-----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, RzGDx9Fh2Jx0N1bZ3ON9FvrQBDr98FBpx+ktOcLBmoVF7COheW2MwyH4NbKoiisy o/wYwtiPF94qi3fe+bgjYg== /in/edgar/work/0000891618-00-005103/0000891618-00-005103.txt : 20001115 0000891618-00-005103.hdr.sgml : 20001115 ACCESSION NUMBER: 0000891618-00-005103 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 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: 766760 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 f67012e10-q.txt FORM 10-Q PERIOD ENDED SEPTEMBER 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 September 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 10,847,011 shares of Common Stock outstanding on November 6, 2000. 2 HERITAGE COMMERCE CORP AND SUBSIDIARIES QUARTERLY REPORT ON FORM 10-Q Table of Contents - --------------------------------------------------------------------------------
Page Part I - Financial Information Item 1. Condensed Consolidated Statements of Financial Condition 3 4 Condensed Consolidated Income Statements 5 Condensed Consolidated Statements of Cash Flows Condensed Consolidated Notes to Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and 9 Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk 21 Part II - Other Information Item 1. Legal Proceedings 21 Item 4. Submission of Matters to a Vote of Security Holders 21 Item 6. Exhibits and Reports on Form 8-K 22 Signatures
3 HERITAGE COMMERCE CORP AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited) ASSETS
September 30, 2000 December 31, 1999 ------------------ ----------------- Cash and due from banks $ 28,152,000 $ 10,049,000 Federal funds sold 94,700,000 128,100,000 ------------- ------------- Total cash and cash equivalents 122,852,000 138,149,000 Securities available-for-sale, at fair value 38,377,000 17,430,000 Securities held-to-maturity, at amortized cost (fair value of $11,890,000 and $13,614,000, respectively) 11,921,000 13,834,000 Loans held for sale, lower of cost or market 30,653,000 22,243,000 Loans, net of deferred fees 383,603,000 271,855,000 Allowance for probable loan losses (6,500,000) (5,003,000) ------------- ------------- Loans, net 377,103,000 266,852,000 Premises and equipment, net 4,315,000 3,459,000 Accrued interest receivable and other assets 10,073,000 5,211,000 Other investments 12,554,000 9,486,000 ------------- ------------- TOTAL $ 607,848,000 $ 476,664,000 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deposits Demand, noninterest bearing $ 158,351,000 $ 109,432,000 Demand, interest bearing 14,849,000 9,898,000 Savings and money market 178,900,000 164,060,000 Time deposits, under $100,000 54,582,000 47,355,000 Time deposits, $100,000 and over 128,852,000 87,795,000 ------------- ------------- Total deposits 535,534,000 418,540,000 Accrued interest payable and other liabilities 8,778,000 13,593,000 Mandatorily redeemable cumulative trust preferred securities of Subsidiary Grantor Trust 14,000,000 -- ------------- ------------- Total liabilities 558,312,000 432,133,000 ------------- ------------- 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: 7,397,003 at September 30, 2000 and 7,031,576 at December 31, 1999 42,558,000 41,021,000 Accumulated other comprehensive income (loss), net of income taxes (benefits) 73,000 (137,000) Retained Earnings 6,905,000 3,647,000 ------------- ------------- Total shareholders' equity 49,536,000 44,531,000 ------------- ------------- TOTAL $ 607,848,000 $ 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 September 30, Nine months ended September 30, -------------------------------- ------------------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Interest income: Loans, including fees $11,216,000 $ 6,545,000 $29,606,000 $18,794,000 Securities, taxable 563,000 407,000 1,639,000 1,481,000 Securities, non-taxable 157,000 144,000 460,000 463,000 Federal funds sold 1,564,000 780,000 3,351,000 1,427,000 ----------- ----------- ----------- ----------- Total interest income 13,500,000 7,876,000 35,056,000 22,165,000 ----------- ----------- ----------- ----------- Interest expense: Deposits 5,290,000 2,634,000 12,870,000 7,006,000 Other 236,000 12,000 451,000 22,000 ----------- ----------- ----------- ----------- Total interest expense 5,526,000 2,646,000 13,321,000 7,028,000 ----------- ----------- ----------- ----------- Net interest income before provision for loan losses 7,974,000 5,230,000 21,735,000 15,137,000 Provision for loan losses 500,000 356,000 1,484,000 1,483,000 ----------- ----------- ----------- ----------- Net interest income after provision for loan losses 7,474,000 4,874,000 20,251,000 13,654,000 ----------- ----------- ----------- ----------- Noninterest income: Other investments 187,000 73,000 468,000 201,000 Service charges and other fees 121,000 84,000 330,000 226,000 Gain on sale of loans held-for-sale -- 271,000 -- 401,000 Gain on sale of securities available-for-sale -- -- 44,000 1,004,000 Servicing income -- 1,180,000 7,000 1,180,000 Other income 236,000 194,000 569,000 701,000 ----------- ----------- ----------- ----------- Total noninterest income 544,000 1,802,000 1,418,000 3,713,000 ----------- ----------- ----------- ----------- Noninterest expenses: Salaries and employee benefits 2,921,000 2,714,000 9,598,000 7,678,000 Client services 589,000 362,000 1,227,000 1,158,000 Professional fees 430,000 884,000 1,082,000 1,129,000 Occupancy 386,000 300,000 1,040,000 793,000 Loan origination costs 277,000 145,000 725,000 401,000 Advertising and promotion 270,000 215,000 506,000 592,000 Furniture and equipment 256,000 244,000 712,000 824,000 Shareholder relations 154,000 19,000 235,000 15,000 Assessments expense 93,000 80,000 137,000 123,000 Stationery & supplies 72,000 91,000 203,000 226,000 Telephone expense 68,000 56,000 192,000 159,000 Software subscriptions 44,000 21,000 184,000 105,000 Other 262,000 372,000 745,000 1,049,000 ----------- ----------- ----------- ----------- Total noninterest expenses 5,822,000 5,503,000 16,586,000 14,252,000 ----------- ----------- ----------- ----------- Net income before provision for income taxes 2,196,000 1,173,000 5,083,000 3,115,000 Provision for income taxes 785,000 420,000 1,825,000 1,060,000 ----------- ----------- ----------- ----------- Net income $ 1,411,000 $ 753,000 $ 3,258,000 $ 2,055,000 =========== =========== =========== =========== Earnings per share: Basic $ 0.19 $ 0.11 $ 0.46 $ 0.32 =========== =========== =========== =========== Diluted $ 0.19 $ 0.10 $ 0.44 $ 0.28 =========== =========== =========== ===========
See notes to condensed consolidated financial statements 4 5 HERITAGE COMMERCE CORP AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended September 30, --------------------------------- 2000 1999 ---- ---- Cash flows from operating activities: Net income $ 3,258,000 $ 2,055,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 684,000 616,000 Provision for loan losses 1,484,000 1,483,000 Gain on sale of securities available-for-sale (44,000) (1,004,000) Net accretion of discounts (35,000) (179,000) Proceeds from sales of loans held for sale -- 4,317,000 Originations of loans held for sale (8,550,000) (9,475,000) Maturities of loans held for sale 140,000 4,244,000 Effect of changes in: Accrued interest receivable and other assets (4,860,000) (6,138,000) Accrued interest payable and other liabilities (4,929,000) 3,487,000 ------------- ------------- Net cash used in operating activities (12,852,000) (594,000) Cash flows from investing activities: Net (increase) decrease in loans (111,735,000) 6,777,000 Purchases of securities available-for-sale (33,575,000) (26,334,000) Maturities of securities available-for-sale 3,091,000 15,082,000 Proceeds from sales of securities available-for-sale 9,933,000 49,512,000 Proceeds from maturities or calls of securities held-to-maturity 1,879,000 1,115,000 Purchases of corporate owned life insurance (3,029,000) (3,801,000) Purchases of property and equipment (1,540,000) (654,000) ------------- ------------- Net cash provided by (used in) investing activities (134,976,000) 41,697,000 Cash flows from financing activities: Net increase in deposits 116,994,000 47,692,000 Proceeds from issuance of mandatorily redeemable cumulative trust preferred securities of Subsidiary Grantor Trust 14,000,000 -- Proceeds from issuance of stock -- 11,200,000 Proceeds from exercise of stock options 1,392,000 388,000 Additional paid in capital 145,000 -- ------------- ------------- Net cash provided by financing activities 132,531,000 59,280,000 ------------- ------------- Net increase (decrease) in cash and cash equivalents (15,297,000) 100,383,000 Cash and cash equivalents, beginning of period 138,149,000 46,639,000 ------------- ------------- Cash and cash equivalents, end of period $ 122,852,000 $ 147,022,000 ============= ============= Supplemental disclosures of cash paid during the period for: Interest $ 12,541,000 $ 7,385,000 Income taxes $ 3,457,000 $ 1,835,000 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 SEPTEMBER 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. On October 1, 2000 Western Holdings Bancorp and its wholly owned subsidiary, Bank of Los Altos was merged with and into Heritage Commerce Corp with Bank of Los Altos operating as a wholly owned subsidiary of Heritage Commerce Corp. The financial statements contained herein have not been restated to include any activity of Western Holdings Bancorp or Bank of Los Altos (see Note 5). 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 nine months ended September 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 Nine months ended September 30, September 30, 2000 1999 2000 1999 ---- ---- ---- ---- Weighted average common shares outstanding - used in computing basic EPS 7,292,275 6,899,421 7,138,237 6,384,190 Dilutive effect of stock options outstanding, using the treasury stock method 256,253 760,443 331,168 838,291 --------- --------- --------- --------- Shares used in computing diluted earnings per share 7,548,528 7,659,864 7,469,405 7,222,481 ========= ========= ========= =========
6 7 3) COMPREHENSIVE INCOME Comprehensive income includes net income and other comprehensive income which represents the change in 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 Nine months ended September 30, September 30, September 30, September 30, 2000 1999 2000 1999 ------------------------------------------------ -------------- Net Income $ 1,411,000 $ 753,000 $ 3,258,000 $ 2,055,000 Other comprehensive income (loss), net of tax: Net unrealized gain (loss) on securities available-for-sale during the period 240,000 40,000 254,000 294,000 Less: reclassification adjustment for realized gains on available-for-sale securities included in net income during the period -- -- (44,000) (1,004,000) ----------- ----------- ----------- ----------- Other comprehensive income (loss) 240,000 40,000 210,000 (710,000) ----------- ----------- ----------- ----------- Comprehensive income $ 1,651,000 $ 793,000 $ 3,468,000 $ 1,345,000 =========== =========== =========== ===========
4) MANDATORILY REDEEMABLE CUMULATIVE TRUST PREFERRED SECURITIES OF SUBSIDIARY GRANTOR TRUST Heritage Capital Trust I ------------------------ Heritage Capital Trust I is a Delaware business trust formed by Heritage Commerce Corp and formed for the purpose of issuing Company obligated mandatorily redeemable cumulative trust preferred securities. 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. Heritage Statutory Trust I -------------------------- Heritage Capital Statutory Trust I is a Delaware business trust formed by Heritage Commerce Corp and formed for the purpose of issuing Company obligated mandatorily redeemable cumulative trust preferred securities. During the third quarter of 2000, Heritage Capital Statutory 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 Statutory Trust I in $7,000,000 aggregate principal amount of 10.60% subordinated debentures due 2030 (the Subordinated Debentures) issued by the Company. The Subordinated Debentures represent the sole assets of Heritage Capital Statutory Trust I. The Subordinated Debentures mature on September 7, 2030, bear interest at the rate of 10.60%, payable semi-annually, and are redeemable by the Company at a premium beginning on or after September 7, 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 September 7, 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 September 7, 2030. The Subordinated Debentures bear the same terms and interest rates as the Trust Preferred Securities. Holders of the trust preferred securities are entitled to cumulative cash distributions at an annual rate of 10.60 % 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 investments 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 currently qualify as Tier I capital. 8 9 5) MERGER WITH WESTERN HOLDINGS BANCORP On October 1, 2000 Western Holdings Bancorp, parent of Bank of Los Altos, was merged with and into Heritage Commerce Corp with Bank of Los Altos becoming a wholly owned subsidiary of Heritage Commerce Corp. The merger resulted in the issuance of approximately 3.4 million shares of Heritage Commerce Corp's common stock based on a conversion ratio of 1.2264 shares of Heritage Commerce Corp common stock for each share of Western Holdings Bancorp common stock. The merger will be accounted for using the pooling-of-interests method of accounting. Historical financial information presented in future reports will be restated to include Western Holdings Bancorp. No material adjustments are expected to be recorded to conform Western Holdings Bancorp's accounting policies to that of Heritage Commerce Corp. The following unaudited pro-forma combined financial information summarizes the combined results of operations of Heritage Commerce Corp and Western Holdings Bancorp based on the pooling-of-interests method of accounting, as if the combination had been consummated on January 1 of each of the periods presented. This information is derived from the historical financial statements of each company. Weighted average shares and earnings per share were calculated based on a conversion ratio of 1.2264 to 1. Unaudited Pro-Forma Combined Summary of Operations
Nine months ended (Dollars in thousands, except per share data) September 30, 2000 September 30, 1999 - --------------------------------------------------------------------------------------------------------- Net interest income $ 30,882 $ 21,800 Net income $ 5,180 $ 3,139 Earnings per share: Basic $ 0.49 $ 0.32 Diluted $ 0.47 $ 0.29 Weighted average common shares used in computing basic EPS 10,514,152 9,721,941 Weighted average common shares used in computing diluted EPS 11,035,544 10,787,161
6) RECENT ACCOUNTING PRONOUNCEMENTS SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" was issued in September 2000. SFAS No. 140 is a replacement of SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". Most of the provisions of SFAS No. 125 were carried forward to SFAS No. 140 without reconsideration by the FASB, and some were changed in only minor ways. In issuing SFAS No. 140, the FASB included issues and decisions that had been addressed and determined since the original publication of SFAS No. 125. SFAS No. 140 is effective for transfers after March 31, 2001. It is effective for disclosures about securitizations and collateral and for recognition and reclassification of collateral for fiscal years ending after December 15, 2000. Management does not expect the adoption of SFAS No. 140 to have a significant impact on the financial position or results of operations of the Company. 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 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 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. 9 10 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. Effective October 1, 2000, the Company completed the merger with Western Holding Bancorp, the holding company of Bank of Los Altos. Bank of Los Altos now operates as a wholly owned subsidiary of Heritage Commerce Corp. Under the terms of the merger agreement, Western Holdings Bancorp shareholders received 3.4 million shares of Heritage Commerce Corp common stock based on a conversion ratio of 1.2264 shares of Heritage Commerce Corp. common stock for each share of Western Holdings Bancorp common stock. The merger will be accounted for as a pooling of interests. The financial statements contained herein have not been restated to include Western Holding Bancorp and Managements Discussion and Analysis of Financial Condition and Results of operations reflects only the activities of Heritage Commerce Corp as of September 30, 2000 and for the three and nine month periods ended September 30, 1999 and 2000. Pro forma information for Western Holdings Bancorp and Heritage Commerce Corp as of June 30, 2000 was filed with the Securities and Exchange Commission on October 16, 2000 on Form 8-K. 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 third quarter and nine months ended September 30, 2000 was $1,411,000 and $3,258,000, up 87% and 59% from $753,000 and $2,055,000 for the third quarter and nine months ended September 30, 1999. Earnings per diluted share for the third quarter and nine months ended September 30, 2000 were $0.19 and $0.44, up 90% and 57% from $0.10 and $0.28 per diluted share for the third quarter and nine month period ended September 30, 1999. For the third quarter and nine months ended September 30, 2000 as compared with the same periods of the previous year, net interest income grew by $2,744,000 and $6,598,000, or 52% and 44%, primarily as a result of an increase in the volume of the Company's interest earning assets, specifically loans. Noninterest income was $544,000 for the quarter and $1,418,000 for the nine months ended September 30, 2000, compared to $1,802,000 and $3,713,000 for the same period of the previous year. Noninterest income for the third quarter of 1999 included $1,180,000 in revenue from the origination of credit cards for an unaffiliated financial institution, and $1,004,000 gain on sale of securities during the nine months ended September 30, 1999. The credit card origination agreement terminated in 1999 and was not renewed. Noninterest expenses, primarily salaries and benefits, increased $319,000 and $2,334,000, or 6% and 16%, 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. Total occupancy expense increased 29% and 31% for the three months and nine months ended September 30, 2000 from the same period of the previous year, due to the opening of Heritage Bank of South Valley and additional work spaces requirement for the Company. The increase in shareholder relations expense primarily related to the printing of proxy material for the merger with Western Holdings Bancorp, and fees charged for filing the annual report and quarterly reports to the SEC. The Company's net interest margin was 5.90% for the quarter ended September 30, 2000, compared with 5.89% for the quarter ended September 30, 1999. Total assets as of September 30, 2000 were $607,848,000, an increase of $139,274,000, or 30%, from September 30, 1999 and an increase of $131,184,000, or 28%, from total assets of $476,664,000 at December 31, 1999. Total deposits as of September 30, 2000 were $535,534,000, an increase of 10 11 $118,884,000, or 29%, from September 30, 1999, and an increase of $116,994,000, or 28%, from total deposits of $418,540,000 at December 31, 1999. Total portfolio loans as of September 30, 2000 were $383,603,000, an increase of $111,748,000, or 41% when compared to December 31, 1999, and an increase of $138,192,000, or 56%, when compared to September 30, 1999. Total portfolio loans as of December 31, 1999 were $271,855,000. The Company's allowance for loan losses was $6,500,000, or 1.69%, of total loans as of September 30, 2000. This compares with an allowance for loan losses of $4,569,000, or 1.86%, and $5,003,000, or 1.84% of total loans at September 30, 1999 and December 31, 1999, respectively. The Company issued $14,000,000 trust preferred securities during the nine months ended as of September 30, 2000. There were no trust preferred securities issued in 1999. The Company did not have any non-performing assets as of September 30, 2000. Non-performing assets were $1,396,000 as of December 31, 1999 and $1,187,000 as of September 30, 1999. The Company's shareholders' equity as of September 30, 2000 was $49,536,000, an increase of $5,005,000, or 11%, when compared to December 31, 1999, and an increase of $5,906,000, or 14%, when compared with to September 30, 1999. Shareholders' equity increased due to a public stock offering in 1999 and current year earnings. Book value per share was $6.70 as of September 30, 2000, compared to $6.21 as of September 30, 1999. The Company's leverage capital ratio was 10.68% at September 30, 2000, compared to 10.71% at September 30, 1999. Annualized year-to-date return on average assets and return on average equity were 0.82% and 9.32%, respectively, compared with returns of 0.72% and 8.06%, respectively, for the same period in 1999. Annualized year-to-date equity to assets ratio was 8.15% at September 30, 2000, compared to 9.31% at September 30, 1999. 11 12 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 September 30, 2000 For the Three Months Ended September 30, 1999 --------------------------------------------------------------------------------------------- Interest Interest Average Income/ Average Average Income/ Average (Dollars in thousands) Balance Expense Yield/Rate Balance Expense Yield/Rate - ------------------------------------------------------------------------------------------------------------------------------- Assets: Loans, gross $406,982 $ 11,216 10.96% $260,884 $ 6,545 9.95% Investment securities 47,386 720 6.05% 43,220 551 5.06% Federal funds sold 95,837 1,564 6.49% 61,675 780 5.02% -------- -------- -------- -------- Total interest earning assets 550,205 $ 13,500 9.76% 365,779 $ 7,876 8.54% -------- -------- -------- -------- Cash and due from banks 24,637 18,128 Premises and equipment, net 3,711 3,177 Other assets 15,018 20,093 -------- -------- Total assets $593,571 $407,177 ======== ======== Liabilities and shareholders' equity: Deposits: Demand, interest bearing $ 12,940 $ 41 1.27% $ 8,751 $ 28 1.27% Savings and money market 181,818 2,240 4.90% 129,283 1,094 3.36% Time deposits, under $100,000 56,701 928 6.51% 41,261 549 5.28% Time deposits, $100,000 and over 126,398 1,903 5.99% 64,310 790 4.87% Brokered deposits 10,246 178 6.91% 11,913 173 5.76% Other borrowings 8,633 236 10.85% 304 12 15.84% -------- -------- -------- -------- Total interest bearing liabilities 396,736 $ 5,526 5.54% 255,822 $ 2,646 4.10% -------- -------- -------- -------- Demand deposits 140,208 105,924 Other liabilities 8,252 5,671 -------- -------- Total liabilities 545,196 367,417 Shareholders' equity 48,375 39,760 -------- -------- Total liabilities and shareholders' equity $593,571 $407,177 ======== ======== Net interest income/margin $ 7,974 5.77% $ 5,230 5.67% ======== ========
Note: Yields and amounts earned on loans include loan fees of $850,000 and $531,000 for the three month periods ended September 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 Nine Months Ended September 30, 2000 For the Nine Months Ended September 30, 1999 -------------------------------------------------------------------------------------------- Interest Interest Average Income/ Average Average Income/ Average (Dollars in thousands) Balance Expense Yield/Rate Balance Expense Yield/Rate - ------------------------------------------------------------------------------------------------------------------------------- Assets: Loans, gross $371,107 $ 29,606 10.66% $255,228 $ 18,794 9.84% Investment securities 47,541 2,099 5.90% 48,946 1,944 5.31% Federal funds sold 72,718 3,351 6.15% 39,336 1,427 4.85% -------- -------- -------- -------- Total interest earning assets 491,366 $ 35,056 9.53% 343,510 $ 22,165 8.63% -------- -------- -------- -------- Cash and due from banks 20,555 16,867 Premises and equipment, net 3,500 3,182 Other assets 13,716 16,482 -------- -------- Total assets $529,137 $380,041 -------- -------- Liabilities and shareholders' equity: Deposits: Demand, interest bearing $ 12,537 $ 123 1.31% $ 9,493 $ 102 1.44% Savings and money market 158,455 5,329 4.49% 125,748 3,022 3.21% Time deposits, under $100,000 51,990 2,308 5.93% 35,687 1,406 5.27% Time deposits, $100,000 and over 105,185 4,582 5.82% 59,011 2,130 4.83% Brokered deposits 10,981 528 6.42% 8,092 346 5.72% Other borrowings 5,918 451 10.17% 469 22 6.25% -------- -------- -------- -------- Total interest bearing liabilities 345,066 $ 13,321 5.16% 238,500 $ 7,028 3.94% -------- -------- -------- -------- Demand deposits 129,990 101,720 Other liabilities 7,385 5,748 -------- -------- Total liabilities 482,441 345,968 Shareholders' equity 46,696 34,073 -------- -------- Total liabilities and shareholders' equity $529,137 $380,041 ======== ======== Net interest income/margin $ 21,735 5.90% $ 15,137 5.89% ======== ========
Note: Yields and amounts earned on loans include loan fees of $2,274,000 and $1,463,000 for the nine month periods ended September 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. 12 13 The Company's net interest income for the three and nine months ended September 30, 2000 was $7,974,000, and $21,735,000, an increase of $2,744,000 and $6,598,000 over the three and nine months ended September 30, 1999. When compared to the three and nine months ended September 30, 1999, average earning assets increased by $184,426,000 and $147,856,000, or 50% and 43%. 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 5.77% and 5.90% for the three and nine months ended of September 30, 2000, compared to 5.67% and 5.89% for the three and nine months ended of September 30, 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 September 30, 2000 vs. 1999 ------------------------------------------------ Increase (Decrease) Due to Change In: (Dollars in thousands) Average Volume Average Rate Net Change - ---------------------------------------------------------------------------------- INTEREST EARNING ASSETS Loans, gross $ 4,105 $ 566 $ 4,671 Investment securities 69 100 169 Federal funds sold 569 215 784 ------- ------- ------- Total interest earning assets $ 4,743 $ 881 $ 5,624 ------- ------- ------- INTEREST BEARING LIABILITIES Demand, interest bearing $ 13 $ -- $ 13 Money Market and Savings 666 480 1,146 Time deposits, under $100,000 260 119 379 Time deposits, $100,000 and over 945 168 1,113 Brokered Deposits (27) 32 5 Other borrowings 227 (3) 224 ------- ------- ------- Total interest bearing liabilities $ 2,084 $ 796 $ 2,880 ------- ------- ------- Net interest income $ 2,659 $ 85 $ 2,744 ======= ======= =======
Nine Months Ended September 30, 2000 vs. 1999 ------------------------------------------------ Increase (Decrease) Due to Change In: (Dollars in thousands) Average Volume Average Rate Net Change - ------------------------------------------------------------------------------------ INTEREST EARNING ASSETS Loans, gross $ 9,244 $ 1,568 $ 10,812 Investment securities (62) 217 155 Federal funds sold 1,539 385 1,924 -------- -------- -------- Total interest earning assets $ 10,721 $ 2,170 $ 12,891 -------- -------- -------- INTEREST BEARING LIABILITIES Demand, interest bearing $ 30 $ (9) $ 21 Money Market and Savings 1,100 1,207 2,307 Time deposits, under $100,000 723 179 902 Time deposits, $100,000 and over 2,012 440 2,452 Brokered Deposits 139 43 182 Other borrowings 415 14 429 -------- -------- -------- Total interest bearing liabilities $ 4,419 $ 1,874 $ 6,293 -------- -------- -------- Net interest income $ 6,302 $ 296 $ 6,598 ======== ======== ========
PROVISION FOR LOAN LOSSES For the nine months ended September 30, 2000, the provision for loan losses was $1,484,000, compared to $1,483,000 for the nine months ended September 30, 1999. For the third quarter of 2000, the provision for loan losses was $500,000, compared to $356,000 for the third quarter of 1999. 13 14 NONINTEREST INCOME The following tables show the various components of the Company's noninterest income for the periods indicated:
Increase (decrease) ------------------------- Three months ended September 30, 2000 versus 1999 ------------------------------------------------------------ (Dollars in thousands) 2000 1999 Amount Percent - ------------------------------------------------------------------------------------------------- Other investment income $ 187 $ 73 156% $ 114 Service charges and other fees 121 84 37 44% Gain on sale of loans -- 271 (271) (100%) Servicing income -- 1,180 (1,180) (100%) Other income 236 194 42 (22%) ------- ------- ------- Total $ 544 $ 1,802 $(1,258) (70%) ======= ======= =======
Increase (decrease) ------------------------- Nine months ended September 30, 2000 versus 1999 ------------------------------------------------------------ (Dollars in thousands) 2000 1999 Amount Percent - ------------------------------------------------------------------------------------------------- Other investment income $ 468 $ 201 $ 267 133% Service charges and other fees 330 226 104 46% Gain on sale of loans -- 401 (401) (100%) Gain on sale of securities 44 1,004 (960) (96%) available-for-sale Servicing income 7 1,180 (1,173) (99%) Other income 569 701 (132) (19%) ------- ------- ------- Total $ 1,418 $ 3,713 $(2,295) (62%) ======= ======= =======
Noninterest income for the third quarter and the first nine months ended September 30, 2000 was $544,000 and $1,418,000, down $1,258,000,and $2,295,000, or 70% and 62%, from $1,802,000 and $3,713,000 for the third quarter and nine months ended September 30, 1999. This decrease was primarily the result of $1,180,000 in revenue from the origination of credit cards for an unaffiliated financial institution in the third quarter of 1999, and a $1,004,000 gain on sale of securities available-for-sale recognized in the first nine months of 1999. The credit card origination agreement terminated in 1999 and was not renewed. There was only a $44,000 gain on sale of securities available-for-sale recognized in the first nine months of 2000. The increase in other investment income was primarily due to the increase of Company's investment in certain life insurance contracts. The decrease in gain on sale of loans was primarily due to not selling of SBA loans in the three months and nine months period ended September 30, 2000, compared to $130,000 gain on sale of SBA loan in the nine months period ended September 30, 1999. NONINTEREST EXPENSE The following tables show the various components of the Company's noninterest expenses for the periods indicated:
For The Three Months Ended September 30, ------------------------------------------------------- Increase Percent Increase (Dollars in thousands) 2000 1999 (Decrease) (Decrease) - ------------------------------------------------------------------------------------------------ Salaries and benefits $2,921 $2,714 $ 207 8% Client services 589 362 227 63% Professional fees 430 884 (454) (51%) Occupancy 386 300 86 29% Loan origination costs 277 145 132 91% Advertising and promotion 270 215 55 26% Furniture and equipment 256 244 12 5% Shareholder relations 154 19 135 711% Assessments expense 93 80 13 16% Stationery & supplies 72 91 (19) (21%) Telephone expense 68 56 12 21% Software subscriptions 44 21 23 110% All other 262 372 (110) (30%) ------ ------ ------ Total $5,822 $5,503 $ 319 6% ====== ====== ======
14 15
For The Three Months Ended September 30, ------------------------------------------------------- Increase Percent Increase (Dollars in thousands) 2000 1999 (Decrease) (Decrease) - ------------------------------------------------------------------------------------------------ Salaries and benefits $ 9,598 $ 7,678 $ 1,920 25% Client services 1,227 1,158 69 6% Professional fees 1,082 1,129 (47) (4%) Occupancy 1,040 793 247 31% Loan origination costs 725 401 324 81% Advertising and promotion 506 592 (86) (15%) Furniture and equipment 712 824 (112) (14%) Shareholder relations 235 15 220 1,467% Assessments expense 137 123 14 11% Stationery & supplies 203 226 (23) (10%) Telephone expense 192 159 33 21% Software subscriptions 184 105 79 75% All other 745 1,049 (304) (29%) ------- ------- ------- Total $16,586 $14,252 $ 2,334 16% ======= ======= =======
Noninterest expenses for the third quarter and nine months ended September 30, 2000 were $5,822,000 and $16,586,000, up $319,000 and $2,334,000, or 6% and 16%, from $5,503,000 and $14,252,000 for the third quarter and nine months ended September 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 (50% and 49% of total noninterest expenses for the third quarter of 2000 and 1999, 58% and 54% of total noninterest expenses for the nine months ended September 30, 2000 and 1999), client services (10% and 7% of total noninterest expenses for the third quarter of 2000 and 1999, 7% and 8% of total noninterest expenses for the nine months ended September 30, 2000 and 1999), professional fees (7% and 6% of total noninterest expenses for the third quarter of 2000 and 1999, 7% and 8% of the nine months ended September 30, 2000 and 1999), occupancy (7% and 5% of total noninterest expenses for the third quarter of 2000 and 1999, 6% for both the nine months ended September 30, 2000 and 1999), and loan origination costs (5% and 4% of total noninterest expenses for the third quarters of 2000 and 1999, 4% and 3% of total noninterest expenses for the nine months ended September 30, 2000 and 1999). The overall increase in salaries and benefits expense was primarily attributable to an overall increase in salaries and severance payments of $630,000 related to changes in management. The Company employed 142 people at September 30, 2000, compared to 135 employees at September 30, 1999. The increase in occupancy expense was primarily attributable to the opening of Heritage Bank South Valley. The increase in shareholder relations expense was primarily for the printing of proxy material for the merger with Western Holdings Bancorp, and fees charged for filing the annual report and quarterly reports to the SEC. The increase in software subscription expense was attributable to updating computer system for the merger with Bank of Los Altos. The increase in loan origination costs was mainly due to the increase volume of loans in 2000. In the fourth quarter of 2000, the Company will recognize certain significant additional expenses related to the merger with Western Holdings. The Company originally estimated these expenses at $2.1 million before the related tax benefit or $1.3 million net of tax benefit. As a result of two members of Western Holdings' senior management not continuing with the Company, the related severance obligations are expected to increase the merger and integration related expenses by approximately $1.6 million to approximately $3.7 million, or $2.4 million net of tax benefit. INCOME TAXES The provision for income taxes for the three and nine months ended September 30, 2000 was $785,000 and $1,825,000, both 36%, as compared to $420,000 and $1,060,000, 36% and 34%, for the three and nine months ended September 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. 15 16 FINANCIAL CONDITION Total assets increased 28% to $607,848,000 at September 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 September 30, 2000:
September 30, 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: U.S. Treasury $ 8,046 5.28% $ -- -- $ -- -- $ -- -- $ 8,046 5.28% Agencies 1,987 6.66% 15,934 6.87% -- -- -- -- 17,921 6.85% Mortgage backed -- -- -- -- 1,979 7.23% 2,921 7.34% 4,900 7.30% Municipals - taxable 320 6.51% -- -- -- -- -- -- 320 6.51% Municipals - nontaxable -- -- 115 4.60% 5,069 4.74% 851 5.36% 6,035 4.82% ------- ------- ------- ------- ------- Total available-for-sale $10,353 5.58% $16,049 6.85% $ 7,048 5.44% $ 3,772 6.89% $37,222 6.24% Securities held-to-maturity: Municipals - taxable $ 936 6.71% $ 3,572 6.48% $ -- -- $ -- -- $ 4,508 6.53% Municipals - nontaxable -- -- 1,082 4.73% 6,127 4.51% 204 4.45% 7,413 4.54% ------- ------- ------- ------- ------- Total held-to-maturity $ 936 6.71% $ 4,654 6.07% $ 6,127 4.51% $ 204 4.45% $11,921 5.29% ------- ------- ------- ------- ------- Total securities $11,289 5.68% $20,703 6.68% $13,175 5.01% $ 3,976 6.77% $49,143 6.01% ======= ======= ======= ======= =======
Note: Yield on non-taxable municipal securities are not presented in a fully tax equivalent basis. LOANS Total gross loans increased 41% to $383,994,000 at September 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. The following table indicates the Company's loan portfolio for the periods indicated:
(Dollars in thousands) September 30, 2000 % of Total December 31, 1999 % of Total - ---------------------- ------------------ ---------- ----------------- ---------- Commercial, financial, and agricultural $ 141,851 37% $ 117,918 43% Real estate - land and construction 118,245 31% 68,152 25% Real estate - mortgage 121,106 31% 83,698 31% Consumer 2,792 1% 2,163 1% --------- --------- --------- --------- Total loans 383,994 100% 271,931 100% Deferred loan fees (391) (76) Allowance for loan losses (6,500) (5,003) --------- --------- Loans, net $ 377,103 $ 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 decrease of the percentage of total loans reflects the sale of the Internet credit card portfolio in 1999. 16 17 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. The following table sets forth the maturity distribution of the Company's loans at September 30, 2000:
Over One Year Due in But Less Than (Dollars in thousands) One Year or Less Five Year Over Five Years Total - --------------------------------------------------------------------------------------------------- Commercial $130,729 $ 10,583 $ 148 $141,460 Real estate - mortgage 59,359 45,831 15,916 121,106 Real estate - land and construction 118,148 97 -- 118,245 Consumer 1,734 1,055 3 2,792 -------- -------- -------- -------- Total loans $309,970 $ 57,566 $ 16,067 $383,603 ======== ======== ======== ======== Loans with variable interest rates $300,431 $ 19,549 $ 489 $320,469 Loans with fixed interest rates 9,539 38,017 15,578 63,134 -------- -------- -------- -------- Total loans $309,970 $ 57,566 $ 16,067 $383,603 ======== ======== ======== ========
Note: Total shown is net of deferred loan fees of $391,000 at September 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 September 30, 2000, approximately 84% of the Company's loan portfolio consisted of floating interest rate loans. NONPERFORMING ASSETS Nonperforming assets consist of nonaccrual loans, loans past due 90 days and still accruing, troubled debt restructurings and other real estate owned. The following table shows nonperforming assets at the dates indicated
September 30, December 31, (Dollars in thousands) 2000 1999 1999 - --------------------------------------------------------------------------------------------------------------------------- Nonaccural loans .............................................................. $ -- $1,187 $1,396 Loans 90 days past due and still accruing ..................................... -- -- -- Restructured loans ............................................................ -- -- -- ----- ------ ------ Total nonperforming loans .................................................. -- 1,187 1,396 Foreclosed assets ............................................................. -- -- -- ----- ------ ------ Total nonperforming assets ................................................. $ -- $1,187 $1,396 ===== ====== ====== Nonperforming assets as a percentage of period end loans plus foreclosed assets --% 0.48% 0.51%
The Company had no non-performing assets (NPA's) as of September 30, 2000. NPA's were $1,187,000 as of September 30, 1999 and $1,396,000 as of December 31, 1999. 17 18 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 Companys' loan loss experience as well as transactions in the allowance for loan losses and certain pertinent ratios for the periods indicated:
September 30, 2000 December 31, (Dollars in thousands) 2000 1999 1999 ---- ---- ---- Balance, beginning of period ...................................... $ 5,003 $ 3,825 $ 3,825 Charge-offs: Domestic: Commercial, financial and agricultural ....................... (20) (194) (203) Real estate-land and construction ............................ -- -- -- Real estate-mortgage ......................................... -- -- -- Installment loans/credit card ................................ -- (603) (603) ------- ------- ------- Total charge-offs ................................................ (20) (797) (806) Recoveries: Domestic: Commercial, financial and agricultural ....................... 33 58 64 Real estate-land and construction ............................ -- -- -- Real estate-mortgage ......................................... -- -- -- Installment loans/credit card ................................ -- -- 9 ======= ======= ======= Total recoveries .................................................. 33 58 73 ------- ------- ------- Net (charge-offs) recoveries ...................................... 13 (739) (733) Provision for loan losses ......................................... 1,484 1,483 1,911 ------- ------- ------- Balance, end of period ............................................ $ 6,500 $ 4,569 $ 5,003 ======= ======= ======= RATIOS: Net (charge-offs) recoveries to average loans outstanding ......... 0.01% 0.31% 0.30% Allowance for loan losses to average loans ........................ 1.70% 1.85% 2.04% Allowance for loan losses to total loans at end of period ......... 1.69% 1.86% 1.84% Allowance for loan losses to nonperforming loans .................. --% 385% 358%
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:
September 30, 2000 September 30, 1999 December 31, 1999 ---------------------------------------------------------------------------------- Percent of ALL Percent of ALL in each category Percent of ALL in each to in each category Category to total (Dollars in thousands) Amount total loans Amount to total loans Amount loans - ---------------------------------------------------------------------------------------------------------------- Commercial $3,121 2.21% $2,196 2.08% $2,635 2.23% Real estate - land and construction 1,481 1.25% 1,064 1.55% 1,076 1.58% Real estate - mortgage 512 0.42% 293 0.42% 356 0.43% Consumer 49 1.74% 28 1.37% 32 1.48% Unallocated 1,337 --% 988 --% 904 --% ------ ------ ------ Total $6,500 1.69% $4,569 1.86% $5,003 1.84% ====== ====== ======
18 19 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 $535,534,000 at September 30, 2000, an increase of 28%, 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, interest bearing deposits, and time deposits, primarily time deposits $100,000 and over. Noninterest bearing deposits, interest bearing deposits, were $158,352,000 at September 30, 2000, as compared to $109,432,000 at December 31, 1999. Interest bearing deposits were $14,849,000 at September 30, 2000, as compared to $9,898,000 at December 31, 1999. Time deposits were $183,434,000 at September 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:
Nine months ended Year ended September 30, 2000 December 31, 1999 ---------------------------------------------- Average Average Average Average (Dollars in thousands) Balance Rate Paid Balance Rate Paid - ------------------------------------------------------------------------------------- Demand, noninterest bearing $129,990 --% $106,397 --% Demand, interest bearing 12,537 1.31% 9,476 1.40% Saving and money market 158,455 4.49% 133,890 3.41% Time deposits, under $100,000 51,990 5.93% 38,295 5.34% Time deposits, $100,000 and over 105,185 5.82% 64,696 4.88% Brokered deposits 10,981 6.42% 8,812 5.88% -------- -------- Total average deposits $469,138 3.66% $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 September 30, 2000.
(Dollars in thousands) Balance % of Total - --------------------------------------------------------------------- Three months or less $ 56,200 44% Over three months through twelve months 65,548 51% Over twelve months 7,104 5% -------- -------- Total $128,852 100% ======== ========
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 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. 19 20 The following table sets forth the interest rate sensitivity of the Company's interest-earning assets and interest-bearing liabilities at September 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:
Within Due in Three Due After Three to Twelve One to Five Due After Not Rate- (Dollars in thousands) Months Months Years Five Years Sensitive Total - -------------------------------------------------------------------------------------------------------------------------------- INTEREST EARNING ASSETS: Federal funds sold $ 94,700 $ -- $ -- $ -- $ -- $ 94,700 Securities -- 11,243 20,807 18,248 -- 50,298 Total loans 314,814 25,809 57,566 16,067 -- 414,256 --------- --------- --------- --------- --------- --------- Total interest earning assets 409,514 37,052 78,373 34,315 -- 559,254 --------- --------- --------- --------- --------- --------- Cash and due from banks -- -- -- -- 28,152 28,152 Other assets -- -- -- -- 20,442 20,442 --------- --------- --------- --------- --------- --------- Total assets $ 409,514 $ 37,052 $ 78,373 $ 34,315 $ 48,594 $ 607,848 ========= ========= ========= ========= ========= ========= INTEREST BEARING LIABILITIES: Demand, interest bearing $ 14,849 $ -- $ -- $ -- $ -- 14,849 Savings and money market 178,900 -- -- -- -- 178,900 Time deposits 71,547 99,380 12,507 -- -- 183,434 --------- --------- --------- --------- --------- --------- Total interest bearing liabilities 265,296 99,380 12,507 -- -- 377,183 --------- --------- --------- --------- --------- --------- Noninterest demand deposits 72,105 -- -- -- 86,246 158,351 Other liabilities -- -- -- -- 22,778 22,778 Shareholders' equity -- -- -- -- 49,536 49,536 --------- --------- --------- --------- --------- --------- Total liabilities and shareholders' equity $ 337,401 $ 99,380 $ 12,507 $ -- $ 158,560 $ 607,848 ========= ========= ========= ========= ========= ========= Interest rate sensitivity GAP $ 72,113 $ (62,328) $ 65,866 $ 34,315 $(109,966) $ -- ========= ========= ========= ========= ========= ========= Cumulative interest rate sensitivity GAP $ 72,113 $ 9,785 $ 75,651 $ 109,966 $ -- $ -- Cumulative interest rate sensitivity GAP ratio 11.86% 1.61% 12.45% 18.09% --% --%
The foregoing table demonstrates that the Company had a positive cumulative one year gap of $9,787,000, or 1.61% of total assets, at September 30, 2000. In theory, this would indicate that $9,787,000 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 September 30, 2000, the Company's primary liquidity ratio was 26.8%, comprised of $26.5 million in investment securities available-for-sale with maturities (or probable calls) of up to five years, less $10 million of available-for-sale securities that were pledged to secure public and certain other deposits as required by law and contract; Federal funds sold of $94.7 million, and $28.2 million in cash and due from banks, as a percentage of total unsecured deposits of $520.6 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 nine months of 2000. 20 21 CAPITAL RESOURCES The following table summarizes risk-based capital, risk-weighted assets, and risk-based capital ratios of the Company:
September 30, December 31, ------------------------------------ (Dollars in thousands) 2000 1999 1999 - --------------------------------------------------------------------- Capital components: Tier 1 Capital $ 63,439 $ 43,531 $ 44,530 Tier 2 Capital 6,423 4,313 4,646 -------- -------- -------- Total risk-based capital $ 69,862 $ 47,844 $ 49,176 ======== ======== ======== Risk-weighted assets $513,731 $344,751 $371,322 Average assets $593,571 $406,686 $475,295
Minimum Regulatory Requirements ------------ Capital ratios: Total risk-based capital 13.6% 13.9% 13.2% 8.0% Tier 1 risk-based capital 12.3% 12.6% 12.0% 4.0% Leverage ratio (1) 10.7% 10.7% 9.4% 4.0%
(1) Tier 1 capital divided by average assets (excluding goodwill). 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. - Submission of Matters to a Vote of Security Holders. On August 24, 2000, the Company held a special meeting of shareholders to vote on a proposal to approve a merger among Heritage, Western Holdings Bancorp and its subsidiary Bank of Los Altos Bank. The vote was as follows:
For Against Abstain Broker Non-Votes 4,418,169 10,130 660 2,605,598
21 22 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 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 under item 5. The report included the unaudited three months and six months income statements and balance sheets as of June 30, 2000 and 1999. On October 16, 2000 the Company filed its press release for the completed merger with Western Holdings Bancorp with the SEC on Form 8-K under item 2 and item 7. The report included the unaudited pro forma condensed combined balance sheet as of June 30, 2000, and the pro forma condensed combined income statement for the six months period ended June 30, 2000. On October 24, 2000, the Company filed its earnings press release for the third quarter ended September 30, 2000 with the SEC on Form 8-K under item 5. The report included the unaudited three months and six months income statements and balance sheets as of September 30, 2000 and 1999. 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) November 14, 2000 /s/ Richard L. Conniff - -------------------------------- ------------------------------------------ Date Richard L. Conniff, President and COO November 14, 2000 /s/ Brad L. Smith - -------------------------------- ------------------------------------------ Date Brad L. Smith, Chairman of the Board and CEO
22 23 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 27.1 Financial Data Schedule
EX-27.1 2 f67012ex27-1.txt FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE HERITAGE COMMERCE CORP UNAUDITED FINANCIAL STATEMENTS AT SEPTEMBER 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 28,152,000 377,183,000 94,700,000 0 11,921,000 11,921,000 11,890,000 383,603,000 6,500,000 607,848,000 535,534,000 0 8,778,000 14,000,000 0 0 42,558,000 6,978,000 607,848,000 29,606,000 2,099,000 3,351,000 35,056,000 12,870,000 13,321,000 20,251,000 1,484,000 0 16,586,000 5,083,000 5,083,000 0 0 3,258,000 0.46 0.44 5.90 0 0 0 0 5,003,000 0 13,000 6,500,000 6,500,000 0 1,337,000
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