-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CPsbl+vhp3QJ3Sy2m7cTIZGqQ/jbIzRdjAua+DSI59fXco+0JGu02TN2Sq1FKXlG 5YXrrzXlUId7BcYt6+2pmA== /in/edgar/work/20000814/0000891618-00-004410/0000891618-00-004410.txt : 20000921 0000891618-00-004410.hdr.sgml : 20000921 ACCESSION NUMBER: 0000891618-00-004410 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HERITAGE COMMERCE CORP CENTRAL INDEX KEY: 0001053352 STANDARD INDUSTRIAL CLASSIFICATION: [6022 ] IRS NUMBER: 770469558 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23877 FILM NUMBER: 700857 BUSINESS ADDRESS: STREET 1: 150 ALMADEN BOULEVARD CITY: SAN JOSE STATE: CA ZIP: 95113 BUSINESS PHONE: 4089476900 MAIL ADDRESS: STREET 1: 150 ALMADEN BOULEVARD CITY: SAN JOSE STATE: CA ZIP: 95113 10-Q 1 e10-q.txt FORM 10-Q FOR QUARTERLY PERIOD ENDED JUNE 30, 2000 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. 2 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 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
3 HERITAGE COMMERCE CORP AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION ASSETS
June 30, 2000 December 31, 1999 ------------- ----------------- (Unaudited) 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 ============= =============
See notes to condensed consolidated financial statements 3 4 HERITAGE COMMERCE CORP AND SUBSIDIARIES CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
Three months ended June 30, Six months ended June 30, ---------------------------- ---------------------------- 2000 1999 2000 1999 ----------- ----------- ----------- ----------- 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 =========== =========== =========== ===========
See notes to condensed consolidated financial statements 4 5 HERITAGE COMMERCE CORP AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended June 30, --------------------------------- 2000 1999 ------------- ------------- 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
See notes to condensed consolidated financial statements 5 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:
Three months ended Six months ended June 30, June 30, ------------------------ ------------------------ 2000 1999 2000 1999 --------- --------- --------- --------- 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 ========= ========= ========= =========
6 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:
Three months ended Six months ended ----------------------------- ----------------------------- June 30, June 30, June 30, June 30, 2000 1999 2000 1999 ----------- ----------- ----------- ----------- 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 =========== =========== =========== ===========
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 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 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 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:
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 ------- -------- ------- ------- -------- ------- 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% ======== ========
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.
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 -------- -------- ------- ------- -------- ------- 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% ======== ========
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 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.
Three Months Ended June 30, 2000 vs. 1999 ---------------------------------------- Increase (Decrease) Due to Change In: Average Average Net (Dollars in thousands) Volume Rate Change ------- ------- ------ 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 ====== ====== ======
Six Months Ended June 30, 2000 vs. 1999 ------------------------------------------- Increase (Decrease) Due to Change In: Average Average Net (Dollars in thousands) Volume Rate Change ------- ------- ------- 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 ======= ======= =======
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 12 NONINTEREST INCOME The following tables show the various components of the Company's noninterest income for the periods indicated:
Increase (decrease) ----------------------------- Three months ended June 30, 2000 versus 1999 --------------------------- ----------------------------- (Dollars in thousands) 2000 1999 Amount Percent ------ ------ ------ ------- 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%) ===== ===== ===== =====
Increase (decrease) ------------------------------- Six months ended June 30, 2000 versus 1999 -------------------------- ------------------------------- (Dollars in thousands) 2000 1999 Amount Percent ---- ------ ------- ------- 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%) ==== ====== ======= ====
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:
For The Three Months Ended June 30, ---------------------------------------------------------- Percent Increase Increase (Dollars in thousands) 2000 1999 (Decrease) (Decrease) ------ ------ ---------- ---------- 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% ====== ====== ======= ====
For The Six Months Ended June 30, ----------------------------------------------------------- Percent Increase Increase (Dollars in thousands) 2000 1999 (Decrease) (Decrease) ------- ------ ---------- ---------- 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% ======= ====== ======= ====
12 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 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:
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 ------- ----- ------- ------ ------- ------ ------- ------ ------- ------ 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% ======= ===== ======= ====== ======= ====== ======= ====== ======= ======
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:
(Dollars in thousands) June 30, 2000 % of Total December 31, 1999 % of Total ------------- ---------- ----------------- ---------- 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 ========= =========
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 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:
Over One Year Due in But Less Than (Dollars in thousands) One Year or Less Five Years Over Five Years Total ----------------- ------------- --------------- -------- 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 ======== ======= ======= ========
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:
Six months ended June 30, Year ended ------------------------- December 31, (Dollars in thousands) 2000 1999 1999 ------ ------ ------------ 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%
The decrease in charge-offs (and in the provision) is primarily due to the sale of the consumer credit card portfolio. 15 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:
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 ------ ----------- ------ ----------- ------ ----------- 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% ====== ====== ======
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:
Six months ended Year ended June 30, 2000 December 31, 1999 ---------------------------- ---------------------------- Average Average Rate Average Average Rate (Dollars in thousands) Balance Paid Balance Paid -------- ------------ -------- ------------ 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% ======== ======== ======== ========
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.
(Dollars in thousands) Balance %of Total -------- --------- 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% ======== ===
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 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:
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 -------- --------- ---------- ---------- ---------- -------- 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% -- --
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 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:
June 30, ---------------------- December 31, (Dollars in thousands) 2000 1999 1999 -------- -------- -------- 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%
(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 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:
Name of Director Votes for Votes withheld ---------------- --------- -------------- 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
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: FOR 5,029,693 WITHHELD 56,077
19 20 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 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 21 EXHIBIT INDEX
Exhibit Number Name - -------------- ---- 27.1 Financial Data Schedule
EX-27.1 2 ex27-1.txt FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE HERITAGE COMMERCE CORP UNAUDITED FINANCIAL STATEMENTS AT JUNE 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 6-MOS DEC-31-2000 JUN-30-2000 30,680,000 361,298,000 85,600,000 0 12,812,000 12,812,000 12,579,000 371,373,000 6,000,000 580,967,000 518,475,000 0 8,449,000 7,000,000 0 0 41,570,000 5,473,000 580,967,000 18,390,000 1,379,000 1,787,000 21,556,000 7,580,000 7,795,000 12,777,000 984,000 0 10,765,000 2,887,000 2,887,000 0 0 1,847,000 0.26 0.24 6.04 1,092,000 0 0 0 5,003,000 0 13,000 6,000,000 6,000,000 0 1,138,000
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