-----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, TN9wq+1eTz+lRtf1fxOvQSDYK5MBBKnJ3pR1FM12rmBZVW6uj9SkNcjHwWwXO/VP 6XsjTYXPDR4TYb62v02qYQ== 0001053352-00-000009.txt : 20000516 0001053352-00-000009.hdr.sgml : 20000516 ACCESSION NUMBER: 0001053352-00-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HERITAGE COMMERCE CORP CENTRAL INDEX KEY: 0001053352 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [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: 635163 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 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2000 Or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transitional period from to Commission File No. 000-23877 HERITAGE COMMERCE CORP (Exact name of registrant as specified in its charter) California 77-0469558 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 150 Almaden Blvd., San Jose, California 95113 (Address of principal executive offices) (Zip Code) (408) 947-6900 (Registrant's telephone number, including area code) None (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No APPLICABLE ONLY TO CORPORATE ISSUERS: The Registrant had 7,036,882 shares of Common Stock outstanding on May 15, 2000. - 1 - HERITAGE COMMERCE CORP AND SUBSIDIARIES QUARTERLY REPORT ON FORM 10-Q Table of Contents Part I - Financial Information Page Item 1. Condensed Consolidated Statements of Financial Condition At March 31, 2000 and December 31, 1999 3 Condensed Consolidated Income Statements For the three months ended March 31, 2000 and 1999 4 Condensed Consolidated Statements of Cash Flows For the three months ended March 31, 2000 and 1999 5 Condensed Consolidated Notes to Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk 16 Part II - Other Information Item 1. Legal Proceedings 17 Item 6. Exhibits and Reports on Form 8-K 17 Signatures 17 - 2 -
HERITAGE COMMERCE CORP AND SUBSIDIARIES Condensed Consolidated Statements of Financial Condition ASSETS March 31, 2000 December 31, 1999 (Unaudited) Cash and due from banks $ 23,310,000 $ 10,049,000 Federal funds sold 82,050,000 128,100,000 Total cash and cash equivalents 105,360,000 138,149,000 Securities available-for-sale, at fair value 33,892,000 16,356,000 Securities held-to-maturity, at amortized cost(fair value of $13,553,000 and $13,614,000, respectively) 13,823,000 13,834,000 Loan held for sale, at fair value 25,960,000 22,243,000 Loans, net of deferred fees 310,005,000 271,855,000 Allowance for probable loan losses (5,616,000) (5,003,000) Loans, net 304,389,000 266,852,000 Premises and equipment, net 3,351,000 3,459,000 Accrued interest receivable and other assets 4,816,000 5,211,000 Other investments 14,014,000 10,560,000 TOTAL $ 505,605,000 $ 476,664,000 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deposits Demand, noninterest bearing $ 140,738,000 $ 109,432,000 Demand, interest bearing 12,231,000 9,898,000 Savings and money market 157,059,000 164,060,000 Time deposits, under $100,000 46,288,000 47,355,000 Time deposits, $100,000 and over 92,519,000 87,795,000 Total deposits 448,835,000 418,540,000 Mandatorily redeemable cumulative trust preferred securities of Subsidiary Grantor Trust 7,000,000 --- Accrued interest payable and other liabilities 4,222,000 13,593,000 Total liabilities 460,057,000 432,133,000 Commitments and contingencies Shareholders' equity: Preferred Stock, no par value; 10,000,000 shares authorized; none outstanding --- --- Common Stock, no par value; 30,000,000 shares authorized; Shares issued and outstanding: 7,034,882 at March 31, 2000 and 7,031,576 at December 31, 1999 41,036,000 41,021,000 Accumulated other comprehensive loss, net of taxes (174,000) (137,000) Retained Earnings 4,686,000 3,647,000 Total shareholders' equity 45,548,000 44,531,000 TOTAL $ 505,605,000 $ 476,664,000 See notes to condensed consolidated financial statements
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HERITAGE COMMERCE CORP AND SUBSIDIARIES Condensed Consolidated Income Statements (Unaudited) Three months ended March 31, 2000 1999 Interest income: Loans, including fees $ 8,271,000 $ 6,031,000 Securities, taxable 488,000 624,000 Securities, non-taxable 146,000 173,000 Federal funds sold 976,000 336,000 Total interest income 9,881,000 7,164,000 Interest expense: Deposits 3,413,000 2,160,000 Other 20,000 11,000 Total interest expense 3,433,000 2,171,000 Net interest income before provision for probable loan losses 6,448,000 4,993,000 Provision for probable loan losses 600,000 643,000 Net interest income after provision for probable loan losses 5,848,000 4,350,000 Noninterest income: Other investments 174,000 80,000 Service charges and other fees 102,000 69,000 Gain on sale of loans 52,000 46,000 Servicing income 7,000 --- Gain on sale of securities available-for-sale --- 771,000 Other income 148,000 258,000 Total other income 483,000 1,224,000 Noninterest expenses: Salaries and employee benefits 2,867,000 2,422,000 Client services 369,000 661,000 Occupancy 342,000 232,000 Loan origination costs 206,000 116,000 Furniture and equipment 203,000 297,000 Professional fees 185,000 170,000 Advertising and promotion 89,000 149,000 Stationery & supplies 65,000 79,000 Telephone expense 63,000 50,000 Other 344,000 411,000 Total other expenses 4,733,000 4,587,000 Net income before income taxes 1,598,000 987,000 Provision for Income taxes 560,000 360,000 Net income $ 1,038,000 $ 627,000 Earnings per share: Basic $ 0.15 $ 0.10 Diluted $ 0.13 $ 0.09 See notes to condensed consolidated financial statements
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HERITAGE COMMERCE CORP AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) Three Months ended March 31, 2000 1999 Cash flows from operating activities: Net income $ 1,038,000 $ 627,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 209,000 203,000 Provision for probable loan losses 600,000 643,000 Gain on sale of securities available-for-sale --- (771,000) Net amortization of premiums / accretion of discounts 24,000 (34,000) Proceeds from sales of loans held for sale --- 2,317,000 Originations of loans held for sale (3,730,000) (322,000) Maturities of loans held for sale 13,000 2,158,000 Effect of changes in: Accrued interest receivable and other assets 395,000 (4,248,000) Accrued interest payable and other liabilities (9,359,000) 403,000 Net cash provided by (used in) operating activities (10,810,000) 976,000 Cash flows from investing activities: Net (increase) decrease in loans (38,138,000) 21,462,000 Purchases of securities available-for-sale (17,597,000) (21,252,000) Maturities of securities available-for-sale --- 2,984,000 Proceeds from sales of securities available-for-sale --- 27,749,000 Proceeds from maturities or calls of securities held-to-maturity --- 1,115,000 Purchases of corporate owned life insurance (2,524,000) (3,480,000) Purchases of other investments (930,000) --- Purchases of property and equipment (100,000) (67,000) Net cash provided by (used in) investing activities (59,289,000) 28,511,000 Cash flows from financing activities: Net increase (decrease) in deposits 30,295,000 (46,912,000) Proceeds from issuance of mandatorily redeemable cumulative trust preferred securities of Subsidiary Grantor Trust 7,000,000 --- Proceeds from exercise of stock options 15,000 38,000 Net cash provided by (used in) financing activities 37,310,000 (46,874,000) Net decrease in cash and cash equivalents (32,789,000) (17,387,000) Cash and cash equivalents, beginning of period 138,149,000 46,639,000 Cash and cash equivalents, end of period $ 105,360,000 $ 29,252,000 Supplemental disclosures of cash paid during the period for: Interest $ 3,149,000 $ 2,246,000 Income taxes $ 767,000 $ 728,000 Supplemental schedule of non-cash investing and financing activity: Transfer of investment securities from HTM to AFS --- $ 11,669,000 See notes to condensed consolidated financial statements
- 5 - HERITAGE COMMERCE CORP AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements March 31, 2000 (Unaudited) 1) Basis of Presentation The unaudited condensed consolidated financial statements of Heritage Commerce Corp and its wholly owned subsidiaries, Heritage Bank of Commerce, Heritage Bank East Bay, and Heritage Bank South Valley, have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and notes required by generally accepted accounting principles for complete financial statements are not included herein. The interim statements should be read in conjunction with the financial statements and notes thereto included in the Company's Form 10-K Annual Report for the year ended December 31, 1999. In the Company's opinion, all adjustments necessary for a fair presentation of these condensed consolidated financial statements have been included and are of a normal and recurring nature. Certain reclassifications have been made to prior year amounts to conform to current year presentation. The results for the three months ended March 31, 2000 are not necessarily indicative of the results expected for any subsequent period or for the entire year ending December 31, 2000. 2) Earnings Per Share Basic earnings per share is computed by dividing net income by the weighted average common shares outstanding. Diluted earnings per share reflects potential dilution from outstanding stock options, using the treasury stock method. For each of the periods presented, net income is the same for basic and diluted earnings per share. Reconciliation of weighted average shares used in computing basic and diluted earnings per share is as follows:
Three months ended March 31, 2000 1999 Weighted average common shares outstanding - used in computing basic EPS 7,034,615 6,112,611 Dilutive effect of stock options outstanding, using the treasury stock method 668,892 941,027 Shares used in computing diluted earnings per share 7,703,507 7,053,638
- 6 - 3) Comprehensive Income In 1998, the Company adopted SFAS No. 130 Reporting Comprehensive Income, which requires that an enterprise report and display, by major components and as a single total, the change in its net assets during the period from non-owner sources. The following is a summary of the components of other comprehensive income:
For the Three Months Ended March 31, 2000 1999 Net Income $ 1,038,000 $ 627,000 Other comprehensive income, net of tax: Net unrealized holding gain (loss) on available-for-sale securities during the period (24,000) 217,000 Less: reclassification adjustment for realized gains on available-for- sale securities included in net income during the period --- (770,000) Other comprehensive loss (24,000) (553,000) Comprehensive income $ 1,014,000 $ 74,000
4) Mandatorily Redeemable Cumulative Trust Preferred Securities of Subsidiary Grantor Trust Heritage Capital Trust I is a Delaware business trust wholly owned by Heritage Commerce Corp and formed for the purpose of issuing Company obligated mandatorily redeemable cumulative trust preferred securities of Subsidiary Grantor Trust holding solely junior subordinated debentures. During the first quarter of 2000, Heritage Capital Trust I issued 7,000 Trust Preferred Securities with a liquidation value of $1,000 per security to the Company for gross proceeds of $7,000,000. The entire proceeds of the issuance were invested by Heritage Capital Trust I in $7,000,000 aggregate principal amount of 10 7/8% subordinated debentures due 2030 (the Subordinated Debentures) issued by the Company. The Subordinated Debentures represent the sole assets of Heritage Capital Trust I. The Subordinated Debentures mature on March 8, 2030, bear interest at the rate of 10 7/8%, payable semi-annually, and are redeemable by the Company at a premium beginning on or after March 8, 2010 based on a percentage of the principal amount of the Subordinated Debentures as stipulated in the Indenture Agreement, plus any accrued and unpaid interest to the redemption date. The Subordinated Debentures are redeemable at 100 percent of the principal amount plus any accrued and unpaid interest to the redemption date at any time on or after March 8, 2020. The Trust Preferred Securities are subject to mandatory redemption to the extent of any early redemption of the Subordinated Debentures and upon maturity of the Subordinated Debentures on March 8, 2030. - 7 - Holders of the trust preferred securities are entitled to cumulative cash distributions at an annual rate of 10 7/8 % of the liquidation amount of $1,000 per security. The Company has the option to defer payment of the distributions for a period of up to five years, as long as the Company is not in default in the payment of interest on the Subordinated Debentures. The Company has guaranteed, on a subordinated basis, distributions and other payments due on the trust preferred securities (the Guarantee). The Guarantee, when taken together with the Company's obligations under the Subordinated Debentures, the Indenture Agreement pursuant to which the Subordinated Debentures were issued and the Company's obligations under the Trust Agreement governing the subsidiary trust, provide a full and unconditional guarantee of amounts due on the Trust Preferred Securities. The Subordinated Debentures and related trust investment in the Subordinated Debentures have been eliminated in consolidation and the Trust Preferred Securities reflected as outstanding in the accompanying condensed consolidated financial statements. Under applicable regulatory guidelines all of the Trust Preferred Securities will qualify as Tier I capital. 5) Reclassifications Certain amounts in the December 31, 1999 and March 31, 1999 financial statements have been reclassified to conform to the March 31, 2000 financial statement presentation. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Net income for the three months ended March 31, 2000 was $1,038,000, up 66% or $411,000 from $627,000 for the first quarter of 1999. Earnings per diluted share for the first quarter of 2000 were $0.13, up 44% or $0.04 from $0.09 per diluted share for the prior year period. The Directors of Heritage Commerce Corp, at their Board Meeting on January 20, 2000, declared a 10% stock dividend payable to Heritage Commerce Corp shareholders of record as of February 7, 2000. The payable date of the dividend was February 21, 2000. All per share data in this report has been adjusted to reflect this dividend. For the first quarter of 2000 as compared with the same period of the previous year, net interest income grew by $1,455,000, or 29% primarily due to increased levels of earning assets over interest bearing liabilities; noninterest income decreased $741,000, primarily due to gains on sale of securities in the first quarter of 1999 of $771,000; and noninterest expense increased $146,000, or 3%. The Company's net interest margin was 5.99% for the quarter ended March 31, 2000, compared with 6.06% for the quarter ended March 31, 1999. Total assets as of March 31, 2000 were $505,605,000, an increase of $147,237,000, or 41%, from March 31, 1999, and an increase of $28,941,000, or 6%, from total assets of $476,664,000 at December 31, 1999. Total deposits as of March 31, 2000 were $448,835,000, an increase of $126,789,000, or 39%, from March 31, 1999, and an increase of $30,295,000, or 7%, from total deposits of $418,540,000 at December 31, 1999. Total portfolio loans as of March 31, 2000 were $310,005,000, an increase of $78,731,000, or 34%, compared to March 31, 1999. Total portfolio loans as of December 31, 1999 were $271,855,000. The Company's allowance for loan losses was $5,616,000, or 1.81%, of total loans as of March 31, 2000. This compares with an allowance for loan losses of $4,277,000, or 1.85%, and $5,003,000, or 1.84% of total loans at March 31, 1999 and December 31, 1999, respectively. The Company's non-performing assets were $1,333,000 as of March 31, 2000. Non-performing assets were $2,269,000 as of March 31, 1999 and $1,396,000 as of December 31, 1999. The Company's shareholders' equity at March 31, 2000 increased to $45,548,000 from $30,929,000 as of March 31, 1999, as a result of the proceeds from the sale of stock in 1999 and retention of earnings. Book value per share totaled $6.47 as of March 31, 2000, compared to $5.06 as of March 31, 1999. The Company's leverage capital ratio was at 11.3% at March 31, 2000. This compared with a leverage ratio of 8.3% at March 31, 1999. - 8 - RESULTS OF OPERATIONS Net Interest Income and Net Interest Margin The following table presents the Company's average balance sheet, net interest income and the resultant yields for the periods presented:
For the Three Months Ended March 31, 2000 For the Three Months Ended March 31, 1999 Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ (Dollars in thousands) Balance Expense Rate Balance Expense Rate Assets: Loans, gross $ 317,420 $ 8,271 10.48% $ 248,042 $ 6,031 9.86% Investments securities 45,472 634 5.61% 56,957 797 5.67% Federal funds sold 70,282 976 5.59% 28,984 336 4.70% Total interest earning assets 433,174 $ 9,881 9.17% 333,983 $ 7,164 8.70% Cash and due from banks 18,906 17,040 Premises and equipment, net 3,350 3,233 Other assets 10,326 13,362 Total assets $ 465,756 $ 367,618 Liabilities and shareholders' equity: Deposits: Demand, interest bearing $ 11,922 $ 38 1.30% $ 9,464 $ 34 1.46% Savings and money market 142,402 1,425 4.02% 131,273 987 3.05% Time deposits, under $100,000 47,287 641 5.45% 32,591 426 5.30% Time deposits, $100,000 and over 85,319 1,153 5.43% 52,678 630 4.85% Brokered deposits 10,403 157 6.05% 6,167 83 5.46% Other borrowings 1,818 19 4.36% 911 11 4.91% Total interest bearing liabilities 299,151 $ 3,433 4.62% 233,084 $ 2,171 3.78% Demand deposits 117,590 96,908 Other liabilities 3,790 6,583 Total liabilities 420,531 336,575 Shareholders' equity 45,225 31,043 Total liabilities and shareholders' equity $ 465,756 $ 367,618 Net interest income / margin $ 6,448 5.99% $ 4,993 6.06%
Note: Yields and amounts earned on loans include loan fees of $707,000 and $455,000 for the three month periods ended March 31, 2000 and 1999, respectively. Interest income is reflected on an actual basis, not a fully taxable equivalent basis, and does not include a fair value adjustment. The Company's net interest income for the first quarter of 2000 was $6,448,000, an increase of $1,455,000 or 29% over the first quarter of 1999. When compared to the first quarter of 1999, average earning assets increased by $99,191,000 or 29%. The net yield on average earning assets was 5.99% in the first quarter of 2000, compared to 6.06% in the first quarter of 1999. - 9 - The following table sets forth an analysis of the changes in interest income resulting from increases in the volume of interest earning liabilities and increases in the average rates earned and paid. The total change is shown in the column designated "Net Change" and is allocated in the columns to the left, to the portions respectively attributable to volume changes and rate changes that occurred during the period indicated. Changes due to both volume and rate have been allocated to the change in volume.
Three Months Ended March 31, 2000 vs. 1999 Increase (Decrease) Due to Change In: Average Average Net (Dollars in thousands) Volume Rate Change Interest earning assets Loans, gross $ 1,790 $ 450 $ 2,240 Investments securities (162) (1) (163) Federal funds sold 572 68 640 Total interest earning assets $ 2,200 $ 517 $ 2,717 Interest bearing liabilities Demand, interest bearing $ 8 $ (4) $ 4 Money Market and Savings 108 330 438 Time deposits, under $100,000 198 17 215 Time deposits, $100,000 and over 439 84 523 Brokered Deposits 63 11 74 Other borrowings 10 (2) 8 Total interest bearing liabilities $ 826 $ 436 $ 1,262 Net interest income $ 1,374 $ 81 $ 1,455
Provision for Loan Losses During the first quarter of 2000, the provision for loan losses was $600,000, down $43,000 from $643,000 for the first quarter of 1999. The decrease was primarily a result of the Company not having an additional provision related to the Nextcard portfolio which was sold during 1999. Noninterest Income The following table sets forth the various components of the Company's noninterest income for the periods indicated:
Increase (decrease) Three months ended March 31, 2000 versus 1999 (Dollars in thousands) 2000 1999 Amount Percent Other investment income $ 174 $ 80 $ 94 118% Service charges and other fees 102 69 33 48% Gain on sale of loans 52 46 6 13% Servicing income 7 --- 7 --- Gain on sale of securities available-for-sale --- 771 (771) (100%) Other income 148 258 (110) (43%) Total $ 483 $ 1,224 $ (741) (61%)
Noninterest income for the first quarter ended March 31, 2000 was $483,000, down $741,000, or 61%, from $1,224,000 for the first quarter ended March 31, 1999. This decrease was the result of a $771,000 gain on sale of securities available-for-sale recognized in the first quarter of 1999. There were no securities sold in the first quarter of 2000. - 10 - Noninterest Expense The following table sets forth the various components of the Company's noninterest expenses for the periods indicated:
For The Three Months Ended March 31, Percent Increase Increase (Dollars in thousands) 2000 1999 (Decrease)(Decrease) Salaries and benefits $ 2,867 $ 2,422 $ 445 18% Client services 369 661 (292) (44%) Occupancy 342 232 110 47% Loan origination costs 206 116 90 78% Furniture and equipment 203 297 (94) (32%) Professional fees 185 170 15 9% Advertising and promotion 89 149 (60) (40%) Stationery & supplies 65 79 (14) (18%) Telephone expense 63 50 13 26% All other 344 411 (67) (17%) Total $ 4,733 $ 4,587 $ 146 3%
Noninterest expenses for the first quarter of 2000 were $4,733,000, up $146,000, or 3%, from $4,587,000 for the first quarter of 1999. The overall increase in noninterest expenses reflects the growth in infrasturcture to support the Company's loan and deposit growth and the opening of Heritage Bank South Valley. Noninterest expenses consist primarily of salaries and employee benefits (61% and 53% of total noninterest expenses for the first quarter of 2000 and 1999, respectively), client services (8% and 14% of total noninterest expenses for the first quarter of 2000 and 1999, respectively), and occupancy (7% and 5% of total noninterest expenses for the first quarter of 2000 and 1999, respectively). The increase in salaries and benefits expenses was primarily attributable to both an increase in salaries and an increase in the number of employees. The Company employed 147 people at March 31, 2000, up 5 from 142 employees at March 31, 1999. Client services expenses are related to certain deposits at the Company and include courier and armored car costs, imprinted check costs, and other client services costs, all of which are directly related to the level of deposits in these accounts. The expense decreased from the prior year due to lower balances in these specific accounts in the first quarter of 2000. The increase in occupancy expense was primarily attributable to the opening of Heritage Bank South Valley. Income Taxes The provision for income taxes for the three months ended March 31, 2000 was $560,000 as compared to $360,000 for the first quarter of 1999. The difference in the effective tax rate compared to the statutory tax rate and the reduction in the effective tax rate is primarily the result of the Company holding certain life insurance contracts and the Company's level of investments in municipal securities. FINANCIAL CONDITION Total assets increased 41% to $505,605,000 at March 31, 2000, compared to $358,368,000 at March 31, 1999. The growth was primarily due to increases in the Company's cash and cash equivalents (primarily in Federal funds sold) and loan portfolio funded by growth in deposits offset by decreases in investment securities. - 11 - Securities Portfolio The following table summarizes the composition of the Company's investment securities and the weighted average yields at March 31, 2000:
March 31, 2000 Maturity After One Year and After Five Years and Within One Year Within Five Years Within Ten Years After Ten Years Total Amortized Cost (Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Securities available-for-sale: Agencies $ --- --- $ 6,746 6.83% $ --- --- $ --- --- $ 6,746 6.83% U.S. Treasury 6,033 4.92% 14,948 6.11% --- --- --- --- 20,981 5.77% Municipals - taxable 380 6.51% --- --- --- --- --- --- 380 6.51% Municipals - nontaxable --- --- --- --- 4,509 4.76% 1,525 5.02% 6,034 4.83% Total available-for-sale $ 6,413 5.01% $ 21,694 6.33% $ 4,509 4.76% $ 1,525 5.02% $ 34,141 5.82% Securities held-to-maturity: Municipals - taxable $ 1,880 6.34% $ 4,013 6.54% $ 514 6.45% $ --- --- $ 6,407 6.47% Municipals - nontaxable --- --- $ 604 4.90% 6,202 4.50% 610 4.62% 7,416 4.54% Total held-to-maturity $ 1,880 6.34% $ 4,617 6.33% $ 6,716 4.65% $ 610 4.62% $ 13,823 5.43% Total securities $ 8,293 5.31% $ 26,311 6.33% $ 11,225 4.69% $ 2,135 4.91% $ 47,964 5.71% Note: Yield on non-taxable municipal securities are not presented in a fully tax equivalent basis.
Loans Total gross loans increased 14% to $310,174,000 at March 31, 2000, as compared to $271,931,000 at December 31, 1999. The increase in loan balances was due to the business development efforts of the Company's loan teams. The following table indicates the Company's loan portfolio for the periods indicated:
(Dollars in thousands) March 31, 2000 % of Total December 31, 1999 % of Total Commercial $ 124,717 40% $ 117,918 43% Real estate - mortgage 95,490 31% 83,698 31% Real estate - land and construction 87,868 28% 68,152 25% Consumer 2,099 1% 2,163 1% Total loans 310,174 100% 271,931 100% Deferred loan fees (169) (76) Allowance for loan losses (5,616) (5,003) Loans, net $ 304,389 $ 266,852
The change in the Company's loan portfolio is primarily due to the increase in the commercial and real estate mortgage, land and construction loan portfolio. The Company's loan portfolio is based in commercial (primarily to companies engaged in manufacturing, wholesale, and service businesses) and real estate lending, with the balance in consumer loans. However, while no specific industry concentration is considered significant, the Company's lending operations are located in the Company's market areas that are dependent on the technology and real estate industries and their supporting companies. Thus, the Company's borrowers could be adversely impacted by a downturn in these sectors of the economy which could reduce the demand for loans and adversely impact the borrowers' abilities to repay their loans. - 12 - The following table sets forth the maturity distribution of the Company's loans at March 31, 2000:
Over One Year Over Due in One But Less Than Five (Dollars in thousands) Year or Less Five Years Years Total Commercial $ 116,485 $ 7,618 $ 445 $ 124,548 Real estate - mortgage 40,297 39,765 15,428 95,490 Real estate - land and construction 87,768 100 --- 87,868 Consumer 1,190 902 7 2,099 Total loans $ 245,740 $ 48,385 $ 15,880 $ 310,005 Loans with variable interest rates $ 236,413 $ 18,814 $ 416 $ 255,643 Loans with fixed interest rates 9,327 29,571 15,464 54,362 Total loans $ 245,740 $ 48,385 $ 15,880 $ 310,005 Note: Total shown is net of deferred loan fees of $169,000 at March 31, 2000.
The table shows the distribution of such loans between those loans with predetermined (fixed) interest rates and those with variable (floating) interest rates. Floating rates generally fluctuate with changes in the prime rate as reflected in the western edition of The Wall Street Journal. At March 31, 2000, approximately 82% of the Company's loan portfolio consisted of floating interest rate loans. Allowance for Loan Losses Management conducts a critical evaluation of the loan portfolio monthly. This evaluation includes an assessment of the following factors: past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, collateral value, loan volumes and concentrations, recent loss experience in particular segments of the portfolio, bank regulatory examination results, and current economic conditions. Management has established an evaluation process designed to determine the adequacy of the allowance for loan losses. This process attempts to assess the risk of loss inherent in the portfolio by segregating the allowance for loan losses into four components: "watch", "special mention", "substandard" and "doubtful". It is the policy of management to maintain the allowance for loan losses at a level adequate for known and future risks inherent in the loan portfolio. Based on information currently available to analyze loan loss delinquency and a history of actual charge-offs, management believes that the loan loss provision and allowance are adequate; however, no assurance of the ultimate level of credit losses can be given with any certainty. Loans are charged against the allowance when management believes that the collectibility of the principal is unlikely. The following table summarizes the Companys' loan loss experience as well as transactions in the allowance for loan losses and certain pertinent ratios for the periods indicated:
Year ended Three months ended March 31, December 31, (Dollars in thousands) 2000 1999 1999 Balance, beginning of period/year $ 5,003 $ 3,825 $ 3,825 Net (charge offs) recoveries 13 (191) (733) Provision for probable loan losses 600 643 1,911 Balance, end of period / year $ 5,616 $ 4,277 $ 5,003 Ratios: Net charge-offs to average loans outstanding 0.01% 0.08% 0.30% Allowance for loan losses to average loans 2.28% 1.82% 2.04% Allowance for loan losses to total loans 1.81% 1.85% 1.84% Allowance for loan losses to non-performing loans 421% 188% 358%
The decrease in charge-offs is due to the sale of the consumer credit card portfolio. - 13 - The following table summarizes the allocation of the allowance for loan losses (ALL) by loan type and the allocated allowance as a percent of loans outstanding in each loan category at the dates indicated:
March 31, 2000 March 31, 1999 December 31, 1999 Percent of Percent of Percent of ALL in each ALL in each ALL in each category to category to category to (Dollars in thousands) Amount total loans Amount total loans Amount total loans Commercial $ 2,802 2.25% $ 1,829 2.05% $ 2,635 2.23% Real estate - mortgage 402 0.42% 231 0.40% 356 0.43% Real estate - land and construction 1,227 1.40% 917 1.72% 1,076 1.58% Consumer 35 1.67% 1,013 3.31% 32 1.48% Unallocated 1,150 --- 287 --- 904 --- Total $ 5,616 1.81% $ 4,277 1.85% $ 5,003 1.84%
The increase in the allowance for loan losses reflects the growth in the Company's commercial and real estate loan portfolio. Deposits Deposits totaled $448,835,000 at March 31, 2000, an increase of 7%, as compared to total deposits of $418,540,000 at December 31, 1999. The increase in deposits was primarily due to increases in noninterest bearing deposits. Noninterest bearing deposits were $140,738,000 at March 31, 2000, compared to $109,432,000 at December 31, 1999. Interest bearing deposits were $308,097,000 at March 31, 2000, as compared to $309,108,000 at December 31, 1999. The following table summarizes the distribution of average deposits and the average rates paid for the periods indicated:
Three months ended Year ended March 31, 2000 December 31, 1999 Average Average Average Average (Dollars in thousands) Balance Rate Paid Balance Rate Paid Demand, noninterest bearing $ 117,590 --- $ 106,397 --- Demand, interest bearing 11,922 1.30% 9,476 1.40% Saving and money market 142,402 4.02% 133,890 3.41% Time deposits, under $100,000 47,287 5.45% 38,295 5.34% Time deposits, $100,000 and over 85,319 5.43% 64,696 4.88% Brokered deposits 10,403 6.05% 8,812 5.88% Total average deposits $ 414,923 3.29% $ 361,566 2.88%
Deposit Concentration and Deposit Volatility The following table indicates the maturity schedule of the Company's time deposits of $100,000 or more as of March 31, 2000.
(Dollars in thousands) Balance % of Total Three months or less $ 42,147 46% Over three months through twelve months 48,450 52% Over twelve months 1,922 2% Total $ 92,519 100%
The Company focuses primarily on servicing business accounts that are frequently over $100,000 in average size. Certain types of accounts that the Company makes available are typically in excess of $100,000 in average balance per account, and certain types of business clients whom the Company serves typically carry deposits in excess of $100,000 on average. The account activity for some account types and client types necessitates appropriate liquidity management practices by the Company to ensure its ability to fund deposit withdrawals. - 14 - Interest Rate Risk The planning of asset and liability maturities is an integral part of the management of an institution's net yield. To the extent maturities of assets and liabilities do not match in a changing interest rate environment, net yields may change over time. Even with perfectly matched repricing of assets and liabilities, risks remain in the form of prepayment of loans or investments or in the form of delays in the adjustment of rates of interest applying to either earning assets with floating rates or to interest bearing liabilities. The Company has generally been able to control its exposure to changing interest rates by maintaining primarily floating interest rate loans and a majority of its time certificates with relatively short maturities. The following table sets forth the interest rate sensitivity of the Company's interest-earning assets and interest-bearing liabilities at March 31, 2000, using the rate sensitivity gap ratio. For purposes of the following table, an asset or liability is considered rate-sensitive within a specified period when it can be repriced or when it is scheduled to mature within the specified time frame:
Due in Within Three to Due After Three Twelve One to Five Due After Not Rate- (Dollars in thousands) Months Months Years Five Years Sensitive Total Interest earning assets: Federal funds sold $ 82,050 $ --- $ --- $ --- $ --- $ 82,050 Securities 2,000 6,236 26,205 13,274 --- 47,715 Total loans 255,196 16,504 48,385 15,880 --- 335,965 Total interest earning assets 339,246 22,740 74,590 29,154 --- 465,730 Cash and due from banks --- --- --- --- 23,310 23,310 Other assets --- --- --- --- 16,565 16,565 Total assets $ 339,246 $ 22,740 $ 74,590 $ 29,154 $ 39,875 $ 505,605 Interest bearing liabilities: Demand, interest bearing $ 12,231 $ --- $ --- $ --- $ --- $ 12,231 Savings and money market 157,059 --- --- --- --- 157,059 Time deposits 62,945 70,745 5,017 100 --- 138,807 Total interest bearing liabilities 232,235 70,745 5,017 100 --- 308,097 Noninterest demand deposits 49,383 --- --- --- 91,355 140,738 Other liabilities --- --- --- --- 11,222 11,222 Shareholders' equity --- --- --- --- 45,548 45,548 Total liabilities and shareholders' equity $ 281,618 70,745 5,017 100 $ 148,125 $ 505,605 Interest rate sensitivity GAP $ 57,628 $ (48,005) $ 69,573 $ 29,054 $(108,250) --- Cumulative interest rate sensitivity GAP $ 57,628 $ 9,623 $ 79,196 $ 108,250 --- --- Cumulative interest rate sensitivity GAP ratio 11.40% 1.90% 15.66% 21.41% --- ---
The foregoing table demonstrates that the Company had a positive cumulative one year gap of $9.6 million, or 1.90% of total assets, at March 31, 2000. In theory, this would indicate that $9.6 million more in assets than liabilities would reprice if there was a change in interest rates over the next year. If interest rates were to increase, the positive gap would tend to result in a higher net interest margin. However, changes in the mix of earning assets or supporting liabilities can either increase or decrease the net margin without affecting interest rate sensitivity. This characteristic is referred to as a basis risk and, generally, relates to the repricing characteristics of short-term funding sources such as certificates of deposit. Varying interest rate environments can create unexpected changes in prepayment levels of assets and liabilities which are not reflected in the interest sensitivity analysis table. These prepayments may have significant effects on the Company's net interest margin. Because of these factors, an interest sensitivity gap report may not provide a complete assessment of the Company's exposure to changes in interest rates. Liquidity and Liability Management To meet liquidity needs, the Company maintains a portion of its funds in cash deposits in other banks, in Federal funds sold, and in investment securities. At March 31, 2000, the Company's primary liquidity ratio was 28.26%, comprised of $27.9 million in investment securities available-for-sale with maturities (or probable calls) of up to five years, less $9.0 million of securities that were pledged to secure public and certain other deposits as required by law and contract; - 15 - Federal funds sold of $82.1 million, and $23.3 million in cash and due from banks, as a percentage of total unsecured deposits of $439.9 million. Capital Resources The following table summarizes risk-based capital, risk-weighted assets, and risk-based capital ratios of the Company:
March 31, December 31, (Dollars in thousands) 2000 1999 1999 Capital components: Tier 1 Capital $ 52,594 $ 30,535 $ 44,530 Tier 2 Capital 5,173 3,713 4,646 Total risk-based capital $ 57,767 $ 34,248 $ 49,176 Risk-weighted assets $ 413,410 $ 296,388 $ 371,322 Average assets $ 465,879 $ 366,918 $ 475,295 Minimum Regulatory Requirements Capital ratios: Total risk-based capital 14.0% 11.6% 13.2% 8.0% Tier 1 risk-based capital 12.7% 10.3% 12.0% 4.0% Leverage ratio (1) 11.3% 8.3% 9.4% 4.0% (1) Tier 1 capital divided by average assets (excluding goodwill).
Year 2000 Data Processing Issues The Company previously recognized the material nature of the business issues surrounding computer processing of dates into and beyond the Year 2000 and began taking corrective action as required pursuant to the interagency statements issued by the Federal Financial Institution Examination Council. Management believes the Company has completed all of the activities within their control to ensure that systems are Year 2000 compliant. The Company has not experienced any material disruptions of the internal computer systems or software applications due to the start of the Year 2000 nor have they experienced any problems with the computer systems or software applications of their third parties to determine the impact, if any, on the business of the Company and the actions the Company must take, if any, in the event of non-compliance by any of these third parties. Based upon the Company's assessment of compliance by third parties, there does not appear to be any material business risk posed by any such non-compliance. Although the Company's Year 2000 rollover did not present any material business disruption, there are some remaining Year 2000 related risks. Management believes that appropriate actions have been taken to address these remaining Year 2000 issues and contingency plans are in place to minimize the financial impact to the Company. Management, however, cannot be certain that Year 2000 issues affecting customers, suppliers or service providers of the Company will not have a material adverse impact on the Company. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK No material changes have occurred during the quarter to the Company's market risk profile or information. For further information refer to the Company's annual report on Form 10-K. - 16 - Part II - Other Information Item 1. - Legal Proceedings To the best of the Company's knowledge, there are no pending legal proceedings to which the Company is a party which may have a materially adverse effect on the Company's financial condition, results of operations, or cash flows. Item 6. - Exhibits and Reports on Form 8-K (a) Exhibits included with this filing: Exhibit Number Name 27.1 Financial Data Schedule (b) Reports on Form 8-K On January 26, 2000 the Company filed its earnings press release for the fourth quarter ended December 31, 1999 with the SEC on Form 8-K. On April 13, 2000, the Company filed its earnings press release for the first quarter ended March 31, 2000 with the SEC on Form 8-K. On May 11, 2000, the Company filed its press release for Heritage Commerce Corp's announcement to merge with Western Holdings Bancorp, holding company for Bank of Los Altos. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Heritage Commerce Corp (Registrant) May 15, 2000 /s/ John E. Rossell Date John E. Rossell, III, President and CEO May 15, 2000 /s/ Lawrence D. McGovern Date Lawrence D. McGovern, Chief Financial Officer - 17 - EX-27.1 2
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE HERITAGE COMMERCE CORP UNAUDITED FINANCIAL STATEMENTS AT MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS DEC-31-2000 MAR-31-2000 23,310,000 308,097,000 82,050,000 0 13,823,000 13,823,000 13,553,000 310,005,000 5,616,000 505,605,000 448,835,000 0 4,222,000 7,000,000 0 0 41,036,000 4,512,000 505,605,000 8,271,000 634,000 976,000 9,881,000 3,413,000 3,433,000 5,848,000 600,000 0 4,733,000 1,598,000 1,598,000 0 0 1,038,000 0.15 0.13 5.99 1,333,000 0 0 0 5,003,000 0 13,000 5,616,000 5,616,000 0 1,150,000
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