assets 15,918 6,224
Total assets $ 364,889 $ 309,235
Liabilities and shareholders' equity:
Deposits:
Demand, interest bearing $ 10,280 $ 40 1.55% $ 6,921 $ 34 1.97%
Savings and Money market 116,719 941 3.23% 113,090 908 3.22%
Time deposits, less than $100,000 33,125 431 5.22% 9,694 121 5.02%
Time deposits, $100,000 and over 59,895 710 4.75% 48,968 604 4.95%
Brokered Deposits 6,135 89 5.85% - - -
Total interest bearing liabilities $ 226,154 $ 2,211 3.92% $ 178,673 $ 1,667 3.74%
Demand deposits 102,233 104,990
Other liabilities 5,180 2,461
Total liabilities 107,413 107,451
Shareholders' equity 31,322 23,111
Total liabilities and
shareholders' equity $ 364,889 $ 309,235
Net interest income/margin $ 4,914 5.97% $ 4,382 6.31%
Note: Yields and amounts earned on loans include loan fees of $476,000
and $362,000 for the three month periods ended June 30, 1999 and 1998,
respectively.
For the Six Months Ended For the Six Months Ended
June 30, 1999 June 30, 1998
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
Assets:
Loans, gross $ 252,354 $ 12,249 9.79% $ 143,917 $ 7,756 10.87%
Investments securities 51,857 1,394 5.42% 95,721 2,901 6.11%
Federal funds sold 27,981 647 4.67% 19,075 512 5.42%
Total interest earning assets $ 332,192 $ 14,290 8.67% $ 258,713 $ 11,169 8.71%
Cash and due from banks 16,226 20,587
Premises and equipment, net 3,184 2,557
Other assets 14,159 5,884
Total assets $ 365,761 $ 287,741
Liabilities and shareholders' equity:
Deposits:
Demand, interest bearing $ 9,870 $ 74 1.51% $ 6,565 $ 63 1.93%
Savings and Money market 123,952 1,928 3.14% 104,413 1,646 3.18%
Time deposits, less than $100,000 32,854 857 5.26% 8,609 207 4.84%
Time deposits, $100,000 and over 56,318 1,340 4.80% 44,272 1,093 4.98%
Brokered Deposits 6,150 172 5.64% - - -
Other borrowings 552 11 4.00% 6 - 11.35%
Total interest bearing liabilities $ 229,696 $ 4,382 3.85% $ 163,865 $ 3,009 3.70%
Demand deposits 99,583 98,541
Other liabilities 5,299 2,412
Total liabilities 104,882 100,953
Shareholders' equity 31,183 22,923
Total liabilities and
shareholders' equity $ 365,761 $ 287,741
Net interest income/margin $ 9,908 6.02% $ 8,160 6.36%
Note: Yields and amounts earned on loans include loan fees of $932,000 and
$639,000 for the six month periods ended June 30, 1999 and 1998,
respectively.
</TABLE>
<PAGE>
The Company's net interest income for the second quarter and six months
end of 1999 was $4,914,000 and $9,908,000, an increase of $532,000 and
$1,748,000 over the second quarter and six months end of 1998. When compared
to the second quarter and six months end of 1998, average earning assets
increased by $51,861,000 and $73,479,000. The net yield on average earning
assets was 5.97% and 6.02% in the second quarter and the first six months of
1999, compared to 6.31% and 6.36% in the second quarter and the first six
months of 1998. The increase in net interest income was primarily due to an
increase in the volume of interest earning assets, primarily loans.
The following table sets forth an analysis of the changes in interest
income and interest expense. The total change is shown in the column
designated "Net Change" and is allocated in the columns to the left, to the
portions respectively attributable to volume changes and rate changes that
occurred during the period indicated. Changes due to both volume and rate
have been allocated between the volume and rate categories in proportion to
the relationship of the changes due solely to the changes in volume and rate,
respectively.
<TABLE>
<CAPTION>
Three Months Ended June 30
1999 vs. 1998
Increase (Decrease) Due to Change In:
<S> <C> <C> <C>
Average Average Net
(Dollars in thousands) Volume Rate Change
Interest earning assets
Loans, gross $ 2,495 $ (483) $ 2,012
Investments securities (716) (236) (952)
Federal funds sold 58 (42) 16
Total interest earning assets $ 1,837 $ (761) $ 1,076
Interest bearing liabilities
Demand, interest bearing $ 13 $ (7) $ 6
Money Market and Savings 30 3 33
Time deposits, less than $100,000 305 5 310
Time deposits, $100,000 and over 130 (24) 106
Brokered Deposits 89 - 89
Total interest bearing liabilities $ 567 $ (23) $ 544
Net interest income $ 1,270 $ (738) $ 532
Six Months Ended June 30
1999 vs. 1998
Increase (Decrease) Due to Change In:
Average Average Net
(Dollars in thousands) Volume Rate Change
Interest earning assets
Loans, gross $ 5,262 $ (769) $ 4,493
Investments securities (1,179) (328) (1,507)
Federal funds sold 205 (70) 135
Total interest earning assets $ 4,288 $(1,167) $ 3,121
Interest bearing liabilities
Demand, interest bearing $ 25 $ (14) $ 11
Money Market and Savings 302 (20) 282
Time deposits, less than $100,000 632 18 650
Time deposits, $100,000 and over 286 (39) 247
Brokered Deposits 172 - 172
Other borrowings 11 - 11
Total interest bearing liabilities $ 1,428 $ (55) $ 1,373
Net interest income $ 2,860 $(1,112) $ 1,748
</TABLE>
Provision for Loan Losses
During the second quarter of 1999, the provision for loan losses was
$484,000, up $134,000 from $350,000 for the second quarter of 1998. The
increase in the provision was due to the overall growth of the loan portfolio.
<PAGE>
Noninterest Income
The following table sets forth the various components of the Company's
noninterest income for the periods indicated:
<TABLE>
<CAPTION>
Increase
Three months ended June 30 1999 versus 1998
(Dollars in thousands) 1999 1998 Amount Percent
<S> <C> <C> <C> <C>
Service charges and other fees $ 73 $ 48 $ 25 52%
Gain on sale of securities
available-for-sale 233 49 184 375%
Gain on sale of loans 84 49 35 71%
Other investment income 49 57 (8) (14%)
Other income 248 40 208 520%
Total $ 687 $ 243 $ 444 183%
Increase
Six months ended June 30 1999 versus 1998
(Dollars in thousands) 1999 1998 Amount Percent
Service charges and other fees $ 142 $ 98 $ 44 45%
Gain on sale of securities
available-for-sale 1,004 67 937 1,399%
Gain on sale of loans 250 50 200 400%
Other investment income 128 109 19 17%
Other income 387 50 337 674%
Total $ 1,911 $ 374 $ 1,537 411%
</TABLE>
Noninterest income for the second quarter and the first six months ended
June 30, 1999 was $687,000 and $1,911,000, up $444,000, or 183%, and
$1,537,000, or 411%, from $243,000 and $374,000 for the second quarter and
the six months ended June 30, 1998. This increase was primarily the result
of gains recognized on the sale of securities available-for-sale (up $184,000
and $937,000) and the increase in other income (up $151,000 and $337,000).
The sale of securities represents favorable market conditions to sell
securities. The increase in other income is primarily due to fee income
associated with the Company's internet credit card program.
Noninterest Expense
The following table sets forth the various components of the Company's
noninterest expenses for the periods indicated:
<TABLE>
<CAPTION>
For The Three Months Ended June 30,
Percent
Increase Increase
(Dollars in thousands) 1999 1998 (Decrease) (Decrease)
<S> <C> <C> <C> <C>
Salaries and benefits $ 2,542 $ 1,790 $ 752 42%
Client services 135 559 (424) (76%)
Furniture and equipment 283 183 100 55%
Occupancy 261 191 70 37%
Advertising and promotion 227 189 38 20%
Loan origination costs 140 114 26 23%
Professional fees 75 149 (74) (50%)
Stationery & Supplies 56 53 3 6%
Telephone expense 54 35 19 54%
Software subscriptions 60 14 46 329%
All other 330 185 145 78%
Total $ 4,163 $ 3,462 $ 701 20%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For The Six Months Ended June 30,
Percent
Increase Increase
(Dollars in thousands) 1999 1998 (Decrease) (Decrease)
<S> <C> <C> <C> <C>
Salaries and benefits $ 4,963 $ 3,370 $ 1,593 47%
Client services 797 919 (122) (13%)
Furniture and equipment 580 353 227 64%
Occupancy 493 342 151 44%
Advertising and promotion 376 369 7 2%
Loan origination costs 257 195 62 32%
Professional fees 245 313 (68) (22%)
Stationery & Supplies 135 108 27 25%
Telephone expense 104 81 23 28%
Software subscriptions 84 30 54 183%
All other 717 400 317 79%
Total $ 8,751 $ 6,480 $ 2,271 35%
</TABLE>
Noninterest expenses for the second quarter of 1999 were $4,163,000, up
$701,000, or 20%, from $3,462,000 for the second quarter of 1998.
Nonintrest expenses for the first six months of 1999 were $8,751,000, up
$2,271,000,or 35%, from $6,480,000 for the first six months of 1998. The
increase in noninterest expenses reflects the growth in infrastructure to
support the Company's loan and deposit growth and the opening of a branch
office in the South Valley in city of Morgan Hill, California.
Noninterest expenses consist primarily of salaries and employee benefits
(61% and 52% of total noninterest expenses for the second quarter of 1999 and
1998, respectively; 57% and 52% of total noninterest expenses for the six
months ended June 30, 1999 and 1998, respectively) and client services (3%
and 16% of total non-interest expenses for the second quarter of 1999 and
1998, respectively; 9% and 14% of total noninterest expenses for the first
six months of 1999 and 1998, respectively). The increase in salaries and
benefits expenses was primarily attributable to an increase in the number of
employees. The Company employed 152 people at June 30, 1999, up 39 from 113
employees at June 30, 1998. Client services expenses include courier and
armored car costs, imprinted check costs, and other client services costs,
all of which are directly related to the amount of funds on deposit at the
Company. Due to lower balances in these accounts in the second quarter of
1999, the expense was less than the previous year. The increase in furniture
and equipment expenses and in occupancy expenses was primarily attributable
to an increase in the number of employees and new banking locations.
<PAGE>
FINANCIAL CONDITION
Total assets increased 15% to $403,215,000 at June 30, 1999, compared to
$349,674,000 at June 30, 1998. The growth was primarily due to increases in
the Company's loan portfolio funded by growth in deposits.
Securities Portfolio
The following table summarizes the composition of the Company's investment
securities and the weighted average yields at June 30, 1999:
<TABLE>
<PAGE>
June 30, 1999
Maturity
After One Year After Five Years
Within and Within and Within Total
One Year Five Years Ten Years After Ten Years Amortized Cost
(Dollars in thousands) Amount Yiel Amount Yield Amount Yield Amount Yield Amount Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available-for-sale:
U.S. Treasury $ 16,075 4.75% $ 10,085 5.19% $ --- --- $ --- --- $ 26,160 4.92%
Municipals - taxable --- --- 457 6.51% --- --- --- --- 457 6.51%
Municipals - non-taxable --- --- --- --- 2,843 4.69% 2,171 4.78% 5,014 4.73%
Total available-for-sale $ 16,075 4.75% $ 10,542 5.25% $ 2,843 4.69% $ 2,171 4.78% $ 31,631 4.91%
Securities held-to-maturity:
Municipals - taxable $ 1,000 6.34% $ 4,919 6.48% $ 516 6.45% --- --- $ 6,435 6.46%
Municipals - non taxable --- --- 267 4.90% 6,036 4.51% 1,118 4.59% 7,421 4.54%
Total held-to-maturity $ 1,000 6.34% $ 5,186 6.40% $ 6,552 4.66% $ 1,118 4.59% $ 13,856 5.43%
Total securities $ 17,074 4.85% $ 15,729 5.63% $ 9,395 4.68% $ 3,289 4.72% $ 45,487 5.08%
Note: Yield on non-taxable municipal securities are not a fully tax
equivalent basis.
</TABLE>
Loans
Total gross loans increased 4% to $245,336,000 at June 30, 1999, as
compared to $236,307,000 at December 31, 1998. The increase in loan balances
was due to the business development efforts of the Company's loan teams.
The following table indicates the Company's loan portfolio for the periods
indicated:
<TABLE>
<CAPTION>
June 30 % of December 31, % of
(Dollars in thousands) 1999 Total 1998 Total
<S> <C> <C> <C> <C>
Commercial $ 99,130 40% $ 79,567 34%
Real estate - mortgage 61,516 25% 57,216 24%
Real estate - land and construction 61,239 25% 49,270 21%
Consumer 23,512 10% 50,349 21%
Total loans 245,397 100% 236,402 100%
Deferred loan fees (61) (95)
Allowance for loan losses (4,337) (3,825)
Loans, net $ 240,999 $ 232,482
</TABLE>
The change in the Company's loan portfolio is primarily due to the
increase in the commercial loan portfolio offset by a decline in the consumer
credit card portfolio.
<PAGE>
The Company's loan portfolio is concentrated in commercial (primarily to
companies engaged in manufacturing, wholesale, and service businesses) and
real estate lending, with the balance in consumer loans. However, while no
specific industry concentration is considered significant, the Company's
lending operations are located in the Company's market areas that are
dependent on the technology and real estate industries and their supporting
companies. Thus, the Company's borrowers could be adversely impacted by a
downturn in these sectors of the economy which could reduce the demand for
loans and adversely impact the borrowers' abilities to repay their loans.
In February 1998, the Company entered into a contract with Internet Access
Financial Corporation to provide a credit card over the Internet. The
customers for the credit cards were not limited to Northern California, the
Companys' primarily market area, as the product was available to anyone
across the country. The growth in 1998 in the consumer loan portfolio was
attributable to the introduction of this Internet credit card. As noted in
the above table, the consumer loans category declined from $50,349,000 to
$ 23,512,000 at June 30, 1999.
Subsequent to June 30, 1999, the Company sold the outstanding Internet
credit card loan balance of approximately $22 million to Internet Access
Financial Corporation. The Company has continued its relationship with
Internet AccessFinancial Corporation as a provider of certain administrative
services to them in conjunctionwith the issuance of credit cards.
The following table sets forth the maturity distribution of the Company's
loans at June 30, 1999:
<TABLE>
<PAGE>
Over One Year Over
Due in One But Less Than Five
(Dollars in thousands) Year or Less Five Years Years Total
<S> <C> <C> <C> <C>
Commercial $ 92,309 $ 6,466 $ 173 $ 98,948
Real estate-mortgage 26,255 19,107 16,154 61,516
Real estate-land and construction 61,239 --- --- 61,239
Consumer 22,729 888 16 23,633
Total loans $ 202,532 $ 26,461 $ 16,343 $ 245,336
Loans with variable
interest rates $ 167,336 $ 5,952 $ 308 $ 173,596
Loans with fixed interest rates 35,196 20,509 16,035 71,740
Total $ 202,532 $ 26,461 $ 16,343 $ 245,336
Note: Total shown is net of deferred loan fees of $61,000 at June 30, 1999.
</TABLE>
The table shows the distribution of such loans between those loans with
predetermined (fixed) interest rates and those with variable (floating)
interest rates. Floating rates generally fluctuate with changes in the prime
rate as reflected in the western edition of The Wall Street Journal. At June
30, 1999, approximately 71% of the Company's loan portfolio consisted of
floating interest rate loans.
Allowance for Loan Losses
Management conducts a critical evaluation of the loan portfolio monthly.
This evaluation includes an assessment of the following factors: past loan
loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, the estimated
value of any underlying collateral, and current economic conditions.
Management has established an evaluation process designed to determine the
adequacy of the allowance for loan losses. This process attempts to assess
the risk of loss inherent in the portfolio by segregating the allowance for
loan losses into four components: "watch", "special mention", "substandard"
and "doubtful".
It is the policy of management to maintain the allowance for loan losses
at a level adequate for known and future risks inherent in the loan
portfolio. Based on information currently available to analyze loan loss
delinquency and a history of actual charge-offs, management believes that the
loan loss provision and allowance are adequate; however, no assurance of the
ultimate level of credit losses can be given with any certainty. Loans are
charged against the allowance when management believes that the
collectibility of the principal is unlikely.
<PAGE>
The following table summarizes the Companys' loan loss experience as well
as transactions in the allowance for loan losses and certain pertinent ratios
for the periods indicated:
<TABLE>
<CAPTION>
Year ended
Six months ended June 30, December 31,
(Dollars in thousands) 1999 1998 1998
<S> <C> <C> <C>
Balance, beginning of period/year $ 3,825 $ 2,285 $ 2,285
Charge-offs (616) (6) (173)
Less recoveries 1 95 137
Net loans charged-off (615) 89 (36)
Provision for loan losses 1,127 510 1,576
Balance, end of period/year $ 4,337 $ 2,884 $ 3,825
Ratios:
Net charge-offs to average
loans outstanding 0.24% 0.06% 0.02%
Allowance for loan losses
to average loans 1.72% 1.88% 2.11%
Allowance for loan losses
to total loans 1.77% 1.69% 1.62%
Allowance for loan losses
to non-performing loans 244% N/A 297%
</TABLE>
The increase in charge-offs relates primarily to the Company's consumer
credit card portfolio.
The following table summarizes the allocation of the allowance for loan
losses by loan type and the allocated allowance as a percent of loans
outstanding in each loan category at the dates indicated:
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998 December 31, 1998
Percent of Percent of Percent of
loans in each loans in each loans in each
category to category to category to
(Dollars in thousands) Amount total loans Amount total loans Amount total loans
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 2,113 2.13% $ 1,256 1.67% $ 1,567 1.98%
Real estate - mortgage 238 0.39% 175 0.40% 224 0.39%
Real estate - land and construction 972 1.59% 614 1.51% 815 1.65%
Consumer 1,014 4.31% 105 0.99% 1,146 2.28%
Unallocated --- --- 734 --- 73 ---
Total $ 4,337 1.77% $ 2,884 1.69% $ 3,825 1.62%
</TABLE>
The increase in the allowance for loan losses reflects increasing on a
percentage basis the reserve for the Company's consumer credit card
portfolio. It also reflects the increase in non-performing assets in the
general loan portfolio.
The Company maintains an allowance for loan losses to provide for
estimated losses in the loan portfolio. Additions to the allowance are made
by charges to operating expenses in the form of a provision for loan losses.
All loans that are judged to be uncollectable are charged against the
allowance and any recoveries are credited to the allowance. Management
conducts a critical evaluation of the loan portfolio monthly. This
evaluation includes an assessment of the following factors: past credit quality
trends, collateral values, loan volumes and concentrations, seasoning of the
loan portfolio, specific industry conditions within portfolio segments,
recent loss experience in particular segments of the portfolio, duration of
the current business cycle, and bank regulatory examination results.
<PAGE>
Deposits
Deposits totaled $364,592,000 at June 30, 1999, an increase of 4%, as
compared to total deposits of $350,047,000 at December 31, 1998. The
increase in deposits was primarily due to increases in time deposit accounts.
Noninterest bearing deposits were $124,160,000 at June 30, 1999, an increase
of 3%, as compared to $120,854,000 at December 31, 1998. Interest bearing
deposits were $240,432,000 at June 30, 1999, an increase of 5% as compared to
$229,193,000 at December 31, 1998.
The following table summarizes the distribution of average deposits and
the average rates paid for the periods indicated:
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 1999 December 31, 1998
Average Average Average Average
(Dollars in thousands) Balance Rate Paid Balance Rate Paid
<S> <C> <C> <C> <C>
Demand, non-interest bearing $ 99,583 --- $ 102,834 ---
Demand, interest bearing 9,870 1.51% 7,368 1.85%
Saving and money market 123,952 3.14% 122,157 3.46%
Time deposits less than $100,000 32,854 5.26% 16,638 5.28%
Time deposits, $100,000 and over 56,318 4.80% 48,861 5.04%
Brokered deposits 6,150 5.64% 3,826 5.87%
Total average deposits $ 328,727 2.68% $ 301,684 2.63%
</TABLE>
Deposit Concentration and Deposit Volatility
The following table indicates the maturity schedule of the Company's time
deposit of $100,000 or more as of June 30, 1999.
<TABLE>
<CAPTION>
(Dollars in thousands) Balance % of Total
<S> <C> <C>
Three months or less $ 36,402 57%
Over three months through twelve months 20,010 32%
Over twelve months 6,969 11%
Total $ 63,381 100%
</TABLE>
The Company focuses primarily on servicing business accounts that are
frequently over $100,000 in average size. Certain types of accounts that the
Company makes available are typically in excess of $100,000 in average balance
per account, and certain types of business clients whom the Company serves
typically carry deposits in excess of $100,000 on average. The account
activity for some account types and client types necessitates appropriate
liquidity management practices by the Company to ensure its ability to fund
deposit withdrawals.
Interest Rate Risk
The planning of asset and liability maturities is an integral part
of the management of an institution's net yield. To the extent maturities of
assets and liabilities do not match in a changing interest rate environment,
net yields may change over time. Even with perfectly matched repricing of
assets and liabilities, risks remain in the form of prepayment of loans or
investments or in the form of delays in the adjustment of rates of interest
applying to either earning assets with floating rates or to interest bearing
liabilities. The Company has generally been able to control its exposure to
changing interest rates by maintaining primarily floating interest rate loans
and a majority of its time certificates in relatively short maturities.
<PAGE>
The following table sets forth the interest rate sensitivity of the
Company's interest-earning assets and interest-bearing liabilities at June
30, 1999, using the rate sensitivity gap ratio. For purposes of the
following table, an asset or liability is considered rate-sensitive within a
specified period when it can be repriced or when it is scheduled to mature
within the specified time frame:
<TABLE>
<CAPTION>
Within Due in Three Due After
Three to Twelve One to Five Due After Not Rate-
(Dollars in thousands) Months Months Years Five Years Sensitive Total
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Federal funds sold $ 59,120 $ --- $ --- $ --- $ --- $ 59,120
Securities 8,015 9,059 15,729 12,684 --- 45,487
Total loans 184,029 30,178 26,461 16,343 --- 257,011
Total interest earning assets 251,164 39,237 42,190 29,027 --- 361,618
Cash and due from banks 21,098 21,098
Other assets 20,499 20,499
Total assets $ 251,164 $ 39,237 $ 42,190 $ 29,027 $ 41,597 $ 403,215
Interest bearing liabilities:
Demand, interest bearing $ 9,171 $ --- $ --- $ --- $ --- $ 9,171
Savings and money market 129,095 --- --- --- --- 129,095
Time deposits 53,607 39,841 8,718 --- --- 102,166
Total interest bearing liabilities 191,873 39,841 8,718 --- --- 240,432
Noninterest demand deposits 124,160 124,160
Other liabilities 7,150 7,150
Shareholders' equity 31,473 31,473
Total liabilities and
shareholders' equity $ 191,873 $ 39,841 $ 8,718 $ --- $ 162,783 $ 403,215
Interest rate sensitivity GAP $ 59,291 $ (604) $ 33,472 $ 29,027 $(121,186) ---
Cumulative interest rate
sensitivity GAP $ 59,291 $ 58,687 $ 92,159 $ 121,186 --- ---
Cumulative interest rate
sensitivity GAP ratio 14.70% 14.55% 22.86% 30.05%
</TABLE>
The foregoing table demonstrates that the Company had a positive
cumulative one year gap of $58.7 million, or 14.6% of total assets, at
June 30, 1999. In theory, this would indicate that $58.7 million more in
assets than liabilities would reprice if there was a change in interest rates
over the next year. If interest rates were to increase, the positive gap
would tend to result in a higher net interest margin. However, changes in
the mix of earning assets or supporting liabilities can either increase or
decrease the net margin without affecting interest rate sensitivity. This
characteristic is referred to as a basis risk and, generally, relates to the
repricing characteristics of short-term funding sources such as certificates
of deposit.
Varying interest rate environments can create unexpected changes in
prepayment levels of assets and liabilities which are not reflected in the
interest sensitivity analysis table. These prepayments may have significant
effects on the Company's net interest margin. Because of these factors, an
interest sensitivity gap report may not provide a complete assessment of the
Company's exposure to changes in interest rates.
Liquidity and Liability Management
To meet liquidity needs, the Company maintains a portion of its funds in
cash deposits in other banks, in Federal funds sold, and in investment
securities. At June 30, 1999, the Company's primary liquidity ratio was
27.08%, comprised of $26.6 million in investment securities
available-for-sale of maturity (or probable calls) of up to five years, less
$11.1 million of securities that were pledged to secure public and certain
other deposits as required by law and contract; Federal funds sold of $59.1
million, and $21.1 million in cash and due from banks, as a percentage of
total unsecured deposits of $353.5 million.
<PAGE>
Capital Resources
The following table summarizes risk-based capital, risk-weighted assets,
and risk-based capital ratios of the Company:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
June 30, December 31,
(Dollars in thousands) 1999 1998 1998
Capital components:
Tier 1 Capital $ 31,400 $ 22,817 $ 29,850
Tier 2 Capital 4,004 2,884 3,825
Total risk-based capital $ 35,404 $ 25,701 $ 33,675
Risk-weighted assets $ 319,953 $ 198,183 $ 323,688
Average assets $ 364,447 $ 315,095 $ 332,062
Minimum
Regulatory
Requirements
Capital ratios:
Total risk-based capital 11.1% 13.0% 10.4% 8.0%
Tier 1 risk-based capital 9.8% 11.5% 9.2% 4.0%
Leverage ratio (1) 8.6% 7.2% 9.0% 4.0%
(1) Tier 1 capital divided by average assets (excluding goodwill).
</TABLE>
On June 1, 1999, Heritage Commerce Corp (the "Company") announced that it
has received an order from the Securities and Exchange Commission declaring
its recently filed Registration Statement effective as of June 1, 1999, and
permitting the Company to begin a public stock offering on that date. The
Company intends to sell up to 700,000 new shares at a price of $15.00 per
share on a best effort basis.
Year 2000
The possible inability of computers, software, and other equipment
utilizing microprocessors to recognize and properly process data fields
containing a two-digit year is commonly referred to as the year 2000 problem.
On January 1, 2000, such systems may be unable to accurately process certain
date-based information.
This discussion of the implications of the year 2000 problem for the
Company contains numerous forward-looking statements based on inherently
uncertain information. The cost of the project and the date on which the
Company plans to complete the internal year 2000 modifications are based on
management's best estimates of future events. The Company cannot guarantee
these estimates and actual results could differ. Although management
believes it will be able to make the necessary modifications in advance,
failure to modify the systems may have a material adverse effect on the
Company.
The Company has developed a plan to assess its year 2000 preparedness,
consisting of the following phases:
- Awareness of the year 2000 problems
- Risk assessment of internal and external systems
- Renovation of problems found in the risk assessment phase
- Validation of renovated systems
- Implementation of validated systems
<PAGE>
Resolution of the year 2000 problem is among the Company's highest
priorities, and the Company is preparing for the century change with a
comprehensive enterprise-wide year 2000 program. The Company has identified
all of the major systems and has sought external and internal resources to
renovate and test the systems. The Company is testing purchased software and
systems supported by external parties as part of the program. The Company is
evaluating customers and vendors that have significant relationships with the
Company to determine whether they are adequately preparing for the year 2000.
In addition, the Company is developing contingency plans to reduce the impact
of some potential events that may occur. The Company cannot guarantee,
however, that the systems of vendors or customers with whom it does business
will be completed on a timely basis, or that contingency plans will shield
operations from failures that may occur.
The Company has identified over 90 individual year-2000 projects. The
projects vary in size, importance and materiality, from large undertakings,
such as remediating complicated data systems, to smaller, but still important,
projects such as installing compliant computer utility systems. All of the
projects currently identified have begun, and approximately 95% have been
completed.
The Company assigns projects a priority, indicating the importance of the
function to the Company's continuing operation. This prioritization
facilitates reporting on projects based on their relative importance. The
Company has prioritized projects as "High Priority - In House", "High
Priority - Not In House" and "Medium Priority". Both High Priority
categories have projects classified as "Mission Critical".
Mission Critical projects are defined as:
- systems vital to the continuance of a broad core business activity;
- functions, the interruption of which for longer than 3 days would
threaten the Company's viability; or
- functions that provide the environment and infrastructure necessary to
continue the broad core business activities.
Testing of all mission critical systems was complete as of March 12, 1999
and the Company has completed a follow-up assessment of many of its clients'
year 2000 preparedness. Currently, the Company's focus is on vendor
follow-up and contingency plans. The Company has communicated with all
vendors with whom it does significant business to determine their year 2000
compliance readiness and the extent to which the Company is vulnerable to
any third-party year 2000 risks. Of all the vendors that present year 2000
risks, approximately 75% have passed testing. The Company does not
significantly rely on "embedded technology" in its critical processes. All
building systems in the Company's main offices use mechanical systems rather
than embedded technology and therefore do not pose any year 2000 risk.
Risks
The principal risks associated with the year 2000 problem can be grouped
into three categories:
- the Company does not successfully ready its operations for the next
century,
- disruption of the Company's operations due to operational failures of
third parties, and
- business interruption among fund providers and obligors such that
expected funding and repayment does not take place
The only risk largely under the Company's control is preparing the
Company's internal operations for the year 2000. The Company, like other
financial institutions, is heavily dependent on its computer systems. The
complexity of these systems and their interdependence make it impractical to
convert to alternative systems without interruptions if necessary
modifications are not completed on schedule. Management believes the Company
will be able to make the necessary modifications on schedule.
<PAGE>
Failure of third parties may jeopardize the Company's operations, but the
seriousness of this risk depends on the nature and duration of the failures.
The most serious impact on the Company's operations from vendors would
result if basic services such as telecommunications, electric power, and
services provided by other financial institutions and governmental agencies
were disrupted. Some public disclosure about readiness preparation among
basic infrastructure and other suppliers is now available. The Company is
unable, however, to estimate the likelihood of significant disruptions among
its basic infrastructure suppliers. In view of the unknown probability of
occurrence and impact on its operations, the Company considers the loss of
basic infrastructure services to be the most reasonably likely worst case
year 2000 scenario.
Operational failures among the Company's customers could affect their
ability to continue to provide funding or meet obligations when due. The
information the Company develops in the customer assessments described earlier
allows the Company to identify those customers that exhibit a risk of not
making adequate preparations for the century change. The Company is taking
appropriate actions to manage these risks.
Contingency Plans
The Company is developing year 2000 remediation contingency plans and
business resumption contingency plans specific to the year 2000. Remediation
contingency plans address the actions the Company would take if the current
approach to remediating a system is falling behind schedule or otherwise
appears to be in jeopardy of failing to deliver year 2000-ready systems when
needed. Business resumption contingency plans address the actions that the
Company would take if critical business functions cannot be carried out in
the normal manner upon entering the next century due to system or supplier
failure.
Cost
The total cost to the Company of year 2000 compliance issues, which
includes testing, system replacement and any anticipated lost revenue, has
been approximately $20,000 and is not anticipated to increase substantially
through the completion of all projects. These costs and the date on which
the Company plans to complete the year 2000 modifications and testing process
are based on management's best estimates, which were derived utilizing
numerous assumptions of future events including the continued availability of
certain resources, third-party modification plans, and other factors.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ from those plans.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No material changes have occurred during the quarter to the Company's
market risk profile or information. For further information refer to the
Company's annual report on Form 10-K.
<PAGE>
Part II - Other Information
Item 1. - Legal Proceedings
To the best of the Company's knowledge, there are no pending legal
proceedings to which the Company is a party which may have a materially
adverse effect on the Company's financial condition, results of operations, or
cash flows.
Item 4. - Submission of Matters to a Vote of Security Holders
The Company held its 1999 Annual Meeting of Shareholders on May 27, 1999
(the "1999 Annual Meeting"). There were 5,561,656 issued and outstanding
shares of Company Common Stock on April 8, 1999, the Record Date for the 1999
Annual Meeting. Each of the shares voting at the meeting was entitled to one
vote.
At the 1999 Annual Meeting, the following actions were taken:
Election of Directors
At the 1999 Annual Meeting, eighteen directors of the Company were
elected. The following chart indicates the number of shares cast for each
elected director:
<TABLE>
<CAPTION>
<S> <C> <C>
Name of director Votes for Votes withheld
Frank G. Bisceglia 4,337,108 992
James R. Blair 4,321,486 16,614
Arthur C. Carmichael, Jr. 4,321,486 16,614
Richard L. Conniff 4,335,716 2,384
William Del Biaggio, Jr. 4,337,108 992
Anneke Dury 4,337,623 447
Tracey A. Enfantino 4,334,731 3,369
Glenn A. George 4,337,858 242
Robert P. Gionfriddo 4,335,025 3,075
P. Michael Hunt 4,337,108 992
John Larsen 4,334,966 3,134
Louis O. Normandin 4,337,108 992
Jack L. Peckham 4,327,516 10,584
Robert W. Peters 4,336,466 1,634
Humphrey P. Polanen 4,322,236 15,864
John E. Rossell III 4,337,858 242
Kirk Rossman 4,322,386 15,714
Brad Smith 4,337,858 242
</TABLE>
Amendment of the Company's Stock Option Plan:
The following chart indicates the results of the vote on the approval of
the amendment to the Company's Restated 1994 Tandem Stock Option Plan. This
amendment is for an increase in the number of shares available for grants of
stock options to directors and key employees of the Company.
FOR 4,148,472
AGAINST 109,714
<PAGE>
Ratification of Auditors
The following chart indicates the result of the vote on the ratification
of the Board of Directors' selection of Deloitte & Touche LLP to serve as the
Company's independent auditors for the fiscal year ending December 31, 1999.
FOR 4,325,441
AGAINST 7,029
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits included with this filing:
Exhibit Number Name
10.1 Employment agreement January 1, 1999 with William B. Nethercott
10.2 Employment agreement January 1, 1999 with Denise Van Houten
10.3 Employment agreement January 1, 1999 with Richard L. Conniff
27.1 Financial Data Schedule
(b) Reports on Form 8-K
On July 21, 1999 the Company filed Form 8-K to report Robert Gionfriddo's
new role as Banking Consultant to Heritage Commerce Corp and Heritage Bank of
Commerce announces promotion of Daniel P. Myers to EVP/COO.
On July 21, 1999, the Company filed its quarterly earnings press release
with the SEC on Form 8-K.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Heritage Commerce Corp
(Registrant)
Aug 13, 1999 /s/ John E. Rossell
Date John E. Rossell, III, President and CEO
Aug 13, 1999 /s/ Lawrence D. McGovern
Date Lawrence D. McGovern, Chief Financial Officer
<PAGE>
EMPLOYMENT AGREEMENT
This employment agreement (the "Agreement") supercedes the agreement dated
April 16, 1998, is effective as of January 1, 1999 (the "Effective Date"),
and is executed on May 27, 1999, by and between Heritage Commerce Corp ("HCC")
and its wholly owned subsidiary, Heritage Bank East Bay ("HBEB"), a California
banking corporation, and Mr. William B. Nethercott on the following terms and
conditions:
1. Position.
Mr. Nethercott has been duly elected to serve as Executive Vice President and
Chief Operating Officer ("COO") of HBEB. Mr. Nethercott will be subject to
the direction of the CEO of HBEB and, by extension, the Board of Directors of
HBEB. As employed hereunder, the term "Bank" is intended to mean HCC and/or
any of its subsidiaries, as applicable. The term "Management" is intended to
mean the CEO of HCC and/or, as applicable, those duly appointed management
committees vested with decision-making authority. The term "Board" will,
unless more narrowly defined in the context of its immediate usage, mean any
and all boards of directors with purview over the matter at hand.
Mr. Nethercott will set a high standard of conduct of courtesy and concern, of
professional and personal discretion and responsibility, forthrightness,
thrift, modesty and hard work. In light of this role with the Bank and the
Bank's position in the industry, Mr. Nethercott will serve as a model for all
employees of the Bank. Given your role with the Bank and your responsibility
relative to the Bank's presence and stature in the community, Mr. Nethercott
will, at all times, emulate this high standard of conduct in order to develop
and enhance the Bank's reputation and image.
Mr. Nethercott will comply with all pertinent regulatory standards as may
affect the Bank.
Mr. Nethercott will devote his entire productive time, attention and energy
to the business of the Bank. In a manner and with such results as are
consistent with his compensation and position, Mr. Nethercott will service
the Bank's existing relationships and cultivate and foster new relationships
for the Bank. Such new relationships will be consistent with the Bank's
mission and will generally improve the Bank's share of market, volume of
business, profitability and return of assets.
Mr. Nethercott will at all times keep the Board and appropriate members of
the Bank's management informed of his activities in the community. He will
introduce his customers and potential customers and other business and civic
contacts to appropriate members of the Bank's management and to appropriate
Board members and to other employees of the Bank in order to enhance and
solidify the Bank's prospects and position.
<PAGE>
Mr. Nethercott will exercise diligence with respect to the control of the
direct and indirect costs of his activities on behalf of the Bank.
In Addition to the above, Mr. Nethercott will:
(a) be responsible for the operation of the Bank, its properties and related
interest in accordance with the direction of the CEO, the management
philosophy of the Board, the basic objectives of the Board and policy as
established by the various Board committees;
(b) be responsible to the CEO and the Board for operating the Bank on a
profitable basis and for the attainment of profit goals established by the
Board;
(c) exercise diligence with respect to the control of the costs of operation
and other expenses directly or indirectly involving interests of the Bank;
(d) be responsible for achieving the broad objectives of business development,
including growth of both loans and deposits as well as fee or deposit
compensated products of the Bank;
(e) be responsible for the loan portfolio, for budgeting, finance and
accounting, and for strategic planning of the bank; and
(f) be responsible for forming and developing the staff in a manner
consistent with the Bank's immediate needs and strategic goals.
2. Term.
Subject to Paragraph 12 below, the Term of this Agreement will be three years
from the Effective Date hereof. At maturity, and annually thereafter, unless
otherwise amended or terminated, this Agreement will automatically renew for
a term of one year. Upon the termination of Mr. Nethercott's employment,
neither he nor the Bank will have any further obligation to the other, except
as set forth in Paragraphs 5, 9, 12, 13, 14, 15, 17, 18, and 24 herein.
3. Base Salary.
For the Term of this Agreement while he is an employee, the Bank will pay Mr.
Nethercott $95,000 per year ("Base Salary"), in accordance with the Bank's
normal payroll procedures, less appropriate withholdings, taxes and similar
deductions. The Base Salary will be reviewed annually by the CEO of HBEB and
the CEO of HCC and is subject to alteration only at the direction of those
individuals.
<PAGE>
4. Performance Bonuses.
From time to time, but not less than annually, subject to the discretion of
the Board, the Bank will undertake, in good faith, to pay performance bonuses
during the Term of this Agreement. The Bank will not be obligated to pay any
specific amount pursuant to this Paragraph. Mr. Nethercott will be eligible
for Performance Bonuses and the Bank will, in good faith, pay Performance
Bonuses in amounts that it deems reasonable. If Performance Bonuses are
paid, the amounts of such generally will be comparable to those for similarly
placed executives at similarly situated financial institutions, and will be
based on Mr. Nethercott's overall performance and that of the Bank, including
such factors as growth, profitability, loan quality, adequacy of the loan
loss reserve and the satisfactory nature of regulatory examinations.
5. Incentive Stock Options.
The Board of HCC has granted to Mr. Nethercott incentive stock options to
acquire shares of HCC's common stock, pursuant to the Heritage Commerce Corp
1994 Tandem Stock Option Plan and to that certain Stock Option Agreement
dated 4/16/98. The Board, in its discretion, may grant such additional
options, as it deems appropriate in order to recognize performance for the
preceding year and in order to provide Mr. Nethercott with the incentive to
sustain and enhance the operational performance of the Bank for the future.
6. Automobile Allowance.
During the Term of this Agreement, the Bank will pay Mr. Nethercott a $450
monthly auto allowance plus gas reimbursement.
7. Medical Insurance.
The Bank will provide medical insurance to Mr. Nethercott and his family with
options and coverage consistent with those of the Bank's group medical plan
as in effect from time to time.
8. Life Insurance, Disability Insurance and Supplemental Retirement Plan.
The Bank will provide Mr. Nethercott life insurance and disability insurance
to the same extent the Bank provides such insurance to its executive
officers. Mr. Nethercott will be entitled to designate the beneficiary of
the life insurance provided by this Paragraph.
The Bank will provide Mr. Nethercott with a Supplemental Executive Retirement
Plan (SERP), according to the terms of a separate agreement, by and between
Mr. Nethercott and the Bank.
<PAGE>
The Board, in its discretion, may from time to time grant to Mr. Nethercott
additional life insurance, disability insurance, and/or SERP benefits as it
deems appropriate to his position and/or performance.
9. Indemnification by the Bank.
The Bank will indemnify and hold Mr. Nethercott harmless pursuant to those
certain Indemnification Agreements dated October 29, 1998 and executed by Mr.
Nethercott and HCC and also to the extent provided for in the Bank's bylaws
as to officers and/or directors of the Bank and HCC.
10. Monthly Expense Account.
Subject to the Bank's Expense Reimbursement Policy, the Bank will reimburse
Mr. Nethercott for his reasonable and necessary business expenses incurred in
furthering the Bank's interests.
11. Vacation.
During the period of this Agreement, Mr. Nethercott will accrue vacation
consistent with the personnel policy of the Bank, but in no event at a rate
of less than four weeks per year. In the event that while he is an employee,
he receives any compensation in lieu of accrued vacation, such payment will
not be included in severance calculations called for in Paragraph 12.1,
Termination without Cause, or in Paragraph 12.2, Change of Control, hereunder.
12. Termination and Severance.
Each party has the right to terminate Mr. Nethercott's employment with the
Bank prior to the end of the Term specified in Paragraph 2 with or without
cause at any time. For purposes of this Agreement, cause will arise if (i)
he willfully breaches or habitually neglects the duties which he is required
to perform under this Agreement, (ii) he commits an intentional act that has
a material detrimental effect on the reputation or business of the Bank, or
(iii) he is convicted of a felony or commits any material and actionable act
of dishonesty, fraud, or intentional material misrepresentation in the
performance of his duties under this Agreement. If the Bank decides to
terminate Mr. Nethercott's employment for cause, the Bank will provide him
with notice specifying the grounds for termination, accompanied by a brief
written statement stating the relevant facts supporting such grounds. Upon
termination of his employment for cause, Mr. Nethercott will not be entitled
to any further amounts under this Agreement, except for the Base Salary accrued
and unpaid vacation pay and any rights under the stock option plan earned
through his last day of employment.
<PAGE>
12.1 Termination Without Cause.
If the Bank terminates Mr. Nethercott's employment without cause, the Bank
will provide him the following, as his full and final severance: (i) a lump
sum payment within 10 days after termination date, equal to one half his
annual Base Salary and his Average Annual Performance Bonus paid (as defined
below), if any, less withholding deductions, and (ii) if he is covered under
the Bank's standard group medical and dental plan at the time of his
termination, the Bank will continue to provide equivalent coverage to Mr.
Nethercott, through C.O.B.R.A., for up to 6 months, as needed, after the date
of his termination, at no cost to Mr. Nethercott; and (iii) with regard to
any group life insurance and/or any group disability benefits enjoyed by Mr.
Nethercott immediately prior to his severance, except as provided hereunder,
the Bank will continue to provide such benefits for 12 months at no cost to
Mr. Nethercott; and (iv) except as provided hereunder, the Bank will continue
to pay for 12 months the premiums on any discreet supplemental life insurance
and/or disability insurance policies carried by the Bank for Mr. Nethercott's
benefit, in amounts and with coverage equivalent to coverage provided
immediately prior to Mr. Nethercott's last day of employment, at no cost to
Mr. Nethercott (thereafter, the Bank will freely assign such policies to Mr.
Nethercott, and he will be responsible for all premium payments, if he so
chooses).
For purposes of this Agreement, a termination resulting from Mr. Nethercott's
death or disability (as defined hereunder) will be considered Termination
Without Cause. Disability will be effective hereunder if it causes Mr.
Nethercott's absence from work for 90 days out of any consecutive 6-month
period.
12.2 Change of Control.
If Mr. Nethercott's employment is terminated without cause or terminates at
Mr. Nethercott's election as a result of a material change in his
compensation, benefits, title, responsibility or location, and such
termination occurs within 30 days before, or 6 months following, a Change of
Control (as hereafter defined), Mr. Nethercott will be entitled to the
following benefits and compensation: (i) a lump sum payment within 10 days
after termination date, equal to his annual Base Salary and his Average
Annual Performance Bonus paid (as defined below), if any, less withholding
deductions, and (ii) if he is covered under the Bank's standard group medical
and dental plan at the time of his termination, the Bank will continue to
provide equivalent coverage to Mr. Nethercott, through C.O.B.R.A., for up to
12 months, as needed, after the date of his termination, at no cost to Mr.
Nethercott; and (iii) with regard to any group life insurance and/or any group
disability benefits enjoyed by Mr. Nethercott immediately prior to his
severance, except as provided hereunder, the Bank will continue to provide
such benefits for 12 months at no cost to Mr. Nethercott; and (iv) except as
provided hereunder, the Bank will continue to pay for 12 months the premiums
on any discrete supplemental life insurance and/or disability insurance
policies carried by the Bank for Mr. Nethercott's benefit, in amounts and
with coverage equivalent to coverage provided immediately prior to Mr.
Nethercott's last day of employment, at no cost to Mr. Nethercott
(thereafter, the Bank will freely
<PAGE>
assign such policies to Mr. Nethercott, and he will be responsible for all
premium payments, if he so chooses); (v) the Bank will reimburse Mr.
Nethercott for bona-fide, professional out-placement services, not to exceed
$3,000.
The term "Change of Control" will mean the occurrence of any of the following
events with respect to the Employer (with the term "Employer" being defined
for purposes of determining whether a "Change of Control" has occurred to
mean HCC, HBEB or any parent bank holding company organized at the direction
of HCC or HBEB to own 100% of the outstanding common stock of HCC or HBEB):
(i) a change in control of a nature that would be required to be reported in
response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or in
response to any other form or report to the regulatory agencies or
governmental authorities having jurisdiction over the Employer or any stock
exchange on which the Employer's shares are listed which requires the
reporting of a change in control; (ii) any merger, consolidation or
reorganization of the Employer in which the Employer does not survive; (iii)
any sale, lease, exchange, mortgage, pledge, transfer or other disposition
(in one transaction or a series of transactions) of any assets of the Employer
having an aggregate fair market value of fifty percent (50%) of the total
value of the assets of the Employer, reflected in the most recent balance
sheet of the Employer; (iv) a transaction whereby any "person" (as such term
is used in the Exchange Act) or any individual, corporation, partnership,
trust or any other entity becomes the beneficial owner, directly or
indirectly, of securities of the Employer representing twenty-five (25%) or
more of the combined voting power of the Employer's then outstanding
securities; or (v) a situation where, in any one-year period, individuals who
at the beginning of such period constitute the Board of Directors of the
Employer cease for any reason to constitute at least a majority thereof,
unless the election, or the nomination for election by the Employer's
shareholders, of each new director is approved by a vote of at least three-
quarters (3/4) of the directors then still in office who were directors at
the beginning of the period. Notwithstanding the foregoing or anything else
contained herein to the contrary, there will not be a "Change of Control" for
purposes of the Agreement if the event which would otherwise come within the
meaning of the term: "Change of Control" involves (i) a reorganization at the
direction of the Employer solely to form a parent bank holding company which
owns 100% of the Employer's common stock following the reorganization, or
(ii) an Employee Stock Ownership Plan sponsored by the Employer or its
parent holding company which is the party that acquires "control," as
described above.
12.3 Voluntary Termination.
If Mr. Nethercott decides of his own volition to terminate his employment
under this Agreement prior to the end of the Term he will provide the Bank
with one month's prior written notice; provided however, upon receiving such
notice, the Bank may terminate his employment immediately. Upon voluntary
termination of his employment, Mr. Nethercott will not be entitled to any
further amounts under this Agreement, except for the Base Salary accrued and
unpaid vacation pay and any rights under the stock option plan earned
<PAGE>
through his last day of employment. Provided that Nethercott tenders proper
notice of voluntary termination under the term of this Agreement, for
purposes of determining accrued salary and unpaid vacation pay only, the last
day of employment will be one month from the Bank's receipt of written notice
to voluntarily terminate employment.
12.4 Other Termination Matters.
As to the Bank's obligations under Paragraph 12, the term "as needed" refers
to Mr. Nethercott's continuing respective status as otherwise uninsured.
Should he become employed, and become so insured as a result of his
employment, the Bank would, from that moment forward, be released from its
related insurance or insurance premium reimbursement obligations.
As to the Bank's obligations under 12.1 (iii), the Bank may, in the
alternative, in its sole discretion, elect to pay to Mr. Nethercott in 12
consecutive monthly installments, as needed by Mr. Nethercott, a monthly
amount equal to the Bank's monthly cost of providing such respective coverage
during Mr. Nethercott's employment.
As to the Bank's obligations under 12.1 (iv), the Bank may, in the
alternative, in its sole discretion, elect to pay to Mr. Nethercott in 12
consecutive monthly installments a monthly amount equal to the Bank's monthly
cost of providing such respective coverage during Mr. Nethercott's
employment. Under no circumstances will the Bank be under obligation to
assign to Mr. Nethercott policies, which it does not possess, or which are
otherwise non-assignable.
As to the Bank's obligations under 12.2 (iii), the Bank may, in the
alternative, in its sole discretion, elect to pay to Mr. Nethercott in 12
consecutive monthly installments, as needed by Mr. Nethercott, a monthly
amount equal to the Bank's monthly cost of providing such respective coverage
during Mr. Nethercott's employment.
As to the Bank's obligations under 12.2 (iv), the Bank may, in the
alternative, in its sole discretion, elect to pay to Mr. Nethercott in 12
consecutive monthly installments a monthly amount equal to the Bank's monthly
cost of providing such respective coverage during Mr. Nethercott's
employment. Under no circumstances will the Bank be under obligation to
assign to Mr. Nethercott policies, which it does not possess, or which are
otherwise non-assignable.
The term "Average Annual Performance Bonus," as used herein, will be
calculated as of Mr. Nethercott's last date of employment and will mean the
higher of (i) Mr. Nethercott's annual performance bonuses averaged from the
date of this Agreement, or (ii) the average of his three most recent annual
performance bonuses.
<PAGE>
13. Confidential and Proprietary Information.
Mr. Nethercott agrees that all Bank information, including but not limited to
that which is directly or indirectly related to the Bank's financial status,
profitability, deposit base, portfolio size and quality as well as its
customers and prospective customers is confidential and proprietary to the
Bank and that he will maintain such information as confidential at all times
during and after his employment. Mr. Nethercott agrees that as a condition of
employment, he will execute such form of confidentiality agreement as the
Board may adopt from time to time for senior officers of the Bank, which
agreement must be consistent with and not exceed the provisions of this
Paragraph.
14. No Conflicting Agreements.
Mr. Nethercott represents that his performance of all of the terms of this
Agreement and any service to be rendered as an employee of the Bank does not
and will not breach any fiduciary or other duty or any covenant, agreement or
understanding, including without limitation, any agreement relating to any
proprietary information, knowledge or data acquired by him in confidence,
trust or otherwise, prior to his employment by the Bank to which he is a
party or by the terms of which he may be bound. Mr. Nethercott covenants and
agrees that he will not disclose to the Bank, or induce the Bank to use, any
proprietary information, knowledge or data, belonging to any previous
employer or others and that he will disclose to the Bank the term and
subject of any prior confidentiality agreement or agreements he has entered
into. Mr. Nethercott further covenants and agrees not to enter into any
agreement or understanding, either written or oral, in conflict with the
provisions of this Agreement. Further, Mr. Nethercott agrees that for a
period of one year after termination, pursuant either to Paragraph 12.1
(Termination Without Cause) or Paragraph 12.2 (Change of Control), he will
not (i) directly or indirectly solicit the services of any employee of the
Bank or directly or indirectly encourage any employee to discontinue his or
her employment with the Bank, or (ii) directly or indirectly solicit or
encourage any customer of the Bank to curtail in any way the business that
customer does with the Bank.
15. Successors and Assigns.
This Agreement will inure to the benefit of and be binding upon the Bank and
any of its successors and assigns. In view of the personal nature of the
services to be performed under this Agreement by Mr. Nethercott, he will not
have the right to assign or transfer any of his rights, obligations or
benefits under this Agreement, except as otherwise noted herein.
16. Governing Law.
This Agreement will at all times and in all respects be governed by the laws
of the State of California applicable to transactions wholly performed in
California between California residents.
<PAGE>
17. Mediation.
Prior to engaging in any legal or equitable litigation or other dispute
resolution process, regarding any of the terms and conditions of this
agreement between the parties, or concerning the subject matter of the
agreement between the parties, each party specifically agrees to engage, in
good faith, in a mediation process at the expense of the Bank, complying with
the procedures provided for under California Evidence Code, Sections 1115
through and including 1125 as then currently in effect. Using a mediator
selected by both parties, the parties further and specifically agree to use
their best efforts to reach a mutually agreeable resolution of the matter at
such mediation. The parties understand and specifically agree that should
any party(ies) to this Agreement refuse to participate in mediation for any
reason, the other party(ies) will be entitled to seek a court order to
enforce this provision in any court of appropriate jurisdiction requiring the
dissenting party to attend, participate, and to make a good faith effort in
the mediation process to reach a mutually agreeable resolution of the matter.
18. Arbitration
In the event of any dispute or claim relating to or arising out of Mr.
Nethercott's employment with the Bank (or any of its subsidiaries), this
Agreement, or any termination of Mr. Nethercott's employment (including, but
not limited to, any claims of breach of contract, wrongful termination, or
age, disability or other discrimination or harassment), which dispute cannot
be resolved by mediation pursuant to Paragraph 17, Mr. Nethercott and the
Bank agree that all such disputes will be resolved exclusively by binding
arbitration conducted by the American Arbitration Association in Santa Clara
County, California. Mr. Nethercott and the Bank hereby knowingly and
willingly waive their respective rights to have such disputes tried to a
judge or jury. This arbitration provision will not apply to a claim for
injunctive relief by either party to this Agreement.
19. Advice to Seek Counsel.
Mr. Nethercott acknowledges that the Bank has advised him that this Agreement
imposes legal obligations upon him and that he should consult with legal
counsel with regard to this Agreement. The Bank will bear the cost of such
legal review up to a maximum of $500.
20. Notices.
Any notice required to be given hereunder will be sufficient if in writing
and sent by certified or registered mail, return receipt requested, first
class postage paid. The applicable address for the Bank is at its principal
office in San Jose, attention to the CEO. Mr. Nethercott's address will be
as shown on the Bank's records. Notices will be deemed given when actually
received, or three days after mailing, whichever is earlier.
<PAGE>
21. Entire Agreement.
Except as provided in Paragraphs 5, 8, 9 and 13, this Agreement and any
attachments hereto contain the entire agreement and understanding by and
between the Bank and Mr. Nethercott. With respect to the subject matter
herein, no representation, promise, agreement or understanding, written or
oral, not herein contained will be of any force or effect. No modification
hereof will be valid or binding unless in writing and signed by the party
intended to be bound. No waiver of any provision of this Agreement will be
valid unless in writing and signed by the party against whom such waiver is
sought to be enforced. No valid waiver of any provision of this Agreement at
any time will be deemed a waiver of any other provision of this Agreement, or
will be deemed a valid waiver of any of such provision at any other time.
If any provision of this Agreement is held by a court of competent
jurisdiction or an arbitration body to be invalid, void or unenforceable, the
remaining provisions of this Agreement will, nonetheless, continue in full
force without being impaired or invalidated in any way.
22. Headings.
The headings and other captions in this Agreement are for convenience and
reference only and will not be used in interpreting, construing or enforcing
any of the provisions of this Agreement.
23. Regulatory Approval.
In the event that any regulatory authority with jurisdiction over the Bank
will disapprove any provision of this Agreement, then the parties hereto will
use their best efforts, acting in good faith, to amend the Agreement in a
manner that will be acceptable to the parties and to the regulatory authorities.
24. Other Attorney's Fees Clause.
If any legal action or any arbitration or other proceeding is brought for the
enforcement of this agreement or because of any dispute or alleged breach,
the successful or prevailing party will be entitled to recover reasonable
attorney fees and other costs incurred in that action or proceeding, in
addition to any other relief which they may be entitled to.
<PAGE>
In witness hereof, the Bank and Mr. Nethercott have duly executed this
Agreement and it is effective as of the day and year first set forth above.
HERITAGE BANK EAST BAY
By: /s/ Richard L. Conniff Date: May 27, 1999
Title: President and CEO
HERITAGE COMMERCE CORP
By: /s/ John E. Rossell Date: May 27, 1999
Title: President and CEO
ACCEPTED BY:
/s/ William B. Nethercott Date: May 27, 1999
William B. Nethercott
EMPLOYMENT AGREEMENT
This employment agreement (the "Agreement") is entered into as of January 1,
1999, (the "Effective Date"), by and between Heritage Commerce Corp (the
"Company") and its wholly owned subsidiary, Heritage Bank of Commerce ("HBC")
a California banking corporation and Denise Van Houten (DVH), on the
following terms and conditions.
1. Duty and Position. DVH will be Senior Vice President, Construction
Lending, (SVP) at Heritage Bank of Commerce. DVH will be subject to the
direction of the CEO of HBC and, by extension, the Board of Directors of HBC.
The term "Bank" is intended to mean Company and/or any of its subsidiaries,
as applicable. The term "Management" is intended to mean the CEO/and or, as
applicable, those duly appointed management committees vested with
decision-making authority. The term "Board" will, unless more narrowly
defined in the context of its immediate usage, mean any and all boards of
directors with purview over the matter at hand.
The Parties agree that during the term of this Agreement, DVH may serve as a
senior officer of HBC or other subsidiaries of Company. Although DVH's
specific job description may change from time to time, the terms and
conditions of the Agreement as defined in Sections 2 through 24 will remain
in full force and effect. The SVP will set a high standard of conduct of
courtesy and concern, of professional and personal discretion and
responsibility, forthrightness, thrift, modesty and hard work and serve as a
model for all employees of the bank. The SVP will comply with all pertinent
regulatory standards as may affect the Bank.
The SVP will devote her entire productive time, attention and energy to the
business of the Bank. In a manner and with such results as are consistent
with her compensation and position, DVH will service the Bank's existing
relationships and cultivate and foster new relationships for the Bank. Such
new relationships will be consistent with the Bank's policies and mission and
will generally improve the Bank's share of market, volume of business,
profitability and return of assets.
The SVP will, at all times, keep the Board and appropriate members of the
Bank's management informed of all of her activities undertaken in context of
her role, including her activities in the community. She will introduce her
customers and potential customers and other business and civic contacts to
appropriate members of the Bank's management and to appropriate Board members
and to other employees of the Bank in order to enhance and solidify the Bank's
prospects and position.
The SVP will exercise diligence with respect to the control of the direct and
indirect costs of her activities on behalf of the Bank and of those of her
staff.
In Addition to the above, DVH will:
(a) be a member of all committees of the Bank to which she is duly appointed.
(b) be responsive to the directives of management which are in accordance
with the objectives and/or policies of the Board and pertinent
regulatory authorities and/or standards.
<PAGE>
(c) exercise diligence with respect to the control of the costs of
operation and other expenses directly or indirectly involving
interests of the Bank;
(d) be responsible for achieving assigned objectives of the Bank for
profitability and business development;
(e) be responsible for the quality of the assigned loan portfolio; and
(f) be responsible for budgeting, planning and management of staff as may
be called for by her position.
The provisions of paragraph 1 of this Agreement do not purport to constitute
a job description, which is subject to change, from time to time, as may be
documented by the records of the Human Resources Department.
2. Term. The Term of this Agreement will be three years from the Effective
Date hereof. At maturity, and annually thereafter, unless otherwise amended or
terminated, this Agreement will automatically renew for a term of one year.
Upon the termination of DVH's employment, neither she nor the Bank will have
any further obligation to the other, except as set forth in Paragraphs 5, 13.
1, 13.2, 16, 17,18 and 19 herein.
3. Base Salary. For the Term of this Agreement while she is an employee,
the Bank will pay DVH $100,000 per year ("Base Salary"), in accordance with
the Bank's normal payroll procedures, less appropriate withholdings, taxes
and similar deductions. The Base Salary will be reviewed annually by the CEO
and at his discretion, by the Personnel and Planning Committee of the
Heritage Commerce Corp Board.
4. Performance Bonuses. From time to time, but not less than annually,
subject to the discretion of the Board, the Bank will undertake, in good
faith, to pay performance bonuses during the Term of this Agreement. The Bank
will not be obligated to pay any specific amount pursuant to this section,
except however, that DVH will be paid not less than $20,000 as her bonus for
1998 performance. Subsequent bonuses will be based on DVH's overall
performance and that of the Bank, including such factors as profitability,
deposit base, loan portfolio size and quality, adequacy of the loan loss
reserve, the capital position of the Bank and the satisfactory nature of
regulatory examinations and loan reviews.
5. Incentive Stock Options. As of the effective date of this Agreement, the
Board of the Company has granted to DVH, incentive stock options to acquire
13,450 shares of the Company's common stock. These options were granted
pursuant to the Heritage Commerce Corp 1994 Tandem Stock Option Plan and
three stock Option Agreements by and between DVH and the bank, dated 9/28/94,
5/23/96 and 12/18/97. The Board, in its discretion, may grant such
additional options, as it deems appropriate in order to recognize performance
and in order to provide her with the incentive to sustain and enhance the
operational performance of the Bank for the future.
6. Automobile Allowance. During the Term of this Agreement, the Bank will
pay DVH a $300.00 monthly auto allowance.
<PAGE>
7. Medical Insurance. The Bank will provide medical insurance to DVH and
her family with options and coverage consistent with those of the Bank's
group medical plan as in effect from time to time.
8. Life Insurance and Supplemental Executive Retirement Plan (SERP). The
Bank will provide DVH life insurance to the same extent the Bank provides
life insurance to its executive officers. She will be entitled to designate
the beneficiary of the life insurance provided by this section.
As this Agreement goes to signature, the Bank is in the process of offering a
SERP to DVH. The SERP is pursuant to a separate agreement dated 1/15/99,
which defines all of its terms and conditions. This Agreement makes no
representations or warranties regarding the SERP, except to attest to the
intention of the Bank to offer such to DVH.
9. Disability Insurance. The Bank will provide DVH long-term disability
insurance to the same extent the Bank provides such disability insurance to
its executive officers.
10. Indemnification by the Bank. The Bank and Company will indemnify and
hold DVH harmless to the extent provided in the Bank's and Company's by-laws
for officers and directors.
11. Monthly Expenses Account. Subject to the Bank's Expense Reimbursement
Policy, the Bank will reimburse DVH for her reasonable and necessary business
expenses incurred in furthering the Bank's interests, including automobile fuel
used in the performance of this agreement. She will prepare and submit
expense reports promptly.
12. Vacation. During the period of this Agreement, DVH will accrue not less
than four weeks vacation, subject to and consistent with the personnel policy
of the Bank. In the event that while she is an employee, she receives any
compensation in lieu of accrued vacation, such payment will be considered
cash compensation in addition to Base Salary and will not be included in
severance calculations called for in Section 13.1, Termination without Cause,
or in Section 13.2, Change of Control, hereunder.
13. Termination and Severance. Each party has the right to terminate DVH's
employment with the Bank prior to the end of the Term specified in paragraph
2 with or without cause at any time. For purposes of this Agreement, cause
will arise if (i) she willfully breaches or habitually neglect the duties
which she is required to perform under this Agreement, (ii) commits an
intentional act that has a material detrimental effect on the reputation or
business of the Bank, or (iii) she is convicted of a felony or commits any
such act of dishonesty, fraud, or intentional material misrepresentation as
would prevent effective performance of her duties under this Agreement. If
the Bank decides to terminate DVH's employment for cause, the Bank will
provide her with notice specifying the grounds for termination, accompanied
by a written statement stating the relevant facts supporting such grounds.
Upon termination of her employment for cause, she will not be entitled to any
further amounts except for the Base Salary earned through her last day of
employment.
<PAGE>
13.1 Termination Without Cause. If the Bank terminates DVH's employment
without cause, the Bank will provide her the following, and her full and
final severance: (i) a lump sum payment within 10 days after termination
date, equal to one-half of her annual Base Salary, (ii) if she is covered
under the Bank's standard group medical and dental plan at the time of her
termination, the Bank will continue to provide equivalent coverage
through C.O.B.R.A. for 6 months, as needed, after the date of termination at
no cost to DVH; (thereafter, DVH will be responsible for such payments if she
so chooses) (iii) with regard to any group life insurance and /or any group
disability benefits enjoyed by DVH immediately prior to her severance, except
as provided hereunder, the Bank will continue to provide such benefits for 6
months at no cost to DVH; and (iv) except as provided
hereunder, the Bank will continue to pay for 6 months the premiums on any
discreet supplemental life insurance and/or disability insurance policies
carried by the Bank for DVH's benefit, in amounts and with coverage
equivalent to coverage provided immediately prior to DVH's last day of
employment, at no cost to DVH (thereafter, the Bank will freely assign such
policies to DVH, and she will be responsible for all premium payments, if
she so chooses).
13.2 Change of Control. If DVH's employment is terminated without cause or
terminates at DVH's election as a result of a material change in her
compensation, benefits, title, responsibility or location, and such
termination occurs within 30 days before, or 6 months following, a Change of
Control (as hereafter defined), DVH will be considered terminated without
cause and will be entitled to the benefits and compensation described in
Section 13.1, Termination Without Cause.
The term "Change in Control" will mean the occurrence of any of the following
events with respect to the Employer (with the term "Employer" being defined
for purposes of determining whether a "Change in Control" has occurred to
include any parent bank holding company organized at the direction of the
Employer to own 100% of the Employer's outstanding common stock): (i) a
change in control of a nature that would be required to be reported in
response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or in
response to any other form or report to the regulatory agencies or
governmental authorities having jurisdiction over the Employer or any stock
exchange on which the Employer's shares are listed which requires the
reporting of a change in control; (ii) any merger, consolidation or
reorganization of the Employer in which the Employer does not survive; (iii)
any sale, lease, exchange, mortgage, pledge, transfer or other disposition
(in one transaction or a series of transactions) of any assets of the Employer
having an aggregate fair market value of fifty percent (50%) of the total
value of the assets of the Employer, reflected in the most recent balance
sheet of the Employer; (iv) a transaction whereby any "person" (as such term
is used in the Exchange Act) or any individual, corporation, partnership,
trust or any other entity becomes the beneficial owner, directly or
indirectly, of securities of the Employer representing twenty-five (25%) or
more of the combined voting power of the Employer's then outstanding
securities; or (v) a situation where, in any one-year period, individuals who
at the beginning of such period constitute the Board of Directors of the
Employer cease for any reason to constitute at least a majority thereof,
unless the election, or the nomination for election by
<PAGE>
the Employer's shareholders, of each new director is approved by a vote of at
least three-quarters (3/4) of the directors then still in office who were
directors at the beginning of the period. Notwithstanding the foregoing or
anything else contained herein to the contrary, there will not be a "Change
of Control" for purposes of the Agreement if the event which would otherwise
come within the meaning of the term: "Change of Control" involves (i) a
reorganization at the direction of the Employer solely to form a parent bank
holding company which owns 100% of the Employer's common stock following the
reorganization, or (ii) an Employee Stock Ownership Plan sponsored by the
Employer or its parent holding company which is the party that acquires
"control", as described above.
13.3 Voluntary Termination. If DVH decides of her own volition to terminate
her employment under this Agreement prior to the end of the Term, the Bank
will be entitled to, and she will provide the Bank with, one month's prior
written notice; provided however, upon receiving such notice, the Bank may
terminate her employment immediately and pay her for the one-month period
that the notice otherwise would have run, in addition to all other amounts
then due and payable under this Agreement.
13.4 Other Termination Matters. As to the Bank's obligations under
Paragraph 13, the term "as needed" refers to DVH's continuing respective
status as otherwise uninsured. Should she become employed, and become so
insured as a result of her employment, the Bank would, from that moment
forward, be released from its related insurance or insurance premium
reimbursement obligations.
As to the Bank's obligations under 13.1 (iii) and 13.2, the Bank may, in the
alternative, in its sole discretion, elect to pay to DVH in 6 consecutive
monthly installments, as needed by DVH, a monthly amount equal to the Bank's
monthly cost of providing such respective coverage during DVH's employment.
As to the Bank's obligations under 13.1 (iv) and 13.2, the Bank may, in the
alternative, in its sole discretion, elect to pay to DVH in 6 consecutive
monthly installments a monthly amount equal to the Bank's monthly cost of
providing such respective coverage during DVH's employment. Under no
circumstances will the Bank be under obligation to assign to DVH policies,
which it does not possess, or which are otherwise non-assignable.
14. Confidential and Proprietary Information. DVH agrees that all
information, including but not limited to that which is directly or
indirectly related to the Bank's financial status, profitability, deposit
base, portfolio size, yield and quality as well as its customers and
prospective customers is confidential and proprietary to the Bank and that
she will maintain such information as confidential. DVH agrees that as a
condition of employment, she will execute such form of confidentiality
agreement as the Board may adopt from time to time for senior officers of the
Bank.
15. No Conflicting Agreements. DVH represents that her performance of all
of the terms of this Agreement and any service to be rendered as an employee
of the Bank does not and will not breach any fiduciary or other duty or any
covenant, agreement or understanding, including without limitation, any
agreement relating to any proprietary information, knowledge or data acquired
by her in confidence, trust or otherwise, prior to her employment by the Bank
to which she is a party or by the terms of which she may be
<PAGE>
bound. DVH covenants and agrees that she will not disclose to the Bank, or
induce the Bank to use, any proprietary information, knowledge or data,
belonging to any previous employer or others and that she will disclose to
the Bank the term and subject of any prior confidentiality agreement or
agreements she has entered into. DVH further covenants and agrees not to
enter into any agreement or understanding, either written or oral, in conflict
with the provisions of this Agreement. Further, DVH agrees that for a period
of one year after payment of full and final severance, pursuant either to
Section 13.1 (Termination Without Cause) or Section 13.2 (Change of Control),
she will not (i) directly solicit the services of any employee of the Bank or
directly encourage any employee to discontinue her or her employment with the
Bank, or (ii) directly solicit or encourage any customer of the Bank to
curtail in any way the business that customer does with the Bank.
16. Successors and Assigns. This Agreement will inure to the benefit of
and be binding upon the Bank and any of its successors and assigns. In view
of the personal nature of the services to be performed under this Agreement
by DVH, she will not have the right to assign or transfer any of her rights,
obligations or benefits under this Agreement, except as otherwise noted
herein.
17. Governing Law. This Agreement will at all times and in all respects be
governed by the laws of the State of California applicable to transactions
wholly performed in California between California residents.
18. Mediation. Prior to engaging in any legal or equitable litigation or
other dispute resolution process, regarding any of the terms and conditions
of this agreement between the parties, or concerning the subject matter of
the agreement between the parties, each party specifically agrees to engage,
in good faith, in a mediation process at the expense of the Bank, complying
with the procedures provided for under California Evidence Code, Sections
1115 through and including 1125 as then currently in effect. The parties
further and specifically agree to use their best efforts to reach a mutually
agreeable resolution of the matter. The parties understand and specifically
agree that should any party(ies) to this Agreement refuse to participate in
mediation for any reason, the other party(ies) will be entitles to seek a
court order to enforce this provision in any court of appropriate
jurisdiction requiring the dissenting party to attend, participate, and to
make a good faith effort in the mediation process to reach a mutually
agreeable resolution of the matter. Parties to this Agreement agree to use
the American Arbitration Association model for any and all employment
mediation.
<PAGE>
19. Arbitration. In the event of any dispute or claim relating to or
arising out of DVH's employment with the Bank (or any of its subsidiaries),
this Agreement, or any termination of DVH's employment (including, but not
limited to, any claims of breach of contract, wrongful termination, or age,
disability or other discrimination or harassment), which dispute cannot be
resolved by mediation pursuant to Paragraph 18, DVH and the Bank agree that
all such disputes will be resolved exclusively by binding arbitration
conducted by the American Arbitration Association in Santa Clara County,
California. DVH and the Bank hereby knowingly and willingly waive their
respective rights to have such disputes tried to a judge or jury. This
arbitration provision will not apply to a claim for injunctive relief by
either party to this Agreement.
20. Advice to Seek Counsel. DVH acknowledges that the Bank has advised
her that this Agreement imposes legal obligations upon her and that she
should consult with legal counsel with regard to this Agreement.
21. Notices. Any notice required to be given hereunder will be sufficient
if in writing and sent by certified or registered mail, return receipt
requested, first class postage paid. The applicable address for the Bank is
at its principal office in San Jose, attention to the CEO. DVH's address will
be as shown on the Bank's records. Notices will be deemed given when
actually received, or three days after mailing, whichever is earlier.
22. Entire Agreement. This Agreement and any attachments hereto contain
the entire agreement and understanding by and between the Bank and DVH and
with respect to the subject matter herein, and no representation, promise,
agreement or understanding, written or oral, not herein contained will be of
any force or effect. No modification hereof will be valid or binding unless
in writing and signed by the party intended to be bound. No waiver of any
provision of this Agreement will be valid unless in writing and signed by the
party against whom such waiver is sought to be enforced. No valid waiver of
any provision of this Agreement at any time will be deemed a waiver of any
other provision of this Agreement, or will be deemed a valid waiver of any of
such provision at any other time.
If any provision of this Agreement is held by a court of competent
jurisdiction or an arbitration body to be invalid, void or unenforceable, the
remaining provisions of this Agreement will, nonetheless, continue in full
force without being impaired or invalidated in any way.
23. Headings. The headings and other captions in this Agreement are for
convenience and reference only and will not be used in interpreting,
construing or enforcing any of the provisions of this Agreement.
24. Regulatory Approval. In the event that any regulatory authority with
jurisdiction over the Bank will disapprove any provision of this Agreement,
then the parties hereto will use their best efforts, acting in good faith, to
amend the Agreement in a manner that will be acceptable to the parties and to
the regulatory authorities.
<PAGE>
In witness whereof, the Bank and Denise Van Houten have duly executed this
Agreement and it is effective as of the day and year first set forth above.
HERITAGE BANK OF COMMERCE
By: /S/ John E. Rossell Date: April 6, 1999
Title: President and CEO
ACCEPTED BY:
/s/ Denise Van Houten Date: April 6, 1999
Denise Van Houten
EMPLOYMENT AGREEMENT
This employment agreement (the "Agreement") supercedes the agreement dated
April 30, 1998, is effective as of January 1, 1999 (the "Effective Date"),
and is executed on May 14, 1999, by and between Heritage Commerce Corp ("HCC"),
a California corporation, and Mr. Richard L. Conniff on the following terms and
conditions:
1. Position.
Mr. Conniff has been duly elected to the Board of Directors of HCC ("HCC
Board"). During the term of this Agreement, the HCC Board will continue to
present Mr. Conniff on the HCC slate of individuals nominated for election by
shareholders to the post of Director. Mr. Conniff will serve as President and
CEO of Heritage Bank East Bay. Mr. Conniff will be subject to the direction
of the CEO of HCC and, by extension, the HCC Board. Notwithstanding the
foregoing reporting responsibility, Mr. Conniff will also be responsible to
the Board of Directors of Heritage Bank East Bay.
As employed hereunder, the term "Bank" is intended to mean HCC and/or any of
its subsidiaries, as applicable. The term "Management" is intended to mean
the CEO of HCC and/or, as applicable, those duly appointed management
committees vested with decision-making authority. The term "Board" will,
unless more narrowly defined in the context of its immediate usage, mean any
and all boards of directors with purview over the matter at hand.
Mr. Conniff will set a high standard of conduct of courtesy and concern, of
professional and personal discretion and responsibility, forthrightness,
thrift, modesty and hard work. In light of this role with the Bank and the
Bank's position in the industry, Mr. Conniff will serve as a model for all
employees of the Bank. Given his role with the Bank and his responsibility
relative to the Bank's presence and stature in the community, Mr. Conniff
will, at all times, emulate this high standard of conduct in order to
develop and enhance the Bank's reputation and image.
Mr. Conniff will comply with all pertinent regulatory standards as may affect
the Bank.
Mr. Conniff will devote his entire productive time, attention and energy to
the business of the Bank. In a manner and with such results as are
consistent with his compensation and position, Mr. Conniff will service the
Bank's existing relationships and cultivate and foster new relationships for
the Bank. Such new relationships will be consistent with the Bank's
mission and will generally improve the Bank's share of market, volume of
business, profitability and return of assets.
<PAGE>
Mr. Conniff will at all times keep the Board and appropriate members of the
Bank's management informed of all of his activities undertaken in context of
his role, including his activities in the community. He will introduce his
customers and potential customers and other business and civic contacts to
appropriate members of the Bank's management and to appropriate Board members
and to other employees of the Bank in order to enhance and solidify the
Bank's prospects and position.
Mr. Conniff will exercise diligence with respect to the control of the direct
and indirect costs of his activities on behalf of the Bank.
In Addition to the above, Mr. Conniff will:
(a) be a member of all committees of the East Bay Board and of the Company
Board to which he is duly appointed, except any audit committee;
(b) be responsible for the operation of the Bank, its properties and related
interests in accordance with the directives of management and in accordance
with the objectives and/or policies of the Board;
(c) exercise diligence with respect to the control of the costs of
operation and other expenses directly or indirectly involving interests of
the Bank;
(d) be responsible for achieving the broad objectives of the Bank for
profitability and business development;
(e) be responsible for the quality of the loan portfolio; and
(f) be responsible for budgeting, finance, accounting, planning and for
forming and developing the staff in a manner consistent with the Bank's
immediate needs and strategic goals.
2. Term.
Subject to Paragraph 12 below, the Term of this Agreement will be three years
from the Effective Date hereof. At maturity, and annually thereafter,
unless otherwise amended or terminated, this Agreement will automatically
renew for a term of one year. Upon the termination of Mr. Conniff's
employment, neither he nor the Bank will have any further obligation to the
other, except as set forth in Paragraphs 5, 9, 12, 13, 14, 15, 17, 18, and
24 herein.
3. Base Salary.
For the Term of this Agreement while he is an employee, the Bank will pay Mr.
Conniff $125,000 per year ("Base Salary"), in accordance with the Bank's
normal payroll procedures, less appropriate withholdings, taxes and similar
deductions. The Base Salary
<PAGE>
will be reviewed annually by the CEO of HCC and the Personnel and Planning
Committee of the HCC Board and is subject to alteration only at the direction
of those individuals.
4. Performance Bonuses.
From time to time, but not less than annually, subject to the discretion of
the Board, the Bank will undertake, in good faith, to pay performance bonuses
during the Term of this Agreement. The Bank will not be obligated to pay any
specific amount pursuant to this Paragraph. Mr. Conniff will be eligible for
Performance Bonuses and the Bank will, in good faith, pay Performance Bonuses
in amounts that it deems reasonable. If Performance Bonuses are paid, the
amounts of such generally will be comparable to those for similarly placed
executives at similarly situated financial institutions, and will be based on
Mr. Conniff's overall performance and that of the Bank, including such
factors as growth, profitability, loan quality, adequacy of the loan loss
reserve and the satisfactory nature of regulatory examinations.
5. Incentive Stock Options.
The Board of HCC has granted to Mr. Conniff incentive stock options to
acquire shares of HCC's common stock, pursuant to the Heritage Commerce Corp
1994 Tandem Stock Option Plan and to those two certain Stock Option
Agreements dated 4/30/98 and 9/17/98. The Board, in its discretion, may grant
such additional options, as it deems appropriate in order to recognize
performance for the preceding year and in order to provide Mr. Conniff with
the incentive to sustain and enhance the operational performance of the Bank
for the future.
6. Automobile Allowance.
During the Term of this Agreement, the Bank will pay Mr. Conniff a $500
monthly auto allowance plus gas reimbursement.
7. Medical Insurance.
The Bank will provide medical insurance to Mr. Conniff and his family with
options and coverage consistent with those of the Bank's group medical plan
as in effect from time to time.
8. Life Insurance, Disability Insurance and Supplemental Retirement Plan.
The Bank will provide Mr. Conniff life insurance and disability insurance to
the same extent the Bank provides such insurance to its executive officers.
Mr. Conniff will be entitled to designate the beneficiary of the life
insurance provided by this Paragraph.
<PAGE>
The Bank will provide Mr. Conniff with a Supplemental Executive Retirement
Plan (SERP) and a Split Dollar Life Insurance Policy, according to the terms
of separate agreements, by and between Mr. Conniff and the Bank.
The Board, in its discretion, may from time to time grant to Mr. Conniff
additional life insurance, disability insurance, and/or SERP benefits as it
deems appropriate to his position and/or performance.
9. Indemnification by the Bank.
The Bank will indemnify and hold Mr. Conniff harmless pursuant to those
certain Indemnification Agreements dated October 29, 1998 and executed by Mr.
Conniff and HCC and also to the extent provided for in the Bank's bylaws as
to officers and/or directors of the Bank and HCC.
10. Monthly Expense Account.
Subject to the Bank's Expense Reimbursement Policy, the Bank will reimburse
Mr. Conniff for his reasonable and necessary business expenses, including
membership in the Silicon Valley Capital Club, incurred in furthering the
Bank's interests.
11. Vacation.
During the period of this Agreement, Mr. Conniff will accrue vacation
consistent with the personnel policy of the Bank, but in no event at a rate
of less than four weeks per year. In the event that while he is an employee,
he receives any compensation in lieu of accrued vacation, such payment will
not be included in severance calculations called for in Paragraph 12.1,
Termination without Cause, or in Paragraph 12.2, Change of Control, hereunder.
12. Termination and Severance.
Each party has the right to terminate Mr. Conniff's employment with the Bank
prior to the end of the Term specified in Paragraph 2 with or without cause
at any time. For purposes of this Agreement, cause will arise if (i) he
willfully breaches or habitually neglects the duties which he is required to
perform under this Agreement, (ii) he commits an intentional act that has a
material detrimental effect on the reputation or business of the Bank, or
(iii) he is convicted of a felony or commits any material and actionable act
of dishonesty, fraud, or intentional material misrepresentation in the
performance of his duties under this Agreement. If the Bank decides to
terminate Mr. Conniff's employment for cause, the Bank will provide him with
notice specifying the grounds for termination, accompanied by a brief written
statement stating the relevant facts supporting such grounds. Upon
termination of his employment for cause, Mr. Conniff will not be entitled
<PAGE>
to any further amounts under this Agreement, except for the Base Salary
accrued and unpaid vacation pay and any rights under the stock option plan
earned through his last day of employment.
12.1 Termination Without Cause.
If the Bank terminates Mr. Conniff's employment without cause, the Bank will
provide him the following, as his full and final severance: (i) a lump sum
payment within 10 days after termination date, equal to his annual Base
Salary, annual auto allowance and Average Annual Performance Bonus paid (as
defined below), if any, less withholding deductions, and (ii) if he is
covered under the Bank's standard group medical and dental plan at the time
of his termination, the Bank will continue to provide equivalent coverage to
Mr. Conniff, through C.O.B.R.A., for up to 12 months, as needed, after the
date of his termination, at no cost to Mr. Conniff; and (iii) with regard to
any group life insurance and/or any group disability benefits enjoyed by Mr.
Conniff immediately prior to his severance, except as provided hereunder, the
Bank will continue to provide such benefits for 12 months at no cost to Mr.
Conniff; and (iv) except as provided hereunder, the Bank will continue to pay
for 12 months the premiums on any discreet supplemental life insurance and/or
disability insurance policies carried by the Bank for Mr. Conniff's benefit,
in amounts and with coverage equivalent to coverage provided immediately
prior to Mr. Conniff's last day of employment, at no cost to Mr. Conniff
(thereafter, the Bank will freely assign such policies to Mr. Conniff, and he
will be responsible for all premium payments, if he so chooses); (v) the Bank
will reimburse Mr. Conniff for bona-fide, professional out-placement
services, not to exceed $5,000.
For purposes of this Agreement, a termination resulting from Mr. Conniff's
death or disability (as defined hereunder) will be considered Termination
Without Cause. Disability will be effective hereunder if it causes Mr.
Conniff's absence from work for 90 days out of any consecutive 6-month period.
12.2 Change of Control.
If Mr. Conniff's employment is terminated without cause or terminates at Mr.
Conniff's election as a result of a material change in his compensation,
benefits, title, responsibility or location, and such termination occurs
within 60 days before, or 12 months following, a Change of Control (as
hereafter defined), Mr. Conniff will be entitled to the following benefits
and compensation: (i) a lump sum payment within 10 days after termination
date, equal to twice the aggregate of his annual Base Salary, annual auto
allowance and Average Annual Performance Bonus paid (as defined below), if
any, less withholding deductions, and (ii) if he is covered under the Bank's
standard group medical and dental plan at the time of his termination, the
Bank will continue to provide equivalent coverage to Mr. Conniff, through
C.O.B.R.A., for up to 18 months, as needed, after the date of his
termination, at no cost to Mr. Conniff; and (iii) with regard to any group
life insurance and/or any group disability benefits enjoyed by Mr. Conniff
immediately prior to his severance, except as provided hereunder, the Bank
will continue to provide such benefits
<PAGE>
for 18 months at no cost to Mr. Conniff; and (iv) except as provided
hereunder, the Bank will continue to pay for 18 months the premiums on any
discrete supplemental life insurance and/or disability insurance policies
carried by the Bank for Mr. Conniff's benefit, in amounts and with coverage
equivalent to coverage provided immediately prior to Mr. Conniff's last day
of employment, at no cost to Mr. Conniff (thereafter, the Bank will freely
assign such policies to Mr. Conniff, and he will be responsible for all
premium payments, if he so chooses); (v) the Bank will reimburse Mr. Conniff
for bona-fide, professional out-placement services, not to exceed $5,000.
The term "Change of Control" will mean the occurrence of any of the following
events with respect to the Employer (with the term "Employer" being defined
for purposes of determining whether a "Change of Control" has occurred to
mean HCC, HBC or any parent bank holding company organized at the direction
of HCC or HBC to own 100% of the outstanding common stock of HCC or HBC): (i)
a change in control of a nature that would be required to be reported in
response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or in
response to any other form or report to the regulatory agencies or
governmental authorities having jurisdiction over the Employer or any stock
exchange on which the Employer's shares are listed which requires the
reporting of a change in control; (ii) any merger, consolidation or
reorganization of the Employer in which the Employer does not survive; (iii)
any sale, lease, exchange, mortgage, pledge, transfer or other disposition
(in one transaction or a series of transactions) of any assets of the Employer
having an aggregate fair market value of fifty percent (50%) of the total
value of the assets of the Employer, reflected in the most recent balance
sheet of the Employer; (iv) a transaction whereby any "person" (as such term
is used in the Exchange Act) or any individual, corporation, partnership,
trust or any other entity becomes the beneficial owner, directly or
indirectly, of securities of the Employer representing twenty-five (25%) or
more of the combined voting power of the Employer's then outstanding
securities; or (v) a situation where, in any one-year period, individuals
who at the beginning of such period constitute the Board of Directors of the
Employer cease for any reason to constitute at least a majority thereof,
unless the election, or the nomination for election by the Employer's
shareholders, of each new director is approved by a vote of at least three-
quarters (3/4) of the directors then still in office who were directors at
the beginning of the period. Notwithstanding the foregoing or anything else
contained herein to the contrary, there will not be a "Change of Control" for
purposes of the Agreement if the event which would otherwise come within the
meaning of the term: "Change of Control" involves (i) a reorganization at the
direction of the Employer solely to form a parent bank holding company which
owns 100% of the Employer's common stock following the reorganization, or
(ii) an Employee Stock Ownership Plan sponsored by the Employer or
its parent holding company which is the party that acquires "control," as
described above.
12.3 Voluntary Termination.
If Mr. Conniff decides of his own volition to terminate his employment under
this Agreement prior to the end of the Term he will provide the Bank with one
month's prior written notice; provided however, upon receiving such notice,
the Bank may terminate his employment immediately. Upon voluntary termination
of his employment, Mr. Conniff will not be entitled to any further amounts
under this Agreement, except for the Base Salary accrued and unpaid vacation
pay and any rights under the stock option plan earned through his last day of
employment.
12.4 Other Termination Matters.
As to the Bank's obligations under Paragraph 12, the term "as needed" refers
to Mr. Conniff's continuing respective status as otherwise uninsured. Should
he become employed, and become so insured as a result of his employment, the
Bank would, from that moment forward, be released from its related insurance
or insurance premium reimbursement obligations.
As to the Bank's obligations under 12.1 (iii), the Bank may, in the
alternative, in its sole discretion, elect to pay to Mr. Conniff in 12
consecutive monthly installments, as needed by Mr. Conniff, a monthly amount
equal to the Bank's monthly cost of providing such respective coverage during
Mr. Conniff's employment.
As to the Bank's obligations under 12.1 (iv), the Bank may, in the
alternative, in its sole discretion, elect to pay to Mr. Conniff in 12
consecutive monthly installments a monthly amount equal to the Bank's
monthly cost of providing such respective coverage during Mr. Conniff's
employment. Under no circumstances will the Bank be under obligation to
assign to Mr. Conniff policies that it does not possess, or which are
otherwise non-assignable.
As to the Bank's obligations under 12.2 (iii), the Bank may, in the
alternative, in its sole discretion, elect to pay to Mr. Conniff in 18
consecutive monthly installments, as needed by Mr. Conniff, a monthly amount
equal to the Bank's monthly cost of providing such respective coverage during
Mr. Conniff's employment.
As to the Bank's obligations under 12.2 (iv), the Bank may, in the
alternative, in its sole discretion, elect to pay to Mr. Conniff in 18
consecutive monthly installments a monthly amount equal to the Bank's monthly
cost of providing such respective coverage during Mr. Conniff's employment.
Under no circumstances will the Bank be under obligation to assign to Mr.
Conniff policies that it does not possess, or which are otherwise
non-assignable.
The term "Average Annual Performance Bonus," as used herein, will be
calculated as of Mr. Conniff's last date of employment and will mean the
higher of (i) Mr. Conniff's annual
<PAGE>
performance bonuses averaged from the date of this Agreement, or (ii) the
average of his three most recent annual performance bonuses.
13. Confidential and Proprietary Information.
Mr. Conniff agrees that all Bank information, including but not limited to
that which is directly or indirectly related to the Bank's financial status,
profitability, deposit base, portfolio size and quality as well as its
customers and prospective customers is confidential and proprietary to the
Bank and that he will maintain such information as confidential at all times
during and after his employment. Mr. Conniff agrees that as a condition of
employment, he will execute such form of confidentiality agreement as the
Board may adopt from time to time for senior officers of the Bank, which
agreement must be consistent with and not exceed the provisions of this
Paragraph.
14. No Conflicting Agreements.
Mr. Conniff represents that his performance of all of the terms of this
Agreement and any service to be rendered as an employee of the Bank does not
and will not breach any fiduciary or other duty or any covenant, agreement or
understanding, including without limitation, any agreement relating to any
proprietary information, knowledge or data acquired by him in confidence,
trust or otherwise, prior to his employment by the Bank to which he is a
party or by the terms of which he may be bound. Mr. Conniff covenants and
agrees that he will not disclose to the Bank, or induce the Bank to use, any
proprietary information, knowledge or data, belonging to any previous
employer or others and that he will disclose to the Bank the term and
subject of any prior confidentiality agreement or agreements he has entered
into. Mr. Conniff further covenants and agrees not to enter into any
agreement or understanding, either written or oral, in conflict with the
provisions of this Agreement. Further, Mr. Conniff agrees that for a period
of one year after termination, pursuant either to Paragraph 12.1 (Termination
Without Cause) or Paragraph 12.2 (Change of Control), he will not (i)
directly or indirectly solicit the services of any employee of the Bank or
directly or indirectly encourage any employee to discontinue his or her
employment with the Bank, or (ii) directly or indirectly solicit or encourage
any customer of the Bank to curtail in any way the business that customer
does with the Bank.
15. Successors and Assigns.
This Agreement will inure to the benefit of and be binding upon the Bank and
any of its successors and assigns. In view of the personal nature of the
services to be performed under this Agreement by Mr. Conniff, he will not
have the right to assign or transfer any of his rights, obligations or
benefits under this Agreement, except as otherwise noted herein.
<PAGE>
16. Governing Law.
This Agreement will at all times and in all respects be governed by the laws
of the State of California applicable to transactions wholly performed in
California between California residents.
17. Mediation.
Prior to engaging in any legal or equitable litigation or other dispute
resolution process, regarding any of the terms and conditions of this
agreement between the parties, or concerning the subject matter of the
agreement between the parties, each party specifically agrees to engage, in
good faith, in a mediation process at the expense of the Bank, complying with
the procedures provided for under California Evidence Code, Sections 1115
through and including 1125 as then currently in effect. Using a mediator
selected by both parties, the parties further and specifically agree to use
their best efforts to reach a mutually agreeable resolution of the matter at
such mediation. The parties understand and specifically agree that should
any party(ies) to this Agreement refuse to participate in mediation for any
reason, the other party(ies) will be entitled to seek a court order to
enforce this provision in any court of appropriate jurisdiction requiring the
dissenting party to attend, participate, and to make a good faith effort in
the mediation process to reach a mutually agreeable resolution of the matter.
18. Arbitration
In the event of any dispute or claim relating to or arising out of Mr.
Conniff's employment with the Bank (or any of its subsidiaries), this
Agreement, or any termination of Mr. Conniff's employment (including, but not
limited to, any claims of breach of contract, wrongful termination, or age,
disability or other discrimination or harassment), which dispute cannot be
resolved by mediation pursuant to Paragraph 17, Mr. Conniff and the Bank
agree that all such disputes will be resolved exclusively by binding
arbitration conducted by the American Arbitration Association in Santa Clara
County, California. Mr. Conniff and the Bank hereby knowingly and willingly
waive their respective rights to have such disputes tried to a judge or jury.
This arbitration provision will not apply to a claim for injunctive relief by
either party to this Agreement.
19. Advice to Seek Counsel.
Mr. Conniff acknowledges that the Bank has advised him that this Agreement
imposes legal obligations upon him and that he should consult with legal
counsel with regard to this Agreement. The Bank will bear the cost of such
legal review up to a maximum of $500.
20. Notices.
Any notice required to be given hereunder will be sufficient if in writing
and sent by certified or registered mail, return receipt requested, first
class postage paid. The
<PAGE>
applicable address for the Bank is at its principal office in San Jose,
attention to the CEO. Mr. Conniff's address will be as shown on the Bank's
records. Notices will be deemed given when actually received, or three days
after mailing, whichever is earlier.
21. Entire Agreement.
Except as provided in Paragraphs 5, 8, 9 and 13, this Agreement and any
attachments hereto contain the entire agreement and understanding by and
between the Bank and Mr. Conniff. With respect to the subject matter herein,
no representation, promise, agreement or understanding, written or oral, not
herein contained will be of any force or effect. No modification hereof will
be valid or binding unless in writing and signed by the party intended to be
bound. No waiver of any provision of this Agreement will be valid unless
in writing and signed by the party against whom such waiver is sought to be
enforced. No valid waiver of any provision of this Agreement at any time
will be deemed a waiver of any other provision of this Agreement, or will be
deemed a valid waiver of any of such provision at any other time.
If any provision of this Agreement is held by a court of competent
jurisdiction or an arbitration body to be invalid, void or unenforceable,
the remaining provisions of this Agreement will, nonetheless, continue in
full force without being impaired or invalidated in any way.
22. Headings.
The headings and other captions in this Agreement are for convenience and
reference only and will not be used in interpreting, construing or enforcing
any of the provisions of this Agreement.
23. Regulatory Approval.
In the event that any regulatory authority with jurisdiction over the Bank
will disapprove any provision of this Agreement, then the parties hereto will
use their best efforts, acting in good faith, to amend the Agreement in a
manner that will be acceptable to the parties and to the regulatory
authorities.
24. Other Attorney's Fees Clause.
If any legal action or any arbitration or other proceeding is brought for the
enforcement of this agreement or because of any dispute or alleged breach,
the successful or prevailing party will be entitled to recover reasonable
attorney fees and other costs incurred in that action or proceeding, in
addition to any other relief which they may be entitled to.
<PAGE>
In witness hereof, the Bank and Mr. Conniff have duly executed this Agreement
and it is effective as of the day and year first set forth above.
HERITAGE COMMERCE CORP
By: /S/ John E. Rossell Date: May 14, 1999
Title: President and CEO
ACCEPTED BY:
/s/ Richard L. Conniff Date: May 14, 1999
Richard L. Conniff
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
HERITAGE COMMERCE CORP UNAUDITED FINANCIAL STATEMENTS AT JUNE 30, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 294,000
<INT-BEARING-DEPOSITS> 240,432,000
<FED-FUNDS-SOLD> 59,120,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 13,856,000
<INVESTMENTS-CARRYING> 13,856,000
<INVESTMENTS-MARKET> 13,783,000
<LOANS> 245,336,000
<ALLOWANCE> 4,337,000
<TOTAL-ASSETS> 403,215,000
<DEPOSITS> 364,592,000
<SHORT-TERM> 0
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0
0
<COMMON> 29,642,000
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