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 March 31, 2000
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 7,036,882 shares of Common Stock outstanding on May
15, 2000.
- 1 -
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 March 31, 2000 and December 31, 1999 3
Condensed Consolidated Income Statements
For the three months ended March 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows
For the three months ended March 31, 2000 and 1999 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 16
Part II - Other Information
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 17
- 2 -
<TABLE>
<CAPTION>
HERITAGE COMMERCE CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition
ASSETS
March 31, 2000 December 31, 1999
(Unaudited)
<S> <C> <C>
Cash and due from banks $ 23,310,000 $ 10,049,000
Federal funds sold 82,050,000 128,100,000
Total cash and cash equivalents 105,360,000 138,149,000
Securities available-for-sale,
at fair value 33,892,000 16,356,000
Securities held-to-maturity, at
amortized cost(fair value of
$13,553,000 and $13,614,000,
respectively) 13,823,000 13,834,000
Loan held for sale, at fair value 25,960,000 22,243,000
Loans, net of deferred fees 310,005,000 271,855,000
Allowance for probable loan losses (5,616,000) (5,003,000)
Loans, net 304,389,000 266,852,000
Premises and equipment, net 3,351,000 3,459,000
Accrued interest receivable
and other assets 4,816,000 5,211,000
Other investments 14,014,000 10,560,000
TOTAL $ 505,605,000 $ 476,664,000
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits
Demand, noninterest bearing $ 140,738,000 $ 109,432,000
Demand, interest bearing 12,231,000 9,898,000
Savings and money market 157,059,000 164,060,000
Time deposits, under $100,000 46,288,000 47,355,000
Time deposits, $100,000 and over 92,519,000 87,795,000
Total deposits 448,835,000 418,540,000
Mandatorily redeemable cumulative
trust preferred securities of
Subsidiary Grantor Trust 7,000,000 ---
Accrued interest payable and other
liabilities 4,222,000 13,593,000
Total liabilities 460,057,000 432,133,000
Commitments and contingencies
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:
7,034,882 at March 31, 2000 and
7,031,576 at December 31, 1999 41,036,000 41,021,000
Accumulated other comprehensive
loss, net of taxes (174,000) (137,000)
Retained Earnings 4,686,000 3,647,000
Total shareholders' equity 45,548,000 44,531,000
TOTAL $ 505,605,000 $ 476,664,000
See notes to condensed consolidated financial statements
</TABLE>
- 3 -
<TABLE>
<CAPTION>
HERITAGE COMMERCE CORP AND SUBSIDIARIES
Condensed Consolidated Income Statements (Unaudited)
Three months ended March 31,
2000 1999
<S> <C> <C>
Interest income:
Loans, including fees $ 8,271,000 $ 6,031,000
Securities, taxable 488,000 624,000
Securities, non-taxable 146,000 173,000
Federal funds sold 976,000 336,000
Total interest income 9,881,000 7,164,000
Interest expense:
Deposits 3,413,000 2,160,000
Other 20,000 11,000
Total interest expense 3,433,000 2,171,000
Net interest income before provision
for probable loan losses 6,448,000 4,993,000
Provision for probable loan losses 600,000 643,000
Net interest income after provision
for probable loan losses 5,848,000 4,350,000
Noninterest income:
Other investments 174,000 80,000
Service charges and other fees 102,000 69,000
Gain on sale of loans 52,000 46,000
Servicing income 7,000 ---
Gain on sale of securities
available-for-sale --- 771,000
Other income 148,000 258,000
Total other income 483,000 1,224,000
Noninterest expenses:
Salaries and employee benefits 2,867,000 2,422,000
Client services 369,000 661,000
Occupancy 342,000 232,000
Loan origination costs 206,000 116,000
Furniture and equipment 203,000 297,000
Professional fees 185,000 170,000
Advertising and promotion 89,000 149,000
Stationery & supplies 65,000 79,000
Telephone expense 63,000 50,000
Other 344,000 411,000
Total other expenses 4,733,000 4,587,000
Net income before income taxes 1,598,000 987,000
Provision for Income taxes 560,000 360,000
Net income $ 1,038,000 $ 627,000
Earnings per share:
Basic $ 0.15 $ 0.10
Diluted $ 0.13 $ 0.09
See notes to condensed consolidated financial statements
</TABLE>
- 4 -
<TABLE>
<CAPTION>
HERITAGE COMMERCE CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three Months ended March 31,
2000 1999
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,038,000 $ 627,000
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 209,000 203,000
Provision for probable loan losses 600,000 643,000
Gain on sale of securities
available-for-sale --- (771,000)
Net amortization of premiums /
accretion of discounts 24,000 (34,000)
Proceeds from sales of loans held for sale --- 2,317,000
Originations of loans held for sale (3,730,000) (322,000)
Maturities of loans held for sale 13,000 2,158,000
Effect of changes in:
Accrued interest receivable and
other assets 395,000 (4,248,000)
Accrued interest payable and
other liabilities (9,359,000) 403,000
Net cash provided by (used in)
operating activities (10,810,000) 976,000
Cash flows from investing activities:
Net (increase) decrease in loans (38,138,000) 21,462,000
Purchases of securities available-for-sale (17,597,000) (21,252,000)
Maturities of securities available-for-sale --- 2,984,000
Proceeds from sales of securities
available-for-sale --- 27,749,000
Proceeds from maturities or calls of
securities held-to-maturity --- 1,115,000
Purchases of corporate owned life insurance (2,524,000) (3,480,000)
Purchases of other investments (930,000) ---
Purchases of property and equipment (100,000) (67,000)
Net cash provided by (used in)
investing activities (59,289,000) 28,511,000
Cash flows from financing activities:
Net increase (decrease) in deposits 30,295,000 (46,912,000)
Proceeds from issuance of mandatorily
redeemable cumulative trust preferred
securities of Subsidiary Grantor Trust 7,000,000 ---
Proceeds from exercise of stock options 15,000 38,000
Net cash provided by (used in)
financing activities 37,310,000 (46,874,000)
Net decrease in cash and cash equivalents (32,789,000) (17,387,000)
Cash and cash equivalents,
beginning of period 138,149,000 46,639,000
Cash and cash equivalents,
end of period $ 105,360,000 $ 29,252,000
Supplemental disclosures of cash paid
during the period for:
Interest $ 3,149,000 $ 2,246,000
Income taxes $ 767,000 $ 728,000
Supplemental schedule of non-cash
investing and financing activity:
Transfer of investment securities
from HTM to AFS --- $ 11,669,000
See notes to condensed consolidated financial statements
</TABLE>
- 5 -
HERITAGE COMMERCE CORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 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 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, 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 months ended March 31, 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 March 31,
2000 1999
<S> <C> <C>
Weighted average common shares
outstanding - used in computing basic EPS 7,034,615 6,112,611
Dilutive effect of stock options outstanding,
using the treasury stock method 668,892 941,027
Shares used in computing diluted
earnings per share 7,703,507 7,053,638
</TABLE>
- 6 -
3) Comprehensive Income
In 1998, the Company adopted 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.
The following is a summary of the components of other comprehensive income:
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
2000 1999
<S> <C> <C>
Net Income $ 1,038,000 $ 627,000
Other comprehensive income, net of tax:
Net unrealized holding gain (loss)
on available-for-sale securities
during the period (24,000) 217,000
Less: reclassification adjustment for
realized gains on available-for-
sale securities included in net
income during the period --- (770,000)
Other comprehensive loss (24,000) (553,000)
Comprehensive income $ 1,014,000 $ 74,000
</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.
- 7 -
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.
5) Reclassifications
Certain amounts in the December 31, 1999 and March 31, 1999 financial
statements have been reclassified to conform to the March 31, 2000 financial
statement presentation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Net income for the three months ended March 31, 2000 was $1,038,000, up
66% or $411,000 from $627,000 for the first quarter of 1999. Earnings per
diluted share for the first quarter of 2000 were $0.13, up 44% or $0.04 from
$0.09 per diluted share for the prior year period.
The Directors of Heritage Commerce Corp, at their Board Meeting on January
20, 2000, declared a 10% stock dividend payable to Heritage Commerce Corp
shareholders of record as of February 7, 2000. The payable date of the
dividend was February 21, 2000. All per share data in this report has been
adjusted to reflect this dividend.
For the first quarter of 2000 as compared with the same period of the
previous year, net interest income grew by $1,455,000, or 29% primarily due
to increased levels of earning assets over interest bearing liabilities;
noninterest income decreased $741,000, primarily due to gains on sale of
securities in the first quarter of 1999 of $771,000; and noninterest expense
increased $146,000, or 3%. The Company's net interest margin was 5.99% for
the quarter ended March 31, 2000, compared with 6.06% for the quarter ended
March 31, 1999.
Total assets as of March 31, 2000 were $505,605,000, an increase of
$147,237,000, or 41%, from March 31, 1999, and an increase of $28,941,000, or
6%, from total assets of $476,664,000 at December 31, 1999. Total deposits as
of March 31, 2000 were $448,835,000, an increase of $126,789,000, or 39%,
from March 31, 1999, and an increase of $30,295,000, or 7%, from total
deposits of $418,540,000 at December 31, 1999.
Total portfolio loans as of March 31, 2000 were $310,005,000, an increase
of $78,731,000, or 34%, compared to March 31, 1999. Total portfolio loans as
of December 31, 1999 were $271,855,000. The Company's allowance for loan
losses was $5,616,000, or 1.81%, of total loans as of March 31, 2000. This
compares with an allowance for loan losses of $4,277,000, or 1.85%, and
$5,003,000, or 1.84% of total loans at March 31, 1999 and December 31, 1999,
respectively. The Company's non-performing assets were $1,333,000 as of
March 31, 2000. Non-performing assets were $2,269,000 as of March 31, 1999
and $1,396,000 as of December 31, 1999.
The Company's shareholders' equity at March 31, 2000 increased to
$45,548,000 from $30,929,000 as of March 31, 1999, as a result of the
proceeds from the sale of stock in 1999 and retention of earnings. Book
value per share totaled $6.47 as of March 31, 2000, compared to $5.06 as of
March 31, 1999. The Company's leverage capital ratio was at 11.3% at March
31, 2000. This compared with a leverage ratio of 8.3% at March 31, 1999.
- 8 -
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 March 31, 2000 For the Three Months Ended March 31, 1999
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
Assets:
Loans, gross $ 317,420 $ 8,271 10.48% $ 248,042 $ 6,031 9.86%
Investments securities 45,472 634 5.61% 56,957 797 5.67%
Federal funds sold 70,282 976 5.59% 28,984 336 4.70%
Total interest earning assets 433,174 $ 9,881 9.17% 333,983 $ 7,164 8.70%
Cash and due from banks 18,906 17,040
Premises and equipment, net 3,350 3,233
Other assets 10,326 13,362
Total assets $ 465,756 $ 367,618
Liabilities and shareholders' equity:
Deposits:
Demand, interest bearing $ 11,922 $ 38 1.30% $ 9,464 $ 34 1.46%
Savings and money market 142,402 1,425 4.02% 131,273 987 3.05%
Time deposits, under $100,000 47,287 641 5.45% 32,591 426 5.30%
Time deposits, $100,000 and over 85,319 1,153 5.43% 52,678 630 4.85%
Brokered deposits 10,403 157 6.05% 6,167 83 5.46%
Other borrowings 1,818 19 4.36% 911 11 4.91%
Total interest bearing liabilities 299,151 $ 3,433 4.62% 233,084 $ 2,171 3.78%
Demand deposits 117,590 96,908
Other liabilities 3,790 6,583
Total liabilities 420,531 336,575
Shareholders' equity 45,225 31,043
Total liabilities and
shareholders' equity $ 465,756 $ 367,618
Net interest income / margin $ 6,448 5.99% $ 4,993 6.06%
</TABLE>
Note: Yields and amounts earned on loans include loan fees of $707,000 and
$455,000 for the three month periods ended March 31, 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.
The Company's net interest income for the first quarter of 2000 was
$6,448,000, an increase of $1,455,000 or 29% over the first quarter of 1999.
When compared to the first quarter of 1999, average earning assets increased
by $99,191,000 or 29%. The net yield on average earning assets was 5.99%
in the first quarter of 2000, compared to 6.06% in the first quarter of 1999.
- 9 -
The following table sets forth an analysis of the changes in interest
income resulting from increases in the volume of interest earning liabilities
and increases 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 respectively 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>
<S> <C> <C> <C>
Three Months Ended March 31,
2000 vs. 1999
Increase (Decrease) Due to Change In:
Average Average Net
(Dollars in thousands) Volume Rate Change
Interest earning assets
Loans, gross $ 1,790 $ 450 $ 2,240
Investments securities (162) (1) (163)
Federal funds sold 572 68 640
Total interest earning assets $ 2,200 $ 517 $ 2,717
Interest bearing liabilities
Demand, interest bearing $ 8 $ (4) $ 4
Money Market and Savings 108 330 438
Time deposits, under $100,000 198 17 215
Time deposits, $100,000 and over 439 84 523
Brokered Deposits 63 11 74
Other borrowings 10 (2) 8
Total interest bearing liabilities $ 826 $ 436 $ 1,262
Net interest income $ 1,374 $ 81 $ 1,455
</TABLE>
Provision for Loan Losses
During the first quarter of 2000, the provision for loan losses was
$600,000, down $43,000 from $643,000 for the first quarter of 1999. The
decrease was primarily a result of the Company not having an additional
provision related to the Nextcard portfolio which was sold
during 1999.
Noninterest Income
The following table sets forth the various components of the Company's
noninterest income for the periods indicated:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Increase (decrease)
Three months ended March 31, 2000 versus 1999
(Dollars in thousands) 2000 1999 Amount Percent
Other investment income $ 174 $ 80 $ 94 118%
Service charges and other fees 102 69 33 48%
Gain on sale of loans 52 46 6 13%
Servicing income 7 --- 7 ---
Gain on sale of securities
available-for-sale --- 771 (771) (100%)
Other income 148 258 (110) (43%)
Total $ 483 $ 1,224 $ (741) (61%)
</TABLE>
Noninterest income for the first quarter ended March 31, 2000 was
$483,000, down $741,000, or 61%, from $1,224,000 for the first quarter ended
March 31, 1999. This decrease was the result of a $771,000 gain on sale of
securities available-for-sale recognized in the first quarter of 1999. There
were no securities sold in the first quarter of 2000.
- 10 -
Noninterest Expense
The following table sets forth the various components of the Company's
noninterest expenses for the periods indicated:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
For The Three Months Ended March 31,
Percent
Increase Increase
(Dollars in thousands) 2000 1999 (Decrease)(Decrease)
Salaries and benefits $ 2,867 $ 2,422 $ 445 18%
Client services 369 661 (292) (44%)
Occupancy 342 232 110 47%
Loan origination costs 206 116 90 78%
Furniture and equipment 203 297 (94) (32%)
Professional fees 185 170 15 9%
Advertising and promotion 89 149 (60) (40%)
Stationery & supplies 65 79 (14) (18%)
Telephone expense 63 50 13 26%
All other 344 411 (67) (17%)
Total $ 4,733 $ 4,587 $ 146 3%
</TABLE>
Noninterest expenses for the first quarter of 2000 were $4,733,000, up
$146,000, or 3%, from $4,587,000 for the first quarter of 1999. The overall
increase in noninterest expenses reflects the growth in infrasturcture 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
(61% and 53% of total noninterest expenses for the first quarter of 2000 and
1999, respectively), client services (8% and 14% of total noninterest
expenses for the first quarter of 2000 and 1999, respectively), and occupancy
(7% and 5% of total noninterest expenses for the first quarter of 2000 and
1999, respectively). The increase in salaries and benefits expenses was
primarily attributable to both an increase in salaries and an increase in the
number of employees. The Company employed 147 people at March 31, 2000, up 5
from 142 employees at March 31, 1999. Client services expenses are related to
certain deposits at the Company and include courier and armored car costs,
imprinted check costs, and other client services costs, all of which are
directly related to the level of deposits in these accounts. The expense
decreased from the prior year due to lower balances in these specific
accounts in the first quarter of 2000. The increase in occupancy expense was
primarily attributable to the opening of Heritage Bank South Valley.
Income Taxes
The provision for income taxes for the three months ended March 31, 2000
was $560,000 as compared to $360,000 for the first quarter of 1999. The
difference in the effective tax rate compared to the statutory tax rate and
the reduction in the effective tax rate is primarily the result of the Company
holding certain life insurance contracts and the Company's level of
investments in municipal securities.
FINANCIAL CONDITION
Total assets increased 41% to $505,605,000 at March 31, 2000, compared to
$358,368,000 at March 31, 1999. The growth was primarily due to increases in
the Company's cash and cash equivalents (primarily in Federal funds sold)
and loan portfolio funded by growth in deposits offset by decreases in
investment securities.
- 11 -
Securities Portfolio
The following table summarizes the composition of the Company's investment
securities and the weighted average yields at March 31, 2000:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
March 31, 2000
Maturity
After One Year and After Five Years and
Within One Year Within Five Years Within Ten Years After Ten Years Total Amortized Cost
(Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
Securities available-for-sale:
Agencies $ --- --- $ 6,746 6.83% $ --- --- $ --- --- $ 6,746 6.83%
U.S. Treasury 6,033 4.92% 14,948 6.11% --- --- --- --- 20,981 5.77%
Municipals - taxable 380 6.51% --- --- --- --- --- --- 380 6.51%
Municipals - nontaxable --- --- --- --- 4,509 4.76% 1,525 5.02% 6,034 4.83%
Total available-for-sale $ 6,413 5.01% $ 21,694 6.33% $ 4,509 4.76% $ 1,525 5.02% $ 34,141 5.82%
Securities held-to-maturity:
Municipals - taxable $ 1,880 6.34% $ 4,013 6.54% $ 514 6.45% $ --- --- $ 6,407 6.47%
Municipals - nontaxable --- --- $ 604 4.90% 6,202 4.50% 610 4.62% 7,416 4.54%
Total held-to-maturity $ 1,880 6.34% $ 4,617 6.33% $ 6,716 4.65% $ 610 4.62% $ 13,823 5.43%
Total securities $ 8,293 5.31% $ 26,311 6.33% $ 11,225 4.69% $ 2,135 4.91% $ 47,964 5.71%
Note: Yield on non-taxable municipal securities are not presented in a
fully tax equivalent basis.
</TABLE>
Loans
Total gross loans increased 14% to $310,174,000 at March 31, 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>
<S> <C> <C> <C> <C>
(Dollars in thousands) March 31, 2000 % of Total December 31, 1999 % of Total
Commercial $ 124,717 40% $ 117,918 43%
Real estate - mortgage 95,490 31% 83,698 31%
Real estate - land and construction 87,868 28% 68,152 25%
Consumer 2,099 1% 2,163 1%
Total loans 310,174 100% 271,931 100%
Deferred loan fees (169) (76)
Allowance for loan losses (5,616) (5,003)
Loans, net $ 304,389 $ 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 economy which could reduce the demand for
loans and adversely impact the borrowers' abilities to repay their loans.
- 12 -
The following table sets forth the maturity distribution of the Company's
loans at March 31, 2000:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Over One Year Over
Due in One But Less Than Five
(Dollars in thousands) Year or Less Five Years Years Total
Commercial $ 116,485 $ 7,618 $ 445 $ 124,548
Real estate - mortgage 40,297 39,765 15,428 95,490
Real estate - land and
construction 87,768 100 --- 87,868
Consumer 1,190 902 7 2,099
Total loans $ 245,740 $ 48,385 $ 15,880 $ 310,005
Loans with variable
interest rates $ 236,413 $ 18,814 $ 416 $ 255,643
Loans with fixed
interest rates 9,327 29,571 15,464 54,362
Total loans $ 245,740 $ 48,385 $ 15,880 $ 310,005
Note: Total shown is net of deferred loan fees of $169,000 at March 31, 2000.
</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
March 31, 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".
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.
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>
<S> <C> <C> <C>
Year ended
Three months ended March 31, December 31,
(Dollars in thousands) 2000 1999 1999
Balance, beginning of period/year $ 5,003 $ 3,825 $ 3,825
Net (charge offs) recoveries 13 (191) (733)
Provision for probable loan losses 600 643 1,911
Balance, end of period / year $ 5,616 $ 4,277 $ 5,003
Ratios:
Net charge-offs to average
loans outstanding 0.01% 0.08% 0.30%
Allowance for loan losses
to average loans 2.28% 1.82% 2.04%
Allowance for loan losses
to total loans 1.81% 1.85% 1.84%
Allowance for loan losses
to non-performing loans 421% 188% 358%
</TABLE>
The decrease in charge-offs is due to the sale of the consumer credit card
portfolio.
- 13 -
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>
<S> <C> <C> <C> <C> <C> <C>
March 31, 2000 March 31, 1999 December 31, 1999
Percent of Percent of Percent of
ALL in each ALL in each ALL in each
category to category to category to
(Dollars in thousands) Amount total loans Amount total loans Amount total loans
Commercial $ 2,802 2.25% $ 1,829 2.05% $ 2,635 2.23%
Real estate - mortgage 402 0.42% 231 0.40% 356 0.43%
Real estate - land and construction 1,227 1.40% 917 1.72% 1,076 1.58%
Consumer 35 1.67% 1,013 3.31% 32 1.48%
Unallocated 1,150 --- 287 --- 904 ---
Total $ 5,616 1.81% $ 4,277 1.85% $ 5,003 1.84%
</TABLE>
The increase in the allowance for loan losses reflects the growth in the
Company's commercial and real estate loan portfolio.
Deposits
Deposits totaled $448,835,000 at March 31, 2000, an increase of 7%, 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. Noninterest bearing deposits were $140,738,000 at March 31, 2000,
compared to $109,432,000 at December 31, 1999. Interest bearing deposits
were $308,097,000 at March 31, 2000, as compared to $309,108,000 at December
31, 1999.
The following table summarizes the distribution of average deposits and
the average rates paid for the periods indicated:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three months ended Year ended
March 31, 2000 December 31, 1999
Average Average Average Average
(Dollars in thousands) Balance Rate Paid Balance Rate Paid
Demand, noninterest bearing $ 117,590 --- $ 106,397 ---
Demand, interest bearing 11,922 1.30% 9,476 1.40%
Saving and money market 142,402 4.02% 133,890 3.41%
Time deposits, under $100,000 47,287 5.45% 38,295 5.34%
Time deposits, $100,000 and over 85,319 5.43% 64,696 4.88%
Brokered deposits 10,403 6.05% 8,812 5.88%
Total average deposits $ 414,923 3.29% $ 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 March 31, 2000.
<TABLE>
<CAPTION>
<S> <C> <C>
(Dollars in thousands) Balance % of Total
Three months or less $ 42,147 46%
Over three months through twelve months 48,450 52%
Over twelve months 1,922 2%
Total $ 92,519 100%
</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.
- 14 -
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 March
31, 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>
<S> <C> <C> <C> <C> <C> <C>
Due in
Within Three to Due After
Three Twelve One to Five Due After Not Rate-
(Dollars in thousands) Months Months Years Five Years Sensitive Total
Interest earning assets:
Federal funds sold $ 82,050 $ --- $ --- $ --- $ --- $ 82,050
Securities 2,000 6,236 26,205 13,274 --- 47,715
Total loans 255,196 16,504 48,385 15,880 --- 335,965
Total interest earning assets 339,246 22,740 74,590 29,154 --- 465,730
Cash and due from banks --- --- --- --- 23,310 23,310
Other assets --- --- --- --- 16,565 16,565
Total assets $ 339,246 $ 22,740 $ 74,590 $ 29,154 $ 39,875 $ 505,605
Interest bearing liabilities:
Demand, interest bearing $ 12,231 $ --- $ --- $ --- $ --- $ 12,231
Savings and money market 157,059 --- --- --- --- 157,059
Time deposits 62,945 70,745 5,017 100 --- 138,807
Total interest bearing liabilities 232,235 70,745 5,017 100 --- 308,097
Noninterest demand deposits 49,383 --- --- --- 91,355 140,738
Other liabilities --- --- --- --- 11,222 11,222
Shareholders' equity --- --- --- --- 45,548 45,548
Total liabilities and
shareholders' equity $ 281,618 70,745 5,017 100 $ 148,125 $ 505,605
Interest rate sensitivity GAP $ 57,628 $ (48,005) $ 69,573 $ 29,054 $(108,250) ---
Cumulative interest rate
sensitivity GAP $ 57,628 $ 9,623 $ 79,196 $ 108,250 --- ---
Cumulative interest rate
sensitivity GAP ratio 11.40% 1.90% 15.66% 21.41% --- ---
</TABLE>
The foregoing table demonstrates that the Company had a positive
cumulative one year gap of $9.6 million, or 1.90% of total assets, at March
31, 2000. In theory, this would indicate that $9.6 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 March 31, 2000, the Company's primary liquidity ratio was
28.26%, comprised of $27.9 million in investment securities
available-for-sale with maturities (or probable calls) of up to five years,
less $9.0 million of securities that were pledged to secure public and
certain other deposits as required by law and contract;
- 15 -
Federal funds sold of $82.1 million, and $23.3 million in cash and due from
banks, as a percentage of total unsecured deposits of $439.9 million.
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>
March 31, December 31,
(Dollars in thousands) 2000 1999 1999
Capital components:
Tier 1 Capital $ 52,594 $ 30,535 $ 44,530
Tier 2 Capital 5,173 3,713 4,646
Total risk-based capital $ 57,767 $ 34,248 $ 49,176
Risk-weighted assets $ 413,410 $ 296,388 $ 371,322
Average assets $ 465,879 $ 366,918 $ 475,295
Minimum
Regulatory
Requirements
Capital ratios:
Total risk-based capital 14.0% 11.6% 13.2% 8.0%
Tier 1 risk-based capital 12.7% 10.3% 12.0% 4.0%
Leverage ratio (1) 11.3% 8.3% 9.4% 4.0%
(1) Tier 1 capital divided by average assets (excluding goodwill).
</TABLE>
Year 2000 Data Processing Issues
The Company previously recognized the material nature of the business
issues surrounding computer processing of dates into and beyond the Year 2000
and began taking corrective action as required pursuant to the interagency
statements issued by the Federal Financial Institution Examination Council.
Management believes the Company has completed all of the activities within
their control to ensure that systems are Year 2000 compliant.
The Company has not experienced any material disruptions of the internal
computer systems or software applications due to the start of the Year 2000
nor have they experienced any problems with the computer systems or software
applications of their third parties to determine the impact, if any, on the
business of the Company and the actions the Company must take, if any, in the
event of non-compliance by any of these third parties. Based upon the
Company's assessment of compliance by third parties, there does not appear
to be any material business risk posed by any such non-compliance.
Although the Company's Year 2000 rollover did not present any material
business disruption, there are some remaining Year 2000 related risks.
Management believes that appropriate actions have been taken to address these
remaining Year 2000 issues and contingency plans are in place to minimize the
financial impact to the Company. Management, however, cannot be certain that
Year 2000 issues affecting customers, suppliers or service providers of the
Company will not have a material adverse impact on the Company.
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.
- 16 -
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 6. - Exhibits and Reports on Form 8-K
(a) Exhibits included with this filing:
Exhibit Number Name
27.1 Financial Data Schedule
(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.
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)
May 15, 2000 /s/ John E. Rossell
Date John E. Rossell, III, President and CEO
May 15, 2000 /s/ Lawrence D. McGovern
Date Lawrence D. McGovern, Chief Financial Officer
- 17 -
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
HERITAGE COMMERCE CORP UNAUDITED FINANCIAL STATEMENTS AT MARCH 31, 2000
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 23,310,000
<INT-BEARING-DEPOSITS> 308,097,000
<FED-FUNDS-SOLD> 82,050,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 13,823,000
<INVESTMENTS-CARRYING> 13,823,000
<INVESTMENTS-MARKET> 13,553,000
<LOANS> 310,005,000
<ALLOWANCE> 5,616,000
<TOTAL-ASSETS> 505,605,000
<DEPOSITS> 448,835,000
<SHORT-TERM> 0
<LIABILITIES-OTHER> 4,222,000
<LONG-TERM> 7,000,000
0
0
<COMMON> 41,036,000
<OTHER-SE> 4,512,000
<TOTAL-LIABILITIES-AND-EQUITY> 505,605,000
<INTEREST-LOAN> 8,271,000
<INTEREST-INVEST> 634,000
<INTEREST-OTHER> 976,000
<INTEREST-TOTAL> 9,881,000
<INTEREST-DEPOSIT> 3,413,000
<INTEREST-EXPENSE> 3,433,000
<INTEREST-INCOME-NET> 5,848,000
<LOAN-LOSSES> 600,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,733,000
<INCOME-PRETAX> 1,598,000
<INCOME-PRE-EXTRAORDINARY> 1,598,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,038,000
<EPS-BASIC> 0.15
<EPS-DILUTED> 0.13
<YIELD-ACTUAL> 5.99
<LOANS-NON> 1,333,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,003,000
<CHARGE-OFFS> 0
<RECOVERIES> 13,000
<ALLOWANCE-CLOSE> 5,616,000
<ALLOWANCE-DOMESTIC> 5,616,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,150,000
</TABLE>
