<PAGE> 1
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, 2000
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition 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 7,305,081 shares of Common Stock outstanding on August 14,
2000.
<PAGE> 2
HERITAGE COMMERCE CORP AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
Table of Contents
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Part I - Financial Information Page
----
<S> <C>
Item 1. Condensed Consolidated Statements of Financial Condition 3
Condensed Consolidated Income Statements 4
Condensed Consolidated Statements of Cash Flows 5
Condensed Consolidated Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Part II - Other Information
Item 1. Legal Proceedings 19
Item 4. Submissions of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 20
</TABLE>
<PAGE> 3
HERITAGE COMMERCE CORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
(Unaudited)
<S> <C> <C>
Cash and due from banks $ 30,680,000 $ 10,049,000
Federal funds sold 85,600,000 128,100,000
------------- -------------
Total cash and cash equivalents 116,280,000 138,149,000
Securities available-for-sale, at fair value 33,087,000 16,356,000
Securities held-to-maturity, at amortized cost
(fair value of $12,579,000 and $13,614,000, respectively) 12,812,000 13,834,000
Loans held for sale, lower of cost or market 27,620,000 22,243,000
Loans, net of deferred fees 371,373,000 271,855,000
Allowance for probable loan losses (6,000,000) (5,003,000)
------------- -------------
Loans, net 365,373,000 266,852,000
Premises and equipment, net 3,420,000 3,459,000
Accrued interest receivable and other assets 9,230,000 5,211,000
Other investments 13,145,000 10,560,000
------------- -------------
TOTAL $ 580,967,000 $ 476,664,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits
Demand, noninterest bearing $ 157,177,000 $ 109,432,000
Demand, interest bearing 12,461,000 9,898,000
Savings and money market 154,291,000 164,060,000
Time deposits, under $100,000 58,781,000 47,355,000
Time deposits, $100,000 and over 135,765,000 87,795,000
------------- -------------
Total deposits 518,475,000 418,540,000
Accrued interest payable and other liabilities 8,449,000 13,593,000
Mandatorily redeemable cumulative trust preferred securities of
Subsidiary Grantor Trust 7,000,000 --
------------- -------------
Total liabilities 533,924,000 432,133,000
------------- -------------
Shareholders' equity:
Preferred Stock, no par value; 10,000,000 shares authorized;
none outstanding -- --
Common Stock, no par value; 30,000,000 shares authorized;
Shares issued and outstanding: 7,179,351 at June 30, 2000 and
7,031,576 at December 31, 1999 41,570,000 41,021,000
Additional paid in capital 146,000 --
Accumulated other comprehensive loss, net of taxes (167,000) (137,000)
Retained Earnings 5,494,000 3,647,000
------------- -------------
Total shareholders' equity 47,043,000 44,531,000
------------- -------------
TOTAL $ 580,967,000 $ 476,664,000
============= =============
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE> 4
HERITAGE COMMERCE CORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
---------------------------- ----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $10,119,000 $ 6,218,000 $18,390,000 $12,249,000
Securities, taxable 588,000 450,000 1,076,000 1,075,000
Securities, non-taxable 157,000 146,000 303,000 319,000
Federal funds sold 811,000 311,000 1,787,000 647,000
----------- ----------- ----------- -----------
Total interest income 11,675,000 7,125,000 21,556,000 14,290,000
----------- ----------- ----------- -----------
Interest expense:
Deposits 4,166,000 2,211,000 7,580,000 4,371,000
Other 196,000 -- 215,000 11,000
----------- ----------- ----------- -----------
Total interest expense 4,362,000 2,211,000 7,795,000 4,382,000
----------- ----------- ----------- -----------
Net interest income before provision for loan losses 7,313,000 4,914,000 13,761,000 9,908,000
Provision for loan losses 384,000 484,000 984,000 1,127,000
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 6,929,000 4,430,000 12,777,000 8,781,000
----------- ----------- ----------- -----------
Noninterest income:
Other investments 107,000 49,000 281,000 128,000
Service charges and other fees 107,000 73,000 209,000 142,000
Gain on sale of loans held-for-sale -- 84,000 -- 250,000
Gain on sale of securities available-for-sale -- 233,000 -- 1,004,000
Other income 177,000 248,000 385,000 387,000
----------- ----------- ----------- -----------
Total noninterest income 391,000 687,000 875,000 1,911,000
----------- ----------- ----------- -----------
Noninterest expenses:
Salaries and employee benefits 3,810,000 2,542,000 6,677,000 4,963,000
Client services 269,000 135,000 638,000 797,000
Occupancy 312,000 261,000 654,000 493,000
Loan origination costs 243,000 140,000 448,000 257,000
Furniture and equipment 253,000 283,000 456,000 580,000
Professional fees 468,000 75,000 653,000 245,000
Advertising and promotion 147,000 227,000 236,000 376,000
Stationery & supplies 66,000 56,000 131,000 135,000
Telephone expense 61,000 54,000 124,000 104,000
Other 402,000 390,000 748,000 801,000
----------- ----------- ----------- -----------
Total noninterest expenses 6,031,000 4,163,000 10,765,000 8,751,000
----------- ----------- ----------- -----------
Net income before provision for income taxes 1,289,000 954,000 2,887,000 1,941,000
Provision for income taxes 480,000 280,000 1,040,000 640,000
----------- ----------- ----------- -----------
Net income $ 809,000 $ 674,000 $ 1,847,000 $ 1,301,000
=========== =========== =========== ===========
Earnings per share:
Basic $ 0.11 $ 0.11 $ 0.26 $ 0.21
=========== =========== =========== ===========
Diluted $ 0.11 $ 0.10 $ 0.24 $ 0.18
=========== =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE> 5
HERITAGE COMMERCE CORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six months ended June 30,
---------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,847,000 $ 1,301,000
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 428,000 414,000
Provision for loan losses 984,000 1,127,000
Gain on sale of securities available-for-sale -- (1,004,000)
Net amortization of premiums / accretion of discounts 4,000 (234,000)
Proceeds from sales of loans held for sale -- 4,317,000
Originations of loans held for sale (5,505,000) (2,709,000)
Maturities of loans held for sale 128,000 4,137,000
Effect of changes in:
Accrued interest receivable and other assets (4,019,000) (5,502,000)
Accrued interest payable and other liabilities (5,136,000) 2,367,000
------------- -------------
Net cash provided by (used in) operating activities (11,269,000) 4,214,000
Cash flows from investing activities:
Net (increase) decrease in loans (99,506,000) 6,015,000
Purchases of securities available-for-sale (27,687,000) (26,334,000)
Maturities of securities available-for-sale 10,938,000 7,005,000
Proceeds from sales of securities available-for-sale -- 49,512,000
Proceeds from maturities or calls of securities held-to-maturity 999,000 1,115,000
Purchases of corporate owned life insurance (1,655,000) (3,528,000)
Purchases of other investments (930,000) --
Purchases of property and equipment (389,000) (278,000)
------------- -------------
Net cash provided by (used in) investing activities (118,230,000) 33,507,000
Cash flows from financing activities:
Net increase (decrease) in deposits 99,935,000 (4,366,000)
Proceeds from issuance of mandatorily redeemable cumulative trust
preferred securities of Subsidiary Grantor Trust 7,000,000 --
Proceeds from exercise of stock options 549,000 224,000
Additional paid in capital 146,000 --
------------- -------------
Net cash provided by (used in) financing activities 107,630,000 (4,142,000)
------------- -------------
Net increase (decrease) in cash and cash equivalents (21,869,000) 33,579,000
Cash and cash equivalents, beginning of period 138,149,000 46,639,000
------------- -------------
Cash and cash equivalents, end of period $ 116,280,000 $ 80,218,000
============= =============
Supplemental disclosures of cash paid during the period for:
Interest $ 7,187,000 $ 4,786,000
Income taxes $ 2,727,000 $ 1,710,000
Supplemental schedule of non-cash investing and financing activity:
Transfer of investment securities from HTM to AFS -- $ 11,669,000
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE> 6
HERITAGE COMMERCE CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
1) BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements of Heritage
Commerce Corp and its wholly owned subsidiaries, Heritage Bank of
Commerce, Heritage Bank East Bay, and Heritage Bank South Valley, have
been prepared pursuant to the Securities and Exchange Commission rules
and regulations for reporting on Form 10-Q. Accordingly, certain
information and notes required by generally accepted accounting
principles for annual 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, 1999.
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 and six months ended June 30, 2000 are not
necessarily indicative of the results expected for any subsequent period
or for the entire year ending December 31, 2000.
2) EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the
weighted average common shares outstanding. Diluted earnings per share
reflects potential dilution from outstanding stock options, using the
treasury stock method. For each of the periods presented, net income is
the same for basic and diluted earnings per share. Reconciliation of
weighted average shares used in computing basic and diluted earnings per
share is as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------ ------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding - used in computing basic EPS 7,088,480 6,140,539 7,061,548 6,126,574
Dilutive effect of stock options outstanding,
using the treasury stock method 413,340 859,981 509,381 899,519
--------- --------- --------- ---------
Shares used in computing diluted earnings
per share 7,501,820 7,000,520 7,570,929 7,026,093
========= ========= ========= =========
</TABLE>
6
<PAGE> 7
3) COMPREHENSIVE INCOME
Comprehensive income includes net income and other comprehensive income
which represents the change in its net assets during the period from
non-owner sources.
The Company's only source of other comprehensive income is derived from
unrealized gains and losses on investment securities available-for-sale.
Reclassification adjustments resulting from gains or losses on
investment securities that were realized and included in net income of
the current period that also had been included in other comprehensive
income as unrealized holding gains or losses in the period in which they
arose are excluded from comprehensive income of the current period. The
Company's total comprehensive income was as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
----------------------------- -----------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Income $ 809,000 $ 674,000 $ 1,847,000 $ 1,301,000
Other comprehensive income (loss), net
of tax:
Net unrealized gain (loss) on
securities available-for-sale
during the period 7,000 (84,000) (30,000) 254,000
Less: reclassification adjustment
for realized gains on
available-for-sale securities
included in net income during
the period -- (233,000) -- (1,004,000)
----------- ----------- ----------- -----------
Other comprehensive income (loss) 7,000 (317,000) (30,000) (750,000)
----------- ----------- ----------- -----------
Comprehensive income $ 816,000 $ 357,000 $ 1,817,000 $ 551,000
=========== =========== =========== ===========
</TABLE>
4) MANDATORILY REDEEMABLE CUMULATIVE TRUST PREFERRED SECURITIES OF
SUBSIDIARY GRANTOR TRUST
Heritage Capital Trust I is a Delaware business trust wholly owned by
Heritage Commerce Corp and formed for the purpose of issuing Company
obligated mandatorily redeemable cumulative trust preferred securities
of Subsidiary Grantor Trust holding solely junior subordinated
debentures.
During the first quarter of 2000, Heritage Capital Trust I issued 7,000
Trust Preferred Securities with a liquidation value of $1,000 per
security to the Company for gross proceeds of $7,000,000. The entire
proceeds of the issuance were invested by Heritage Capital Trust I in
$7,000,000 aggregate principal amount of 10 7/8% subordinated debentures
due 2030 (the Subordinated Debentures) issued by the Company. The
Subordinated Debentures represent the sole assets of Heritage Capital
Trust I. The Subordinated Debentures mature on March 8, 2030, bear
interest at the rate of 10 7/8%, payable semi-annually, and are
redeemable by the Company at a premium beginning on or after March 8,
2010 based on a percentage of the principal amount of the Subordinated
Debentures as stipulated in the Indenture Agreement, plus any accrued
and unpaid interest to the redemption date. The Subordinated Debentures
are redeemable at 100 percent of the principal amount plus any accrued
and unpaid interest to the redemption date at any time on or after March
8, 2020. The Trust Preferred Securities are subject to mandatory
redemption to the extent of any early redemption of the Subordinated
Debentures and upon maturity of the Subordinated Debentures on March 8,
2030. The Subordinated Debentures bear the same terms and interest rates
as the Trust Preferred Securities.
7
<PAGE> 8
Holders of the trust preferred securities are entitled to cumulative
cash distributions at an annual rate of 10 7/8 % of the liquidation
amount of $1,000 per security. The Company has the option to defer
payment of the distributions for a period of up to five years, as long
as the Company is not in default in the payment of interest on the
Subordinated Debentures. The Company has guaranteed, on a subordinated
basis, distributions and other payments due on the trust preferred
securities (the Guarantee). The Guarantee, when taken together with the
Company's obligations under the Subordinated Debentures, the Indenture
Agreement pursuant to which the Subordinated Debentures were issued and
the Company's obligations under the Trust Agreement governing the
subsidiary trust, provide a full and unconditional guarantee of amounts
due on the Trust Preferred Securities.
The Subordinated Debentures and related trust investment in the
Subordinated Debentures have been eliminated in consolidation and the
Trust Preferred Securities reflected as outstanding in the accompanying
condensed consolidated financial statements. Under applicable regulatory
guidelines all of the Trust Preferred Securities will qualify as Tier I
capital.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Discussions of certain matters in this Report on Form 10-Q may constitute
forward looking statements within the meaning of the Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities and
Exchange Act of 1934, as amended (the "Exchange Act"), and as such, may involve
risks and uncertainties. Forward-looking statements, which are based on certain
assumptions and describe future plans, strategies, and expectations, are
generally identifiable by the use of the words such as "believe", "expect",
"intend", "anticipate", "estimate", "project", or similar expressions. These
forward-looking statements relate to, among other things, expectations of the
business environment in which the Company operates, projections of future
performance, potential future performance, potential future credit experience,
perceived opportunities in the market, and statements regarding the Company's
mission and vision. The Company's actual results, performance, and achievements
may differ materially from the results, performance, and achievements expressed
or implied in such forward-looking statements due to a wide range of factors.
These factors include, but are not limited to changes in interest rates, general
economic conditions, legislative and regulatory changes, monetary and fiscal
policies of the US Government, real estate valuations, competition in the
financial services industry, and other risks. The Company does not undertake,
and specifically disclaims any obligation, to update any forward-looking
statements to reflect occurrences or unanticipated events or circumstances after
the date of such statements.
Heritage operates as the bank holding company for the three subsidiary banks:
Heritage Bank of Commerce, Heritage Bank East Bay and Heritage Bank South Valley
(collectively the "Banks"). All are California state chartered banks which offer
a full range of commercial and personal banking services to residents and the
business/professional community in Santa Clara, Contra Costa and Alameda
counties, California. The accounting and reporting policies of Heritage Company
and its subsidiary banks conform to generally accepted accounting principles and
prevailing practices within the banking industry.
On January 27, 1999, Heritage's board of directors announced the declaration of
a 3-for-2 stock split effective for shareholders of record on February 5, 1999,
and paid on February 19, 1999. On February 21, 2000, a 10 percent stock dividend
was paid to shareholders of record as of February 7, 2000. All historical
financial information has been restated as if the stock split and stock dividend
had been in effect for all periods presented.
OVERVIEW
Net income for the second quarter and six months ended June 30, 2000 was
$809,000 and $1,847,000, up 20% and 42% from $674,000 and $1,301,000 for the
second quarter and six months ended June 30, 1999. Income for the second quarter
of 2000 was affected by the payment of severance benefits resulting from a
change in management. Earnings for the second quarter would have been $1,439,000
if not for this change in management. Earnings per diluted share for the second
quarter and six months ended June 30, 2000 were $0.11 and $0.24, up 10% and 33%
from $0.10 and $0.18 per diluted share for the second quarter and six month
period ended June 30, 1999.
8
<PAGE> 9
For the second quarter and six months ended June 30, 2000 as compared with the
same periods of the previous year, net interest income grew by $2,399,000 and
$3,853,000 or 49% and 39% primarily a result of change in the types of
interest-earning assets and the overall growth in earning assets and new
deposits at favorable rates. Noninterest income decreased $296,000 and
$1,036,000, primarily due to gains on sale of securities in the second quarter
of 1999 of $233,000 and during the six months ended June 30, 1999 of $1,004,000;
and noninterest expenses, primarily salaries and benefits, increased $1,868,000
and $2,014,000 or 45% and 23%, as a result of the payment of severance costs
related to a change in management and an increase in the number of employees to
support the growth of the Company. The Company's net interest margin remained
stable at 6.04% for the quarter ended June 30, 2000, compared with 6.02% for the
quarter ended June 30, 1999.
Total assets as of June 30, 2000 were $580,967,000, an increase of $177,752,000,
or 44%, from June 30, 1999 and an increase of $104,303,000, or 22%, from total
assets of $476,664,000 at December 31, 1999. Total deposits as of June 30, 2000
were $518,475,000, an increase of $153,883,000, or 42%, from June 30, 1999, and
an increase of $99,935,000, or 24%, from total deposits of $418,540,000 at
December 31, 1999.
Total portfolio loans as of June 30, 2000 were $371,373,000, an increase of
$99,518,000 or 37% when compared to December 31, 1999, and an increase of
$126,037,000, or 51%, when compared to June 30, 1999. Total portfolio loans as
of December 31, 1999 were $271,855,000. The Company's allowance for loan losses
was $6,000,000, or 1.62%, of total loans as of June 30, 2000. This compares with
an allowance for loan losses of $4,337,000, or 1.77%, and $5,003,000, or 1.84%
of total loans at June 30, 1999 and December 31, 1999, respectively. The
Company's non-performing assets were $1,092,000 as of June 30, 2000.
Non-performing assets were $1,396,000 as of December 31, 1999 and $1,776,000 as
of June 30, 1999.
The Company's shareholders' equity as of June 30, 2000 was $47,043,000, an
increase of $2,512,000 or 6% when compared to December 31, 1999, and an increase
of $15,570,000 or 49% when compared with to June 30, 1999. Shareholders' equity
increased due to a public stock offering in 1999. Book value per share was $6.55
as of June 30, 2000, compared to $5.12 as of June 30, 1999. The Company's
leverage capital ratio was 10.3% at June 30, 2000, compared to 8.6% at June 30,
1999.
9
<PAGE> 10
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>
For the Three Months Ended For the Three Months Ended
June 30, 2000 June 30, 1999
------------------------------------- ------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Loans, gross $381,035 $ 10,119 10.68% $256,633 $ 6,218 9.72%
Investments securities 49,777 745 6.02% 46,845 596 5.10%
Federal funds sold 53,323 811 6.12% 26,937 311 4.63%
-------- -------- ------ -------- -------- ------
Total interest earning assets 484,135 $ 11,675 9.59% 330,415 $ 7,125 8.65%
-------- -------- ------ -------- -------- ------
Cash and due from banks 18,584 15,420
Premises and equipment, net 3,441 3,136
Other assets 16,999 15,918
-------- --------
Total assets $523,159 $364,889
======== ========
Liabilities and shareholders' equity:
Deposits:
Demand, interest bearing $ 12,763 $ 43 1.36% $ 10,280 $ 40 1.56%
Savings and money market 150,840 1,665 4.44% 116,719 941 3.23%
Time deposits, under $100,000 51,916 740 5.73% 33,125 431 5.22%
Time deposits, $100,000 and over 103,603 1,525 5.92% 59,895 710 4.75%
Brokered deposits 12,292 193 6.33% 6,135 89 5.82%
Other borrowings 8,916 196 8.81% -- -- --
-------- -------- ------ -------- -------- ------
Total interest bearing liabilities 340,330 $ 4,362 5.15% 226,154 $ 2,211 3.92%
-------- -------- ------ -------- -------- ------
Demand deposits 131,490 102,233
Other liabilities 4,601 5,180
-------- --------
Total liabilities 476,421 333,567
Shareholders' equity 46,738 31,322
-------- --------
Total liabilities and shareholders' equity $523,159 $364,889
======== ========
Net interest income / margin $ 7,313 6.08% $ 4,914 5.97%
======== ========
</TABLE>
Note: Yields and amounts earned on loans include loan fees of $716,000 and
$476,000 for the three month periods ended June 30, 2000 and 1999,
respectively. Interest income is reflected on an actual basis, not a
fully taxable equivalent basis, and does not include a fair value
adjustment. Nonaccrual loans are included in the average balance
calculations above.
<TABLE>
<CAPTION>
For the Six Months Ended For the Six Months Ended
June 30, 2000 June 30, 1999
--------------------------------- ---------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
-------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Loans, gross $348,755 $ 18,390 10.60% $252,354 $ 12,249 9.79%
Investments securities 47,625 1,379 5.82% 51,857 1,394 5.42%
Federal funds sold 60,998 1,787 5.89% 27,981 647 4.66%
-------- -------- ----- -------- -------- -----
Total interest earning assets 457,378 $ 21,556 9.48% 332,192 $ 14,290 8.67%
-------- -------- ----- -------- -------- -----
Cash and due from banks 18,491 16,226
Premises and equipment, net 3,395 3,184
Other assets 14,135 14,159
-------- --------
Total assets $493,399 $365,761
======== ========
Liabilities and shareholders' equity:
Deposits:
Demand, interest bearing $ 12,342 $ 81 1.33% $ 9,870 $ 74 1.51%
Savings and money market 146,621 3,090 4.24% 123,952 1,928 3.14%
Time deposits, under $100,000 49,602 1,380 5.60% 32,854 857 5.26%
Time deposits, $100,000 and over 94,461 2,678 5.70% 56,318 1,340 4.80%
Brokered deposits 11,347 350 6.20% 6,150 172 5.64%
Other borrowings 4,563 216 9.48% 552 11 4.02%
-------- -------- ----- -------- -------- -----
Total interest bearing liabilities 318,936 $ 7,795 4.91% 229,696 $ 4,382 3.85%
-------- -------- ----- -------- -------- -----
Demand deposits 124,286 99,583
Other liabilities 4,324 5,299
-------- --------
Total liabilities 447,546 334,578
Shareholders' equity 45,853 31,183
-------- --------
Total liabilities and shareholders' equity $493,399 $365,761
======== ========
Net interest income / margin $ 13,761 6.04% $ 9,908 6.02%
======== ========
</TABLE>
Note: Yields and amounts earned on loans include loan fees of $1,424,000 and
$932,000 for the six month periods ended June 30, 2000 and 1999,
respectively. Interest income is reflected on an actual basis, not a
fully taxable equivalent basis, and does not include a fair value
adjustment. Nonaccrual loans are included in the average balance
calculations above.
10
<PAGE> 11
The Company's net interest income for the second quarter and six months ended
June 30, 2000 was $7,313,000, and $13,761,000, an increase of $2,399,000 and
$3,853,000 over the second quarter and six months ended June 30, 1999. When
compared to the second quarter and six months ended June 30, 1999, average
earning assets increased by $153,720,000 and $125,186,000 or 47% and 38%. The
increase was primarily a result of increases in average loans and Fed funds
sold, funded by the increases in demand, savings, and time deposits. The net
yield on average earning assets was 6.08% in the second quarter of 2000,
compared to 5.97% in the second quarter of 1999.
The following tables show the changes in interest income resulting from
increases in the volume of interest earning assets and liabilities and changes
in the average rates earned and paid. The total change is shown in the column
designated "Net Change" and is allocated in the columns to the left, to the
portions attributable to volume changes and rate changes that occurred during
the period indicated. Changes due to both volume and rate have been allocated to
the change in volume.
<TABLE>
<CAPTION>
Three Months Ended June 30,
2000 vs. 1999
----------------------------------------
Increase (Decrease) Due to Change In:
Average Average Net
(Dollars in thousands) Volume Rate Change
------- ------- ------
<S> <C> <C> <C>
INTEREST EARNING ASSETS
Loans, gross $3,286 $ 615 $3,901
Investments securities 42 107 149
Federal funds sold 400 100 500
------ ------ ------
Total interest earning assets $3,728 $ 822 $4,550
------ ------ ------
INTEREST BEARING LIABILITIES
Demand, interest bearing $ 8 $ (5) $ 3
Money Market and Savings 373 351 724
Time deposits, under $100,000 267 41 308
Time deposits, $100,000 and over 641 174 815
Brokered Deposits 97 8 105
Other borrowings 196 -- 196
------ ------ ------
Total interest bearing liabilities $1,582 $ 569 $2,151
------ ------ ------
Net interest income $2,146 $ 253 $2,399
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 vs. 1999
-------------------------------------------
Increase (Decrease) Due to Change In:
Average Average Net
(Dollars in thousands) Volume Rate Change
------- ------- -------
<S> <C> <C> <C>
INTEREST EARNING ASSETS
Loans, gross $ 5,125 $ 1,016 $ 6,141
Investments securities (118) 103 (15)
Federal funds sold 970 170 1,140
------- ------- -------
Total interest earning assets $ 5,977 $ 1,289 $ 7,266
------- ------- -------
INTEREST BEARING LIABILITIES
Demand, interest bearing $ 16 $ (9) $ 7
Money Market and Savings 484 678 1,162
Time deposits, under $100,000 468 55 523
Time deposits, $100,000 and over 1,086 252 1,338
Brokered Deposits 161 17 178
Other borrowings 190 15 205
------- ------- -------
Total interest bearing liabilities $ 2,405 $ 1,008 $ 3,413
------- ------- -------
Net interest income $ 3,572 $ 281 $ 3,853
======= ======= =======
</TABLE>
PROVISION FOR LOAN LOSSES
For the six months ended June 30, 2000, the provision for loan losses was
$984,000, down $143,000 from $1,127,000 for the six months ended June 30, 1999.
For the second quarter of 2000, the provision for loan losses was $384,000, down
$100,000 from $484,000 for the second quarter of 1999. The decrease was
primarily a result of the Company selling the Internet credit card portfolio
during 1999 and no longer making provisions for this portfolio.
11
<PAGE> 12
NONINTEREST INCOME
The following tables show the various components of the Company's noninterest
income for the periods indicated:
<TABLE>
<CAPTION>
Increase (decrease)
-----------------------------
Three months ended June 30, 2000 versus 1999
--------------------------- -----------------------------
(Dollars in thousands) 2000 1999 Amount Percent
------ ------ ------ -------
<S> <C> <C> <C> <C>
Other investment income $ 107 $ 49 $ 58 118%
Service charges and other fees 107 73 34 47%
Gain on sale of loans -- 84 (84) (100%)
Gain on sale of securities
available-for-sale -- 233 (233) (100%)
Other income 177 248 (71) (29%)
----- ----- ----- -----
Total $ 391 $ 687 $(296) (43%)
===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Increase (decrease)
-------------------------------
Six months ended June 30, 2000 versus 1999
-------------------------- -------------------------------
(Dollars in thousands) 2000 1999 Amount Percent
---- ------ ------- -------
<S> <C> <C> <C> <C>
Other investment income $281 $ 128 $ 153 120%
Service charges and other fees 209 142 67 47%
Gain on sale of loans -- 250 (250) (100%)
Gain on sale of securities
available-for-sale -- 1,004 (1,004) (100%)
Other income 385 387 (2) (1%)
---- ------ ------- ----
Total $875 $1,911 $(1,036) (54%)
==== ====== ======= ====
</TABLE>
Noninterest income for the second quarter and the first six months ended June
30, 2000 was $391,000 and $875,000, down $296,000 and $1,036,000, or 43% and
54%, from $687,000 and $1,911,000 for the second quarter and six months ended
June 30, 1999. This decrease was primarily the result of a $1,004,000 gain on
sale of securities available-for-sale recognized in the first six months of
1999, and the decrease in gains on loans sales in the second quarter and the six
months ended June 30, 2000 compared to the same periods in 1999. There were no
securities sold in the first six months of 2000.
NONINTEREST EXPENSE
The following tables show 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) 2000 1999 (Decrease) (Decrease)
------ ------ ---------- ----------
<S> <C> <C> <C> <C>
Salaries and benefits $3,810 $2,542 $ 1,268 50%
Client services 269 135 134 99%
Occupancy 312 261 51 20%
Loan origination costs 243 140 103 74%
Furniture and equipment 253 283 (30) (11%)
Professional fees 468 75 393 524%
Advertising and promotion 147 227 (80) (35%)
Stationery & supplies 66 56 10 18%
Telephone expense 61 54 7 13%
All other 402 390 12 3%
------ ------ ------- ----
Total $6,031 $4,163 $ 1,868 45%
====== ====== ======= ====
</TABLE>
<TABLE>
<CAPTION>
For The Six Months Ended June 30,
-----------------------------------------------------------
Percent
Increase Increase
(Dollars in thousands) 2000 1999 (Decrease) (Decrease)
------- ------ ---------- ----------
<S> <C> <C> <C> <C>
Salaries and benefits $ 6,677 $4,963 $ 1,714 35%
Client services 638 797 (159) (20%)
Occupancy 654 493 161 33%
Loan origination costs 448 257 191 74%
Furniture and equipment 456 580 (124) (21%)
Professional fees 653 245 408 167%
Advertising and promotion 236 376 (140) (37%)
Stationery & supplies 131 135 (4) (3%)
Telephone expense 124 104 20 19%
All other 748 801 (53) (7%)
------- ------ ------- ----
Total $10,765 $8,751 $ 2,014 23%
======= ====== ======= ====
</TABLE>
12
<PAGE> 13
Noninterest expenses for the second quarter and six months ended June 30, 2000
were $6,031,000 and $10,765,000, up $1,868,000 and $2,014,000, or 45% and 23%,
from $4,163,000 and $8,751,000 for the second quarter and six months ended June
30, 1999. The overall increase in noninterest expenses reflects the growth in
infrastructure to support the Company's loan and deposit growth and the opening
of Heritage Bank South Valley.
Noninterest expenses consist primarily of salaries and employee benefits (63%
and 61% of total noninterest expenses for the second quarter of 2000 and 1999,
62% and 57% of total noninterest expenses for the six months ended June 30, 2000
and 1999), client services (5% and 8% of total noninterest expenses for the
second quarter of 2000 and 1999, 6% and 10% of total noninterest expenses for
the six months ended June 30, 2000 and 1999), loan origination costs (4% of
total noninterest expenses for the second quarters of both 2000 and 1999, 5% and
3% of total noninterest expenses for the six months ended June 30, 2000 and
1999), professional fees (8% and 2% of total noninterest expenses for the second
quarter of 2000 and 1999, 6% and 3% of the six months ended June 30, 2000 and
1999), and occupancy (5% and 6% of total noninterest expenses for the second
quarter of 2000 and 1999, 6% and 6% for both the six months ended June 30, 2000
and 1999). The increase in salaries and benefits expenses was primarily
attributable to an increase in salaries and severance pay related to changes in
management. The Company employed 151 people at June 30, 2000, compared to 152
employees at June 30, 1999. The increase in professional fees is primarily
related to accounting and legal fees incurred in conjunction with the proposed
merger with Western Bancshares. The increase in occupancy expense was primarily
attributable to the opening of Heritage Bank South Valley. The decrease in
advertising and promotion costs was attributable to less frequent advertising
insertions in business publications, and no product promotional advertising
during the periods presented.
INCOME TAXES
The provision for income taxes for the second quarter and six months ended June
30, 2000 were $480,000 and $1,040,000 as compared to $280,000 and $640,000 for
the second quarter and six months ended June 30, 1999. The difference in the
effective tax rate compared to the statutory tax rate and the increase in the
effective tax rate is primarily the result of the activity related to the
Company's holdings in certain life insurance contracts and changes in the level
of investments in municipal securities.
13
<PAGE> 14
FINANCIAL CONDITION
Total assets increased 22% to $580,967,000 at June 30, 2000, compared to
$476,664,000 at December 31, 1999. 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, 2000:
<TABLE>
<CAPTION>
June 30, 2000
-----------------------------------------------------------------------------------------
Maturity
-----------------------------------------------------------------------------------------
After One Year After Five Years
and Within and Within Total Amortized
Within One Year Five Years Ten Years After Ten Years Cost
--------------- --------------- ---------------- --------------- ---------------
(Dollars in thousands) Amount Yield 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 $ 8,046 6.66% $ 2,020 5.59% $ -- -- $ -- -- $10,066 5.18%
Agencies 1,983 5.08% 14,899 6.88% -- -- -- -- 16,882 6.85%
Municipals - taxable 345 6.51% -- -- -- -- -- -- 345 6.51%
Municipals - nontaxable -- -- 115 4.60% 4,395 4.76% 1,525 5.02% 6,035 4.83%
------- ----- ------- ------ ------- ------ ------- ------ ------- ------
Total available-for-sale $10,374 5.43% $17,034 6.71% $ 4,395 4.76% $ 1,525 5.02% $33,328 5.98%
Securities held-to-maturity:
Municipals - taxable $ 880 6.26% $ 4,004 6.54% $ 513 6.45% $ -- -- $ 5,397 6.49%
Municipals - nontaxable -- -- 1,028 4.72% 5,776 4.50% 611 4.62% 7,415 4.54%
------- ----- ------- ------ ------- ------ ------- ------ ------- ------
Total held-to-maturity $ 880 6.26% $ 5,032 6.17% $ 6,289 4.66% $ 611 4.62% $12,812 5.36%
------- ----- ------- ------ ------- ------ ------- ------ ------- ------
Total securities $11,254 5.49% $22,066 6.59% $10,684 4.70% $ 2,136 4.91% $46,140 5.81%
======= ===== ======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
Note: Yield on non-taxable municipal securities are not presented in a fully
tax equivalent basis.
LOANS
Total gross loans increased 37% to $371,610,000 at June 30, 2000, as compared to
$271,931,000 at December 31, 1999. 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>
(Dollars in thousands) June 30, 2000 % of Total December 31, 1999 % of Total
------------- ---------- ----------------- ----------
<S> <C> <C> <C> <C>
Commercial, financial, and
agricultural $ 142,380 38% $117,918 43%
Real estate - mortgage 120,569 32% 83,698 31%
Real estate - land and construction 106,248 29% 68,152 25%
Consumer 2,413 1% 2,163 1%
--------- ------- -------- ---
Total loans 371,610 100% 271,931 100%
Deferred loan fees (237) (76)
Allowance for loan losses (6,000) (5,003)
--------- ---------
Loans, net $ 365,373 $ 266,852
========= =========
</TABLE>
The change in the Company's loan portfolio is primarily due to the increase in
the commercial and real estate mortgage, land and construction loan portfolio.
The Company's loan portfolio is based 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
14
<PAGE> 15
economy which could reduce the demand for loans and adversely impact the
borrowers' abilities to repay their loans.
The following table sets forth the maturity distribution of the Company's loans
at June 30, 2000:
<TABLE>
<CAPTION>
Over One Year
Due in But Less Than
(Dollars in thousands) One Year or Less Five Years Over Five Years Total
----------------- ------------- --------------- --------
<S> <C> <C> <C> <C>
Commercial $129,706 $10,709 $ 1,728 $142,143
Real estate - mortgage 60,097 44,496 15,976 120,569
Real estate - land and construction 106,149 99 -- 106,248
Consumer 1,313 1,096 4 2,413
-------- ------- ------- --------
Total loans $297,265 $56,400 $17,708 $371,373
======== ======= ======= ========
Loans with variable interest rates $287,340 $18,056 $ 377 $305,773
Loans with fixed interest rates 9,925 38,344 17,331 65,600
-------- ------- ------- --------
Total loans $297,265 $56,400 $17,708 $371,373
======== ======= ======= ========
</TABLE>
Note: Total shown is net of deferred loan fees of $237,000 at June 30, 2000.
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, 2000,
approximately 82% 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, collateral value, loan volumes and
concentrations, recent loss experience in particular segments of the portfolio,
bank regulatory examination results, 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". The
following table summarizes the Company's loan loss experience as well as
transactions in the allowance for loan losses and certain pertinent ratios for
the periods indicated:
<TABLE>
<CAPTION>
Six months ended June 30, Year ended
------------------------- December 31,
(Dollars in thousands) 2000 1999 1999
------ ------ ------------
<S> <C> <C> <C>
Balance, beginning of period / year $5,003 $3,825 $3,825
Net (charge offs) recoveries 13 (615) (733)
Provision for probable loan losses 984 1,127 1,911
------ ------ ------
Balance, end of period / year $6,000 $4,337 $5,003
====== ====== ======
RATIOS:
Net charge-offs to average loans outstanding 0.01% 0.24% 0.30%
Allowance for loan losses to average loans 1.71% 1.72% 2.04%
Allowance for loan losses to total loans 1.62% 1.77% 1.84%
Allowance for loan losses to non-performing loans 549% 244% 358%
</TABLE>
The decrease in charge-offs (and in the provision) is primarily due to the sale
of the consumer credit card portfolio.
15
<PAGE> 16
The following table summarizes the allocation of the allowance for loan losses
(ALL) 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, 2000 June 30, 1999 December 31, 1999
-------------------------- ------------------------- -------------------------
Percent of Percent of Percent of
ALL ALL ALL
in each in each 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 $2,923 2.06% $2,113 2.13% $2,635 2.23%
Real estate - land and construction 1,367 1.29% 972 1.59% 1,076 1.58%
Real estate - mortgage 529 0.44% 238 0.39% 356 0.43%
Consumer 43 1.80% 1,014 4.31% 32 1.48%
Unallocated 1,138 -- -- -- 904 --
------ ------ ------ ------ ------ ------
Total $6,000 1.62% $4,337 1.77% $5,003 1.84%
====== ====== ======
</TABLE>
The increase in the allowance for loan losses reflects the growth in the
Company's overall level of loans, primarily in the commercial and real estate
loan portfolio offset by the decrease resulting from the sale of the Internet
credit card portfolio in 1999.
DEPOSITS
Deposits totaled $518,475,000 at June 30, 2000, an increase of 24%, as compared
to total deposits of $418,540,000 at December 31, 1999. The increase in deposits
was primarily due to increases in noninterest bearing deposits and time
deposits. Noninterest bearing deposits were $157,177,000 at June 30, 2000,
compared to $109,432,000 at December 31, 1999. Time deposits were $194,546,000
at June 30, 2000, as compared to $135,150,000 at December 31, 1999.
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, 2000 December 31, 1999
---------------------------- ----------------------------
Average Average Rate Average Average Rate
(Dollars in thousands) Balance Paid Balance Paid
-------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Demand, noninterest bearing $124,286 -- $106,397 --
Demand, interest bearing 12,342 1.33% 9,476 1.40%
Saving and money market 146,621 4.24% 133,890 3.41%
Time deposits, under $100,000 49,602 5.60% 38,295 5.34%
Time deposits, $100,000 and over 94,461 5.70% 64,696 4.88%
Brokered deposits 11,347 6.20% 8,812 5.88%
-------- -------- -------- --------
Total average deposits $438,659 3.48% $361,566 2.88%
======== ======== ======== ========
</TABLE>
DEPOSIT CONCENTRATION AND DEPOSIT VOLATILITY
The following table indicates the maturity schedule of the Company's time
deposits of $100,000 or more as of June 30, 2000.
<TABLE>
<CAPTION>
(Dollars in thousands) Balance %of Total
-------- ---------
<S> <C> <C>
Three months or less $ 64,918 48%
Over three months through twelve months 64,736 48%
Over twelve months 6,111 4%
-------- ---
Total $135,765 100%
======== ===
</TABLE>
Due to the Company's focus on servicing business accounts, 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
16
<PAGE> 17
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 with relatively short maturities.
The following table sets forth the interest rate sensitivity of the Company's
interest-earning assets and interest-bearing liabilities at June 30, 2000, 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>
Due in
Within Three to Due After
(Dollars in thousands) Three Twelve One to Due After Not Rate-
Months Months Five Years Five Years Sensitive Total
-------- --------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Federal funds sold $ 85,600 $ -- $ -- $ -- $ -- $ 85,600
Securities 2,876 8,309 21,970 12,744 -- 45,899
Total loans 301,689 23,196 56,400 17,708 -- 398,993
-------- --------- ------- ------- --------- --------
Total interest earning assets 390,165 31,505 78,370 30,452 -- 530,492
-------- --------- ------- ------- --------- --------
Cash and due from banks -- -- -- -- 30,680 30,680
Other assets -- -- -- -- 19,795 19,795
-------- --------- ------- ------- --------- --------
Total assets $390,165 $ 31,505 $78,370 $30,452 $ 50,475 $580,967
======== ========= ======= ======= ========= ========
INTEREST BEARING LIABILITIES:
Demand, interest bearing $ 12,461 $ -- $ -- $ -- $ -- $ 12,461
Savings and money market 154,291 -- -- -- -- 154,291
Time deposits 81,713 100,872 11,961 -- -- 194,546
-------- --------- ------- ------- --------- --------
Total interest bearing liabilities 248,465 100,872 11,961 -- -- 361,298
-------- --------- ------- ------- --------- --------
Noninterest demand deposits 72,703 -- -- -- 84,474 157,177
Other liabilities -- -- -- -- 15,449 15,449
Shareholders' equity -- -- -- -- 47,043 47,043
-------- --------- ------- ------- --------- --------
Total liabilities and
shareholders' equity $321,168 $ 100,872 $11,961 $ -- $ 146,966 $580,967
======== ========= ======= ======= ========= ========
Interest rate sensitivity GAP $ 68,998 $ (69,367) $66,409 $30,452 $ (96,492) --
======== ========= ======= ======= ========= ========
Cumulative interest rate sensitivity GAP $ 68,998 $ (369) $66,040 $96,492 -- --
Cumulative interest rate sensitivity GAP
ratio 11.88% (.06)% 11.37% 16.61% -- --
</TABLE>
The foregoing table demonstrates that the Company had a negative cumulative one
year gap of $369,000, or (0.06%) of total assets, at June 30, 2000. In theory,
this would indicate that $369,000 more in liabilities than assets would reprice
if there was a change in interest rates over the next year. If interest rates
were to increase, the negative gap would tend to result in a lower 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.
17
<PAGE> 18
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, 2000, the Company's primary liquidity ratio was 25.70%, comprised of
$27.2 million in investment securities available-for-sale with maturities (or
probable calls) of up to five years, less $13.8 million of securities that were
pledged to secure public and certain other deposits as required by law and
contract; Federal funds sold of $85.6 million, and $30.7 million in cash and due
from banks, as a percentage of total unsecured deposits of $504.7 million. The
decline in the liquidity ratio from 34.0% at December 31, 1999 was a result of
the use of liquid assets to fund loan growth during the first six months of
2000.
CAPITAL RESOURCES
The following table summarizes risk-based capital, risk-weighted assets, and
risk-based capital ratios of the Company:
<TABLE>
<CAPTION>
June 30,
---------------------- December 31,
(Dollars in thousands) 2000 1999 1999
-------- -------- --------
<S> <C> <C> <C> <C>
Capital components:
Tier 1 Capital $ 54,102 $ 31,400 $ 44,530
Tier 2 Capital 6,000 4,004 4,646
-------- -------- --------
Total risk-based capital $ 60,102 $ 35,404 $ 49,176
======== ======== ========
Risk-weighted assets $487,713 $319,953 $371,322
Average assets $523,283 $364,447 $475,295
Minimum
Regulatory
Requirements
------------
Capital ratios:
Total risk-based capital 12.3% 11.1% 13.2% 8.0%
Tier 1 risk-based capital 11.1% 9.8% 12.0% 4.0%
Leverage ratio (1) 10.3% 8.6% 9.4% 4.0%
</TABLE>
(1) Tier 1 capital divided by average assets (excluding goodwill).
MERGER
On May 9, 2000, the Company signed a Definitive Merger Agreement with Western
Holdings Bancorp, the holding company for Bank of Los Altos. The Agreement
provides for shareholders of Western Holdings Bancorp to receive shares of
Heritage Commerce Corp stock in a tax-free exchange. The merger is expected to
be accounted for as a pooling of interests and is expected to be completed in
the fourth quarter of 2000. The merger is subject to customary conditions,
including the approval of the shareholders of both companies and required
regulatory agencies. In connection with the merger, the parties have granted
reciprocal options to acquire 19.9% of their respective outstanding shares in
the event a party terminates the merger in favor of another transaction. Upon
completion of the merger, Bank of Los Altos will operate as a wholly owned
subsidiary of Heritage Commerce Corp.
CHANGES IN MANAGEMENT
On June 15, 2000 John E. Rossell resigned as president and chief executive
officer of Heritage. As a result, Brad L. Smith, chairman of Heritage, assumed
the role of chief executive officer of Heritage and acting president of Heritage
Bank of Commerce, and Richard Conniff, a director of Heritage and president of
Heritage Bank East Bay, assumed the role of president and chief operating
officer of Heritage.
18
<PAGE> 19
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.
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. - Submissions of Matters to a Vote of Security Holders
The Company held its 2000 Annual Meeting of Shareholders on May 18, 2000 (the
"2000 Annual Meeting"). There were 7,034,557 issued and outstanding shares of
Company Common Stock on April 3, 2000, the Record Date for the 2000 Annual
Meeting. Each of the shares voting at the meeting was entitled to one vote.
At the 2000 Annual Meeting, the following actions were taken:
Election of Directors
At the 2000 Annual Meeting, eighteen directors of the Company were elected. The
following chart indicates the number of shares cast for each elected director:
<TABLE>
<CAPTION>
Name of Director Votes for Votes withheld
---------------- --------- --------------
<S> <C> <C>
Frank G. Bisceglia 5,057,510 28,260
James R. Blair 5,039,100 46,670
Arthur C. Carmichael, Jr. 5,022,251 63,519
Richard L. Conniff 5,049,430 36,340
William J. Del Biaggio 5,074,359 11,411
Anneke Dury 5,073,809 11,961
Tracey A. Enfantino 5,056,914 28,856
Glenn A. George 5,074,359 11,411
Robert P. Gionfriddo 5,027,568 58,202
P. Michael Hunt 5,056,960 28,810
John Larsen 5,074,313 11,457
Loius O. Normandin 5,057,510 28,260
Jack L. Peckham 5,074,359 11,411
Robert W. Peters 5,074,359 11,411
Humphrey P. Polanen 5,037,542 48,228
John E. Rossell III 5,016,731 69,039
Kirk Rossmann 4,976,992 48,778
Brad L. Smith 5,049,430 36,340
</TABLE>
Ratification of Deloitte & Touche as the Company's auditors
The number of shares cast for and against the ratification of the Board of
Directors' selection of Deloitte & Touche to serve as the Company's auditors for
the fiscal year ending December 31, 2000 was as follows:
<TABLE>
<S> <C>
FOR 5,029,693
WITHHELD 56,077
</TABLE>
19
<PAGE> 20
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits included with this filing:
<TABLE>
<CAPTION>
Exhibit Number Name
-------------- ----
<S> <C>
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
On January 26, 2000 the Company filed its earnings press release for the fourth
quarter ended December 31, 1999 with the SEC on Form 8-K.
On April 13, 2000, the Company filed its earnings press release for the first
quarter ended March 31, 2000 with the SEC on Form 8-K.
On May 11, 2000, the Company filed its press release for Heritage Commerce
Corp's announcement to merge with Western Holdings Bancorp, holding company for
Bank of Los Altos with the SEC on Form 8-K.
On June 19, 2000, the Company filed its press release for Heritage Commerce
Corp's announcement of a change in management with the SEC on Form 8-K.
On July 24, 2000, the Company filed its earnings press release for the second
quarter ended June 30, 2000 with the SEC on Form 8-K.
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)
August 14, 2000 /s/ Richard L. Conniff
-------------------------- ------------------------------------------------
Date Richard L. Conniff, President and COO
August 14, 2000 /s/ Brad L. Smith
-------------------------- -----------------------------------------------
Date Brad L. Smith, Chairman of the Board and CEO
20
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Name
-------------- ----
<S> <C>
27.1 Financial Data Schedule
</TABLE>
